TAXATION I PRE-MIDTERM NOTES

June 15, 2010 Tuesday

What do you understand of the power of the government to impose taxes? This is simply Constitutional law. Russel answers. So youre saying
that the existence of the Constitution is not to grant the power of taxation because it is already inherent in every sovereignty?

What is taxation?

- Taxation is the inherent power of every sovereign government exercised through the legislative body or the Congress to impose or
exact burdens, which we call as taxes, upon not only persons but upon subjects or objects of taxation for the purpose of raising
revenues in order to address the legitimate needs of the government.
- It is a symbiotic relationship between the people and the government. The government cannot exist without the people and the
people cannot exist without the government protecting to help them.

The nature of the power of taxation is:

1. It is legislative in character.

- Who can actually exercise the power to impose tax?

o Only Congress
- How about the President?
o As a rule, no.

2. It is inherent.

- Even the Constitution does not grant the power to tax because the power to tax is already a right in itself by the sovereign.

3. It is subject to inherent and constitutional limitations.

- So whenever you see the word tax or taxation in the Constitution, you will know that it is not a grant of power but simply it is a
limitation to the unlimited, plenary and supreme power of the government to impose taxation.

The inherent power to tax simply arose because there is a need of the government to raise revenues in order to support its activities.

- If you are reading the business section of the newspaper, it talks about budgets for the government to meet. The budget of the Commissioner
of the BIR to raise.

So taxation actually plays a major part or a big part in running the entire government. Its basis is the basis of necessity the need of the
government to protect the people and the need of the government to serve the people. And it is actually on what we call the famous doctrine
of taxation the lifeblood doctrine.

So, what is the lifeblood doctrine? Ryan answers. So without taxes, the government cannot exist?

- 99% of the countries or nations impose taxes in order to survive. Government cannot exist without taxes. But I think there is one
state which does not it mainly subsists in gambling activities. So that is an exception to the rule but most of us especially the
Philippines would survive on the generation of taxes in order to raise revenues and meet the needs of the government and its
people.
- So whenever you have doubts, if there is a bar question asking if whether or not an object or a person or an activity is taxable, you
think of the lifeblood doctrine it should be taxable because the government needs taxes. But the lifeblood doctrine is only the last
recourse. You should not reach such point because you should know the answer beforehand. Otherwise, you would just bet tackling
legal ethics wherein youre last recourse answer would be good moral character. The lifeblood doctrine answer is only to support
your first answer, which should be the legal provision of the law.

Taxation as a theory, which we call as the symbiotic relationship between the government and its people. It is also called the benefits-received
theory or the compensation theory. These three theories are actually almost the same.

What do you know of the symbiotic relationship theory between the government and its people? What is the need of the government and
what is the need of the people in so far as taxation is concerned?

- When you say symbiotic relationship the one needs the other. In so far as taxation is concerned, what the government can offer
to the people is protection and general welfare while what the people can offer to the government is the funds to operate the
government. So taxes by the people to the government in exchange for the governments protection and regulation of the entire
nation. So it is symbiotic in the sense that one needs the other. It is a benefits-received theory because it is for the benefit of both
and compensation for the activity (compensation theory).
 - There are three theories actually. It is a compensation theory for the people. It is a compensation to the government for the support
to the people.

What is the main or primary objective of taxation?

- The primary purpose of the power of taxation is to raise revenues. Whenever there is a law for which the purpose is raising revenue,
then you have no doubt that it is in the exercise of the power of taxation.

But there are secondary purposes. What do you think are the secondary purposes of the power of taxation?

- To regulate businesses
o Speaking of gambling, are winnings from gambling taxable? Winnings from lotto (PCSO) are exempt. Let us say illegal
gambling or games from cockfighting? Even illegal winnings or gains from illegal gambling are as a rule taxable because
subject to income tax because the definition of income tax is a tax on any income from whatever source. Because of the
phrase whatever source, it includes both legal and illegal games. But then again since it is illegal, I dont expect you to
declare it. If you dont declare it, you become not subject to tax by virtue of your own decision.
o Are cigarettes subject to tax? Yes.
What kind of tax? Sin taxes or excise taxes. Excise taxes are those taxes which are imposed on items which are
not essential. Cigarettes are not essential, in fact, dominant is the phrase, cigarette smoking is dangerous to
your health. It is taxable not only to income tax but as well as to excise tax. If you notice in a pack of cigarettes,
there is a documentary stamp but it is actually a proof that it has been paid of excise taxes. It is the same as
liquors.
Whenever you withdraw non-essential items or goods from the warehouse, it is expected that at that point, it
will have to be paid of excise taxes or sin taxes. So that is proof that it has been paid.
If it is imported from abroad then that is another kind of tax and what tax is that? Customs tariffs and duties.
If there is a business which is rendering non-essential services, such as movie theaters whenever you watch
a movie, you expect that 30% of what you pay goes to amusement taxes payable to the local government. So
these are types of activities that are not really necessary therefore, in order to regulate and at the same time
raise revenues, the government imposes larger taxes.
So when you say that the power to tax is also used as the power to regulate, there comes in the famous words
that the power to tax also involves the power to destroy
What do you mean by the power to tax involves the power to destroy? Is it not that this phrase is in conflict
with the provisions on the Constitution regarding due process of law and no taking of life, liberty and property?
The power to tax involves the power to destroy is not necessarily an invalid premise. Therefore, it is
not invalid to say that. The power to tax involves the power to destroy if the purpose of taxation is the
secondary purpose which is the purpose for regulation such as trying to regulate an illegal activity,
it has to impose taxes but not really for the purpose of raising revenue but for the purpose of
regulating even to the extent of closing the business if it is illegal. But it (the closing or destruction of
the business or taking of the property through the imposition of taxes) becomes only valid if there is
compliance with substantive and procedural requirements as required by the Constitution. That is
why we said earlier that one of the nature of taxation is that it must always follow the Constitutional
and inherent limitations constitutional limitations as provided by the Constitution and inherent
limitations as provided by your conscience because the power to tax is inherent.

What are the other secondary purposes?

- To promote the general welfare, public health, public safety, public morals, and order in the community.
o This power of taxation is exercised hand-in-hand with the police power of the state.
- Another secondary purpose is to reduce social inequality. Reduction of social inequality means that we impose taxes with escalating
rates to those who are earning income more than the others. You notice a provision in the Constitution that Congress shall evolve
a progressive system of taxation. This simply means that we, as much as possible, should try to enact a law which exacts taxes on
those who have the ability to pay.
o Example: If you earn P5, youll be taxed of 5% income tax. If you earn 1M, you belong to that category of income earners
subject to an income tax of 32%. So it is based on your ability to pay.
o If you purchase an egg, raw meat that has not been processed, mango (not the dried mango) from the grocery store, it is
not subject to VAT. You notice the receipt you received from the grocery store, at the bottom, there is a breakdown of
what is vatable and what is not vatable.
o But if youre sosyal and you buy egg from the restaurant, even if it is just hard-boiled egg, it is imposed a VAT. So it is
based on the ability to pay principle. Why? Because if you cant afford, then why would you buy egg from the restaurant.
o But we cannot achieve a perfect system of taxation. Even the Constitution does not require but only encourages
progressive system of taxation.
- Finally, another secondary purpose is to encourage economic growth by imposing tax or granting fiscal incentives or exceptions.
Notice that to encourage investors from abroad, we give them income tax holiday or exemption for the first four or six years of
operation. Now, are we really giving an exemption in order to raise revenue? No, because we are actually giving up our right to
collect taxes but it encourages economic growth in the long run.
The scope of taxation is unlimited in scope. Even the amount and rate of taxes can be determined alone by Congress. But Congress is voted
as representatives of the people so it actually comes from the people indirectly.

Taxation is comprehensive, plenary and supreme. So what makes it comprehensive, unlimited, plenary and supreme? It is because when the
power of taxation is exercised by both the House and the Senate, they can determine who the subjects and objects of taxation are so long as
these objects and subjects are within its jurisdiction.

So are you class subject to US federal taxes? No because you are not within the jurisdiction of the US. But are you subject to Philippine tax,
even if you are not yet income earners? Yes example is VAT (such as when you purchase gasoline).

So you will notice that the power of Congress to enact tax law is unlimited because whatever they can think of, they can actually enact a law
and impose tax on it, which may be a person, a property or an activity.

Taxes are imposed not only in persons or properties but also activities. So more or less everything is covered. Congress has a leeway to enact
the law imposing tax on such activity so long as it is within its jurisdiction.

Scope of the Legislative Taxing Power:

1. Determination of Purposes

2. Determination of the subject and objects of taxation (within its jurisdiction)

3. Determination of the amount and rate of tax to be collected

4. Determination of the kind of tax to be collected

5. Determination of apportionment of the tax

6. Determination of the situs of taxation

7. Determination of the manner and mode of enforcement and collection

- The other scope of the taxing power is left to the executive branch of the government, which is the enforcement the means,
manner and method of how to collect the tax.

two aspects of taxation:

1. Levy (impose the tax)

2. Administration of the tax

How do we develop a sound tax system?

Distinguish taxation from police power and eminent domain:

Taxation Eminent Domain Police Power

Authority which exercises May be exercised only by May be: May be exercised only by
the power the government or its 1)Exercised by the the government or its
political subdivisions government or its political political subdivisions
(LGUs) subdivisions (LGUs)

2)Granted to public service

companies or public
utilities
Purpose The property (generally in The property is taken for The use of the property is
the form of money) is taken public use; it must be regulated for the
for the support of the compensated purpose of promoting the
government general welfare; it is not
compensable
Persons affected Operates upon a: Operates on an individual Operates upon a:
as the owner of a particular
1)Community; or property 1)Community; or

2)Class of individuals 2)Class of individuals

Effects The money contributed There is a transfer of the There is no transfer of title
becomes part of the public right to property
funds At most, there is restraint
on the injurious use of
property

Benefits received or It is assumed that the
compensation individual receives the
equivalent of the tax in the
form of protection and
benefits he receives from
the government
Amount of imposition Generally, there is no limit
on the amount of tax that
may be imposed
Relationship to Is subject to certain
Constitution constitutional and inherent
limitations
Including the prohibition
against impairment of the
obligation of contracts
He receives the market The person affected
value of the property taken receives indirect benefits
from him as may arise from the
maintenance of a healthy
economic standard of
society
No amount imposed but Amount imposed should
rather the owner is paid the not be more than sufficient
market value of property to cover the cost of the
taken license and necessary
expenses
Is subject to certain Relatively free from
constitutional limitations constitutional limitations
such as due-process clause
and just compensation Is superior to the
impairment of contract
Inferior to the impairment provision
prohibition; government
cannot expropriate private
property, which under a
contract it had previously
bound itself to purchase
from the other contracting
party

- Can taxes be the subject of compensation or set-off or can the taxpayer refuse to pay taxes because it has an existing claim against
the government?
o No, because you cannot subject the government to uncertainty in the collection of taxes. Notwithstanding that you have
an existing claim for refunds of taxes against the government, you cannot offer to set-off or exchange your payables with
your receivables from the government because the lifeblood of the government, the existence of the government and its
survival rests on the collection of taxes.

- Note: Sometimes, the power of taxation is used as the power to destroy. In that case, you can close up a business so long as your
purpose is not for revenue-raising but only for regulation.
- Note: Even if we take out the Constitution, does that make the power of taxation limitless? No because there are also inherent
limitations which attach to the power of taxation. These inherent limitations always follow the power to tax. So whether or not the
Constitution is there, still the power to tax is limited in some sense.

- GR: Taxes are payable in money.

o Reason: Lifeblood doctrine Do you think the government can actually work and provide you with basic services if it
accepts property as payment? They have to liquidate it and sell it and if there is no takers or buyers, what will the
government do? Thus, their operations will be paralyzed because taxes are like blood which runs through the veins of the
government.

- So what are taxes?

o Taxes are enforced proportionate contributions, in money, levied on persons, property or activities of the persons and
levied by the State which has jurisdiction over the subject or object of taxation and which is actually exercised by the
lawmaking body of the government for the purpose of raising revenues to meet the needs of the government.

- If you dissect the definition of taxes, you will arrive at the characteristics or elements or attributes of taxes:
o It is an enforced contribution
If you have been paying taxes and you seek no concrete benefit from the government such as that you dont
use the roads, you have been living in the mountains, can you refuse to pay taxes considering that it is a
symbiotic relationship?
 You cannot refuse to pay taxes simply because you do not get direct benefit from the government.
Otherwise stated, you cannot solely be the person to pay taxes simply because you get more benefits
than the rest. Purpose of taxation is public which is for the common good and general welfare. So long
as it addresses the common good of the people then taxation is proper.
o It is proportionate
This is based on the principle of ability-to-pay principle, which is actually the principle in equitable payment of
taxes following the progressive system of taxation the higher the ability to pay taxes, the more is expected of
you by the government
o Taxes are generally payable in money
Reason: It is only money that is the standard of measure. Everything else will rise and fall but not money.
Exception:
When taxpayer becomes delinquent in paying taxes (distraining or levying properties). A lien is created
on every property of a taxpayer once he fails to settle his tax liability. But as much as possible,
government is not interested in taking properties because its hard to dispose of them. But up to the
point wherein you cannot settle because you are not liquid, meaning no cash, it is when the
government will sell your properties in a public auction.
When you pay through tax credit certificates, which are certificates issued by the government itself.
These are tax certificates issued by the BIR.
o Example: If you overpaid your taxes, you ask for a refund from the government but the
government will only give you a certificate which is called the tax credit certificate or TCC
showing that you have overpaid taxes.
o Why does the government not pay you in cash? Again, lifeblood doctrine.
o So instead of giving back the money to you if the government realizes that indeed you have
overpaid the taxes then the government will simply give you certificates and you use that as
a taxpayer to pay out your other tax liabilities to that same agency of the government.
o So if you have the certificate, next year you can use that certificate to pay out your other
taxes.
o So it is only this instance wherein government will not be receiving cash as tax payment
o It is levied on persons, properties or activities (these are subjects of taxation)
Activities:
The privilege to transmit property upon death is subject to estate tax but the privilege to receive
property as an heir is no longer subject to inheritance tax.
In the same way that donors are subject to donors tax for giving something but donees for receiving
are no longer subject to donees tax.
Property
Real Property tax tax imposed against the property itself and not against a person
Person
Income tax is more of like a tax against an activity in earning or generating an income because if you
dont engage in an activity, you arent subject to income tax.
Community tax (cedula) is an example wherein tax is directed against a person himself with or without
an exercise of an activity.
o Levied by the state having jurisdiction over the subject matter or object of taxation
It simply means to say that the power to tax, although supreme and unlimited in nature supposedly, it only
extends until the boundary of the country. Somewhat physical in nature that when you go abroad, or you are
an immigrant abroad and not living in the Philippines physically, then your income abroad is not subject to
Philippine income tax.
So nurses abroad earning thousands of dollars are not expected to remit taxes to the Philippine government.
But if you are only a tourist abroad and still a resident in the Philippines, then you are subject to Philippine
income tax.
o It is exercised by the Congress or lawmaking body of the state
o Levied for a public purposes

- Taxes are divided into 4 categories:

o Internal revenue taxes are those taxes imposed by the NIRC
Example: income tax, donors tax, estate tax, VAT, percentage taxes, common carriers tax, gross receipts tax,
amusement taxes, documentary stamp tax, excise tax
So what is within the scope of the BIR? It is the enforcement of the taxes under the NIRC. In short, the tax code.
o Local/Municipal taxes taxes found in the LGC, which comes in 2 types:
Local taxes local transfer tax, amusement tax, franchise tax
Real property taxes
o Tariffs and Customs Duties those that are found in the Tariffs and Customs Code
Examples: anti-dumping duties, retaliatory duties
o Taxes and tax incentives under special laws taxed found in different special laws, such as special laws for sugar industry
and coconut industry
June 22, 2010
Recap of Last Meetings Discussion starting of with is the definition of Taxation: It is an enforced contribution to the government.
We said that 1 of the nature of the taxation power is that it is legislative in nature. In relation to fiscal adequacy as one of the basic
principles to make the tax system sound, just in case the basic needs and expenses is not met by the tax collector under the present
taxing system, is it allowed that a tax or a fee will be collected without a law so as to meet the needs of the government?
o Without a law imposing a tax, no tax can be collected. Notwithstanding that there is a deficit in the budget or collection.
o When taxation or the power of taxation is inherent in every sovereignty it simply means to say that every government or every
sovereign country can actually tax its people but through the legislative body. That there is no need for the Constitution or any
law to grant the power to tax because it can tax but in order for it to be effective, collecting from the people taxes, there must
be a law imposed for the government to collect taxes.
o The constitution is just there to limit the power of taxation which is otherwise inherent. At any point in time, the government
through the legislative body can enact a law imposing the tax. The law imposing the tax will be enforced or executed by the
executive branch of the government collecting the tax from the people. If we make a short cut, for the government collecting
directly from the people without the law, it is not possible.
o Cannot use the life blood doctrine cannot be used because this situation is the opposite.
o It will result in chaos and oppression. And it will be arbitrary for the government, exercised through government officials that
they collect the tax without any guidelines or without any law.
o Collection of taxes without any law will violate the basic provision of the Constitution- _________. That when the nature of the
power of taxation is legislative in character it simply means to say that taxation is statutory in nature. Without a statute or law,
no tax can be imposed or collected. Even if this is inherent, the power to tax, no collection can be made if no law is made by
Congress.
We discussed what taxation is all about, it is inherent in every society, it is legislative in character and it is limited by 2 types: inherent
and constitutional limitations.
We also discussed what is the basis why there is an inherent power to tax in every government because there is that need of the
government to protect its people and serve its people. Having these needs of the government, this can only be addressed by the people
supporting the government through the payment of taxes which is a symbiotic relationship between the government and its people.
Taxes will be in monetary form while the other one is through serving and protecting its people.
In life blood doctrine, we say the government has a need for it to survive will need taxes coming from its people.
o And we illustrated the life blood doctrine in an example, there can be no set off. Taxes can never be the subject of any set off.
No tax payer can offer can offer to set off his claimable against the government against his liability for taxes. For one, the
government and its people are not creditors and debtors of each other. In civil law, compensation or set off can only happen
if there is that creditor-debtor relationship but taxes are not debts of the people they are civil obligations that are actually
enforced upon the people.
If the tax payer will have a liability for taxes, the tax payer will have to settle that obligation and it cannot be off-set
against any right of the taxpayer, whether it be a right to be refunded of any tax, etc.
Only exception to the rule that there is no set off or compensation between taxes is the case of Domingo
v. Carlicos:
o There was a set off of the obligation of the tax payer and his claimable from the government. But
this will only hold true if the receivable from the government is already LIQUIDATED and
DEMANDABLE.
o A claim for refund from the government is not as yet liquidated, then it is not demandable. It will
have to be settled by the government and look into its validity. So there can be no set off as a
GENERAL RULE.
o Another illustration of the life blood doctrine, is when you cant enjoin the collection of taxes by filing a case in court. Say for
example the government filed a civil case for collection of your unpaid taxes for prior years, you cannot file an injunction
against the government or BIR against the case filed.
You will see in last part of the Tax Code that there can be no injunction filed against a collection made by the
government for taxes. This is the GENERAL RULE.
Exception: there is only 1 to be discussed in remedies.
Whenever the government undertakes a move to collect your taxes in any other type of remedy not only the tax
collection, administrative case, etc., whatever the remedy undertaken by the government, you cannot file an
injunction case as a general rule.
We also discussed last meeting the purposes of taxation, the scope of the power of the legislative department in which starts in
determining the purpose of the tax law down to the kind, amount, nature of tax, etc.
We also discussed the 2 aspects of taxation: the administration aspect and preceded by the levy aspect which is undertaken by the
legislative branch.
The 3 basic principles of the sound tax system and distinguished taxation from police power and eminent domain, the 2 other powers of
the government.
What is TAX? What are taxes? TAXES are enforced proportional contributions generally payable in money impose or levied against
persons, properties or objects of taxation within the taxing jurisdiction levied through the legislative law making body of the state for
purposes of raising revenues to meet the legitimate objectives and public needs of the government and the people.
o It is an enforced contribution. It can never be voluntary as nobody will voluntarily pay taxes.
o It is proportionate in contributions because it proportions the burden of taxes to those who are able to pay the taxes. It is more
based on the ability to pay principle.
 o It is generally payable in money. However, TAX CREDIT CERTIFICATES (TCT) which are the certificates issued either by the
Bureau of Internal Revenue, Department of Finance or the Bureau of Customs, they are actually indications that you have a
receivable or overpaid taxes to the government and it symbolizes that you have advance payment to the government and you
can use this certificate to pay out your other tax liabilities. Thus, you are not paying in cash but through another item.
If TCT is issued by the BIR, it can only be used to pay taxes due to the BIR. So if its a TCT for income tax that you
overpaid, you can use that certificate to pay other taxes found in the IRC like documentary stamp taxes, donors tax.
But you cannot use this TCT to pay off your real property tax before the LGU or to pay customs duties or VAT before
the BOC. It must only be against a tax of the issuing authority.
o It is levied against persons, properties or objects of taxation so long as it is within the taxing jurisdiction.
o It is the levied by the law making body of the state for public purposes.
Generally, for tax to be valid, it must have the following major requirements:
o 1. The tax should be for public purpose.
In the Constitution, any tax levied by the government should not be appropriated for any private purpose but only
for public purpose.
o 2. Taxation should be uniform in nature. When we say uniform in nature, then it must be applied to all persons within the same
class similarly situated.
To be expounded when we reach equal protection clause and uniformity and equity in taxation.
o 3. It must be within the jurisdiction of the taxing authority to be expounded when we reach citus of taxation.
o 4. There must be due process in the assessment and collection of taxes. So fair and reasonable methods of collection.
o 5. With porper observance of both inherent and constitutional limitations to the Power of Taxation (POT).
How are taxes classified? What are the classification of taxes?
o The subject matter or object against which it is taxed is directed can be classified into 3:
Personal Tax: tax imposed on a person who is a resident of a particular place without regard to his citizenship. Maybe
an alien national or without regard to the type of business or profession he is engaged in. He may be a minimum
wage earner or a president of a multi-national corporation, it does not matter. Personal tax is a tax directed against
a person who is a resident of a particular place.
When we say resident in a particular place, it means residence in the Philippines.
Why cant we impose a personal tax against a residence of the US? Because he is outside our jurisdiction.
Property Tax: it is assessed on properties that lie within the jurisdiction of the taxing authority.
Example: Real property tax. Who is liable to pay the tax?
Example: This class formed a corporation, which can be incorporated by a minimum of 5 individuals. The
corporation owns various real properties.
o Since corporations have different personalities or distinct from the persons composing the
corporation or owning the corporation, the liability of the real property tax would actually call on
the corporation itself. Stockholders would not be liable.
Thats the reason why you only 3 types of businesses or organizations. It can be
corporation, partnership, or sole proprietorship.
For purposes of protection of individual assets, you go for corporation because you
create a separate and distinct personality and it cannot go after your personal assets.
Now if the corporation has real properties, it is the corporation who pays for the real property tax (RPT).
The only instance wherein the stockholders will be liable to pay the RPT of the corporation is when the
corporation dissolves and properties are distributed to the tax holders without the tax having been paid
because the tax follows the property being a property tax. Property tax attaches to the property itself
whoever the owner is.
Excise Tax: it is a kind of tax which does not fall within the meaning of personal or property tax. It is a tax based, not
on the persons residence or the persons property, but on the performance of an act or enjoyment of an activity or
privilege and the exercise or engaging of a particular profession. All others which do not fall under the definition of
a personal or property tax will have to be called an excise tax.
Example: Income tax an excise tax? Estate tax an excise tax?
o Second classification, under who is burdened by the tax: Direct and Indirect taxes.
What do you call a person who is liable for tax as provided under a law? STATUTORY TAX PAYER (STP).
o Is the STP always burdened by the tax imposed by the law? Not always. So we discuss, direct and
indirect taxes.
Direct: the burden falls directly on the tax payer who is mentioned in the law. We call every taxpayer or every person
mentioned in the law as the one liable to remit the tax to the government as a STP. He is a taxpayer as provided by
the law. He is the one required to remit.
Is remittance to the government requirement equivalent to being burdened by the tax itself? Not
necessarily. In some cases where the STP is required to remit the tax that he himself is burdened by it, by
which he can no longer pass the tax to anyone. We call the tax as the direct tax.
o Example: Income tax for your lawyer. And you received for your profession as a lawyer, you will
be liable, as a rule by income tax.
Can you shift income tax to your clients? No because income tax is only computed at
the end of the year when you realize your income. If your expenses is lower than your
receipts from your clients. Since you can no longer shift the burden to anyone ellse,
 you are liable to pay the direct tax. Because you are burdened to pay the tax which you
are required to remit to the government.
Indirect: the STP is found in the law can shift on or pass the burden to another person may he be a direct consumer
or any other entity in the production chain.
Example: VAT. Under the law every person who sells, barters, exchanges goods, services, or properties are
liable 12% VAT on the gross selling price or gross receipts.
o If you are a seller of a property, you will be liable to pay the 12% VAT. You are a STP under the
law. But the VAT of 12% is added on to the selling price of the property which the consumer pays.
So the consumer actually pays the 12% vat to you for which you only conduit and you remit the
12% vat to the government.
o So VAT is an indirect tax because the burden is shifted by the STP down to the next person, may
he be an individual or an entity.
o It may be consumer like us or an entity.
o Example: if y have a mango and you sell it to someone who will convert it to a dried mango chip.
After which it is sold to a wholesaler, to a retailer sold to a hotel. Every chain, in every transfer of
property or goods, there will be a 12% added on. Everyone becomes burdened by tax. The last
person, someone ate it in the hotel. That hotel also becomes a STP required to remit it to the
government. But the burden was actually shifted to the one who ate it.
o That is why it is called VAT because it is a tax on every value added as it is distributed in a
production chain or chain of distribution, its tax is added up.
o Classification as how the amount of tax is determined:
Specific: tax imposed by the head or number, or by some standard of weight or measurement.
Excise taxes under the tax code imposed on non essential items, not totally though, that they are more of
specific taxes. Ad valorem taxes
Ad Valorem: are imposed on the value of the item or goods.
Example: real property tax. Estate tax. Donors tax. They are always imposed on how much is the value of
the property that is transferred or so.
o As to purpose:
Revenue raising, which is the general purpose of taxation.
Regulatory purpose: imposed for a special purpose.
o As to the scope
National: by national government
Local or Municipal: by municipal corporations or local governments.
o As to graduation or rate of taxation:
Progressive: taxes which escalate or increases as your income increase based on ability to pay principle. The tax rate
increase as the income increases.
This is more reasonable because you are imposing the buden of tax to those who are able to pay them.
Regressive: the tax rate decreases as the income increases.
No regressive taxes in the Philippines because these are discouraged. Otherwise it will be unfair to those
whose income is not so much.
What is only argued as a regressive tax is the VAT. But it is a proportional tax.
Proportional: it is neither regressive nor progressive. In between regressive and progressive taxes, is proportional
taxes which is a fixed percentage of tax based on the amount of the property subject or object to be taxed. What is
fixed is the tax rate. What is increasing or decreasing is the value of the property, object, subject or income.
Progressive: tax goes up, income goes up. Regressive: tax goes up, income goes down. Proportional: stays
as a fixed percentage whether the income is going up or income is going down.
Example: real property tax. Because RPT in cities and municipalities within the Metro Manila area is
imposed at 2% of the assessed value of the property. Whether the assessed value is 1M or 1peso, the RPT
pays fixed at 2%
o Corporate Income Tax: stays at 30% flat income tax even if the income of the corporation is at 1B
or 1peso.
When you have progressive income taxation, it simply means that the tax laws of the country or system of taxation is placing emphasis
on more on direct taxes because equivalent to progressive system of taxation is the ability to pay principle. While regressive system of
taxation focuses more on the presence of indirect taxes as against direct taxes. What is encouraged by the Constitution is for Congress
to evolve a regressive system of taxation. This means, Congress would like to have as many direct taxes as can be.
o But the Constitution does not prohibit indirect taxes. It only encourages a progressive system of taxation.
o That is why when a case was field in the SC, on the Constitutionality of the EVAT law as being regressive in nature. The SC
upheld its constitutionality. The constitution does not prohibit the imposition of indirect taxes. Long ago, sales taxes were
there, indirect taxes were already present. The argument that VAT being regressive is that if you compute 12% as a fixed
amount against the purchases of a high income earner as against a VAT on low income earner, there would be a big difference
of the take home pay of the individual.
Example: Mr. A is earning 100,000 per month, if he uses 30% of that 100% for purchases imposed with VAT. And Mr.
B whose income is and he uses 30% for purchases subject to VAT. His purchases per month is Php50,000 plus VAT
of 12% which is equivalent 6000 as against the income component of Php 100,000. He actually paid VAT of 6% only.
 If Mr. B earning only 10,000 in a month and spends 80% of his income to purchase in order to subsist in his living
expenses since we cannot say 5000 is enough. He will have to pay 8000 purchases plus VAT. VAT is Php 916. So he
actually spent for 9.6%.
Although both of them are subjected to a proportional tax of 12% because VAT belongs to the proportional tax being
fixed in amount imposed in varying degrees of the property bought or sold, but in effect the burden of the tax is
different as to Mr. A and Mr. B. There was a difference of 3.6%. Thus, argument is that it is regressive because the
burden decreases as your income increases.
SC: upheld the VAT as valid:
1. Indirect taxes is not prohibited by the Constitution.
2. Indirect taxes or sales tax, which VAT is a sales tax, has been there for a long time. It is impossible to take
it out.
3. Because low income earners are expected to purchase items which are not vatable. As provided for in
Section 109 of your tax code, it lists down from A to Z items which are now exempt. It provides there that
items, which are original in stake or which has not been processed as yet are exempt from VAT. The SC is
actually saying that this group of income earners will not spend on VAT because they will only purchasing
items which are not vatable. Therefore VAT is still a valid tax.
Distinguish Taxes from License or Permit Fees. (If to distinguish, the best answer is to answer as to every distinction you can think of;
Enumeration as to bullet points or numbers).
o As to source of power: Police Power for license and power of taxation for taxes.
o As to purpose: License for regulation; Taxes for revenue.
o As to amount: As to taxes, it is unlimited. It is for Congress to determine so long as provided under the law, you follow the law.
If its 50% tax, then its 50% tax. But for licenses, it is only to recover the cost of regulation. But sometimes if it is exercised in
consonance with the power of taxation, this may exceed the cost of regulation.
o As to when paid: Because every business before it starts would have to be licensed in order for it to be operative, thus it is paid
in the beginning. Taxes are only imposed if an income is earned or for other taxes, such as community tax, if there is capital,
etc.
o As to legal effect: Non-payment of licenses will make the business illegal while non-payment of taxes makes the business still
valid but subject to civil and criminal liability.
Toll Fees vs. Taxes: Toll fees are payments for the use of property. It is not exercised in the power of taxation.
o Toll fees are imposed for the use of the property for purposes of recovering the construction cost. It is not only the government
who has the right to collect toll fees but any private entity as well. The reason there being is that in some cases the government
of the Philippines cannot afford to have these kinds of structures. It will have another foreign company to do the Construction
and the spending and allow the private entity or corporation to recover the cost of construction through told fees. In some
cases, the government will enter into a BOT Agreement, Bill-Operate-Transfer, wherein a private entity will build something,
operate it and after recovering the full cost will transfer the entire property to the government.
o Toll fees is a demand fo the government or private entity for purposes other than governmental purposes.
o As to demand: Tolls fees are a demand for ownership while taxes are a demand of the sovereignty.
Special Assessment vs. Taxes
o Special Assessment is a levy on a parcel of land that has been directly benefited by the public.
Example: If a flyover, BTC flyover, can the government actually claim a levy against BTC? Can they say that that
particular piece of land was benefited by the public improvement? Not all public improvements will entitle the
government to levy a special assesedment against the land surrounding the improvement.
SA is not personal in nature. It is directed against the parcel of land, directly benefited by the public improvement. It
is more a property tax. When we said that thtere is only 1 kind of property tax, which is real property tax. You will
notice that SA is a real property tax under the local government code. It is a property tax against a land benefited
directly by the public improivement wherein the government can directly collect to up to 60% of the cost of the
improvement from all surrounding properties. If no benefit is given, no special levy can be collected.
o Tax is collected on a regular basis while SL is collected only after an ordinance has been passed by the LGU imposing such levy.
And there can be no public improvement every now and then in the same area. For purposes of observance of due process,
public hearing is necessary so that all property owners is given the chance to object on whether or not they will be benefited.
Compromise Penalty (1:13:10)
o Compromise Penalties are those granted by the government in lieu of a prosecution for the violation of the tax law. It is still in
relation to taxes. You will see in the tax code that for every violation of tax law, you will be subjected to fines, imprisonments,
surcharges, and interests. But if you want to escape criminal prosecution, if the government will offer to impose and collect
from you the compromise penalty in lieu of a criminal prosecution for the violation of the tax law. It is allowed.
Example: you have a business and you earn 1M in income and spend 1M in sales, and 1M in expenses. You are at a
lost of 1M. You were advised by your advisor that there is no need to file an income tax return because you did not
earn any income and thus not liable for any tax. Is this correct? NO.
As a rule, the tax code provides that every business has to file his income tax return whether it earned
income or did not perform well. In this example, if you did not file an income tax return and its found that
out, you will be liable for the non-filing of tax return which is criminal prosecution, violation of the tax code
but in lieu of this the government will offer you a compromise penalty of Php 10,000 for that failure to file
the tax return. But you will not be liable for interest or surcharge because you did not earn income.
Surcharge is only based on the tax that has not been paid, you are losing. You will not be liable for interest
because you did not earn income thus you are not liable for tax, no interest which to base on.
 o So, the compromise penalty is monetary in nature. The government is not really interest in prosecuting tax payers but rather
as much as possible into entering into compromise because taxes are the life blood of the state.
o Compromise penalty is for the government to determine and offer. There is another type of compromise which is not a penalty.
The tax payer of the government wishes into compromise meeting and middle ground in the assessment and in the capability
of the tax payer to settle his past obligations. This is a compromise which must be decided upon by both parties. But this
compromise penalty here is the sole prerogative and offer of the government. If accepted, then taxpayer has only to pay. But
the government cannot force the tax payer to pay the compromise penalty. The only recourse left for the government is to
criminally prosecute the tax payer.
Debt vs. Taxes
o Debt is assignable but tax is not generally assignable. Taxes are generally not assignable tax. If you are the statutory tax payer,
it is only against you with whom the government will collect from, whether its direct or not. Say for example, in VAT, there is
a different statutory tax payer and the tax payer burdened by the tax. If the purchaser of the property that you sold did not
pay VAT. You are still liable to pay the 12% VAT because you are the STP whether its a direct tax or not. The liability to remit
the tax falls on the statutory tax payer.
Only in very few exceptional cases, wherein another person is liable for the tax of someone else.
Example: estate tax. If a person Mr. A dies, he leaves an estate. The tax payer is the estate, the person who
died has no more personality. The estate left will be liable to pay the estate tax. If the peroperty is
distributed to the heirs before settling the estate tax, the government can actually proceed to run after the
heirs not anymore against the estate because of the violation of the law that distribution can only be made
after payment or settlement.
o Debts can be paid other in money. While tax is generally paid in money.
o In debtedness, as provided in the Civil Code, there can be no interest collected if it is not stipulated. Unless the promissory
note or written agreement or loan contract provides for interest, it cannot collect interest. But in taxation, interest would only
come in after you failed to your tax on due date. In every regular interval, if you are very prompt in paying taxes, you dont
have to pay interest.
If you are very early in paying your taxes, for NIR taxes, no incentive because of the life blood doctrine, you are not
given any discount. But for LCG and real property taxes, you are given discount of 10% or 20% for real property tax
discount but not to exceed these rates.
o Debts can be compensated or offsetted against each other but not taxes because in taxes, the relationship of the government
and the tax payer is not that of a creditor-debtor. While in debts it can be compensated or offsetted.
(Philex Mining Corp. Case): Philex actually offered its VAT claims for refund in lieu of the governments liability on
excise taxes on mineral extracted. SC said no there can be no offset or compensation between the vat refund filed
and the excise tax due. Excise tax due is already a civil obligation of Philex mining while the claims for VAT refund are
simply inchoate or yet to be proven and is not yet liquidated and thus not yet demandable by the corporation so
there can be no offset.
(Another Case) There was allowed an offsetting. Between the salary of a government employee as against an estate
tax liability.
Subsidy vs. Taxes:
o Subsidies are those which is given or bounties given by the government to the Philippines while taxes are.
o Revenue is the more general term. Revenue is that which is earned by the government through the tax imposition, subsidies
from other nations and tariffs.
o Whiles taxes and subsidies are part of the revenue of every government, taxes are actually imposed against its constituents
while subsidies are voluntary received by the government.
o Revenue, that which enters the coffers of the government. It is more encompassing than taxes and subsidies.
o Internal revenues are the revenues of taxes imposed by the BIR which is part under the NIRC or tax code.
o Customs, duties and tariffs are those taxes imposed on goods coming in or out of the country. But, the tariff and customs code
focuses more on taxes on importation because these are the types of activities wherein we give up foreign exchanges or
currencies. Under economics, the Bangko Central cannot arbitrarily issue legal tenders of the Philippines without foreign
currencies. Therefore, we favor exportations rather than importations. As much as possible we utilize local products than
importing from abroad.
o Tariffs is a table of rates which is synonymously used with customs duties. Its like customs duties as well.
Limitations to the power of taxation:
o Inherent Limitations
o Constitutional Limitations
INHERENT LIMITATIONS:
o First: For public purpose
When you say the purpose is public, it means that it affects the inhabitants of the state not merely the individual. It
is more of directed to the common good of the people.
But there can be indirect benefits to particular individuals.
It can only be appropriated for public purpose. But it can happen that incidentally or a few individuals who can be
benefited. So long as the main objective is for the common good of the people it is still for a purpose. The wisdom of
the tax law is for Congress to decide. The motive behind every law is also for Congress to determine.
So once a tax law is levied by Congress not for public purpose it violates not only the Constitutional limitation that it
must be for public purpose but the inherent nature as well of taxation that always it must be made for a public
purpose.
 A violation would actually result to a violation of the due process clause which is taking of property from the
individuals.
Example: Congress enacted a law which provides that there shall be levied Php1 for every sack of fertilizer produced
by every fertilizer producer. Proceeds of which is to rehabilitate Company B an ailing fertilizer company. Lets say it
is a private corporation. Is this valid?
The law enacted by Congress, according to a SC decision, levying tax of every sack of fertilizer produced for
the purpose of funding and rehabilitating an ailing company which is a private company is invalid because
the purpose is not public. The tax collected or the tax levied is directed to rehabilitate a private corporation
which is actually a direct benefit on a particular entity which is not for the common good.
It made the law void and unconstitutional because of violating the inherent limitation that every tax law
must be for a public purpose.
But it is not so general as to say that a law cannot be enacted to impose a tax in order to fund a particular industry
of the country. Example, the levying of fees and taxes to support the sugar industry is valid because it was for the
common good of the entire industry. It is for public purpose to support that industry, to support the entire
government.
But if it is only for 1 entity or a few individuals or few entities and so it is not for public purpose. You identify someone
to be directly benefited from the tax it is invalid.
To test whether a tax law is for public purpose or not determine whether the proceeds will be used for the support
of the government or any of the government activities which is governmental in character and whether or not its
proceeds is used to promote the general welfare of the government. Other than that, if the main purpose is not any
of those, then it becomes for private purpose and an invalid tax law.
If you are a tax payer, as a student of a class, if you realize that a law has been enacted imposing a tax but the
proceeds is used by the public official or the government to fund private purposes, your recourse is through a
taxpayers suit.
To be able to file a tax payers suit, the requisites are:
o
A taxpayers suit is for the discretion of the courts. The courts may not at all times grant you to file a
taxpayers suit. But the basis of filing that case is generally because public funds are illegally disbursed for
purposes other than for public purpose.
Public purpose should be determined at(2:01:00) We said that the scope of the taxing power of every legislative
department of a country is that they have this exclusive power of determining the wisdom of the law, the motive,
and the expediency and necessity of enacting that tax law. So courts in that point have no power to inquire into the
law, unless, a tax payer comes in to question the wisdom or purpose of the law.
In determining whether a law is valid or not or having violated the inherent limitation that a tax law must be for a
public purpose, public purpose must exist at the time that the law is enacted. If at the time the law is enacted, it will
be there in the deliberations in Congress and it is for public purpose then the law is valid at that point.
If at the time of the implementation of the law, we dont have any control over that. But if and when it is
actually proven that the proceeds of the imposition of that law is not utilized for the public purpose
determined at the time of the enactment of the law, that is when the taxpayer comes in. You question the
illegal disbursement.
o Second: Non-delegation by the taxing authority: As a general rule, the power of taxation cannot be delegated. The power to
impose a tax law remains exclusive to the legislative branch of the government as a general rule. The tax law cannot be
delegated by Congress except in 3 instances:
1. The president who does not belong to the legislative branch is also given the power to do something with the tarrif
rates. Like increase, decrease, or remove protective tariff rates, impose bonds on imports or increase the customs
duty rates by not more than 10%, which are exceptions as provided for in the Constitution.
When it allows the executive branch of the government to enforce the law through revenue regulation
making. It is the Secretary of Finance who makes a revenue regulation enforced in a tax law with the
recommending approval of the Commissioner of Internal Revenue. Since certain regulations as we said
forms part of the law therefore it is as if Congress is delegating that power to the executive part of the
government. But very limited because the executive branch can only execute rules and regulations within
the bounds and parameters provided for and already identified by Congress in the law.
Flexible Tariff Clause in the Constitution provides: Wherein the president can actually, under this tariff
clause, in the Constitution it provides the Congress may authorize by virtue of a law the president to fix the
tariff rates whether to remove existing protective tariff duties, to increase it, to reduce it, according to the
needs of the country and to impose import or export quota bands, and to impose additional custom duties
by not more than 10%. The constitution itself says that Congress can delegate through the president, the
law making power not only in so far as tariff or custom duties is concerned.
This provision is not self-executing. By the first phrase it says, Congress may authorize
by law. As provided, Congress can authorize but it has to make a law first before the
President can actually exercise the right.
Congress already enacted a law with the Tariff and Customs Code and its part of the
Tariff and Customs Code.
WHY: The president is delegated with such power because:
 The primary reason being, the president is actually involved in everything,
not only in importation and exportation but also with the budget, the annual
budgets that we have.
Can the president actually say that VAT should be 100% or 50%? No. Because
there is no law providing the president such delegated power. The
The reason why this was delegated is for EXPEDIENCY purposes. Importation
will cause a major change in our economy vis a vis wqorld trade. If many
goods will come in without proper regulation, local industries will be
affected. If we do not impose import bands or quotas in importation,
automatically by will of the president, for us to be waiting by Congress to
enact a law, 3 separate readings, etc, then our economy will be greatly
affected like the influx of China made items, the influx of Ukay-ukay which is
not actually taxed cannot be regulated properly. Its for the president, and
only 1 person who decides, you can say that anti-dumping duties or
retaliatory duties will be 100% more than what is existing in order to prevent
the flow of that particular item that we do not like in the Philippines.
The word flexible is so flexible as to this matter so long as the president will follow the
rule that the protective rates can be increased or reduced by not more than 100%
additional duties on top of the existing may be increased by not more than 10%. These
are the guidelines Congress has provided the president and the president is so flexible
as to move within these limits and boundaries.
The reason is for expediency, necessity and flexibility. But this can only be done with
NEDA recommendation for purposes of national economy, general welfare and
national security.
Info: We have custom duties which we impose normally. If we have importations that we do not like coming
from a country which discriminates against our products or anything about the Philippines, we can impose
on top of the regular custom duties, a discriminatory tax as well. This is where the president can move
about.
2. LGU. The local government unit has been given by the Constitution as well the power to raise its own sources of
revenue.
Every local government unit has the power to raise its own right to raise its own source of revenue by
imposing taxes, fees and charges against its constituents as provided under the Constitution.
This is NOT self-executory. Just like the power of the president to do something with the custom duties and
tariff rates by virtue of a law granted by Congress, then LGU as well, needs a law coming from Congress so
it can fully execute that provision in the Constitution.
Congress has made a law granting this power through the Local Government Code of 1991. This is the law
enacted by Congress granting the local government units its power to raise all sources of revenue.
Municipal corporations are mere creatures of the Congress so as the inherent power to tax. If Congress
decides to take away this power from the municipalities or cities and do with centralized and national
taxing system, then LGUs will be left without recourse but to simply surrender its power to tax and let the
BIR do the collection of taxes. But we are for local autonomy. So still, we have the LGUs taxing.
3. Exemption of government agencies. If the government will tax itself for the purpose of of using it to fund its
operations, it is superfluous and circuitry wherein you simply remove money from 1 pocket and transfer it to another.
It will also encourage or allow an opportunity for corruption during the transfer. Also, immunity from tax for the
government is necessary so as not to impede the normal operations of the government.
When are government agencies or corporations exempt?
o National government is exempt from tax.
o Municipal governments, as a rule are exempt from tax, because they are political subdivisions
which are provinces, cities, municipalities and barangay. They are taxable, if and when a
government agency is performing proprietary functions it removes the exemption away from
them.
o GOCCs, as a rule are taxable just like any other corporation. In the income tax chapter in the tax
code, there are 4 GOCCS which are exempt from income tax, all others are subject to income tax:
The 4 GOCCs exempt are: SSS, GSIS(Government Service Insurance System); PhilHealth
and PCSO.
Before PAGCOR is exempt but this has been removed from the exemption.
Those other GOCCs not mentioned, they are subject to income tax unless their charter
provides for exemption.
o Fourth inherent limitation: International Comity.
The grounds for exempting foreign government from taxes, etc. on the income that they have is the sovereign
equality of the states which is actually based on traditions, customs, and duties that we dont tax a state which we
recognize as co-equal to us. Besides, every state is immuned from suit. In case, they do not pay if we require them
to pay, our suit will not prosper. So there is no use. We do not tax them actually because of the sovereign equality of
states and the immunity from suit included customs, duties and traditions.
o Fifth, territorial jurisdiction:
 If you go abroad tomorrow, you perform an activity or do some concerts in the US for 1 month and paid 1M USD,
you did that outside the taxing jurisdiction of the state. You taxable? Yes.
It does not only mean to say that you will only be taxable if you are within the territorial boundaries. When you say
within the taxing jurisdiction, there are many things to consider including of course the situs of taxation because the
first thing that comes to mind when we say that the power of taxation is limited by the territorial jurisdiction of the
state is that we only tax what is inside the Philippines. This only holds true for real property tax or taxes on property
because we follow the rule wherever the property is situated.
But for people who can move about freely in and out of the country, we not only determine whether they are in the
Philippines or abroad but also where they earned the income, etc. As of now, the limitation is territorial in nature. If
the income is earned here, the property is here, general rule, you will be taxable.
1. If your parcel of land is in the Philippines, it is subject to tax.
2. If you are in the Philippines working, it is subject to tax.
3. If you are a foreigner earning income in the Philippines, it is subject to tax because you are enclosed in
this territorial jurisdiction. If you are a foreigner earning income abroad, it is not within our power to tax.
He is beyond us. But if you are a Filipino earning income abroad, the answer is yes and no. It depends on
how long you have stayed abroad.
4. Properties abroad. As a rule, properties are taxable where they are located. This is only the general rule
because there are different rules for different types of tax.
Constitutional Limitations: There are many limitations provided in the Constitution, it may be directly said about taxation or it may be
indirectly and applicable to all other powers of the government.
o First, Concurrence of the majority of Congress is needed in order to pass a avalid law granting tax exemption, both Senate and
the House. When you say majority, it means plus 1.
When a tax exemption is granted by Congress there must be the concurrence of both the house and the Senate with
atleast majority both in each. They have to vote separately otherwise Senate will be absorbed by the number of the
House.
Does this hold true as well with passing a law granting tax amnesty?
Tax amnesty means the intentional overlooking of the state of its right to collect taxes which could have
been due to it. While exemption is the foregoing the collection of future taxes. While amnesty is for taxed
taxes. Because in amnesty you are forgiving past violations. In exemption, not yet, in the future, you are
supposed to be taxable but the government withheld its right to collect the tax.
This is the basic difference but bottom line, the government is not getting any money out of it. Therefore,
being a restriction on the governments part to collect. And the restriction that they are not in consonance
with the life blood doctrine, therefore they have to have a strict majority vote.
Since tax amnesty is the same effect as tax exemption because bottom line is both is that the government
is actually forgoing the collection of amounts, therefore, coming up with a tax amnesty law by Congress
also needs the concurrence of majority vote of both Senate and the house for it to be a valid law. For all
others, may it be a law granting the refund of taxes for a particular period of payment or any other amnesty,
majority vote.
o Second, exemption of religious, charitable or education institutions (RCE), non-profit cemeteries, churches and parsonages are
exempt from property tax.
All lands, buildings and improvements, as real properties, of all RCE institutions are exempt from property tax? It
should be ACTUALLY, DIRECTLY, EXCLUSIVELY (ADE) used for the purpose of RCE.
Example: you have a parcel of land owned by you is this subject to real property tax (RPT)? Yes. You have it leased
and used by USC, a non-stock, non-profit educational institution, is it subject to real property tax? NO. because it is
ADE used for educational purpose.
If this is leased by USC and a chapel is built but not a school, it is not subject to RPT because the chapel is incidental
to the main purpose which is for educational purpose.
If USC makes a school, chapel and a dormitory, which is all used by the students, is the entire parcel of land subject
to RPT or partially subject to RPT? Constitution says that all lands, buildings and improvements should be ADE used
by a RCE, etc are exempt from real property taxes. Therefore, the whole land is exempted. What is provided in the
Constitution is only exemption from real property taxes. Whatever other income that will come out with the use of
the property, lands, buildings and improvements, will be subject to other kinds of taxes such as income from the rent
of the building, donors tax for the donations, tax for the transfer of the property in case its sold.
The only exemption is for real property taxes in this provision of the law.
The exemption is not absolute. It requires that the use and not the ownership that matters but its the use. So long
as its actually ADE for RCE purposes, or any other purposes like cemetery, etc.
University of Cebu, is the parcel of land taxable or exempt from real property tax?
Constitution says, ADE for RCE purposes does not require that the school must be a non-stock, non-profit.
So long as the purpose is education in nature, whoever that school is will be exempt from RPT. Whether
UC is a proprietary school or whether USC a non-stock, non-profit school, properties used for education
purposes will be exempt from real property tax.
Ex: School building. This is the parcel of land rented out by you from USC. There is a school building, dormitory, a
canteen was constructed off site. Will the canteen and garden be tax exempt?
Here is a canteen but operated by you. As a condition to USC that you will only allow to sell the parcel of
land if you will be operating the canteen attached to this building. Is the parcel of land exempt from RPT?
 o Example: Styler (canteen in the main building),
General rule, if the parcel of land is used for educational purposes then it is exempt
from RPT so long as it is ADE. It does not matter whether the school is non-stock or
non-profit or proprietary or for profit. The religious institution is does not have to be
Catholic. So long as it is a charitable institution.
But for this incidental activities, like canteens, so long as the canteen is operated by the
school itself and within the campus, then it will be exempt from RPT. But if it is operated
by someone else, even if inside the school, it will no longer be exempt.
So if in USC, there is a bar, which is part of the school building. Only that portion of the
land will not be exempt. All others will be.
o Example, dormitory, which is open for the public, you cannot place exemption for this parcel of
land.
o If the school is operated by the school, and located outside the school: If it is accessible to the
public, then strictly speaking, it is taxable.
o If a hotel in the school and accessible to the public, for HRM students in USC, the income from
outside guests, being merely incidental, are subject to income tax. But the property itself, RPT
that will be exempt because having a hotel is part of the activities it will be having for school
purposes. For the RPT, they can ask for exemption.
o Third, all assets and revenues of a non-stock, non-profit educational institution is exempt from income tax, property tax,
donors tax and custom duties.
Because of the governments priority for education in the Philippines, it elevated the role of non-stock, non-profit
education to a very special class which it granted exemption to the 4 kinds of taxes. It will be exempt from income
tax from revenues derived from educational activities. Donors taxes on donations of properties related to
educational purposes. Custom duties on importations on equipments and items used for educational purposes as
well. Beyond that, NSNP will not be exempt if it is not for educational purpose. It must also be ADE used for
educational purposes.

Taxation - june 29,2010

CONSTITUTIONAL LIMITATIONS (cont.)
Revenue bill must originate exclusively in the House but the senate may propose with amendments law making process

In drafting of tax law, it must originate from the house of representatives. Does that mean the senate has to follow what
the house does? No.
Just like the general ruling in making a law, for revenue laws or tax laws, every revenue must originate from the house
but it does not mean that everything has to originate from the house. The power of the senate is to amend whatever originated
from the house or actually have in advance a substitute bill already made in anticipation of the revenue bill which is to be
passed by the house. So it is just for formality purposes, but notwithstanding, it will have to follow the 3 readings in 3 separate
days wherein a panel form of such enactment is to be given 3 days before.
Exemption of religious, charitable and educational entities, non-profit cemeteries and churches from property taxation

Provision: Charitable institutions, churches, parsonages, convents, mosques, nonprofit cemeteries and any improvements actually,
directly and exclusively used for religious, educational and charitable purposes shall be exempt from taxation.
What is the exemption granted to religious institutions? It only covers the property tax.
When you say property tax, what do you mean by that? If a religious institution has various properties, both real and
personal prop, would all these prop be exempt from tax under the constitution? Piano used by the choir, is it covered by
exemption? No. Piano is not a real prop.
The coverage of exemption under this constitutional provision is only REAL prop tax exemption on real prop. Real prop
refers only to lands, buildings and improvements.
Would the ownership of a parcel of land by a religious institution automatically grant it real property tax exemption? No.
The test of exemption is not ownership by the charitable institution, not the ownership by the religious institution, not
ownership by educational institution. It is granted real prop tax exemption if it is actually, directly and exclusively used by
such institutions. When you say ADE, it refers to the use.
Does it mean to say that incidental use of the property will strip off its right to be exempted from the real prop tax? No.
Incidental use of prop as long as it is -11.30--- main purpose is still covered by the exemption.
i.e. convents used by priests and nuns and canteen in school. When you say exclusively used, it does not mean that it has
to be used only for that religious purpose. It does not mean sole use but it must be used primarily for religious purpose.
i.e. a parcel of land owned by a private individual, leased out to a religious institution. 50% of the area is used as parking
space P10 per hour exclusively used for parishioners. ---- do not be confused with the exemption in so far as real prop taxes
is concerned as against the income tax on the income generated by the use of that prop. In that case, if it is incidental, when
the use of the free space to park the vehicles of those attending religious activities, the portion of that parcel of land is still
exempt from real prop tax because the use is incidental to the primary purpose of what the activity is all about, but the income
generated, the parking fees, is another matter. It is an income subject to income tax. The provision of the constitution does
not grant exemption from income tax to income generated by these religious institutions. If we will move towards income
taxation, what section 30 of the tax code provides for all those exempt organizations, nonprofit cemeteries, nonstock
 nonprofit educational institution, government educ. Inst. they are exempt from income tax but any use of their prop will be
subject to income tax regardless of how the proceeds will be used. In that case, religious institutions earning income from
parking fees, can they say that they will be exempt from income tax because the fees will be used to maintain the premises?
It is not an exemption because what is granted by the constitution is only real property tax exemption.
Q: if parking space would also be used by outsiders and not merely parishioners? We have to determine what the numbers
are. If majority are outsiders, probably it is not already incidental to the existence of the church but will be a commercial
parking space for everyone so that will not be exempt from real prop tax.
i.e. San Carlos is non-stock non-profit, if it leases out a portion of its space (10%) for use to Jollibee, is it subject to tax?
We are still in real property exemption, it says charitable, religious and educational inst. is exempt from real prop tax whether
they own the prop or not so long as the prop is ADE used for the purpose. In this case, whether this parcel of land is leased
out by USC or owned by it. if it leases out or subleases out a portion to a commercial establishment, this is taken out from the
coverage of the exemption. A portion of this entire parcel of land would have to be paid of real prop taxes. Jollibee space is
to be paid of tax. Who is liable for this real prop tax? It depends on the agreement. The contract of lease would have been
entered into, real prop tax follows first whoever the owner is, if it is leased out to somebody else, liability may be shifted to
someone else.
Would it differ if USC will be changed to UC? Would your answer still be the same? If we change this to UC, a proprietary
private educational inst. which is for profit, would your answer still be the same, 90% exempt, 10% taxable?
If the canteen is owned and operated by the school itself and it is located within the campus, it will be exempt from real
prop tax. Same holds true with operating dormitories, with operating bookstores, computer rent outs, so long as it can be
justified as related for the promotion of educational welfare of the students then you can say that the use of the space is still
ADE used.
i.e. USC has an idle parcel of land that it plans to sell to UC, is this parcel of land held by USC as an idle parcel of land be
exempt from real prop tax prior to its sale to UC? No. Prop held for future use or for speculation purposes are not covered by
the words ADE use for charitable, religious and education purposes.
Let us say this parcel of land is fully used for educational purposes and is sold by USC to UC. Its exempt from real prop tax
because it is entirely for educational purposes. Will the sale to UC be subject to income tax? If the sale is not for educational
purposes it is not covered by the exemption.
If it is donated to UC, will it be subject to donors tax? No.
Advance topic: Income taxation and donors taxation but nonetheless is preliminary to the discussion of the exemptions
granted to non-stock non-profit educational institution which we will expound later.
Real prop tax exemption is that which is granted to the 3 major institutions - charitable, religious and educational. All
educational institutions are really exempt from real prop taxes so long as their assets, buildings, lands, improvements are
used for educational purposes. We do not distinguish. But the exemption stops there. Whatever they do to the prop, these
religious, charitable and educational institutions whether they transfer that, they donate that, etc, it will be subject normally
to taxes applicable to other institutions. But that is the general rule because we have not studied yet the next exemption
granted to a very special institution which we call the non-stock non-profit educational institution.
i.e. If a religious institution has a parcel of land which it wishes to donate to a school, to a private entity, to a charitable
institution, will it be subject to donors tax? Yes, because religious institutions are not exempt from donors tax as a rule. Will
it be subject to local transfer tax which is a liability to the local government units? Yes. Because local transfer taxes are not
real prop taxes therefore they are still liable for that.
But how about educational institutions? Will they be taxable as charitable and religious institutions are taxable? Not
necessarily. Non-stock non-profit educational institution has a very very large scope of exemption granted under the
constitution. What is it all about? The constitution provides that all revenues and assets of non-stock non-profit educational
institutions used ADE for educational purposes shall be exempt from taxes and duties.
Exemption of nonstock, nonprofit educational institutions from taxation

i.e. if this is USC leasing out to Jollibee earning P100,000 monthly rent income, will the P100k be subject to income tax?
Yes it is taxable since income derived from leasing to Jollibee is not used ADE for educational purposes.
Notwithstanding that the constitution says that all assets. When it says all assets and revenues, assets refer to exemption
from donors tax, real prop taxes. Revenues refer to exemption from income tax. All revenues of a non-stock non-profit
educational institution shall be exempt from taxes which is income tax so long as it is ADE used for educational purposes.
What if USC raises the defense that P100k monthly income proceeds will be used to further the purposes of education,
meaning proceeds will be used for educational purposes, will they still be subject to income tax? The constitution grants
income tax exemption to revenues of the school so long as it is ADE used for educational purposes. It is somewhat vain in
saying that it is ADE use if we apply this argument that P100k income rent from Jollibee is to be used to buy books for school,
to maintain the premises, etc., meaning the argument that this will actually be devoted to the educational purposes of USC,
can they actually be exempt using this agreement? If you look at the constitution, it would seem that a non-stock non-profit
educational institution can get away with everything by saying that all proceeds will be used for educational purposes. Would
it run counter to the provision in Sec 30 last paragraph of the tax code which says all entities otherwise exempt from income
tax which includes non-stock non-profit educational institution are exempt from income tax. It is just but a repetition of what
the constitution provides, but in the last paragraph, it further went on to clarify that all income derived by these institutions
including non-stock non-profit educational institutions will be subject to income tax if it is an income derived from the use of
real or personal prop. Is 100K an income derived from the use of real prop of USC? Yes. Therefore the argument that these
proceeds will be used for educational purposes will not stand. It will still be subject to income tax.
 What it really means when it said that revenues are exempt from income tax of non-stock non-profit educational
institution is that revenues coming from its educational activities, the use of library if it has a fee, use of dormitories, the use
of canteens operated by the school, use of parking spaces which charges parking fees. These are proceeds incidental to
activities operated by the school itself in order to enhance the services to the students but Jollibee is entirely and distinctly
operated by another entity which is for profit therefore, it is as if USC is gaining profit out of the rental of this space. Of course,
if you were USC, all you have to do is do not charge rental fees. Therefore, no income, ask for donation from Jollibee. It is
exempt from donors tax if the donation is intended for educational purposes. Do not execute a contract of lease, execute a
deed of donation.
EXEMPTIONS:
1. Income tax exemption
2. Real prop tax exemption
3. Customs duties
4. Educational institutions are exempt from donors taxes.

Donors tax exemption: On what kind of prop? Would all donations to and from the school be exempt from donors tax? It
has to be shown that it is ADE used for educational purposes.
i.e. If USC would import other equipments, would it be subject to customs duties? Customs duties are taxes you pay upon
claiming your imported items from the bureau of customs. No release of goods without the settlement of customs duties. If
the school orders and imports equipment from abroad, will they be liable for customs duties upon claiming the items from
the Bureau of customs? Yes if primarily for educational purposes? If importation of school bus? Yes. So long as it is for ADE
educational purposes.
Lets change USC to UC, importation of products, exempt from customs tax? Does UC have the same set of exemptions
granted to USC? Assuming UC is proprietary? Not the same level of exemption as nonstock, nonprofit.
If you talk about the NIRC, this is not covering customs duties and exemptions because customs duties is part of tariff and
customs code. The exemptions granted to proprietary educational institutions or educational institutions other than non-
stock non-profit or government institutions, the constitution is not so direct as to say that they are exempt. What it actually
says is that congress may grant exemptions to these types of institutions because the constitution favors and supports
education to the constituents. What congress did when it enacted the national internal revenue code, it provided partial
exemption granted to these proprietary educational institutions.
What do you mean by proprietary? In the nature business which has the end of obtaining profit. Sec 27B of tax code
provides partial exemption granted to proprietary institutions.
What is this exemption? It is an exemption of income tax. Ordinarily, institutions or private entities are subject to 30%
corporate income tax. When you say corporate income tax, it does not mean tax only on corporations. It is a tax on all
businesses or entities other than sole proprietorships or other than those ran only by 1 individual. Whether we say
corporation, strict corporation, entity, foundation, institution or a partnership that is taxable, it is subject to corporate rate
of 30%. Supposedly, educational institutions will be covered by this because it is not a sole proprietorship, it is an entity. But
by virtue of constitution, non-stock, non-profit educational institutions has been granted full exemption from 30% income tax
while proprietary educational institutions under section 27B of tax code provides for a partial exemption of 20%. It means to
say that proprietary educational institutions are subject only to a tax rate of 10% because the 20% is an exemption. Although
it did not say 20% but we presumed that the difference between 30% and 10% is 20%. Schools will be subject to 10% income
tax.
An easy scheme to get rich (1) organize a religious cult, (2) schools. Schools whether it is proprietary, you enjoy privileges
of 10% income tax. It is very much lower than the 30% when you make a business. So you make a business out of school.
It is not in the tax code nor the constitution as well, educational institutions have went further in claiming their
exemption, non-stock non-profit educational institution also asks for exemption from withholding taxes on their
deposits and investments with financial institutions. If you have a deposit in a bank, the bank withholds 20% of
interest income even before you have actually received the interest.
Schools (non-stock non-profit) because they have been granted income tax exemption also sought from the
department of finance an exemption from final withholding taxes on their interest from bank deposits. Because in
some cases they have extra money and they put in a bank. Their argument is interest earned will be used for
educational purposes etc luckily they have been granted exemption on many conditions:
1. They must submit financial statement showing the interest income earned.
2. They must show proof of how the proceeds of that income was spent for etc

What if claiming for exemption is not an accredited educational institution? Even if it is charitable, even if it is non-stock,
non-profit foundation if its nature is not really an accredited school by the CHED or DECS it will not enjoy the exemption
granted to non-stock non-profit entities.
When it says in 27b that it is exempt from taxable income, it only means income from operation. Customs duties is a tax
not on income but on the landed cost or value of the products coming in. so it is based on the total value of the product.
When you say subject to income tax, the tax is directed at the income or profit after deducting your costs from your proceeds.
Rule of uniformity and equity in taxation

Are these 2 the same? No. uniformity and equity in taxation do not mean the same.
Uniformity There is uniformity in taxation if subject matter whether persons, properties or particular activity belonging
to the same class is taxed at the same rate. You may take the que from uniformity of the rate of those belonging within the
 same class and they will be accorded the same privileges and sameness of liabilities imposed. But equity in taxation does
mean uniformity.
Equity Equity is the apportionment of the burden of taxes is distributed heavily on those who are better able to pay the
tax and lesser to those who cannot really pay the tax. So it is based more on ability to pay principle
Which of the 2, uniformity as against equity, follows the directive or progressive system of taxation? This is the table of
individual income tax rates provided under section 24 applicable to Filipino citizens and resident aliens including non-
resident aliens engaged in trade or business:
Not over P10,000 ------------------------------------------- 5%
Over P10,000 but not over P30,000 ------------------- P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000 ------------------- P2,500 +15% of the excess over P30,000
Over P70,000 but not over P140,000 ----------------- P8500 + 20% of the excess over P70,000
Over P140,000 but not over 250,000 ----------------- P22,500 + 25% of the excess over p140,000
Over P250,000 but not over P500,000 --------------- P50,000 + 30% of the excess over P250,000
Over P500,00 ----------------------------------------------- P125,000 +32% of the excess over P500,000

i.e. If you belong to P1 until P10,000 it will be subject to 5%. Anything in excess of P10,000 up to P30000 is subject to 10%
and so onif your income is more than P500,000, it will be subject to 32%. Is this uniformity in taxation or equity in taxation?
How can you apply the words uniformity as being applied to taxing the same class with the same rate and equity based on
the ability to pay principle. When you say uniformity, you are taxing persons, prop, or activities belonging to the same class
with the same uniform rate. Congress has deemed it proper to classify individuals belonging to the P1 income earner up to
P10,000 income earner while those P10001 to P30000 earner belongs to another bracket. They are uniform. All those within
the same bracket are taxed at a uniform rate. So uniformity would apply at every bracket. As to the wisdom as to how they
have divided the income bracket is up to congress. When can you say there is equity in taxation? Equity in taxation is taxing
persons, prop and activities belonging to different classes with the different rates according to their ability to shoulder the
burden of tax. So this is vertical equity or equity in taxation. Where is progressive system of taxation? Did congress really
develop a progressive system of taxation in this individual income tax rates? Progressive - Income tax rate increases as your
income increases.
Equal protection clause (indirect constitutional limitation)

Is equal protection clause related somehow in this equity? Yes.

Do u think it is valid for congress to impose varying rates on individual income earners? Yes.
Corporate income tax rate is 30% . Do you think it is valid for congress to have assigned varying and increasing rates to
income of individual persons as against the flat rate of 30% on corporate income? Congress can make valid classifications in
determination of tax rates, application of tax rates? Yes.
How would congress make classification without violating equal protection clause? i.e. why would individuals earning
P10,000 be taxed only as such while individuals earning P500000 be taxed as 32%? If these groups of taxpayers would
question the rate they want to be applied 5% how would you defend the tax? Why did congress afford to tax all entities
regardless of income at the same rate? How would you defend the classification made by congress?
Equal protection clause is violated when distinction is made by congress if no distinction is called for, on the other hand,
if no distinction is made by congress when distinction is necessary in the application of tax rates. In this case, there is no
violation of the equal protection clause because there is substantial distinction between those belonging to such income
brackets. There is as well no violation of the equal protection clause when congress decided to impose varying rates, lower
rates to those low income earners and a flat rate to corporate because corporations and individuals are not in the same
footing. Corporations are taxed at a flat rate of 30% despite a very low income in cases of low income earning corporation
because corporations can deduct expenses related to the business. While for us individuals if we are mere employees, can
we deduct our personal family living expenses before these tax rates can be applied? No. We cannot deduct the gasoline
that we spent for, the food that we bought, etc. So long as no violation of equal protection clause and there is:
1. Substantial distinction
2. Distinction is germane to the purpose of the law, ability to pay principle.
3. It will apply not only to present conditions but as well to future conditions.
4. Applies equally to all members of the same class - classification must apply to all those situated within the same
circle. Wherever that particular person is located, the same rate will be applied. This will apply even to an individual
who is not present in the Phils. at the time the income is earned. It applies to those who are situated in the same
scope.

Non-imprisonment or non-payment of poll tax

A person cannot be imprisoned by nonpayment of community tax unless he falsifies such.

What is your penalty to non-payment? Interest will be imposed, no imprisonment for nonpayment of poll tax.
Poll tax a tax based on residence regardless of citizenship, nationality, income and property.
Non-impairment of the jurisdiction of the supreme court in tax cases:

What is that limitation of the power of congress to impose taxes? The SC has the power to finally adjudicate tax cases. If
congress decides to amend the constitution, can it withhold form the SC this power to decide the finality tax cases. No. It
provided in the constitution.
 What is the role of the SC in so far as the power of congress to impose taxes is concerned ? The SC acts as the final arbiter
in tax cases. The consti provides that congress is so powerful as to withhold and take away the various powers of the different
courts that we have. But it withholds from congress the power to take away from the SC its role as the final arbiter in tax cases,
the power to review, revise, modify, affirm any issues on the legality of taxes, the constitutionality of tax laws etc. Power of
congress actually stops in the enactment of the law but the final determination whether it is constitutional or not still belongs
to the SC. The 3 branches of the government are still co-equal, each has a role to play.
Other provisions in the constitution which are directing so for as taxation is concerned but not necessary a limitation is :

o Flexible tariff clause the delegation made to the president in so far as customs duties and tariffs are concerned.

o Power to raise its own sources of revenues has been given to local government units.

INDIRECT CONSTITUTIONAL LIMITATIONS

No mention of specific mention of taxes but they might be applicable to taxation as well.
1. Due process of law

No person shall not be deprived of life, liberty and prop without due process of law.
Does it mean to say that deprivation of prop can be made? Yes. So long it is in compliance with substantive due process
and procedural due process.
Compliance of 2 processes:
Substantive due process in relation to taxation- for due process to be satisfied, every enactment of a law must not
contradict the provisions of the consti and other tax laws.
Procedural due process - in the assessment and collection stage and how the tax law must be enforced, everything must
be fair and reasonable, nothing oppressive and arbitrary. With it comes the requirement that in the enactment of a tax law and
application of the proceeds of the tax law it must be for public purpose, otherwise, it is violative of due process. It is like taking
away property from the tax payer.
2. Non-impairment of obligations and contracts

When can say that a tax law enacted by congress is violative of the consti provision of non-impairment.
Contract must be between the government and a private person or entity. Does it include a franchise granted exemption
by the government? No. Congress can repeal, modify, revoke, amend franchise contracts.
What do you mean by impairment? Results when there is a change in the rights of the taxpayers.
When can a taxpayer invoke this? Can a taxpayer actually say that there has been a violation of this constitutional
provision if a new tax law is enacted impairing the exemption granted to them. Yes if the exemption is based on a contract.
Contract between the government and private entity/individual.
Would exemption granted under a law allow a tax payer to invoke nonimpairment clause? No. When an exemption is
taken away by a new law, can taxpayer raise nonimpairment clause? When you want to invoke nonimpairment clause, do
not base your argument on the exemption granted in a general law which is applicable to everyone. You can raise
nonimpairment clause violation wherein you have entered into a contract with the government granting you an exemption.
When you say contract, it means to say it is bilateral. The govt is as well receiving some benefits out of granting you the
exemption. so there is an agreement, there is a contract. Your liability under a tax law and the exemption granted under
general law is but a civil obligation, it is not a contract. We said that there is no set off because there is no contract between
the government and the taxpayer. If your exemption is fully dependent on the law, then congress repealed it, you cannot say
that you have a contract that has been repaired. But if you have an existing contract, the government cannot impair it if the
contract is bilateral and it is an onerous contract.
Will non-impairment clause apply to contracts not with the government for taxation? NO. Non-impairment clause is a
very general provision. That is why it is under indirect limitation. But if you apply it to taxation, we are thinking here of some
kind of exemption that has been granted to you as a taxpayer by the government. So whenever we are talking about a contract
that has been impaired in relation to the power of taxation, there is some kind of reprieve, exemption, amnesty granted by
the government and if it is taken out unilaterally by the government impairing your rights under a contract, you can invoke
non-impairment clause because the power of taxation is not supreme to the non-impairment clause. A new law cannot
supersede a very personal contract between the government and a taxpayer wherein the taxpayer is granted an exemption
in exchange for some consideration that the government is receiving. It is all about exemption or anything which decreases
collection of the government.
Franchises do not fall under the definition contracts in so far as this consti provision is concerned. Why? There is a
particular provision which says that franchises are withdrawable and revocable at any time without impairing the rights of
the franchise grantee.
3. Non-infringement of religious freedom

Taxes shall not be imposed which infringes the right to exercise religion.
i.e. Ayala and SM St. Paul store selling religious articles, is it free from taxes? No. Can they invoke this provision? No.
When the consti says noninfringement of religious freedom, there shall be freedom to exercise your religion without being
subjected to taxation otherwise there will be a violation of the due process, deprivation of liberty to exercise your religion.
What it actually prohibits is taxing the activity itself including the free distribution of items which promotes your religious
activity and your religious freedom. But when you engage in selling, especially if it is for profit, you will be subjected to sales
 taxes, value added taxes, even on your religious articles except bible because bible is literary. Statues, rosaries etc., if it is sold
by an outlet in ayala, sm it presumes an entity that is for profit. It is taxable to income tax, VAT, it is even required to be
licensed. What is a No-No in religious freedom is you do not require a license or permit fee from religious activity or the
distribution of religious articles which are not really intended for profit.
Religious freedom shall not infringe by the rule that no taxes shall be imposed for any religious activity, no permit in
relation to taxes necessary, no license fees to distribute items, bibles etc, except if it is already sales and for profit.
4. No public money shall be appropriated for religious purposes

The congress cannot enact a law to give public funds to support a religious organization. Not even the predominantly
catholic religion can demand a share from the collection for the public funds that we have. There is an entire separation of
the church and state. No appropriation purposes not even to support a priest, an institution, a religious activity. But the consti
provides for exemptions:
1. Priests in govt orphanages
2. Penal institution
3. Leprosarium
4. Armed forces in the phils.

What is exempt from the rule that no public funds shall be appropriated for religious purposes? If a priest, minister, pastor
works in a leprosarium, govt orphanage, penal institution (priest is there to give final blessing)or the Armed Forces etc. so this
is exempt from the rule that no public funds shall be appropriated for religious purposes because what is actually being given
to these priests, ministers and pastors are in the form of compensation or salary for the service rendered because it is not
directly a religious activity for the entire country or parishioners but it is for a specific purpose. It is exempt because it is not
really to promote religion but address the needs of those who are in these institutions.
Is the compensation or salary of the priest working in a leprosarium exempt from income tax? No. The priest has to pay
income tax.
i.e. A parish priest or a priest assigned in a chapel far-off. He is receiving a monthly amount. He is working in religious
capacity. Will that monthly amount that he is receiving be exempt from income taxes? No. If he receives the income while
rendering services to parish he is subject to income tax.
Nuns are subject to income tax on any income they receive. What the consti provides is that no public funds shall be
appropriated to promote a particular religion. In order to promote any particular religion, no public fund shall be used for
religious purposes. Exception is when these priests, ministers and pastors are hired in these 4 institutions. What they are
actually doing is not promoting religion but addressing the needs of those that belong of the same region, the prisoners, the
orphanage, etc. so this is not appropriating public money for religious purpose. Going to the issue on whether what the priests
are receiving whether in these 4 institutions them doing the service, or those priests detailed in different parishes both are
subject to income tax in their personal capacity.
What if we exempt them from income tax, would it violate any constitutional provision? Separation of church and state,
equal protection clause. They are still individuals earning income. They are subject to the same tax rates that we are subjected
to. It is not a lucrative practice, vow of poverty as well.
There is a BIR ruling that even SC justices are taxable on the honorarium that they are receiving for preparing bar
questions. Anything which is an income to anyone is taxable unless you fall under the exemption. Whomever you are,
whatever capacity you are doing, your service, in general rule, is subject. Anything which is an income to an individual or
entity is taxable unless it falls under the exception.
i.e. When Pope John Paul came to the Phils and billions was appropriated for that visit. Did it violate the rule that no public
funds will be appropriated for public purposes? No because he came here as head of state rather than as a religious icon or
as a pope.
5. Freedom of the press from taxation

No license fees, no permit fees can be collected to express your opinion or even the airing of news etc, but what is taxable
is the business of producing magazines, newpapers, etc. When it is already translated into printed materials that is when it
becomes taxable but to express your opinion is not taxable.
6. Power of the president to veto any particular item

SITUS OF TAXATION
It is the place of taxation a subject matter, object or person becomes taxable if it is within the taxing jurisdiction of the state in
question. Different subject matters of taxation which is person, property, exercise, business, transaction, activity, would have different
situs.
Which of the 5 inherent limitations closest to situs of taxation? Territorial jurisdiction.
What are the factors that have to be considered whether a particular state has juris over that subject matter? the different subject
matters - person, property (real, personal, personal tangible, personal intangible), excise occupation, transaction, privilege, activity,
business.
To determine whether subj matter is within the juris of the taxing state, how will we know? What factors do we have to use?
1. Source of income if it is an excise tax (occupation, activity, business, profession, privilege) where is the source of income?
You have to answer that. If it is in the phils, then phils has the juris to tax.
2. If it is a person is he a citizen of the phils? is he a resident of the phils?

3. Property tax subclassify if real, personal, tangible, intangible, where is the property located, etc.

it is the type of subj matter, what kind of tax has to be imposed, what is the citizenship or nationality, where is the
residence, where is it located etc. where is the source. We follow a very comprehensive situs of taxation. One question will not
be answered by one factor in determining whether the situs is here in the Phils or not.
i.e. If real prop, the situs is where it is located. Real prop are immovable prop. If prop is located in the Phils even if the
owner is abroad, the Phils has juris to subject it to tax. What kind of tax? Real prop tax.
If excise tax, ask what is the use of the tax, is it for business, etc. since the source is in the phils, it is subject to phil tax.
Real prop situs where prop is located
Personal tangible prop where prop located
Personal intangible prop GR: follows the owner/domicile of owner

In some cases, there is multiplicity of situs. One state claims that it is taxable and another state claims its taxability as well.
When does this happen? i.e. shares of stock if that share of stock is issued by a domestic corporation but the owner of the
stock is a non-resident alien individual an investor who is residing abroad, will the dividends coming from the shares of stocks
be subject to phil income tax if the owner is abroad, the citizenship is nonfilipino and residence is not here? Subject to income
tax? Yes. Even if domicile of owner is not here? Why? What is the right of Phils to subject it to phil income tax? The privity of
relationship, the benefit received by that corporation. The domestic corp is located in the phils. and the shares of stocks issued
by the corp remains domestic wherever and whoever the owner is. The Phils is granting protection and benefits to that corp
resulting to it operating. If there is income coming out from the shares of stocks whoever the recipient is whether he is here
or not will be subject to income tax because of the privity of relation between the govt and corporation and the benefit received
theory.
GR: For intangible personal prop you just determine who the owner is and where he is domiciled.
E: 2 exceptions when domiciliary theory is not applicable 1. when the law provides that it will have situs in another place
and 2. if there is another basis that the benefit received theory etc on which to base and we have to follow the exception
to the rule.
i.e. example of intangible personal prop something which you cannot see, receivables and payables. If you have a payable
to a non-resident bank, the asset of the bank in the Phils is actually receivable of interest, interest is intangible, is the interest
you are paying from foreign bank is tangible in the phils? GR: All intangibles, personal prop follow the domiciliary theory as a
rule therefore in interest it is the general rule. Wherever the domicile of the borrower is, it is the state which has the taxing
jurisdiction. If he is the borrower, despite that the income earner of the interest is staying abroad, it will be subject to Phil.
income tax. Basis: protection and benefits that the government is giving to that borrower allowing him and enabling him to
perform his duty in complying his obligation abroad. The foreign bank abroad would be expecting that whatever income he
is earning in the Phils. would be subjected to tax.
A share of stock in a foreign corp. (intangible), usually a foreign corp does not have a domicile here but if that corp has
operation of more than 85% or more in the phils, then it acquires domicile in the phils., any share of stock will be subjected
to tax in the phils whoever the holder of the stock is. That is why whenever a foreign individual who has a share holding in
the phils corp or foreign corp operating 85% in the phils, wherever he dies, whatever his nationality is are always subject to
estate tax in the phils because of the benefits and protection received by the corp issuing the stock.
Another reason for multiplicity of situs different taxing authorities. Why would both have the same interest on the same
income? The primary reason why there could be multiplicity of situs in 1 same subject matter is that different states have
different concepts of what domicile is. They have different process of taxation for the type of use of the prop or subj matter
and there is multiple distinct relationships with respect to intangibles. In order to address the multiplicity of situs, because it
can be burdensomegoing back to interest:
i.e. if mr. leal obtains a loan from a foreign bank, who is the income earner? The foreign bank. Because mr. leal would
have to be obligated to pay not only the principal but also the interest. The foreign bank is earning income out on the loan
that it had extended.
The Phils is interested in taxing the interest that he has to pay abroad because we follow the domiciliary theory
that wherever the borrower is domiciled, we tax the intangible. We tax the interest that he remits abroad. Of
course that foreign bank is a resident of that foreign state registered to their tax authority. Whatever income
he has earned including the interest that he has earned here would have to be declared and taxed by that
foreign state. Two taxing states on one same interest.

How do tax laws address multiplicity of situs of taxation? Whenever one subject matter and there are two or more states
taxing the interest there are remedies:
1. by granting tax exemptions

2. by allowing tax deductions are allowed for foreign tax payments i.e. if the tax that has been paid and remitted by mr.
leal on the interest here in the Phils., if that is a Japanese corp/Japanese bank, they may allow the taxes paid in the Phils
as a deduction from their income before tax is computed or the other way around. (sec 34 of tax code)
 3. allowing foreign tax credit this is different from allowing tax deduction. Tax deduction is claimed as an expense. Allowing
foreign tax credit is deducting the tax that you have paid directly against the tax liability. Which is more favorable? Foreign
tax credit because you are offsetting the tax paid directly against your liability. Tax deduction is different you are claiming
as an expense only an item which you have paid.

4. Entering into bilateral tax treaties between 2 states we have 51 tax treaties entered into. i.e. whenever an income is
earned by a Japanese corporation here for 1 day service may be exempt from income tax in the Phils. it can only be taxed
in Japan.

DOUBLE TAXATION
2 types of double taxation
1. Direct double taxation/ double taxation in its strict sense
2. Indirect double taxation in its broad sense

Does the constitution prohibit double taxation? Does not outrightly prohibit double taxation but it indirectly prohibits direct
double taxation because it violates due process clause and equal protection of laws. Although there is no word double in the
constitution, once a person invokes that there is double taxation in the strict sense, it means to say that he is invoking the violation
of equal protection clause and the deprivation of his due process.
Double taxation in its strict sense (direct) prohibited. Taxed twice by same taxing authority, same taxing period, same subject
matter and for the same purpose, within the same taxing year. This is violative of the constitution provision of due process and
equal protection clause.
Indirect double taxation lacking any 1 of those items in direct double taxation. Can be same subject matter, same purpose,
same kind of tax but different taxing authority. i.e. if it is taxed by the national government and taxed by the local govt. It is not
indirect double taxation that is prohibited.
i.e. if a certain prop is subject to real prop tax, subject to local transfer tax when sold and subject to capital gains tax when sold,
is there double taxation?
1. real prop tax is imposed by LGU on existence of prop itself.
2. local transfer tax is imposed by the LGU on the sale, barter or exchange of the prop.
3. capital gains tax which is taxed together with local transfer tax is taxed by the National government on the sale,
barter or exchange of the prop.

Is there double taxation particularly between these local transfer tax and capital gains tax which is a tax on the same subject
matter, for the same purpose within same taxing year? No double taxation.
Parcel of land, you have it sold, you pay capital gains tax 6% to BIR based on the selling price or fair market value whichever is
higher. You have to pay documentary stamp tax of 1.5% to the BIR but basis is the contract that you have entered into. You have
to pay local transfer tax of of 1% sometimes of 1% (it depends) to the LGU all referring to the same prop, same year, same
purpose because you sold it. Is there direct double taxation? Why is it not direct double taxation? Why is it allowed? Why valid? It
is not direct double taxation because BIR, National government, LGU are different taxing authorities. One element is lacking.
DIFFERENT FORMS OF ESCAPING TAXES:
1. SHIFTING
When the burden of tax is shifted by a person who is required by the statute to pay a tax. Shifting is made to another person. The
impact of taxation, the shifting is the process of transferring the burden and the incidence.
Impact of taxation is the point at which the tax is imposed as provided under law. It is shifted by that person required by the law to
pay to another person who is burdened by it, and incidence of taxation is when the burden finally falls or rest to the consumer or the
person willing to shoulder the tax.
i.e. VAT because shifting can only happen in indirect taxes. There can be no shifting in direct taxes because the person on whom
the law expects to pay is the person who is burdened by a direct tax, but in indirect tax there can be passing on or shifting of the burden.
Forward shifting when the tax burden is shifted from the factors of production down to the factors of distribution up to the
consumer. Every shift is forward.
Backward shifting if it is from the consumer to the production.
Onward shifting if it is more than 1 shift.
i.e. If a fisherman (producer) fishing fish puhunan is P0.00, it will be put in a can and the manufacturer purchased it at P100, section
105 of tax code says that every seller is subject to 12% VAT in value of goods sold. How much will he actually sell it? P200 +12% VAT. So
the wholesaler purchased it at P224 which is the selling price + VAT ( which goes to the govt.). It has been shifted forward to the
wholesaler. The wholesaler will sell it to the retailer at P300 + 12% VAT selling price, again tax goes to the government but it is shifted
on to the retailer at P336 which is the purchase price of the retailer. If the retailer of the hotel serves it to the consumer at P400+12%
VAT, 12% goes to the government, it is paid for by the consumer for P448. From P0, consumer actually shouldered the entire burden
of taxes as it is passed on from every chain of distribution.
2. CAPITALIZATION
Form of escape of taxation. Someone else is passing on the burden of tax to another person. There is no actual payment of tax. The
reduction of the price of the subject matter, the reduction being equivalent to the future taxes the buyer is expecting to pay. It is like
backward shifting where consumer passing on the burden to the source or producer. Whenever a buyer of a certain property expects
that the property will have to pay will generate future taxes that he intends to recover from the selling price. So he will offer a lower
purchase price. The reduction in the offer between the seller and the acceptance supposedly by the buyer is that which is equivalent
 more or less the future taxes that he needs to pay on the property that he is purchasing. It is a form of shifting but in the end, just like
shifting, the government does not lose anything. It is just that there is some escape of taxation by one person but someone else has to
bear it. In shifting, it is very obvious, it is the next person on whom the tax has been shifted who will be burdened and shoulder. In
capitalization, the seller is receiving a lower selling price but it is still the buyer who has to shoulder the taxes. But then again he has
recovered by offering a lower purchase a lower purchase price.
3. TRANSFORMATION
A form of escape of taxation wherein a person afraid that he will lose his market if he passes on the 12% VAT or any other tax on
the selling price, he instead shoulders paying the tax by giving out a lower price intending to recover himself in turning out more units
produced at a lower cost.
i.e. If he purchased the P100 fish and he intends to sell it at P200 + VAT but he is afraid that there is another supplier who can
actually sell at P210 not P224. What he does is simply shoulder the tax as a component of P200 but on the hope that he can recover
the tax that he is shouldering by selling more because he can produce more at a lower cost.

i.e. When you order a particular product like keychain, it has to have a hole. If you order 1 piece, you have to shoulder the cost of
the hole. If you order 100 pcs, the value of each piece would have to be way way lower than one piece that you ordered. More sale
for less cost.

4. TAX EVASION
Illegal. You evade the payment of tax. Tax evaders (people who evades taxes). Tax dodging another word for tax evasion.
RATE program of government to Run After Tax Evaders.
Evasion is the employment of illegal and fraudulent means to defeat, lessen or do away with the payment of taxes. It is illegal and
fraudulent. It is a heavy charge to say that you are fraudulently evading the payment of tax. It is also a heavy charge to say that you are
a tax evader. When can you say that evasion took place?
There are 3 factors of tax evasion. Evasion can only happen if all these factors take place:
1. End to be achieved - pay less tax than what is legally due. State of mind. You are thinking of lessening the payment
of your true tax or not paying the tax at all. But it is still conceived in your mind.
2. The accompanying state of mind which is evil or in bad faith, deliberate. Even if you have arrived at the first factor
of the end to be achieved, it is not total evasion but because you can still think that I want to lessen the payment of
taxes but second factor is not present if you would employ tax avoidance because tax avoidance is legal. If your end
to be achieved is not to pay tax or lessen the payment of tax and the accompanying state of mind is evil, deliberate,
intent refusal to pay the tax, evasion will be perfected once you reach the 3rd stage.
3. Course of action or failure of doing an action which is unlawful when it is translated into a deed i.e. that you have
not filed your tax return or you have filed but did not pay the correct tax.

i.e. an indication that you have evaded taxes the failure of declaring your income tax in ITR. Would one instance be equivalent
to evasion? It would point out to tax evasion when the failure is for 2 consecutive years. Since this is attended by fraudulent
intent which is all in the mind and you cannot prove at all times that there is actual fraud sometimes you to have to consider
the circumstances surrounding whether there is constructive fraud. If there is already a failure of 2 consecutive years that you
have not truly reflected the income that you have earned or have overclaimed the deductions or expenses than the true
expense, then the circumstances would point out to fraud and evasion.
5. TAX AVOIDANCE
Not the full amount goes to the government. Avoidance which is tax minimization is employment of legal and permissible means of
avoiding the payment of tax. In avoiding you have to avoid. There is a legal means to avoid. You use another route, use another activity
in order to avoid the payment of taxes. It is not evading the payment of taxes so this is legal permissible tax rates methods and means
of computing your income taxes or doing your activities.
Tax avoidance and tax evasion does not at all tantamount to zero collection by the BIR. You can avoid in part, you can evade in part,
you can also evade the tax totally or not.
i.e. if there are 2 bridges, one is free, one has toll fee for passing through, you pass on to the free bridge not charging for a fee. The
same instance, if you have excess money and you want to invest it in a bank, avoidance can be to an extent wherein you deposit your
money not in the regular peso account but in a dollar account. Why? Your interest in peso account is subject to 20% tax. It is withheld.
If you deposit in a foreign currency unit system dollar, it is only subject to 7.5% income tax. So you are actually avoiding paying the
12.5% tax. Another instance is when you actually deposit your money on a long-term basis with maturity of 5 years, totally exempt from
tax. To avoid tax is legal because it is provided by the law. It may not be the intent of congress to allow you to escape taxes but since it
will not defeat the literal provision of the law then it is simply called tax avoidance.
i.e. if this is company A owned by company B in US. Co. A is located in Cebu and the other is located in Lapu2. Both are branches of
the head office in US. You follow the single entity concept rule . if it is located in Cebu city whatever remittances after earning income
here you have to remit to your head office but provided by your tax code, it says that whenever a branch locates within an economic
zone, it is exempt from the 15%. So you transfer your branch inside an ecozone. Whatever you give abroad is 0 tax. This is simply tax
avoidance.
6. TAX EXEMPTION
A grant of immunity either express or implied to particular persons or corporations from the obligation to pay taxes which generally
they should have been liable to. An immunity granted for future taxes.
 TAX AMNESTY intentional overlooking of your tax violations wherein the government actually foregoes the collection of
any. If you simply read the definition of amnesty in the book, it will come to mind that amnesty is totally not paying any tax or any
money because you have been pardoned. It is not the case.
In a recent amnesty law enacted by congress sometime 2005, amnesty law is to the point where you are actually pardoned
from paying penalties of your previous violations but you pay the basic tax. Amnesty can be in varied forms although it will not be
impossible in the future to have amnesty law actually pardoning everyone of us from paying past taxes. The reason why amnesty
law is not so popular is because it will only encourage violators. Why would you strictly follow the provisions in the law when you
know in the future an amnesty law will be enacted.
What is the nature of tax exemption? It is personal. Generally revocable by the person granting it. Waiver on the part of the
government. Whenever an exemption is granted, only the one who actually falls under that exemption is personally free from paying
the tax. It cannot be shifted off.
i.e. if a corporation is granted tax exemption. The stockholders owning the corporation will not be free from taxes on the dividends
that they will earn from their investment. It is personal to the corp.
Why do you think the government would grant exemptions when it needs taxes to run the government? The rationale or basis for
granting exemption is public policy. So long as it will subserve public interest for the good of all. So notwithstanding that it becomes in
part a waiver of collecting taxes by the government, it expects to receive taxes in some other forms. i.e. if this is a corp which has been
granted income tax holiday for 6 years. It means to say that for 6 years the government will not be receiving income tax. The government
is actually expecting other taxes in some other forms.
1. incentive fiscal is the influx of industry. 2. Employment of Filipinos. 3. Taxes from the salaries of employees. 4. VAT
5. Other forms of taxes like withholding of taxes.

Every corporation in the first minimum 3 years is actually operating at a loss, it has to recover the investment first.

TAXATION JULY 6
FORMS OF ESCAPE OF TAXATION (continued)
1. EXEMPTION --- is the immunity granted to persons/ classes of persons or corporations who would otherwise been subject to tax as
other people belonging to the same situation

Does congress have the power to inherently grant tax exemption? Yes, it arises from Congress inherent power to tax (the
power comes with it)

But if Congress grants tax exemption, what is the constitutional limitation? In an enactment of a law granting exemption,
congress must vote by: Majority vote of both houses, voting separately

Insofar as the LGU is concerned do they have the inherent power to tax? No, it is not inherent

But can they grant tax exemption? Yes, if the LGU is delegated power to impose tax (bring its own sources of revenue) it
carries with it the power to grant exemption but not inherent

Example: in the LG Code, LGU can grant real property tax exemption, local business tax exemption, or exemption
in cases of natural calamity, disasters, etc. (Like what happened during Ondoy --- cities of Marikina and Rizal
could enact an ordinance granting exemption from real property taxes for those properties destroyed by the
typhoon)

It is an immunity of payment from future burden of taxation

If an exemption is granted, what is the nature of the exemption granted?

Note: when you want to avail of exemption, burden lies on you to prove you are exempt. It is not enough that
there is a law granting you exemption

The second requirement is that you must be able to fall under the conditions for the exemptions to apply. So
General exemption is not enough, you must prove that you satisfy all the privileges required

1st nature: Is its personal privilege granted to person/ class/ corporations

Does it mean to say exemption granted is not transferrable? General rule it is a personal privilege and
not transferrable ---- unless law expressly provides for its transferability because exemptions are
against the lifeblood doctrine

2nd nature: if it is founded on contract it cannot impair the non-impairment clause

 General rule: all exemptions are generally revocable and withdrawable by the government like when
it needs funds. This includes franchises because constitution itself provides it is revocable.

Exception: when the exception is granted based on the contract the government entered into with a
private corporation or person --- it cannot be withdrawn because it will violate non-impairment clause.

The only instance the exemption can be withdrawn even if it will violate the non-impairment clause is
when the government will exercise the police power of the state

3rd nature: it is a waiver on the part of the government

Moment congress passes a law it knows it is waiver

4th: it is not necessarily discriminatory from other persons

Because it is presumed there is substantial distinction of else it will violate the equal protection clause

What do you mean by equality in taxation, is that the same as equity in taxation? No. Equality in
taxation is simply the equal protection clause or uniformity clause (similarly situated taxed alike) while
Equity in taxation is taxation that apportions to those who are better able to pay the taxes

What is the reason/ rationale by tax exemption is granted despite the waiver/ absence of taxes?

Reason why tax exemption is granted is to subserve public interest and public benefit --- which is sufficient to
offset the monetary loss

Public benefit derived is Non-monetary in a sense

Grounds for tax exemption:

Contract --- law between parties

Public policy

Reciprocity --- created by treaties; to lessen burden of international taxation when 2 taxing jurisdictions are
interested in 1 and the same subject matter of taxation; this can be provided in a treaty or in a municipal law of
the Philippines or another country

Equity --- is not a ground for tax exemption because

What is equity?

Typhoon Ondoy resulted in many business at a loss, can they demand equity as an exemption and
demand release from income taxes?

Taxation and exemption is statutory in nature --- without a tax law there can be no tax. No exemption
can be availed without another law granting exemption

For the 3 grounds, there must be a law supporting the ground of tax exemption. Equity cannot be a
ground for exemption because it has no ground to stand on/ support it

Can the government arbitrarily enter into contracts granting tax exemption? There must be a basis for such exemption.
Government should receive full equivalent for the exemption

It must not be unilateral in a sense that only the tax payer is benefited by the terms of the contract. The
government should receive full equivalent in other aspects or benefits

Public policy as a ground for tax exemption --- to help necessary industries, help newly created business, put investments,
when it wants to foster charitable institutions and non-stock non-profit institutions noble intentions

Public policy requires still a general or special law supporting it

 example: foundations tax exemption are not granted In constitution itself. But Sec. 30 of tax code, congress also
granted exemption to these non-profit institutions. So there is a general law, tax code is a general law

Example: new investment in Philippines are exempted from first 4 years of income tax RA 7916 promote eco-
zone enterprises (a special law)

So must always pinpoint to a law and show that all conditions necessary are satisfied

Exemption may be either

Express --- clearly granted/ provided under the law

Is there exemption by implication? No there is no exemption by implication (this is different by exempt

from omission)

Taxation is statutory in nature --- if activity or person is not enumerated under the law then you are
exempt by omission

Exemption by omission --- those not enumerated under the law (because without a law, still cannot be exempt;
so use this term to be technically correct)

Total --- exempt from all types of taxes

Does it include exemption from indirect taxes (like VAT)? General rule: exemption from all taxes covers
only those which the taxpayer is generally liable for and does not include VAT.

Indirect tax are not easily granted as exemption, because these are taxes the burden of which are
shifted to another person

Take the case of San Carlos, exempt from income tax, real property tax, Sec. 109 of tax code (tuition
fees exempt from vat) --- but it is liable to pay VAT on its purchases

Is San Carlos exempted from paying withholding tax from salaries of its employees? San Carlos cannot
claim exemption, because the tax is actually somebody elses. San Carlos is actually a conduit of the
employee and the government. San Carlos is both the withholding agent of the employee and the
collecting agent of the government

Partial --- exempt from certain types of tax

Granted exemption partially

Example: corporations situated in economic zone are granted 5% preferential tax rates, and not be
liable for VAT or income tax

Personal --- granted to certain persons

Impersonal --- granted to certain classes

Examples of exemption --- give example of statutory, constitutional and special law exemption (see book)

CONSTRUCTION OF TAX EXEMPTIONS

How tax exemption laws are construed? Strictly against the tax payer --- because taxation is the rule, exemption is the
exception. All persons property and transaction, should bear a burden a share in the cost and expenses in running the
government

4 exceptions to the general rule:

Law expressly provides liberal construction in favor of Tax payer

Exemption granted to particular class of persons

 When it concerns public property

Real property owned by the government, notwithstanding use in proprietary or governmental

functions ---- because only real property tax exemption (is different from income tax exemption)

That real property tax exemption is given in relation to use --- applies only to religious, charitable and
educational institutions

But when it comes to property owned by government --- use is immaterial, ownership is sufficient to
grant exemption from real property taxes

There are 2 kinds on exemption from Real property tax:

o Exemption based on use

o Exemption based on ownership --- example the government

Exception to exception: if the government allows 3rd persons to use the property,
it takes away exemption based on ownership

Exemption in favor of government and instrumentalities (specifically income taxes

Provision in constitution granting exemption to religious, charitable institutions

2. TAX AMNESTY --- are waiver on the part of the state of the penalties or delinquent taxes due

How construed? Strictly against tax payer --- because it is the same nature as tax exemption in the sense that it is a waiver
on the part of the government to connect penalties from violators

Tax remissions, conditions, refunds --- how construed? Strictly against tax payer

Tax remissions

Tax condonation

Tax refunds

If tax code provides imprisonment for tax violators does it make tax laws penal in character? No, because it tax penalties
are only to encourage prompt payment of taxes; it is only to compel the timely payment and compliance of taxpayers and
only to punish tax evasion

Tax laws are civil in nature --- are laws of the territory and not of the occupying enemy. Tax laws will not change
with the change in government

Tax laws are not penal in nature --- ex post facto laws do not apply

Tax laws are not political in character

CONSTRUCTION OF TAX LAWS

Taxation is statutory In nature. Without tax law, no taxes imposed

If there is a tax law that is clear (in imposing tax) then it must be carried out. IT will be strictly construed against the tax payer
because he is clearly liable under the law.

But once the provision is doubtful, it is only when it will be construed strictly against government --- only when there is doubt!
Because tax laws is purely statutory in nature, without a clear tax law, there can be no tax

NATURE OF TAX LAW

 Do tax laws have prescriptive period? Some are prescriptible some are not. Or else we will be at the mercy of the government

o Tax code and tariff and custom code provide for prescriptive periods. But there are also provision that provide for
imprescriptibility

o When it is all about tax evasion, a criminal case can be filed by the government within 5 years from the commission of the
crime OR if the commission is not known, from the discovery and institution of judicial proceeding

It can be made imprescriptible ---- because it can be filed 5 years from the time government has knowledge. So
if I were the government I would say I had no knowledge

Even if you discovered it now, if the government does not institute criminal proceedings, it does not prescribe,
so it is lifetime

o Another example of imprescriptibility: Fraudulent returns --- prescribes 10 years from the date of discovery. So long as
the government says that is did not discover your fraudulent returns, it does not prescribe.

o But general rule: right to assess you prescribes to give you peace of mind. In the absence of fraud --- the government can
assess you only within 3 years from the filing of the return. Under the local government code the LGU can only assess you
within 5 years from the payment

o Under the Tarriff and customs code --- once you have settled the final liquidation of customs duties and 3 years have
lapsed, the government cannot question your payment.

o These are the prescriptive periods in the absence of fraud. But fraudulent activities would result to imprescriptibility

HOW ARE TAX LAWS APPLIED

General rule: prospective application of tax laws (but not an absolute rule)

o Why not retroactive? Because It will be applying taxes to back taxes or past transactions on which it had no knowledge
of the taxes so it will be absence of due process especially it is more burdensome to the taxpayer

Exception

o Law expressly provides for retroactive application --- but notwithstanding express provisions of retroactivity still it there
will not be retroactive application in all cases --- if it results to oppressive taxes and equates to lack of due process, it will
still be applied prospectively

o Example: RA 9204 took effect Jul. 6, 2008, it exempted from tax the minimum wage earners. With it there was also
increase in personal exemptions.

All income within the calendar year, will be totaled and exemptions are deducted to cover your living
exemptions

Before: for every single, head of family is 20K or married is there is exemption AND additional exemption of 8K
for every dependent child

Now: 50K each regardless of status and each child is 20K each. This compensates the transportation and grocery
expenses you use.

At the end of 2008, what did the BIR (Who is the exec. Branch of government) enforce these 2 laws? What
exemption was applied?

if you use 50K for the whole year, you would be using retroactive application for half (Jan Jun) but the law did
not provide for retroactive application --- so what happened, for 2008, for the 2st half of the year, apply half of
the old 20K exemption and half of the new 50K exemption so you have 35K as exemption

because the law did not provide for retroactive application. So on july 6, was the only time the new law took
effect

had the law provide for retroactive application to Jan 1 2008, we could fully apply the new 50K exemption
 This is lifeblood doctrine as well, exemption is strictly construed

MANDATORY AND DIRECTORY PROVISION

Mandatory provision--- are those which we find in tax law or regulations implementing it

Directory Provision --- provisions contained in circulars, orders issued by the head of office to its subordinates for the proper
implementation of the law

REVENUE REGUALTIONS
o What are revenue regulations? (see below, when differentiated with rules and regulations)

o purpose of revenue of regulations? Enforcement and execution of the law

o who issues revenue regulations? Secretary of Finance

o What is the role of the commissioner of internal revenue (his signature is still on the revenue regulation? Only
recommending approval by the commissioner

Is one of the powers not delegable by the commissioner

General rule: all of powers of the commissioner of international revenue are delegable

Exception: 4 powers not delegablewe will learn later

o For every revenue regulation, you will see 2 signatures: the one who issues and the one who recommends

o Enforcement actually falls with BIR for national revenue taxes that is why it is a recommendation coming from the BIR
itself

What differentiates Revenue Reg from Rulings/ Opinions of commissioner?

Main difference: Revenue regulations (implementing rules and regulations- --- are the more general interpretation of the law, to
explain and carry effect the general provisions of the tax law for the purpose of properly implementing and executing it. It is a
clarification but on a general level

o When revenue regulations are issued it does not pinpoint to a particular tax payer, it does not provide for a specific
scenario that is actually experienced by the tax payer

Rulings/ opinions of commissioner

o Are issued by the commissioner of the BIR --- because these are the less general interpretations of the law, catering to a
specific situation presented by the taxpayer

o A taxpayer when In doubt of interpretation of the law, can seek a ruling or opinion of the commissioner but he has to
present the actual facts (no hypothetical questions is allowed to be basis of the ruling to be issued)

o Is the ruling of the BIR Comm. subject to review of Sec. of Fin.? Yes

Commissioner of Internal revenue has the power to issue rulings/ opinions but it is not a final. It can be reviewed
by the secretary of finance.

Other powers of commissioner not delegable (2nd and 3rd)

Power to issue rulings of first impression --- those rulings that have no precedent as yet

Power to revoke, revise, modify existing rulings

o All other existing rulings and opinions (meaning those with precedent) can be issued by the
Deputy Commissioner or Asst. Commissioner

How do you make revenue reg. valid and effective? Requires publication --- this applies only to revenue regulations
 o Not hold true for rulings and opinions

Do revenue regulations have the force and effect of tax law? It forms part of the law of the land

Can the current Sec. Fin or Comm. BIR revoke existing rulings issued by his predecessor? Yes

o Does it make rulings and opinions volatile? What happens is already in effect is reversed by the commissioner?

Example: Mr. X commissioner of 07-09. He granted exemption to a particular entity. In 2005 a new law enacted
where the exemption was no longer covered. When Mr. Y became commissioner, it came upon ruling of Mr. X
so he reversed the tax payer. Will the taxpayer be liable for taxes upon issuance and reversal?

Answer: as a rule, rulings are not applied retroactively . if there is a subsequent ruling reversing the previous
ruling it is applied prospectively. But there are exemptions to the rule: (in these instances reversal of the ruling
applies retroactively)

When the taxpayer seeking exemption applied it in bad faith and thus able to get the exemption

When the taxpayer seeking exemption deliberately omitted/ misstated material facts leading to the
grant of exemption

When the subsequent findings of the BIR are different from the facts present when the ruling was
made

*in all cases, it is about the data presented by the taxpayer

Towards the end of every ruling issued, there is a provision that this ruling was issued based on the facts given,
that any deviation would lead to a change of opinion would nullify the ruling issued. This gives BIR area of aveue
to reverse/ withdraw opinion given

SOURCES OF TAX LAWS

o Constitution

o National law

o Local ordinances

o Executive orders

o Presidential decrees

o Treaties

o Judicial decisions

o Revenue regulations

o Rulings and decisions of the executive branch

BACKGROUND ON INCOME TAX

What is income? All income/ wealth that flows into the hands of the taxpayer (including those from illegal activities) other than he
return of capital (example: finding yamashita)

o Capital --- is that which provides the income

o But in some cases you derive income without capital (if is given to you in silver plate; example: see money on the floor,
finding treasure in backyard)

o Example of capital: that which you invest, that you allow to produce an income

o Capital is the tree while fruit is the income.

 o Example: deposit money (your capital), it earns interest (your income)

Income taxation is something else. It is taxing an income. And not all income are taxable. You have to satisfy the requisites of when
an income becomes taxable

3 requisites before income is taxable (to income tax)

o There must be a gain or profit

What is gain or profit? its the result from reducing the proceeds from the cost

The tax is only a tax on the profit or income (not capital/ puhunan)

The only exception where there is a tax on the capital is Sec. 24(d) or Sec. 27(d) --- capital gains tax on sale,
barter, exchange of real property located in the Philippines and classified as a capital asset

Example: parcel of land bought at 1 million sell at 2 million --- tax here is on the capital because basis of capital
against tax is the gross selling price. So regardless if you sold it at a profit, or sold it at a loss, you will be taxed
on your selling price. *this is the only exemption if you read through the income tax where there is tax on capital
and not the income

Had this not been a parcel of land (capital asset) bought at 1 million, sell at 2 million --- income tax is applied
only to the 1 million profit

Is income merely a tax on the difference at of the price and cost? (that tax only profit/ income) but what we
study in income tax is to study all the revenue, the cost and the income. Once you get gross income, this is where
you apply the tax rates.

Prizes winning from sports competitions --- are winnings taxable unless sanctioned by the PSA (Philippine sports
association) and approval Phil. Olympic committee

So Manny Pacquio is practicing it as a profession, his fights are not sanctions so his income is subject
to general rule that all income are subject to income tax

July 13, 2010 (2nd Part)

A. Definition of Terms
What is income?
In its broad senseall wealth which flows into the hands of the taxpayers other than as a mere return on capital.
Why? Everything which comes to the taxpayer as an addition to his asset except for those which are merely returns,
because it is his capital, are considered income already. It is the broad definition because it includes everything which
comes to the hands of the taxpayer.

In its strict/ more specific meaning senseit is an amount of money coming to the taxpayer for the service performed, for an activity
which he engaged in, or for an investment he has made but it is not all inclusive because as we have said, anything that is seen
without anybody owning that income or wealth can be considered as income insofar as the finder is concerned.

So, if you file for illegal dismissal, aside from back wages because that is compensation income, and you are awarded damages
(exemplary and moral damages), is this subject to income tax? Is it an income?
Yes, it is income because it increases your patrimony or your asset. All damages that you receive are considered income
except actual damages.
As to moral, exemplary damages, arising from various reasons such as breach of promise to marry, accidents, physical
injury, illegal termination, illegal dismissal is considered income. WON it is taxable, it is a different story. It has to satisfy
all the other requirements in order to be taxable.

How about actual damages, is that an income? Youre driving your car and you met an accident, and you were awarded damages?
The actual damages was paid as a breach of a promise to marry, is that an income?
No, it is not considered income because it is an actual loss awarded to the person who suffered actual damages. So long
as the actual damages is equivalent to the actual loss suffered by the recipient, then, that is not an income. It does not
increase your asset or wealth. It simply to recover the value of the property that was lost. So, it is not income. But once
 the actual damages has been miscomputed and it is more than the actual damages that you have suffered, then it is
considered as part of your income.

If you find treasure in your backyard, is it considered income?

Yes, it is income.

Are all kinds of dividend considered income?

(this was answered in the later part of the lecture)

How about illegal gains, is that an income?

Yes, it is income.
What is capital?
It is a fund or property existing at one point of time.
What is income tax?
Tax on income
Simply, a tax on income or on amount which increases the net worth or net value of the taxpayer
This definition is included because it is not in all cases where the BIR can determine the income tax of a person based on
his income alone. In some cases, taxpayers do not reflect their true sales or income, and they overstate or over claim their
expenses in order to arrive at a lower taxable base or taxable income as against which the income tax rates are to be
computed. So, what the BIR does in order to assess taxpayers of their true income and collect the true tax, is to simply
determine the net worth of a taxpayer.
What is net worth? Simply stated, it is your value. Assets less liabilities, this is your net value. What the BIR does when it
does not have books on which to audit or no reliable books. Some taxpayers have at least two sets of books. They maintain
two books of account. (refer to the illustration below) So, what they do is determine the net worth of the taxpayer from
one point in time to another point in time, any increase, so if this is 2007 to 2009, no taxes are paid in between, would
the BIR simply agree on no tax payment? What they will do is compare the value. If this is 1 million and this is 10 million,
there is an increase in the net worth of the taxpayer which is 9 million. 9 million is an income although not fully declared
as an income.

Net Worth 2007: 1 Million

No Taxes Paid 9
MILLION

Net Worth 2009: 10 Million

So, income tax is a tax on declared income and those which is reflected from an increase in the net worth or net value of the taxpayer
because it will reflect the sources of the income by the taxpayer which is actually undeclared.

Tax on all yearly profits arising from property, profession, trade or business, or as a tax on a persons income, emoluments, profits
and the like. It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right
of a person to receive income or profits
What is gross income?
Means all income derived from whatever source, including but not limited to the following, see Sec. 32 (A). It is defined in various
ways, depending on what context presented.
This is the entire formula (refer to the illustration below). Your first revenue is your sales. Assume that you are selling siopao, how
much did you buy the siopao for? Any difference is your gross income but you deduct the salary of your salespersons and
transportation (to and fro your source; then to your buyers). You get the taxable income. The tax rate is not multiplied against the
revenue nor directly against the gross income. You are allowed certain deductions.
Revenues
Less: Cost
_________________
Gross Income
Less: Deductions
_________________
Taxable Income
X Tax Rate
_________________
Tax Due

Gross income is all income derived from whatever source, whether it is from illegal sources or from found treasure. It all forms part
of your gross income, if you truly declare all wealth which flows into your hands.

B. Purposes of Income Taxation

 All taxes are for the purpose of raising revenue save for the case of secondary purposes such as to offset the effects of sales and
consumption taxes which are seen as regressive taxes by some proponents and in order to mitigate the effects of the inequitable
distribution of wealth between different income earners. Of course, this is made together with the imposition of estate taxes
because we are taking about wealth and income distribution.

C. Systems of Income Taxation

What are the systems of income taxation in the Philippines?
Schedular systemfollows a schedule of rates. The Tax Code or Congress treats differently every category of income earners.
Global systema uniform rate or proportional rate for all types of income so long as it is classified within the same class. If it is
corporate taxpayer, all the income of the corporations regardless of value is taxed at a flat rate of 30%
D. The Philippine law is following what kind of income taxation system?
The Philippine law is following the semi-global and semi-schedular system of taxation because this is what is provided in the Tax
Code.
Why is it semi-schedular? Give me an example of a scheduler tax rate.
-----Because the income is treated differently according to a taxpayers ability to pay. An example is Income tax on
individuals.
A global income tax system views indifferently the tax base and treats all the categories of income the same which is
a uniform tax rate applied to the income of corporate taxpayers.
What are the income tax methods followed by the Philippine tax laws? What are the methods of taxing the income of an individual?
If you go into business, all that flows into you is revenue. But that is not taxable because a portion of that is simply a return of
capital. If you buy siomai at 5 peso each and sell it at 10 peso each. You have revenue of 10 pesos. But you have a capital of 5, so
what is taxable is the difference of 5 plus all your other expenses.

There are 2 kinds of tax methods followed in the Philippines but in different occasionsgross income taxation and net income
taxation.

The basic difference is the deductions (expenses that you are allowed to claim).

Gross income taxationincome is taxed at gross without the benefit of deductions and expenses found under Sec.
34 of the Tax Code. Sometimes, it could even mean that it is taxed at a revenue.

Net income taxationas the word net implied, is taxation based on net income after you are allowed to deduct
some items.

What are the advantages and disadvantages of gross income taxation?

If we follow gross income taxation and your income is sourced from service, service income (i.e. working in Junquera), what is your
concrete source that you can deduct? If we follow the gross income of taxation, you will be taxed directly with the amount paid by
your customers. No deductions allowed.
Advantageous to the government:
More revenue going to the coffers of the government
Simplified method of taxation. There is nothing to determine whether the expenses is allowable or not.
Disadvantages
Inequitable to the taxpayer. It is unjust. Why are they not allowed to deduct the costs incurred in order to get that income
of revenue?
It will not encourage taxpayers to earn more because everything goes to the government. And would lead mainly to tax
evasion because taxpayers would not declare their true income due to high tax rate. WON the tax rate is high, it is still
high because it is directly computed against your gross income without the benefit of gross deductions.
What are the advantages and disadvantages of net income taxation?
Advantageous more on the taxpayer because he is given the chance to deduct all the expenses and deductions there is so long as it
is applicable in the business for which he is engaged in or the profession he is practicing.
Disadvantageous on the part of the government because of the allowance for deduction, it will be more tedious for the government
to determine whether the expenses or deductions claimed are valid or not; legal or not. It becomes an avenue for over claiming
expenses especially in family owned corporations. There is no 3 rd person investor who is interested whether the income you are
declaring is the true net income. In one actual case, for example, part of a cost of a service company was the cost of the motor
vehicle, which is personal, owned by one of the owners children. Can the BIR plug that loophole? Of course it is very difficult unless
we demand for the gross income taxation. But then again, applying gross income taxation is not equitable in all cases.
E. Features of Our Present Income of Taxation

What are the features of individual income taxation?

Schedular system of taxation
As your income increases, your tax rate also increases. 5% to 32% tax rate for individual taxpayers.
Would the sole proprietorship business be covered by the scheduler system of taxation or the global system of taxation?
Sole proprietorship is owned by one owner. Hence, it is covered by the scheduler system of taxation. In fact, when you
 sue a sole proprietorship, you have to include the owner of the sole proprietorship. It is like taxing an individual. It follows
still the rate of 5% to 32%. It does not follow the 30% flat rate because it is not a corporation.

Tax rates are progressive in character

As income increases, your tax rate also increases.

Modified gross income as regards pure compensation earner

If you are a pure compensation income earner in the Philippines, meaning all your income is derived from pure
employment, then, you will be subjected to gross income taxation although modified. Modified in the sense that you will
be allowed to deduct personal and additional exemptions, remember, the 15k exemption and the 25k exemption. For
every child, 25k exemption. Thats what makes it modified but it is still gross. It is still gross because you are not allowed
to deduct expenses like transportation expenses to and from your office, or your food during office hours. No deductions,
like depreciation to your car etc.
So, it is gross but modified. There are a few, one or two, deductions that you can make.

But as regards those individual taxpayers that derive business, trade or professional income, we adopt the net income system
For example, you are the president of a multi-national company but at night you perform services. You have two incomes,
two typescompensation income from employment and compensation income that you have at night but not thru
employment (from your profession). By the time that you pay your income tax, you have to consolidate everything at the
end of the year. Will you be subjected to gross income taxation or net income taxation? Are you allowed to make
deductions(net income taxation)?
--You are subjected to net income taxation. By the process of elimination, your modified gross income taxation will only
be applicable if you are a pure compensation income earner. Once you cross that boundary, meaning you are a pure
business income earner, pure profession income earner or modified (both income and employment), you will now be
allowed to claim deductions. You will be covered by net income taxation. But in all cases, the schedular rates will have to
be applied for individuals.
!!! Let us go to rates. This is a backgrounder for individual income taxation.
1. Always, always the rates will be schedular.
2. WON an individual is allowed deductions. The rules would be:
If you are a pure compensation income earner, your deductions would only be personal additional
exemptions which will subject you to modified gross income taxation.
If you earn compensation PLUS business or profession or trade, you are now shifted to the other type of
taxing your income which is net income taxation. You will be allowed deductions. Logic behind this is
once you earn income other than from employment, you will be expected to have incurred expenses for
your business, trade or profession.

Pay as you file system

Whenever you file for your return, you are expected to pay within the same day.
Under certain cases, pay as you earn system, as applicable to income subject to withholding tax
Individuals are also subjected to the rule that they pay the taxes as they earn. It is covered by the withholding tax system
because you are expected to be withheld of your taxes the moment you earn it. When you receive your salary, it is already
net of withholding taxes. The moment you receive interest from bank deposits, it is already net of taxes. Pay as you earn.
What are the features of corporate income taxation?
Global concept of taxation
Because you are taxed at the same rate. Example is that of corporations. It is taxed at the same rate regardless of what
type of corporation it is (whether domestic, foreign resident, or non-resident foreign corporation) and regardless of the
amount of income that it has earned. So, it is global.

Corporate taxpayer, particularly domestic corporations are entitled to deductions insofar as domestic corporations and resident
foreign corporations are concerned, we adopt the net income tax system.
Corporations, as a rule, are following net income taxation (Ex. SM deducting from its gross income the salary of its
employees) because they are allowed to deduct business expenses. But this is not absolute. A resident foreign corporation
is subject to gross income taxation.
Non-resident foreign corporations are not allowed to deduct business expenses because they are not doing business
here in the Philippines. For every income that they earn they are subjected to gross income taxation. The concept of a
corporation is to do business and earn profit or income. Therefore, only domestic corporations which are engaged in
business are subject to net income taxation. Resident foreign corporations which registered itself in the Philippines is
registered outside as well. The registration starts outside.

Difference between domestic and resident foreign corporation

 COMPANY A COMPANY B
99% owned by Filipinos 99% owned by Germans
Registered in British Virgin Registered in the Philippines
Islands (domestic corporation)
(resident foreign corporation)

Company B is a domestic corporation because it is registered in the Philippines. Company A is foreign. It becomes
resident when it also registers in the Philippines. If it is not registered, it remains a non-resident foreign
corporation.
Only those corporations doing business in the Philippines are allowed to claim exemptions. When you do
business in the Philippines, you incur expenses which are deductible.

Pay as you file system (except insofar as the electronic filing system is applied)
If you file the return, you are expected to pay unless they avail of electronic filing system which gives them 5 days
thereafter to pay the taxes.
What are the criteria used in our present income taxation?
This is only for income. Do not consider real property.

Residency
As a criteria, you have to know whether the he is a resident or not.
Nationality or Citizenship
You have to know whether the resident is a citizen or not.
Source/ Place
Whether the income has been earned in the Philippines or abroad.
Sometimes the execution of the document, the finality of the transaction etc. doesnt even matter, it is where the
source of income is. (well learn this in letter J, situs of taxation)
F. Sources of Income
What are the 4 sources of income?
Is the source of income a place? it is not a place. it is a property, activity or service that produces the income. To be
considered as an income coming from the Philippines, it is enough that the income is derived from within. You would
know that there is a source within and without the Philippines (letter J, situs of taxation).
Capital
Fund or property existing at one point of time. It can be an investment or capital in order for it to grow.
Labor
Without any tangible capital, you can derive income out from labor performed.
Both capital and labor
Like constructions
Sale of property
Dealings in real property (sale, barter etc.)
G. Criteria to Determine if Income is Taxable
In summary:
1. There is Gain or Profit
In determining the profit from the sale of property, the formula is
AMOUNT RECEIVED / REALIZED LESS COST OF PROPERTY = PROFIT
2. The gain or profit is realized or received (either actually or constructively received)
3. Such gain or profit is not exempt under any law or treaty.

When can we say that the income which flows into our hands are taxable?
There is a gain or profit
The gain or profit is realized or received (either actually or constructively received) during the taxable year
Such gain or profit is not exempt under any law or treaty

Illustration: You purchased a parcel of land in 1961 for 1 million. Today, its value is 100 million. Do you have an income? Do you have a 99
million income that is taxable?
A. Parcel of Land

Purchased in 1961 Php 1,000,000.00

Today Php 100,000,000.00

 Do you consider Php 99 Million as taxable income based on the criteria that you have just mentioned? So its not taxable because it has
not yet been sold? What if nobody buys the property? Will you pay the tax on the Php99M if no one is buying the property? Therefore,
it is not taxable. Because it failed to follow number 2 criteria. Its not an income that you have realized or you have received.
What the difference from realizing and income or receiving?
o So you own this one and has the power to dispose it, is it not realizing an income? Not all economic gains constitute taxable
income. Mere increase in the value of the property without such value having been actually realized does not constitute an
income but is merely an unrealized income or unrealized gain. In this case, until and unless you dispose of this property and
actually sell it for the value that you expect. It is not a realized income and not being realized, with more reason it is not a
received income.
o There is a big difference between receiving an income and realizing it. Which comes first? Whats the difference between
constructive receipt of an income and realizing it? You must know what comprises of profit. The formula as provided in your
outline is simple:
Proceeds or the revenues less the cost is equals your gain or profit. So if you were able to sell it at Php 100M for a
cost of Php1M, your profit is Php 99M. Is it taxable or not? Depends whether the income is received or realized.
When you say its received, there are 2 connotations there:
Actual Receipt of Income
o Example is there is a general professional partnership which you created, 48 lawyers. You decided
that at the end of every month, each of you will get Php 100,000.00. That is actual receipt of
income when you get it.
Second, it could be constructive receipt.
o It is constructive if after distributing the Php 100,000 each, there still remains at the end of the
year, Php 1B in income of the general professional partnership. Even if the share is undistributed,
it is considered constructive receipt of income in so far as the partners are concerned because it
will be now taxable on the individual partners. It is upon your free disposal to get hold of your
share of the Php 1B. Its constructive receipt. You can get it anytime. Its just that it is not with
you yet.

REALIZE
D

ACTUAL CONSTRUCTIV
E

How about realized? You say that income is realized when your right to have it has already ripened in simple words.
Example: You have an apartment. You entered into a contract of lease for 1 year. All rents payable at the
end of the 1 year contract. Say for example, you started out the rent or leasing out of your apartment July
1, 2010. Ending June 30, 2011, midway for the calendar year. At the end of the calendar year, December
31, 2010. Are you expected to declare a taxable income from leasing your apartment as owner? YES.
The mere fact that you are able to lease out 6 months over 12 months, the activity has been finished from
July 1 to December 31, 2010, your right to collect has already ripened. It is already due. So you should at
the end of the year declare it as a realized income.
So if it taxable or not, should you end there? If you have answered whether it is realized or received. Can you at that point say whether
it is taxable or not? Can you say that after determining that the income has been realized or received, that is already automatically
subject to income tax? Not yet.
o You may say that it is a realized income but it is not taxable because there is a law exempting it.
Given an example. Look into Section 32B on compensation for injuries. A bank for example, if you have been awarded
moral and exemplary damages for physical injuries inflicted upon you, will the damages awarded be subject to
income tax? If you have received Php1M in cash? You have been awarded moral and exemplary damages plus actual
damages. Awarded Php 6M, received Php 1M as actual and Php5M for mental damages. You received it and it was
wired to your account. Thats actual receipt because your account. Can we now say that this income actually received
is subject to income tax?
1 Million ACTUAL
Awarded Php 6M
5 Million Mental (Moral, Exemplary, etc)

ANSWER: In outline no. 2, letter K number 4. It is compensation for injuries or sickness. This will be exempt to income
tax. If you are awarded damages as compensation for physical injuries or sickness, the damages, whether its actual
or moral, exemplary, nominal, temperate, liquidated damages, are all exclusions from gross income. It is not subject
to income tax. Despite the fact that you have actually received it. Its a wealth which is given to your hands.
So you cannot exclusively pick 1 or 2 of these criteria.
o 1. Determine whether there is income or profit. Meaning your revenues less the cost to get those revenues, do you have a net
gain or profit?
 o 2. Have you realized the income? Or have you received actually or constructively the income. If yes, proceed down to the next.
o 3. Is there a law or a tax treaty granting exemption? If none, which we always actually construe strictly against the tax payer in
exemption, if there is none, proceed on to compute for the income tax.

H. Kinds of Taxable Income or Gain

1. Capital gains: gains or income from the sale or exchange of capital assets including:
a. Income from dealings in shares of stock of domestic corporation whether or not through the stock exchange
b. Income from dealings in real property located in the Philippines and
c. Income from dealings in other capital assets other than (a) and (b).
2. Ordinary gains: gains or income from the sale or exchange of property which are not capital assets:
a. Business Income
b. Compensation Income
c. Passive Income
d. Other income from whatever source
Last meeting as mentioned, Is income tax always a tax on income alone? No capital can even be subjected to tax? Capital gains.
Proceeds Cost = Income / Profit
Proceeds - Cost = Income/Profit
FT 100Million - 0 = 100Million
Taxable
Parcel of Land 1Million - 5Million = (4Million) Not Taxable
Siomai Business 1Million - 500K = 500K Taxable

o If you found Php100M in treasures at zero cost, everything is taxable.

o If you have a real property sold for 1M, put purchased it for Php5M, you lost Php4M, is this transaction taxable?
o If you have siomai business, at a cost of Php500k, taxable.
o There is an exemption to the rule that income tax is a tax on income not tariff. All taxes that you will see in the chapter of
income tax, is income tax. Differently named, differently collected. Meaning the mode of collection is different, the manner of
how it is paid is different. But everything you see in the chapter is an income tax.
o So capital gain stocks is an income tax. It is the exemption to the rule that income tax is only a tax on income because in cases
of sale of real properties classified as capital assets located in the Philippines, you may be taxed on that capital. Capital is
actually the cost. You may be taxed because it is not dependent on the rule proceeds less cost equals profit. It is based on the
gross selling price or fair market value whichever is higher.
o If the gross selling price is 1M but the fair market value is Php10M, then you are taxed at Php10M, a portion of that Php10M
is the cost of Php5M in buying that property before hand. It is the exemption to the rule that income tax is a tax on income.
What about capital asset. We said that it must be a capital asset. Because if this is not a capital asset, it does not
become subject to capital gain stock.
We move on to the kinds of taxable income for gain. 2 kinds:
Capital Gains
Ordinary Gains
o In a car rental business, is the car a capital asset or an ordinary asset? Because only capital asset
produces capital gains and only ordinary asset produces ordinary gains. Why is it an ordinary
asset? In capital gains, be careful with letter C, it is a catch-all-provision, that which is not in A or
B, means all others. So is it in letter C? It is under the 3rd classification of an ordinary asset, which
is used in business and subject to depreciation.

(A short recap after break) We all know the possible sources of income is. But not all income would be a source of tax by the government.
Upon knowing that there is a flow of wealth, following the life-blood theory, it has come upon you. Your next step is to determine
whether you have received the income or realized it which means the REALIZATION TEST, if it is realized income then it may be taxable.
Then move on to the next, if there is a law exempting it. If none, proceed to subject it to tax.
o If there is no income, no realized income, such as the example of Php1M parcel of land valued at Php100M now, as long as it
is not sold, there is no realized income. No tax. You can only subject it to tax once there is a close and completed transaction
of selling it, bartering it, with something else.
o Now, it is not enough, if you want to move through the formula above, it is not enough to know whether there is an income,
whether it has been realized, whether there is a law exempting it, we also have to distinguish whether the income is an ordinary
income or a capital income. Why? There are different rules for taxing ordinary income or ordinary gains. And there are different
rules for capital gains or capital income. But both for income taxation, even for the bar is more on ordinary income.
Even part, on corporate taxation part 4 of our outline, is more on ordinary income. Say for letter A and B in capital
gains. We will discuss capital gains after we are done with the 3 outlines for income taxation.
When we start discussing individual and corporate taxation, we will be discussing together with that capital gains A
and B.

To know what are ordinary gains and capital gains, we have to know what are those assets which produces capital gains and what are
those assets which produces ordinary gains.
o What is a capital asset? What is an ordinary asset? In Section 39 of your tax code, you will see the negative definition of what
a capital asset is. There is no definition of what an ordinary asset is but it is enumerated in Section 39. It says a capital asset is
 an asset that is not among the following. So it simply means that what is enumerating is an ordinary asset. If it does not fall in
the ordinary assets, the four categories of ordinary assets, then all else will have to considered capital asset. What are the four
ordinary assets, we will know what is not covered by an ordinary asset is a capital asset:
o Taxation for ordinary assets and ordinary income is much more simple than capital assets and capital gains. But what are the
ordinary assets and capital assets? So you will know if the ordinary rates will apply or the special rates.
o Ordinary assets are those assets enumerated in Section 39, which comprises the negative definition of what capital asset is.
Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year. Stock in trade or those assets that remain as inventory at the
end of the year of the tax payer. So goods, merchandise, inventories.
T: Inventory commonly known as the stocks if you will look at SM at the end of the year, December 31.
Anything remaining is the stock in trade or inventory which is considered as an ordinary asset of SM.
Second, assets which are primarily held for sale.
Example if you are a real estate company, house and lot are considered assets primarily held for sale. It is
somewhat an inventory but bigger in a sense.
Third, are those assets which are subjected to depreciation and use in business.
Example, is the example given above on the car rental business. The motor vehicles are assets used in
business subjected to depreciation. It depreciates in value as time goes by.
Finally, even real property can be considered as ordinary asset if used as business.
A parcel of land can be considered as ordinary asset if it is used in trade or business. Example if it is where
your condominium unit is for selling condominium units or condominium building, then that is an ordinary
asset. If it is sold, then it calls for a taxation of ordinary gains.
Is a manufacturing building a capital asset or an ordinary asset? And if sold, will it be subject to tax on
capital gains or ordinary gains? Parcel of land which the building stands, capital asset or ordinary asset?
o Obnimaga answers: Ordinary asset for both.
o For all others, it falls under capital assets.
Example, as a student, if you have a motor vehicle, that is a capital asset. Unless you use it as a taxi cab. Or your
house, as long as you are not renting it out. Your rings, your jewelries, etc, so long as you are not into jewelry business.
But majorly, there are 3 classes or capital assets for taxation purposes.
No. 1 category is stocks. If you buy stocks. If you are in stock trading, the stocks that you are buying and
selling are capital assets unless you are a broker.
No. 2, real properties located in the Philippines which are not used for trade or business.
No. 3, all others. It can be as many as 3000, all other assets not related to business is capital and we have
a special taxation for that.
I. Gross Income
1. Inclusions Section 32A
The enumeration is NOT EXCLUSIVE.
Treatment of some special items:
a. Forgiveness of Indebtedness
b. Recovery of amounts previously written off.
2. Exclusions Section 32B
Gross Income, in Section 32A, is all income derived from whatever source. By the phrase whatever source, it means legal or illegal,
whatever type of income that is. Including but not limited to the following to those enumerated in Section 32 (A).
o Those list in Section 32 in not an all in exclusive list. There can be as many sources of income except those enumerated. What
is enumerated in Section 32A is simply a list of the major items we classify as income.
o So the simplest way is to memorize Section 32B which is exclusions from gross income. Exclusions are a quick list of what are
those not considered as income. We cannot consider Section 32 as exclusions from gross income as including but not limited
to the following because we cannot arbitrarily declare an income as an exclusion. What is the list as exclusion is an exclusive
list according to the tax code.
o If you meet encounter a problem you run through the list of Section 32B. If it is not among Section 32B as an exclusion, probably
that is an inclusion. But you still have to answer all those other criteria enumerated above.
o Give an example of income, part of a business that is taxable but not enumerated in Section 32A:
1. In outline, forgiveness of an indebtedness.

COMPANY A 1 Million COMPANY B

Creditor Debtor

Lets illustrate. 1 million loan, Company A forgives the debt and Company B, as debtor earns income. If the
reason for the forgiveness or condonation of debt is for services that have been performed or will be
performed, it will be considered as income subject to income tax because it is tax for compensation for
service.
But if the reason for the forgiveness or condonation of debt is gratuitous or liberal, it is not subject to
income tax but it is subject to donors tax.
2. Second item, is recovery of amounts previously written off. (Has always come out of the bar and in review notes
in Manila) To be discussed in later outines.
 Take note, donation is an exclusion because it is already to donors tax.

J. Situs of Income
Exclusions are those types of income that are considered as income, profit, realized, received but because of a provision of the law,
Section 32b, they are not considered as not part to the taxable income. It is not subject to income tax, which is to be discussed thoroughly
after discussing situs of income.
o Again, situs of income under general principles, it is the place of taxation where the state has a right to subject it for taxes or
it is fully within its taxing jurisdiction.
o When we proceed and have answered the following criteria:
1. Is there an income or profit?
2. Is it realized or received?
3. Is there a law exempting it?
If the answer here is there is no law exempting it, therefore, it is taxable. But it is not complete at this point,
we have to answer situs of taxation.
Where is the situs is it in the Philippines?
Example, when we are talking about the non-resident foreign corporation doing business abroad and
earning income abroad, are we interested in the income?
The situs of income is discussed in your outline according to how it is presented in Section 32. Section 32A is the enumeration, although
not an exclusive list, of what may comprise gross income. For every income, let us know whether it has situs in the Philippines or not.
1. First, compensation income,
The situs is the place where the services are rendered.
Example, if you are a resident alien and you perform. If you are Usher and perform a 1 night concert here. Subject to
income tax? The service is rendered in the Philippines or was conducted in the Philippine, therefore there is Situs in
the Philippines. So Philippines has the right to tax that income.
For compensation or any service that you performed, always it is where always the service is performed.
Same holds true for example if a Filipino celebrity performs a concert abroad, the question of whether it is taxable
or not is not fully captured in this situs. The service performed abroad, will we automatically say it is subject to tax
only abroad? No because he is still a national or a resident of the Philippines. But for compensation per se lang, it is
where the service is rendered.
2. Gross Income from business.
Situs is the place where the business is undertaken.
Merchandising, mining, farming or agricultural business, the situs is more stable. It has definite place, thus the
situs is where the business is undertaken. Therefore, it is taxable in the Philippines. We cannot bring the actual
mining from abroad here. It can only be an extension office which is not the actual mining.
Manufacturing business, takes into consideration where the products are manufactures and where the products
are sold. If the products are manufactured here, sold here, entirely we have jurisdiction over it. Everything is
100% taxable.
If it is manufactured abroad, sold abroad, we dont tax it, it is beyond our jurisdiction.
But if it is manufactured abroad, and sold in the Philippines, we have the right to tax it. The business
of selling is here.
If manufactured here, sold abroad, we have the right to tax it. The situs is partly within and partly
without. Partly within because the manufacturing here and if the contract of sale, before it is shipped
abroad is perfected here, then we have situs here.
3. Income from Sale or Exchange of Property. Distinguish from real or personal property

(1) If it involves personal property the place of sale

(2) In the case of sale of transport documents the place where the transport document is sold.
(3) If it involves real property the place or location of the real property

- For real property in so far as income taxation is concerned. Its easy. It is immobilized by nature therefore wherever the real property
is situated, it is the state exercising jurisdiction over it which has the power to tax. So if its in the Philippines then it is taxable to
Phil. income tax.
- How about personal property? The goods that cross borders? Will the Phil. have jurisdiction over a personal property that is sold
like motor vehicle, equipments, machineries? Its not easy to answer because it is the place of sale. Where could be the place of
sale?
o For example: Company A would like to purchase machineries and equipments from Japan. Its a personal property that is
movable, where is the place of sale? Is it in Japan or in the Philippines?
It depends with the arrangement. If the contract is perfected abroad and ownership is actually relinquished at
the point of delivering it to the carrier abroad, then the sale has been consummated abroad. But if ownership
is retained by the seller until it reaches Philippine ports and if its consummated here, then the sale is undertaken
in the Philippines, then it will be subject to Phil. income tax.

4. Interest Income

Tax Situs: residence of the debtor

- Interest Income is something that cannot really be seen except payment of money.
o So if a domestic corporation, needing capital for its operations, obtains a loan from a non-resident foreign bank in Japan.
Of course, domestic has to pay the principal and interest. The payment of principal or the loan amount is mere return of
capital while the payment of interest is the income. There is here a territorial boarder. So who has the right to tax the
interest, the Phil. or Japan?
Territorial Border

COMPANY A Bank B
In Japan (Income Earner)
Domestic

Obtained a loan

Note: INTEREST is the INCOME

PRINCIPAL is the CAPITAL

Note: There is a difference between a domestic corporation and a Filipino corporation. Domestic is that which
is incorporated in the Phil. Filipino is at least owned 60% by Filipinos.
Phil. because the domestic corporation, who is the debtor, resides in the Phil. Benefits-received theory for
the Phil. government who have protected domestic corporation and allowing it to raise money in order for it to
pay interest to bank Japan abroad, it will have jurisdiction. The situs is where the debtor is residing. So no matter
who the creditor is, always, the Philippines has taxing jurisdiction over such interest income. Remember that
the income-interest earner here is bank Japan, thus, technically, it should be Japan who will be taxing the
interest income because such bank is residing in Japan but because we have our own situs rule here in the Phil.
which says that any interest income where the debtor is a resident of the Phil. will be covered by the Phil. taxing
jurisdiction. Therefore, the Phil. will also have to tax it.
How will the Phil. government get the tax of such interest income? Will it require bank Japan to declare the
income, remit the tax or some other arrangement?
For payments to a non-resident foreign corporation who is not registered in the Phil., it will have to
be withheld by the paying company.
o So payments to Usher concert, will have to be withheld by the production team, before it is
given to the non-resident foreign corporation as net.
o Such non-resident foreign corporation or individual, is not within the hold of the Phil. tax
authorities. They cannot be required to actually pay because they are not registered tax
payers in the Phil.

5. Rent Income
Tax Situs: place where the property subject of the contract of lease is located

6. Royalties
Tax Situs: place where the intangible property is used

- Royalties are fees you pay for the use of intangible property such as intellectual property rights.
o Example: McDonalds is originally a non-resident foreign corporation the actual source. If we obtain a franchise from
McDonalds, the monthly payment for the franchise is called a royalty fee. So does the Phil. have taxing jurisdiction over
the royalty income that is remitted by a franchisee to the franchisor abroad?
Yes since McDonalds, the intangible property, is used in the Phil. then it is the Phil. who has taxing jurisdiction
over such royalty income.
o Another example: In manufacturing companies wherein they have to get technical knowledge and technical know-how in
creating microchips, etc. They have to pay royalty fees, lets say, 3% for the annual revenues here in the Phil. so that any
payment to the non-resident foreign corporation abroad would have to be withheld of the tax because the situs of the
royalty income is in the Phil. The technical know-how is exercised and being used in the Phil. So although it is intangible,
you will see the effects of where it is actually used and who is benefiting.

7. Dividend
a. received from domestic corporation income purely within
b. received from foreign corporation consider the income of the foreign corporation in the Philippines during the last preceding
3 taxable years:
(1) The income is purely within if the income derived from the Philippine sources is more than 85%
(2) It is purely without if the proportion of its Phil. income to the total income is less than 50%
(3) There should be an allocation if it is more than 50% but not exceeding 85% (partly within and partly without)
- Dividends are company profits paid pro rata to stockholders. It is a fruit out of the stockholders investment in a corporation.
Dividends come in many forms.
- Kinds of Dividends:
o Cash Dividends you receive cash out of the profits of the business
Example: If youre a 10% owner of PLDT, you get 10% out of the entire dividends that will be declared to the
owner so if its 1B dividends then you will get 100M share because youre a 10% owner.
o Sometimes what the corporation gives if its not so liquid, meaning no cash, is property dividends if its a subdivision
company, you may be given a house and lot. Its property dividend; its property; its income because it is a wealth it is
an increase in your assets.
o Sometimes it can be stock dividends
- The dividend referred to here is cash &/or property dividend because both of them are considered income while stock dividend is
not included since stock dividend is not considered income as a rule because it is not yet a realized income, it is inchoate.

10 Years After
Assets 47Million 100Million
Liabilities 0Million 10Million
Net Worth 47Million 90Million = Increased to
43Million

o Illustration: Tiu makes a corporation. You all contribute 1M each so you get 47M since the class consists of 47 students
and no loans so net worth is 47M. But after 10 years of operation, youre assets became 100M and liabilities 10M so you
will have a net worth of 90M. Did the net worth increase? Yes the net worth increase to 43M. This 43M is your earnings
from the start-up of your business and your cut-off point, which is 10 years of operation. You would actually would want
to distribute the 43M as dividends if you have cash. Say for example, the 43M is in real estate property (you invested it in
real estate valued at 100M) so you dont have cash. What you will do is that you will simply say that youre ownership
becomes 1.5M already, thus, Tiu will increase your investment from 1M to 1.5M to each of you but it is not given in cash,
it will simply increase your investment in the corporation. That is stock dividend your ownership is increased but nothing
is given to you, its inchoate. Until and unless it will be given to you and you have free disposal of that, it remains a non-
taxable stock dividend because its unrealized income. Who knows by next year the corporation will be losing so that there
is negative net worth.
- The reason why dividend is taxable in the Phil. if it is issued by a domestic corporation or paid by a domestic corporation without
regard to where and who the owner of the dividend is its because the domestic corporation receives protection from the
government such that being an intangible property, it does not follow the general rule where the domicile of the owner is since its
receiving benefits and protection from the government, the Phil. government has the right to fully tax a dividend that is given by a
domestic corporation wherever and whoever the recipient of the dividend is (100%).
- If its a foreign corporation abroad such as for example, Ms. Dumagad owns a share in a mining corporation in Africa and she gets
millions out of it annually, the situs of the dividend for Africa is where the corporation is issuing the dividend but thats a separate
issue as to being her a resident citizen. But the point is, it follows where the issuing corporation is except that if a foreign corporation
performs business 85% or more. Why? If its operation amounts to 85% or more located in the Philippines, it is as if it acquired situs
already in the Phil. It is receiving, at most, the benefits and protection from the Phil. government, therefore, it will have full situs
here in the Phil. But if its less than 50% operation in the Phil., it will have situs abroad where the domicile of that foreign corporation
is. If its in between 50% and 85%, it is partly within and partly without according to the percentage of the operation in the Phil.

8. Annuities
Tax Situs: place where the contract was made

9. Prizes and Winnings

- given on account of services rendered place where the services were rendered
- not given on account of services rendered place where the same was given

- Winnings are those not given on account of services rendered while Prizes maybe given on account of services rendered or not
given on account of services rendered.
- Every time you receive something and it is attached to a service that you have rendered, its like a compensation for services you
have rendered so you back to the first rule, a compensation given is taxable where the service has been rendered. So prizes given
for services rendered is taxable on the place where such services were rendered while prizes and winnings not for services rendered
is taxable on the place where the same was given.
o Example: Lets say Mr. Pelinio went to the U.S on March 31 and he has his bet and he won $100M lotto there. Where is
the situs?
The situs is in the U.S. because Mr. Pelinio did not render any service so situs is in the place where the winnings
was given, which is in this case, it is in the U.S.
But is it taxable in the Phil.? Knowing where the situs is does not totally equate whether its taxable or not. Is it
taxable in the Phil.?
Yes, because Mr. Pelinio is a resident citizen and he is taxable for all his income within and without
the Phil.
So what should Mr. Pelinio do so that his $100M winnings will not be subject to tax?
 o Mr. Pelinio will not come back for a certain period. Sec. 22E of the Tax Code provides that if
youre a citizen who will qualify as non-resident because you have stayed for the most part
of the year abroad, meaning more than 183 days abroad or more, then all your income
abroad will not be subject to Phil. income tax. So if Mr. Pelinio will just stay after winning
plus 183 days or more then you come back after that, then the winnings will not be subject
to Phil. tax. So Mr. Pelinio earn it abroad, for the year he is considered non-resident citizen.

10. Pension
Tax Situs: place where this may be given on account of services rendered

- Since pension is something that is more related to a service such as that you have rendered in the past and youre given retirement
or pension pay then the situs is the place to where the services were rendered.

11. Professional income of professional partners

Tax Situs: place where the exercise of profession is undertaken

- Since it is more on the exercise of a profession, its an activitiy, so its where the activity or the profession is undertaken. It follows
the place where such profession is exercised.

K. Exclusions from gross income

- For all the enumerations in gross income Sec. 32A, all income from whatever including but not limited to the following, from
compensation income down to partners distributive share, you now know where the situs is. But is situs enough for you to be able
to answer whether its taxable to Phil. income tax? Not yet because we have yet to discuss individual income taxation and corporate
income taxation. But at least we now know whether it has Phil. situs or not.
- But in order to complete the formula, we start-off with revenues or income but there are items which we do not need to include
in the formula for income. We call them exclusions to gross income. It is not included in the formula instead it is excluded from the
listings of gross income.

1. Proceeds of Life Insurance Policy

Subject to tax if:
a) Insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to pay interest in the
same, the interest is the one subject to tax.
b) there is transfer of the insurance policy

- What is referred to here is the proceeds of life insurance given to the beneficiary once the insured dies.
- Reason: since it is a contract of indemnity; not a profit or gain
- Proceed of life insurance policy is receivable by the beneficiary, not the insured one who already died. Will it be taxable in the hands
of the beneficiary?
o No, because it is paid by reason of death and is considered an indemnity rather than a gain or profit on those who are
aggrieved.

MR. B
President
COMPANY A For the life of
Domestic
(Insurer)
Premium: Insurance Details:
Worth Beneficiary INCOME TAX ESTATE TAX
1. 400,000 1. 1 Million: Beneficiary Company A
2. 400,000 2. 1 Million: Beneficiary Heirs of B

Example: Company A took out a life insurance policy on the life of its President, Mr. B, in order to protect itself
from the sudden loss of its chief operating officer. Say for example, there are 2 life insurance policies taken by
company A with different insurance companies. The insurance was for 1M each. The beneficiary of the first
insurance policy is Company A. The beneficiary of the second insurance policy is the heirs of Mr. B. Mr. B died.
 2M was released, one by one insurance company and the other one by the second insurance company. Will the
1M proceeds received by company A be subject to income tax or an exclusion to income tax? Will the 1M
received by the heirs of B subject to income tax or an exclusion to income tax? Will they be subject to estate
tax?
For income tax, the 1M each received by company A and the heirs of B are exempted because the
provision in Sec. 32B (1) does not distinguish the kind of beneficiaries who will receive the proceeds
of a life insurance policy, therefore, proceeds of life insurance policy, regardless of who the beneficiary
is (whether it be a juridical or natural person), as a rule, are exempted from income tax or excluded
from gross income.
Lets say, company A has to pay a total of 400,000 premiums for each policy. Will the premiums be
part of the compensation or salary on the part of Mr. B who is actually indirectly benefited (his life is
insured) and thus subject to income tax?
o For the 400,000 premiums paid by company A in order to secure the second insurance policy
wherein the beneficiary is the heirs of Mr. B, such premiums are subject to income tax for
they form part of Mr. Bs salary as an indirect benefit on Mr. Bs part. So the 400,000
premiums for the second insurance policy is subject to the tax on Mr. Bs salary. However,
for the 400,000 premiums paid by company A in order to secure the first insurance policy
wherein the beneficiary is company A itself, such premiums is not subject to tax because it
is merely a return on capital of company A. Therefore, its not subject to tax on the part of
Mr. Bs salary.
The 1M received by company A will never form part of the estate of Mr. B and a juridical person has
no estate, thus it is not subject to estate tax. However, the 1M received by the heirs of B will form part
of the estate of B, and thus, it may be subject to estate tax. But can estate tax and income tax co-exist
in one and the same 1M?
o No, because in exclusions from gross income, once an income is subject to estate tax, it will
never be subject to income tax.
But if there is a third person, lets say, in the life insurance policy, C, a very close friend of Mr. B, was
designated as a beneficiary. Will the proceeds received by C upon Bs death form part of the estate of
B?
o If the designation is revocable, which is the default, it goes to the estate of B, thus it will be
subject to estate tax. If the designation is irrevocable, it will never form part of the estate of
B, thus it will not be subject to estate tax.

July 20, 2010

Transcription from room 403 for July 24, 2010 class

Were now with exclusions from gross income.
The enumeration sec32b are substantive exclusion from gross income. So it is by law an exclusion regardless of the point of realization.

There is what we call a temporary exclusion from gross income from gross income.
The word temporary means that in some point in time, the income is excluded from the gross income because either it has not been realized
or it has not yet been perfected.
Ex. although there is a gain or profit, so long as it has not yet been realized, it is not a taxable income as yet. It is excluded.
But once it is realized, it ripens into an income that is taxable.
Those are the types of income that is listed in 32b.

Those that are listed in 32b whether it is received, realized, unrealized, etc, these are already exclusions from gross income.
And we started off discussing number 1 last meeting.

PROCEEDS FROM LIFE INSURANCE

What is the reason why proceeds from life insurance are excluded?
It is to indemnify the beneficiary of the death of the person.

So there must be somebody who will die?

Yes.

There are insurance policies which are life insurance policies but are the other type. At the point of maturity of that insurance policy, even
life insurance policy, the insured has the option of receiving the proceeds from the insurance company. Is that the same type that is not
taxable?
To be totally free from income tax, the proceeds of the life insurance policy must result to the death of the insured?
True or False. The proceeds from life insurance policy regardless of the designated beneficiary is not subject to income tax.
False.
 As an exception to the rule, if and when the insurance proceeds are withheld by the insurance company on the condition that interest will
be paid upon release, the interest or any income derived from the withholding, meaning the point of not yet releasing the insurance proceeds
will be subject to income tax. It is already an income of insurance proceeds.

But the life insurance proceeds, the reason why its not subject to income tax or is an exclusion from gross income is because its simply a
payment or an indemnity for a loss or a death of a person.
We are looking here at somebody who died. The person who is insured will never get the chance to receive the insurance proceeds.
Otherwise, if he does so receive it, it will only be covered by exclusion number 2.

We have another exception to the rule why it is false.

Since we are talking about exception to the rule, this means to say that there will be tax implication or some form of taxes that needs to be
paid.

Just like number 1, we said any interest derived from withholding the release of the life insurance proceeds is already an inclusion from gross
income which is taxable.

Second exception is when there is a transfer to life insurance policy.

What do you mean by that one?
If an insurance policy is subsequently sold or transferred to another person, what will happen is that any difference between the amount paid
to get the insurance policy versus the proceeds will already be subject to income tax.

Ex. if the face value of the insurance policy is 10m and you are required to pay 5m in premiums over a period of 5 years, that means to say
over five years you have to pay 1m per year.
And it will produce face value or face amount of 10m. So half diba?

If along the way, second year of the insurance policy, you have already paid 2m, and you sell it to your friend for 3m, how much is your friend
going to pay to the insurance company to finish off the policy?
3m pa diba.

Because the seller sold it at a point after the point of paying the premium which is 2m.

Although the seller paid 2m in premiums but sold it for 3m, transfree paid 3m to seller and 3m remaining premiums since the insurance
company is expected to receive total of 5m.

How much did the buyer paid for the contract?

6m

If he receives the insurance policy face value of 10m, is the 10m exclusion from gross income?
Not anymore because it is an exception to the rule.

Therefore, is 10m taxable?

The insurance policy has a face value of 10m. How much do you expect to receive upon maturity or upon death?
10m

But you dont pay 10m premiums just to get the face value of 10m. Otherwise theres no sense of getting the insurance policy.

So if the insurance policy says 5m of premiums in 5 years, that means to say 1m per year.

If the first insured sells it for 3m after paying 2m, the buyer actually has a capital of 3m. If he decides to finish by paying off the remaining
3m which is unpaid, he actually paid for 6m.
So if the beneficiary receives the 10m in proceeds, this is not anymore covered in the exclusion number 1 because there is already a
subsequent transfer of the policy.

But the entire 10m is not taxable because we also have to apply the exclusion number two which says that if the part of the proceeds is a
return on premium payments or cost, then it has to be exclusion from gross income or nontaxable.

How much of the 10m is premium and cost?

The 3m and 3m=6m

So only 4m is taxable in the hands of the recipient.

So again, true or false. All proceeds from the life insurance policy regardless of the designated beneficiary is not subject to income tax.
FALSE.
Because not all proceeds will have to be, except if it falls under the exception 1 and 2.
The statement regardless of the beneficiary, is that correct?
Yes.

So would the designation of the beneficiary matter insofar as considering the income as exclusion?
No. Whoever is the beneficiary of the life insurance proceeds would enjoy the exemption from income tax because the law does not
distinguish.

But it does not mean to say that if the proceeds or life insurance proceeds is an exclusion from life insurance program, totally there would be
no other tax applicable.

What are the applicable tax, just in case? Lets talk about the beneficiary.

Life insurance proceeds; if the beneficiary is any of the relations of the insured: heirs, estate, administrator executive, is it subject to income
tax?
Is it an inclusion to gross income?
Yes. Therefore it is not subject to tax.

If the beneficiary is a third person other than those related to the estate of the decedent or the insured; ex. the company who took the life
insurance policy of the insured or any other friend, would it be an exclusion from gross income of the beneficiary?
Is the recipient beneficiary be subject to income tax or would that life insurance proceeds be part of his gross income?
It is one of the exclusions because its regardless of who the beneficiary is.

Its no longer taxable insofar as the beneficiary whether he is beneficiary class number and number 2; he is not required to pay income tax
on the proceeds.

But would the estate of the decedent be liable for estate tax by the mere transfer? Or would it be liable for estate tax because it is part of his
estate upon death?
Yes. Because if the beneficiary is the estate itself, then it goes to the estate. If the heirs, it goes still to the estate. If the executor or
administrator, it goes still to the estate.
Therefore it just goes to show that its part of the property of the decedent upon death.

Remember estate taxation is taxing the decedent on all properties existing at the point of death.

How about life insurance proceeds, when does it accrue?

Upon death of the insured.

Beneficiaries would not have to pay the income tax but the estate itself is liable for estate tax.

Remember an estate if the decedent is a separate entity. Its an individual for tax purposes.

If the beneficiary is a third person; the company who took the insurance policy, a friend, a relative who is not near the heirs, is the estate
liable?
At the point of computing the estate tax, will the BIR include the proceeds as part of the estate and be liable for estate tax?
Mr. A, the insured is the president of company B who took out the insurance company in favor of the prior.
There are two scenarios.
One, beneficiary is in relation of Mr. A which can be the estate of Mr. A itself, heir, administrator or executor.
Second scenario is the company made itself the beneficiary.
Insofar as recipient beneficiary is concerned, we dont have any problem. Its never subject to income tax.
But how about estate tax?
Will it be subject to estate tax if the beneficiary of the policy is the third person, the company itself?
NO.
Because ownership of the proceeds belongs to the company who is not part of the estate of the decedent.
Therefore it is not subject to the estate tax.
Estate tax refers only to the estate of the dead person.

And if its now the ownership of the company who has designated itself as the beneficiary, of course you do not co-mingle the company with
the estate.

So there is the irrevocable designation of the company as the beneficiary, no way is it subject to income tax.

But if in default, the company is the designated beneficiary, then it is.

And what is default of insurance policy?
 The designation is revocable.

Only if the designated beneficiary is irrevocably designated that it not belong to the estate of the decedent.

So as a general rule, you will see that majority, it will always form part of the estate of the decedent, relations or third party revocably
designated.

It will only be excluded from the estate of the decedent if it is irrevocably designated. And irrevocable designation must be clear from the
policy itself. Otherwise, default is revocable.

Mr.A took out a life insurance policy wherein the terms of the contract is 10 years payment of premium and on the 20 th, it will mature.
If he outlives the policy he gets the insurance proceeds.
If he dies before the 20 year period, his beneficiaries or heirs will get the life insurance proceeds.
What is the tax if he outlives the policy and if he has not?
If he outlives the policy, meaning he himself outlives the policy, it will be taxable except for the portion which represents the return of the
premium payments that he has made.

If he gets 100m after outliving the policy after it has matured on the 20th year, and by computation he was only able to pay 5m in premiums,
then the 95m difference will have to be declared as part of his gross income taxable to 32%.

If he dies before maturity of the policy, then we will follow exclusion number 1.

Lets go to exclusion number 3.

ITEMS ALREADY COVERED BY DONORS TAXATION AND ESTATE TAXATION

Why is it excluded from gross income?

If X gives a gift to D, who is subject to tax? What tax?
X, for donors tax.

Will D be liable for tax on the amount received?

No.

The taxability of income tax would have to be on the part of recipient.

The taxability of donors tax would have to be on the part of the donor.

So there are 2 exceptions to the rule that gifts are not subject to income tax because they are exclusions from gross income:
1. any income or fruit derived from the gift is not covered by the exclusion. Its subject to income tax.
Naturally. Its like exclusion number 1, if life insurance proceeds is withheld and it bears interest, the interest as a fruit will have to be
subjected to income tax.
2. if you require the done to perform some services in exchange for the gift.
Who here will be taxable?

Whichever way, the amount given is always subject to tax.

It might be on his part, if its purely gratuitous, the entire donation will be subject to donors tax.
If its for compensation as a whole because services are to be performed, he will be free from taxes but the done will be taxed for income.
If its half-half or partly, the donor will pay the donors tax and the done will pay the income tax.

Next exclusion is.

COMPENSATION FOR INJURIES AND SICKNESS.
What injury are we talking about?
Would all types of injury be covered in the exclusion?
What type of compensation do you get out of a physical injury case?
What are the sources wherein you derive compensation for physical injury?
Compensation for injuries, do you agree that it refers only to physical injuries?

As discussed by some of the authors, when you say compensation for sickness and injuries, it would have to refer to physical injuries and
sickness.
 And when you say compensation for physical injuries, its related to sickness. You have to take it with the other.

The law itself says that, for compensation maybe by virtue of a suit or a case or paid by virtue of a health insurance, personal heath insurance,
accident insurance, and workmans compensation act.
It simply boils down with there being something wrong with the physical body or physical disability.

Would the damages received as part of the compensation for injuries and sickness be subject to income tax?
No. Its not subject to income tax because it is derived not from labor, capital, labor or capital and properties.

And again, its exclusion is not stemmed from the other laws but because of this 32b which actually says that any compensation received
including damages on account of such injury or sickness is not part of the gross income subject to income tax.

The only gray area there is the compensation for loss for future earnings.
If you have studied torts, somewhere along the way you will come across SC granting compensation for the loss of the future earnings which
could have been derived by the person who met the accident.

So whatever is derived from that; EX. if the dead or injured is expected to receive 50k a month times the number of years of his life expectancy.
That will be awarded by SC.

As to whether it is taxable or not, there are conflicting views.

Some of the authors would say that it is subject to income tax because it is compensation for future services which could have been rendered.

But some of the authors would also say that it is not subject to income tax because it is part of the compensation for the injury or sickness.

We can say that it is not taxable.

We use the word compensation. And it means all types of awards given by either the SC or insurance companies.

INCOME EXEPMT UNDER TREATY

Since the doctrine of incorporation, any agreement we have entered into with the other countries that there are exemption to be granted to
the taxpayers earning income here, the principle of reciprocity will be respected.
We consider those as exclusions from gross income.

But mind you, this is not even self executing. Whatever the provisions of the tax treaties are, we have to seek confirmation from the national
office of the bureau of internal revenue in Quezon City.
Otherwise, if we dont seek for a confirmation ruling, even if youre situation falls squarely with what the treaty provides, you will not be
allowed to avail of the exemption or the preferential treatment of the treaty.

So again, its like lifeblood doctrine that in construing exemptions, it has to be strictly construed against the tax payer.

RETIREMENT BENEFITS
What retirement benefits are subject to tax?
1. If it falls under RA 7641 which actually is part of the labor code, art 287 on retirement benefits.
2. If it is part of the private retirement fund.

So, what are the conditions for excluding from income the benefits received under retirement benefits plan?
1. recipient must be at least 50 years old
2. at least 10 years of services
3. retirement plan is reasonable
4. in nature of pension, stock option or profit sharing
5. availed once
6. approved by BIR
7. employer must contribute and for the common benefit

How many situations are the in 6a, how many retirement benefits are we referring?

If you are 48 years old and you have rendered 48 years with the company, can you retire with the retirement pay tax free?
If you retire at the age of 51 and have rendered 8 years of service, can you retire tax free?
Should both (age, years of service) requirements co exist in all cases?
This matters. Because most of the companies I know, most of the employees will wait until the point that they can get the retirement benefit
free of tax. Otherwise they will have to pay 30%.
When can you say that 60 year old rule will apply rather than the 50 year old rule? Can both requirement co exist?
Can we expect the two types of benefits under the 7641 and the reasonable retirement benefit plan to be applied in one and the same
company?
So that some can retire at 60 tax free while others can retire at 50?
After break.

Would the two situations mentioned before co exist in one company?

This rule is under the tax code reasonable private benefit plan.
If the company sets up a reasonable retirement benefit plan, retirements for it to be exempt from tax must be by a person at least 50 years
old, having rendered service for at least 10 years and it is his first availment of retirement.

When will the 60 year old, 5 years of service apply?

In the absence of a reasonable private benefit plan established by the company,
In the absence of collective bargaining agreement,
In the absence of the employment contract designating when the retirement is.

So it is a catch all rule.

If there is no reasonable private benefit plan, there is no collective bargaining agreement, no employment contract, no other agreement
entered into by the employee and employer, then use this.
He gets to retire tax free at the age of 60, having rendered five years of service.

But in more cases than not, companies, since they are encouraged to establish a reasonable retirement benefit plan, then the default is the
retiree should at least be 50 years old with at least 10 years of service.

So if there is a reasonable private benefit plan, to be tax free, it should be:

1. duly approved by the BIR
2. gratuity plan
3. employer established the fund, contributing to the fund itself
4. fund will be for the sole benefit of employees

What are the requirement of private benefit plans proceeds to be tax free?
1. employee is at least 50 years old
2. has rendered at least
3. first availment of retirement

For you to be exempt, not only must you be at least 50 years old and had at least 10 years of service. It must be the first time that you have
availed of a tax free retirement, exclusive of the government retirement.

Of course if its a government retirement, its totally tax free.

So in this case, for example, you have reached 50 years old and have rendered 5 years of service with company A. This is the first time you
have availed of the retirement.
Are you tax free?
Yes.

Then you got yourself hired with the government at age 51. You rendered 10 years of service with the government and retired at the age of
60. Is the retirement pay that you will receive from the government exempt from tax?
No.

The rule is to exclude retirements from government.

So if the second retirement is from the government institution, it will have to be exempt from tax.

But if your second retirement after you first private institution retirement, is still with another private institution, regardless of how old you
are, it is already taxable.

Even if you rely on the law itself, it says there retirement benefit plan of a private institution or private corporation
So if its not a private institution, its government, its not availing twice with the private.

So if its private-government, both are exempt.

If its private-private, that is taxable.
This will apply if there is a reasonable private benefit plan.
Let us say there is no private benefit plan. A collective bargaining agreement is in effect. And it says that an employee can retire at the age of
60 or after rendering 20 years of service.
A, 40 years old, wants to retire after rendering 21 years of service.
Taxable or not?
Not taxable.

Another case, no collective bargaining agreement, no employment policy, no reasonable private benefit plan.
A, 60 years old, wants to retire after rendering 4 years of service in the company.
Taxable or not?
Taxable.

Theres an existing retirement benefit plan, 50 years old, ten years of service.
Taxable or not?
Not taxable

You always consider if there is an existing retirement benefit plan with the company. Because the law says; retirement benefits derived are
exempt if its derived from RA 7641 or a reasonable private benefit plan RPBP.
But the law also says that for the benefits derived in RPBP would only be exempt if it satisfies the requirements: 50 years old, 10 years of
service, and first availment of in a private institution. Well of course the RPBP would also be duly approved with all the requirements.

But would that 10 years- 50 years old apply to 7641?

No. because this is a different law. This is the tax code itself.

If there is no retirement benefit plan, you have to apply the retirement benefits derived from 7641.

But 7641 is not exclusive to 60 years old or 5 years.

It says that it will only be applicable if there is no CBA, employer policy, etc..

Now if there is a CBA, do not use this as yet.

If the CBA says you can retire at the age of 60 plus 20 years of service, then it must be PLUS. Both conditions must exist.

If the CBA says 60 years old or more than 20 years of service, if you can satisfy just 1, then it is exempt.

So long as the CBA is not more burdensome than the 60-5 year rule.
It says in 641, any CBA or policy that is not more burdensome than the 60-5 year rule can be acceptable.

The 60-5 year rule will be applied if there are no agreements existing.

So in the case of 60 years old or at least 20 years of service, and the employee has been working for 21 years, this is exempt. Because the CBA
says OR. So even if you are still young at the age of 40, you can still retire if you have rendered at least 20 .

**If there is a CBA and RPBP at the same time, it has to be well defined in the CBA to whom and to what extent it will be applied.
I dont really know if it can co-exist

But in this ruling in BIR, an employee retired at less than 50, and rendered 21 years of service. His retirement benefits are granted with exempt
by BIR. Why?
Because the CBA itself which is duly approved, says than employee may be retired at the option of the company upon reaching the age of
60 years or upon having completed more than 20 years of service.

So it can even be more than 10 years of service. At the age of 30 he can retire. And that is exempt.
But then again, if you get yourself rehired in a private institution, and you get again your retirement, that is taxable na.

You retired and got the retirement pay of 10m. Because of your excellent service, you receive a gratuity pay of 4m. Plus 15 days of work, 50k.
Your vacation leave and sick leave credits that have not been used are 500k and 500k respectively. You are 50 years old with 10 years of
service.
In total, you receive 15,050k.
Which of the items are subject to tax if the you are under the RPBP?
If the company has a retirement fund, and you retire, your retirement pay will not be taken out of the retirement funds. It will be taken out
from a plan, which plan is a separate entity itself. It is usually handled by insurance companies or banks.
If you did your job well, you can be given gratuity pay which is outside of the fund. It is bonus
Is the gratuity pay subject to tax?
No.

Is the 50k taxable?

Yes because it is compensation for the service rendered.

How about the leave credits?

If you work and you are given vacation leave and you dont utilize them, in some companies it can be converted to cash and can be
accumulated for as long as you want.
Are they subject to tax?
No.

If you have plans of retiring, do not compute or convert your leave credits before retiring. Because usually if you convert your leave credits
on a regular basis without being connected to any retirement, they are taxable in excess of ten days.

But if you retire and its the only time that you convert all leave credits, it becomes a terminal leave pay, everything is taxable.

Everything given during retirement if your retirement is qualified, tax free, is exempt.
So even the gratuity pay is not taxable.
Only the 15 day salary is taxable.
But all the rest, retirement pay, bonuses, gratuity pay, leave credits, whatever it is named, basta lang the basic is exempt, everything that
follows will also be exempt.

SEPARATION PAY
Separation pay. Is it subject to tax? What are the rules for it to be exempt from tax?
Is separation pay taxable if it is given out of pity?

You were hired by the government as one of the midnight appointees of GMA. When Aquino came in you will be separated from work.
You got 100k separation pay. Is that taxable?

Quizer question: if you are given separation pay at the age of 48 years old after rendering 9 years of service due to occupying a redundant
position, is it an inclusion to gross income?

For separation pay, there is no age requirement, no years of service rendered requirement for the payment to be tax free.

All that it requires is that your separation from the company must be due to death, sickness, physical disability or indury and those other
causes beyond your control.
For example, redundant position, or those that you find in you LC, labor saving device, retrenchment, occupying a co terminus position.

How about social security benefits? Is that an exclusion from gross income?
Social security benefits for us Filipinos receiving from our Philippine social security system is not taxable. Even from the GSIS as well as social
security benefits from abroad.

Ex. you have been a citizen or a resident in the US and you retired here, you will get your pension and social security benefits, its also tax
free.
Probably thats the reason why there are so many retirees here.

US VETERANS BENEFITS
Thats self explanatory

MISCELLANEOUS ITEMS
Quizer Question: Mr. A received a 100k cash prize after his cell number was automatically included in the electronic draw effected by the
service provider. He did not perform any act to enter the contest nor is he ever required to render future services as a condition to getting
the prize.
Is the 100k part of the exclusion?
Yes?
How about joining the raffle in SM. If the prize is motor vehicle. Is it subject to tax?
Yes.
There is an on going restoration project of the church. In order to encourage people to donate, they sell raffle tickets and if they win its tax
free?
 What are the requirements?
What about buying the ticket itself, is that not active part of joining the contest?
Its taxable. Even if the purpose is religious.

So long as you do some or theres an action on your part in order to join the contest and win it, it is taxable.

If youre a taxicab driver and you are given money for returning the money left in your cab as an award.

Educational naman, you join whos smarter than a fifth grader, thats taxable because there is active participation.

So both requirements should be satisfied.

1. without any action on the part of the recipient to enter the contest
2. not required to render substantial future services

Prize given to Pacqiao by the government is not because he was not expecting that. It was given for giving honor to the country.

PRIZES AND AWARD IN SPORTS COMPETITION

Is Pacqiaos last tournament winning taxable?
Yes.

In sports competitions, for your awards to be tax free or excluded in gross income, the competition must have been duly approved by the
national sports associaltion and approved as well by the Philippine Olympic committee, whether it may be an international competition or
neld in the Philippines or not.

What it means to say is that the exclusion from gross income would never include a professional fight.

Many is a professional boxer. He is not representing any sports in the Olympics. Everything that he earns is taxable.

In one of the BIR rulings, there is this one boxer who sought for exemption. He was granted an exemption on the ground of bringing glory to
the Philippines.

But if it granted to that boxer, no other boxer can avail or use that ruling for an exemption.
Why do you think other boxers cannot avail of the exemption if the exemption is granted by BIR to one of them?
Exemptions are personal.
So whenever rulings or SC says that this person is exempt, then no other person can use that provision unless the law is general.
In any case, if and when prizes and award granted in sports competition or if any literary, religious, charitable educational achievements that
you get, if it does not satisfy the condition, therefore it is taxed; it will now be with held of tax. Because the nature of prizes and awards is
that it will be given to the recipient net of taxes.

Now if you happen to win in SM 1m, do not expect to get 1m. its only 800k because the tax withheld is 20%.

If in the posters it is said to be tax free, will you receive 1m?

Yes. But do not be misled. There is tax but the burden of tax is shifted to the one giving the price. SM will pay 1250k. the 1m you received is
as if it is the 80% of the price.

If it is not tax free, the price (motor vehicle) will not be given unless the winner pays the tax.

INCOME DERIVED BY GOVERNMENT OR POLITICAL SUBDIVISIONS

In this exclusion, whose income is exempt?
Whats a government entity? Does it include government agencies?
No.
You have to strictly construe it.
In this case, this is exclusions are only the income of the government of the Philippines or the income of political subdivisions.

And you know political subdivisions as composing of the provinces, cities, municipalities and barangays.

It does not include government instrumentalities nor entities nor GOCCs.

If you have seen from your readings that here is exemption granted to agencies, instrumentalities or GOCCs, that basis is not 32b but some
other provision of the law.

What were talking about here is the income from the exercise of the essential governmental function of the government of the Philippines
and its political subdivisions as well.
The basis here is that we cannot tax the government who is taxing us.

How about income derived by foreign government? Is that subject to income tax?
If there is income received by a non resident foreign bank fully owned by the Japanese government, is that taxable?
So when we say income derived from investment in the Philippines, would it include extending a loan to the corporations in the Philippines
or the Philippine government itself?
If a domestic corporation of the Philippines is obtaining a loan from a bank in Japan fully owned by the Japanese government, is that taxable?
You get 1b loan and will have interest of 100k monthly. Is this covered by the exclusion that investments made by a foreign government or
a financial institution fully owned by the government are exempt from tax?

If the 1b is claimed in the Philippines, it is a domestic corporation, the operation is expectedly in the Philippines.

The SC has already included granting of loans by foreign banks to domestic corporations, investment not only in stock, bonds and also
extending loans.
So any income derived from money extended to the Philippines by a foreign government or even if it is a financial institution so long as its
fully owned by the foreign government is already exempt from tax.

So in the Philippines, it also works the other way around. There is already a tax treaty.
If we extend a loan as well to foreign government, the income derived from that loan is also exempt.

But not all banks are considered as covered in this exclusion. In Japan there are only two banks. In the Philippines are Land bank of the
Philippines and Development bank in the Philippines.

When it says income from investment, it does not mean to say lang investment in the business. It includes and it has expanded the meaning
to those extending a loan to domestic corporation.

But if the extension of the loan is to a foreign corporation or not a domestic corporation, then its not income having situs here. Thats another
issue.

GAINS DERIVED FROM REDEMPTION OF SHARES OF STOCK BY THE MUTUAL FUND COMPANY
It should be the mutual fund company. If not, no exclsions, no exemptions.

CONTRIBUTIONS TO SSS, GSIS, PAGIBIG AND UNION DUES

You will notice that your salary is already deducted with these contributions. Its your share. Because the share of you employer is not reflected
in the pay slips.
In the computation of you tax, those items are deducted from your income because of the provision of the law.
After the law made in 1997, they were already made as deductions.

If your have monthly salary, you will give PAGIBIG 100. Your employer will also give 100. Your PAGIBIG account will be added 200.

But if you have a housing loan and you want to contribute to PAGIBIG 1100 and your taxable income if 8900, this will actually benefit you.
This will reduce your taxable income.