Taxation Law Green Notes 2015

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From the notes of: Justice Japar B. Dimaampao and Atty. Noel M. Ortega

Taxation Law

Green Notes 2015

ESSENTIAL NOTATIONS IN TAXATION: A PRE-BAR REVIEW GUIDE

I. GENERAL PRINCIPLES

Q. Define Taxation

Taxation is the inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.

It is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burden.

Q. What is the nature of the power of taxation

 The power of taxation is inherent in

sovereignty as an incident or attribute thereof, being essential to the existence of independent government.

 It is legislative in character.

 It is generally not delegated to

executive or judicial department. Exceptions:

i. To LGUs in respect to

matters of local concern to be exercised by the LG bodies thereof [Sec. 5, Art. X, 1987 Constitution];

ii. When allowed by the

Constitution [Sec. 28[2], Art. VI, 1987 Constitution];

iii. When the delegation relates

merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standards expressed by law Cervantes v. Auditor General, [91 Phil. 359], or implied from the policy and purpose of the Act Maceda v. Macaraig, [197 SCRA 771].

 It is subject to constitutional and

inherent limitations.

Q. Explain briefly the theory and basis of taxation

The power to tax is an attribute of

sovereignty emanating from necessity (Phil.

Guaranty Co. Inc. Vs. Commissioner of Internal Revenue, G.R. No. L-22074). Taxation is described as a symbiotic relationship whereby in exchange of the benefits and protection that the citizens get

from the government, taxes are paid (CIR vs.

Algue, Inc., G.R. No. L-28896).

Q. Explain the pronouncement of the Supreme Court that the power of taxation is purely legislative

Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it

shall be imposed (CREBA v. Romulo, 614

SCRA 605, 626).

Q. Expound on the theory that the power of taxation is considered as a principal attribute of sovereignty.

A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfil its mandate of promoting the general welfare and well-being

of the people (CIR v. BPI, 521 SCRA 373,

387-388).

Q. Briefly discuss the dictum that ―the power to tax involves the power to destroy.‖

In Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667, 679, the Supreme Court stressed that taxation is a

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destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.

The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare xxx

(Cruz, Constitutional Law, 2000 Ed., p. 87).

Q. Describe the Scope of the Power to Tax

The power of taxation is the most absolute of all powers of the government (Sison v. Ancheta, 130 SCRA 654).It has the broadest scope of all the powers of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme.

However, the power of taxation should be exercised with caution to minimize injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill ―the hen

that lays the golden egg‖ (Roxas v. CTA, 23

SCRA 276).

Q. Discuss the meaning an implication of the LIFEBLOOD DOCTRINE.

1. By enforcing the tax lien, the BIR availed itself of the most expeditious way to collect the tax. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious

need (CIR v. Pineda, 21 SCRA 105).

2. The government is not bound by the errors committed by its agents. In the performance of its government functions, the State cannot be estopped by the neglect of its agents and officers. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the state effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to

jeopardize the government‘s

financial position (CIR v. CTA, 234

SCRA 348).

3. The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon the sale of real properties of a decedent, without the cognition and authority of the court sitting in probate over the supposed will of

the decedent, because the

collection of the estate tax is executive in character. As such, the estate tax is exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding,

immortalized in the maxim ―Taxes

are the lifeblood of the government and should be collected without unnecessary hindrance.‖ However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself (MARCOS II v. CA, 273 SCRA 47). 4. Taxes are the lifeblood of the

government and so should be collected without unnecessary hindrance. Philex‘s claim that it had no obligation to pay the excise tax liabilities within the prescribed period since it still has pending claims for VAT input credit/refund with the BIR is UNTENABLE (Philex Mining Corporation v. CIR, 294 SCRA 687).

Q. It has been said that the State can never be in estoppel, and this is particularly true in matters involving taxation. Explain the philosophy behind the government‘s exception, as a general rule, from the operation of the principle of estoppel

Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affair. This

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should not hold true to government officials with respect to matters not of their own personal concern.

Q. State the DOCTRINE OF SYMBIOTIC RELATIONSHIP.

This doctrine is enunciated in the case of CIR v. ALGUE, INC., 158 SCRA 9, which states

that: ―Taxes are what we pay for civilized

society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one‘s hard-earned income to the taxing authorities, every person who is able to must contribute his share in the burden of running the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values.‖

Q. When is Taxation considered an implement of Police Power?

1. In Walter Lutz v. J. Antonio

Araneta, 98 Phil. 148, the SC upheld the validity of the tax law increasing the existing tax on the manufacture of sugar. ―The protection and promotion of the sugar industry is a matter of public concern; the legislature may

determine within reasonable

bounds what is necessary for its protection and expedient for its promotion. If objective and methods alike are constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State‘s police power.‖

2. In Tio v. Videogram Regulatory

Board, 151 SCRA 208, the levy of a 30% tax under PD 1987, was imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual

property rights, and the

proliferation of pornographic

videotapes, and therefore VALID. While the direct beneficiary of the

said decree is the movie industry, the citizens are held to be its indirect beneficiaries.

Q. May the power of taxation be used as an implement of the power of eminent domain?

YES. The Supreme Court in the case of CIR v. Central Luzon Drug Corp., 456 SCRA 414, 445 held: ―Tax measures are but ―enforced contributions exacted on pain of penal sanctions‖ and ―clearly imposed for a public purpose. In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.

While it is declared commitment under Section 1 of RA 7432, social justice ―cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto. For this reason, a just compensation for income that is taken away from respondent (Central Luzon Drug Corp.)

becomes necessary. It is in the tax credit (now

tax deduction) that our legislators find support to realize social justice, and no administrative body can alter that fact.‖

PURPOSE OF TAXATION

i. Revenue – Basically, the purpose of taxation is to provide funds or property with which the State promotes the general welfare and protection of its citizens. (51 Am. Jur. 71-73) The conservative and pivotal distinction between police power and power of taxation rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax. (Gerochi v. DOE) While it is true that the power of taxation can be used as an implement of police power, the primary purpose of levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax (Planters Products, Inc. v. Fertiphil Corporation).

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ii. Non-Revenue

a. Regulation—Taxes may also be imposed for a regulatory purpose

as, for instance, in the

rehabilitation of a threatened industry which is affected with public interest, like the oil industry. (Caltex Phils. V. COA)

b. Promotion of General Welfare— Taxation may be used as an implement of the police power in order to promote the general welfare of the people. Thus, in the case of Lutz v. Araneta, the SC upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is so undeniably vital to the economy – the sugar industry.

c. Reduction of Social Inequality— This is made possible through the progressive system of taxation where the object is to prevent the undue concentration of wealth in the hands of a few individuals. Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger portion of the tax burden.

d. Encouragement of Economic

Growth—Taxation does not only raise public revenue, but in the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the country‘s economic growth.

e. Protectionism

Q. What are the essentials of the principle of administrative feasibility?

It requires that (a) each tax should be clear and plain to the taxpayers; (b) capable of enforcement by an adequate and well-trained staff of officials; (c) convenient as to time and manner of payment; and (d) not duly burdensome upon or discouraging to business activity.

Q. What does the principle of Fiscal Adequacy as a characteristic of a sound tax system require?

It requires that the sources of revenues must be adequate to meet government

expenditures and their variations (Abakada

Guro, et al. v. Ermita, 469 SCRA 1; Chavez vs Ongpin, 186 SCRA 331).

Q. What does the principle of theoretical justice or equality entail?

A good tax system must be based on the taxpayer‘s ability to pay. This suggests that taxation must be progressive conformably with the constitutional mandate that Congress shall evolve a progressive system of taxation. (Sec. 28[1], Art. VI, 1987 Constitution) It holds that similarly situated taxpayers should pay equal taxes, while those who have more should pay more.

Q. Are taxes subject of set-off?

1. The income tax liability of

Francia cannot be compensated with the amount owed by the government as compensation for his expropriated property. A taxpayer may not set-off taxes due from claims he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such debt, demand, contract or judgment as is allowed to be set-off. The collection of a tax cannot await the results of a lawsuit against the government (Francia v. IAC, 162 SCRA 753).

2. The claim of Philex for VAT

refund is still pending litigation, and still has to be determined by the CTA. A fortiori, the liquidated debt of Philex to the government cannot, therefore, be set off against the unliquidated claim which Philex conceived as existing in its favor. Debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity (Philex v. CIR, 294 SCRA 687).

Q. Distinguish direct tax from indirect tax. Direct tax refers to one assessed upon the property, person, business income, etc., of those who pay them, whereas indirect tax includes those levied on commodities before

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they reach the consumer, and are paid by those upon whom they ultimately fall, not as taxes, but as part of the market price of the

commodity (Cooley, Tax. 61).

INHERENT LIMITATIONS ON THE POWER TO TAX

Q. What is meant by ―public purpose‖ as an inherent limitation on the power of taxation?

The term ―public purpose‖ is not defined. It is an elastic concept that can be

hammered to fit modern standards.

Jurisprudence states that ―public purpose‖ should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing

and urban or agrarian reform (Planters

Products, Inc. v. Fertiphil Corporation, 548 SCRA 485 [2008]).

Public v. Private interest

In the case of Pascual v. Secretary of Public Works, 110 PHIL 331, the SC held that the appropriation for construction of feeder roads on land belonging to a private person is not valid, and donation to the government of the said land 5 months after the approval and effectivity of the Act for the purpose of giving a semblance of legality to the appropriation does not cure the basic defect. Incidental advantage to the public or to the State, which results from the promotion of private enterprises, does not justify the use of public funds.

Tax Situs of Shares of Stock

The SC held that the actual situs of the shares of stock left by non-resident alien decedent is in the Philippines. The owner residing in California has extended activities here with respect to her intangibles so as to avail herself of the protection and benefit of the Philippine laws. Accordingly, the Philippine government had the jurisdiction to

tax the same (Wells Fargo Bank v. Collector,

70 Phil. 235).

Exemption from Taxation of Government Agencies

The Constitution is silent on whether Congress is prohibited from taxing the properties of the agencies of the government. In MCIAA v. Marcos, 261 SCRA 667, the Supreme Court held that nothing can prevent

Congress from decreeing that even

instrumentalities or agencies of the

government performing governmental

functions may be subject to tax.

Tax exemption of property owned by the Republic of the Philippines refers to property owned by the government and its agencies which to do not have separate and distinct personalities. ―The government does not part with its title by reserving them, but simply gives notice to the world that it desires them for a certain purpose.‖ As its title remains with the Republic, the reserved land is clearly covered by tax exemption.

However, the exemption does not extend to improvements on the public land. Consequently, the warehouse constructed on the reserved land by NDC should properly be assessed real estate tax as such improvement

does not appear to belong to the public (NDC

v. Cebu City, 215 SCRA 382).

Q. Is Manila International Airport Authority considered an instrumentality of the National Government exempt from local taxation?

YES. In Manila International Airport

Authority v. Court of Appeals (495 SCRA 591, 615), the Supreme Court held that the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,

exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units.

This has been echoed in the recent case of Philippine Fisheries Development Authority v. The Municipality of Navotas, 534 SCRA 490, wherein the Supreme Court ruled that PFDA, being an instrumentality of the national

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government, is exempt from real property tax but the exemption does not extend to the portions of the Navotas Fishing Port Complex (NFPC) that were leased to taxable or private persons and entities for their beneficial use. Q. Is Philippine Reclamation Authority

(PRA) exempt from real property tax? YES. It is exempt from real property

tax. First. PRA is not a government-owned or

controlled corporation but an instrumentality of the National Government vested with corporate powers and performing an essential public service pursuant to Section 2(10) of the Introductory Provisions of the Administrative

Code. Second. Real properties of PRA are

owned by the Republic of the Philippines. Section 234(a) of the Local Government Code exempts from real estate tax any ―[r]eal property owned by the Republic of the

Philippines.‖ [Republic v. City of Parañaque,

677 SCRA 246 (2012)]

Q. Explicate the Destination Principle in the imposition of value added tax. According to the Destination Principle, goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT while those destined for use or consumption within the Philippines shall be imposed with 10% VAT (Now 12% under R.A. No. 9337). Export processing zones are to be managed as a separate customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as foreign territory. For this reason, sales by persons from the Philippine customs territory to those inside the export processing zones are already taxed

as exports (Atlas Consolidated Mining and

Development Corporation v. CIR, 524 SCRA 73, 103).

Q. Distinguish tax from license fee

Tax may be distinguished from license fee as follows:

Tax License Fee

Levied for revenue Imposed for

regulations Involves exercise of

taxing power Involves exercise of police an

power Amount is generally

not limited Amount usually limited to is

the necessary

expenses of

regulation Imposed on the right

to exercise a privilege as well as to persons and property Imposed on the right to exercise a privilege Enforced contribution assessed by sovereign authority to defray public expenses Legal compensation or reward of an officer for public services

Failure to pay does not necessarily make the business illegal

Failure to pay makes the act or business illegal Q. Are toll fees considered taxes?

A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public

expenditures.Toll fees, on the other hand, are

collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities,

as an attribute of ownership (Renato V. Diaz,

et al. vs. Sec. of Finance, et al., G.R. No. 193007).

Q. Give the sources of tax law

The sources of tax law are: (a) Constitution; (b) statutes or laws; (c) presidential decrees; (d) revenue regulation; (e) administrative rulings and opinions; (f) judicial decisions; (g) provincial, city, municipal and barangay ordinances; and (h) treaties or international agreements.

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Q. What is meant by progressive taxation and what is its basis?

Progressive taxation is built on the principle of the taxpayer‘s ability to pay— taxation is progressive when its rate goes up depending on the resources of the person affected.

CONSTITUTIONAL LIMITATIONS ON THE TAXING POWER

Q. When does the power of taxation impinge the due process clause?

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to a

confiscation of property (Reyes v. Almanzor,

196 SCRA 322).

There is a need for proof of persuasive character as would lead to a violation thereof. Absent such a showing, the presumption of validity must prevail.

Q. Is classification allowed in taxation? The taxing power has the authority to make reasonable and natural classification for purposes of taxation, but the government‘s act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed (Sison v. Ancheta, 130 SCRA 654).

The equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of taxation, and a classification is reasonable where: (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purposes of the law; (3) the classification applies not only to present conditions but also to future conditions; (4) the classification applies only to those who belong to the same class. In the case of Ormoc Sugar Company, Inc. v. the Treasurer of Ormoc City, 22 SCRA 603, the SC held an ordinance unconstitutional for taxing only sugar produced and exported by the Ormoc Sugar Co., Inc.. The classification, to be

reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any substantially established sugar central, of the same class as plaintiff, from the coverage of the tax.

The equal protection clause does not require universal application of the laws on all persons or things without distinction. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the group of persons or things similar to each other in certain particulars and different from all others in

these same particulars (Abakada Guro Party

List v. Ermita, supra).

Q. A law withdrawing the exemption granted to the press was challenged as discriminatory by giving broadcast media favored treatment.

IT IS NOT DISCRIMINATORY. If the press is now required to pay VAT, it is not because it is being singled out but only because of the removal of the exemption previously granted by law. Further, the press is taxed on its transactions involving printing and publication, which are different from the transactions of broadcast media. There is a reasonable basis for the classification (Tolentino v. Secretary of Finance, 235 SCRA 630).

Q. What is the controlling doctrine on exemption from taxation of real property of religious, charitable and educational institutions?

In the case of Lung Center of the

Philippines v. Quezon City and Constantino P. Rosas, City Assessor of Quezon City, 433 SCRA 119, the prevailing rule on the application of tax exemption to properties incidentally used for religious, charitable and educational

purposes, as enunciated in the case of Herrera

v. QC-BAA, 3 SCRA 187, has now been abandoned. In resolving the issue of whether or not the portions of the real property of Lung Center that are leased to private entities are exempt from real property taxes, the Supreme Court reexamined the intent of the

constitutional provision granting tax

exemption of properties ACTUALLY,

DIRECTLY AND EXCLUSIVELY USED FOR

RELIGIOUS, CHARITABLE AND

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Thus, the records of the Constitutional Commission reveal that what is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.

Citing the case of St. Louis Young

Men‘s Christian Association v. Gehner, 47 S.W.2d 776 which held that if real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation, the Supreme Court explained that ―What is meant by actual, direct and exclusive use of the property for charitable institutions is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.‖

In sum, the Court ruled that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from taxes.

In the most recent case of CIR v. St. Luke's Medical Center, Inc., 682 SCRA 66, the Supreme Court held that St. Luke's is not automatically exempt from real property tax even if it meets the test of charity. To be exempt, Section 28(3), Article VI of the Constitution requires that a charitable institutions use the property ―actually, directly and exclusively‖ for charitable purposes. Q. What is the requisite proof for

exemption from realty taxation? To be exempt from realty taxation, there must be proof of actual and direct and exclusive use of the lands, buildings and improvements for religious or charitable

purposes (Province of Abra v. Hernando, 107

SCRA 104).

DOUBLE TAXATION

Q. What is double taxation? When does it arise? How is it prevented? Is it unconstitutional?

Double taxation means taxing the same thing or activity twice during the same

tax period (Villanueva v. City of Iloilo, 26

SCRA 578). It takes place when a person is a resident of a contracting state and derives income from, or owns capital in, the other contracting state, and both states impose tax on that income or capital.

Tax conventions such as the RP-US Tax Treaty are drafted with a view towards the elimination of international juridical double

taxation. In CIR v. S.C. Johnson and Sons, Inc.,

309 SCRA 87, however, it was held that since the RP-US Tax treaty does not give a matching credit of 20% for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, S.C. Johnson (Phils.) is not entitled to the 10% rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

Moreover, double taxation, in general, is not forbidden by our fundamental law, so that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality (Pepsi-Cola Bottling Company of the Philippines v. Municipality of Tanauan, Leyte, 69 SCRA 460).

Q. Define international juridical double taxation.

It is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. (P. Baker, Double Taxation Conventions and International Law [1994], p. 11, citing the Committee on Fiscal Affairs of the Organization for Economic Cooperation and Development [OECD]). Q. What are the modes of eliminating

double taxation?

The usual methods of avoiding the occurrence of double taxation are:

5. Allowing reciprocal exemption either by law or by treaty

6. Allowance of tax credit for foreign taxes paid

7. Allowance of deduction for foreign taxes paid; and

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Q: What is meant by ―shifting the tax burden‖?

Shifting of tax burden is the process by which the burden of a tax is transferred from the statutory taxpayer or the one whom the tax was assessed or imposed to another without violating the law.

Q: Enumerate the ways of shifting the tax burden and define each.

1. Forward shifting—When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. 2. Backward shifting—When the burden

of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production.

3. Onward shifting—When the tax is shifted two or more times either forward or backward.

TAX EVASION

Q. Does an affidavit executed by revenue officers constitute a tax assessment? An affidavit executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, is not an assessment that can be questioned before the CTA. An assessment contains not only a computation of tax liabilities, but also a demand for payment

within a prescribed period (CIR v. PASCOR

Realty and Development Corp., 309 SCRA 402).

Q. Is prior assessment necessary before a taxpayer may be charged with tax evasion?

NO. In case of failure to file a return, the tax may be assessed or a proceeding in court may be begun without an assessment. An assessment is not necessary before a taxpayer may be prosecuted if there is a prima facie showing of a willful and deliberate attempt to file a fraudulent return with the intent to evade and defeat tax. A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax

Code (Ungab v. Cusi, 97 SCRA 877; CIR v.

PASCOR Realty and Development Corp., supra).

Q. How are statutory provisions granting tax exemptions or deductions construed? State the basis for the rule. It is an elementary rule in taxation that exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority. It is the taxpayers duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted (Radio Communications of the Phil. vs Provincial Assessor of South Cotabato, 456 SCRA 1).

The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among

taxpayers (Quezon City vs. ABS-CBN

Broadcasting Corporation).

TAX EVASION AND TAX AVOIDANCE DISTINGUISHED

Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. On the other hand, tax avoidance is a legal means used by the

taxpayer to reduce taxes (Benny v. Commr.,

25 T.Cl.78).

The intention to minimize taxes, when used in the context of fraud, must be proven by clear and convincing evidence amounting to more than mere preponderance. Mere understatement of tax in itself does not prove

fraud (Yutivo Sons Hardware Co. v. CTA, 1

SCRA 160).

A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. Therefore, a man may perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient (Court Holding Co. v. Commr., 2 T.Cl. 531).

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by taxpayer to be legally due, or the

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payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being ―evil‖, in ―bad faith‖, ―willful‖, or ―deliberate and not accidental‖; and (3) a course of action or failure of action

which is unlawful (Commissioner of Internal

Revenue v. The Estate of Benigno P. Toda, Jr., G.R. No. 147188, September 14, 2004, 438 SCRA 290).

TAXPAYER‘S SUIT

Q. What is a taxpayer‘s suit? When is it proper?

A taxpayer‘s suit requires illegal

expenditure of taxpayers‘ money.

Jurisprudence dictates that a taxpayer may be allowed to sue where there is a claim that public funds are illegally disbursed or that public money is being deflected to any improper purpose, or that public funds are wasted through the enforcement of an invalid

or unconstitutional law or ordinance. (Remulla

v. Maliksi, 706 SCRA 35, 18 September 2013) In Maceda v. Macaraig, 197 SCRA 771, the SC sustained the right of Sen. Maceda as taxpayer to file a petition questioning the legality of the tax refund to NPC by way of tax credit certificates, and the use of tax certificates by oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.

However, in Gonzales v. Marcos, 65

SCRA 624, the SC held that the taxpayer had no legal personality to assail the validity of E.O. 30 creating the Cultural Center of the Philippines as the assailed order does not involve the use of public funds. The funds came by way of donations and contributions, not by taxation.

Q. Are government contracts covered by the taxpayer‘s suit?

YES. In the recent case of Abaya v. Ebdane, Jr. (515 SCRA 720, 757-758), the Supreme Court stressed that the prevailing doctrine in the taxpayer‘s suits is to allow taxpayers to question contracts entered into by the national government or government-owned and controlled corporations allegedly in contravention of law. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or

that there is a wastage of public funds through the enforcement of an invalid or unconditional law. Significantly, a taxpayer need not be a party to the contract to challenge its validity. Q. How is the plaintiff in a taxpayer‘s suit

differentiated from the plaintiff in a citizen‘s suit?

The plaintiff in a taxpayer‘s suit is in a different category from the plaintiff in a citizen‘s suit—in the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere

instrument of the public concern (David vs.

Macapagal-Arroyo, 489 SCRA 160).

DECISIONAL RULINGS ON REFORMED EVAT LAW (RA 9337)

No undue delegation of legislative power

 The case before the Court is not a

delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual maters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is

the fact that the word shall is used in the

common proviso. The use of the word

shall connote a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed. Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically

uses the word shall, the exercise of

discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on

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the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

The Secretary of Finance is an agent of Congress in making his

recommendation to the President on the existence of either of the

conditions

 In making his recommendation to the

President on the existence of either of the two conditions, in the present case, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter.

VAT rates are uniform

 Uniformity in taxation means that all

taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Section 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of

properties. These same sections also provide for a 0% rate on certain sales and transaction. Neither does the law make any distinction as to the type of industry or trade that will bear the 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class.

VAT rates are equitable

 R.A. No. 9337 is also equitable. The law

is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00. Also, basic marine and agricultural food products in their original state are still not subject to the tax, thus ensuring that prices at the grassroots level will remain accessible.

Creditable input tax is a mere statutory privilege

 The input tax is not a property or a

property right within the constitutional purview of the due process clause. A VAT-registered person‘s entitlement to the creditable input tax is a mere statutory privilege. The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights. Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. x x x It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interest-free loan to the government. In the same breath, Congress also justified its move by saying that the provision was designed to raise an annual revenue of 22.6 billion. The legislature also dispelled the fear that the provision

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will fend off foreign investments, saying that foreign investors have other tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not deterred. Again, for whatever is the purpose of the 60-month amortization, this involves executive economic policy and legislative wisdom in which the Court cannot intervene.

5% creditable withholding tax is a method of collection

 With regard to the 5% creditable

withholding tax imposed on payments made by the government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads: ***Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. The government in this case is constituted as a withholding agent with respect to their payments for goods and services. x x x The Court observes, however, that the law used the word final. In tax usage, final, as opposed to creditable, means full. Thus, it is provided in Section 114(C): ―final value-added tax at the rate of five percent (5%)‖.

VAT is by its nature, regressive

 The VAT is an antithesis of progressive

taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller the portion of the income or profit that is

eaten by VAT. A converso, the lower the

income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit.

Imposition of regressive tax like VAT is not constitutionally prohibited

 The Constitution does not really prohibit

the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall ―evolve a progressive system of taxation.‖ The Court stated in the Tolentino case, thus: The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall ‗evolve a progressive system of taxation.‘ The constitutional provision has been interpreted to mean simply that ‗direct taxes are … to be preferred [and] as much as possible, indirect taxes should be

minimized.‘ (E. FERNANDO, THE

CONSTITUTION OF THE PHILIPPINES 221 [Second ed. 1977]) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would

have been prohibited with the

proclamation of Art. VII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales taxes are also regressive. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers‘ ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions.

II. INCOME TAXATION

Q. Distinguish Global Tax Treatment from Schedular System of Income Taxation. What system of taxation was adopted under the NIRC on income taxation? A global system of taxation is one where the taxpayer is required to report all income earned during a taxable period in one income tax return, which income shall be taxed under the same rule of income taxation. The schedular system requires a separate return for each type of income and the tax is computed on a per return or per schedule basis. Schedular system provides for different tax treatment of different types of income.

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The NIRC adopted a semi-global and semi-schedular tax system.

Q. What are the features of the Philippine Income Tax Law?

The features are as follows:

1. Income tax is a direct tax because the burden is borne by the income recipient upon whom the tax is imposed.

2. Income tax is a progressive tax since the tax base increases as the tax rate increases.

3. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, resident principle and the source principle. 4. The Philippines follows the

semi-schedular or semi-global system of income taxation

Q. What are the criteria in imposing Income Tax in the Philippines?

The criteria are:

1. Citizenship or nationality principle – A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the Philippines (b) only on his Philippine source income, if he qualifies as a non-resident citizen where his foreign-source income shall be tax-exempt. 2. Residence or domicile principle – An

alien is subject to Philippine income tax because of his residence in the Philippines. A resident alien is liable to pay Philippine income tax only from his income from Philippine sources but is tax exempt from foreign-source income.

3. Source of income principle – An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines.

Q. What are the types of Philippine Income Tax?

The types of Income tax under Title II of the NIRC are:

1. Graduated income tax on individuals 2. Normal corporate income tax on

corporations

3. Minimum corporate income tax on corporations

4. Special income tax on certain

corporations (e.g. private educational institutions, FCDUs, and international carriers)

5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset

6. Capital gains tax on sale or exchange of real property located in the Philippines and classified as a capital asset

7. Final withholding tax on certain passive investment incomes 8. Fringe benefit tax

9. Branch profit remittance tax; and 10. Tax on improperly accumulated

earnings.

Q. What is Income?

Income refers to ―an amount of money coming to a person within a specified time, whether as payment for services, interest or profit from investment.‖ It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both combined.

Stock dividends issued by the corporation are considered unrealized gains, and cannot be subjected to income tax until those gains have been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was

derived from a transaction (CIR v. CA, 301

SCRA 152).

Q. What are the requisites of taxable income?

For income to be taxable, the following requisites must exist:

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1. There must be gain or profit; 2. That the gain or profit is realized

or received, actually or

constructively;

3. It is not exempted by law or treaty from income tax

Q. What are the sources of income? The sources of income are: ―the property, activity or service that produces the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from

activity within the Philippines‖ (CIR v. BOAC,

149 SCRA 395).

Q. When is income considered realized? For income tax purposes, income is realized when the earning process is complete or virtually complete and an exchange has taken place.

Q. What is the source of income considered from within the Philippines?

In general, for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from property, activity or service within the Philippines.

In CIR vs. BOAC (1987), an off-line international carrier maintained a sales agent in the Philippines who sold tickets for flights flown outside the Philippines. The Supreme Court considered the sale of tickets in the Philippines as the activity that produced the income. The test of taxability is the ―source‖; and the source of an income is that activity which produced the income. Even if the BOAC tickets sold covered the ―transport of passengers and cargo to and from foreign cities‖‘ it cannot alter the fact that income from the sale of tickets was derived from the Philippines. Thus, BOAC was made liable for revenue derived from the sale of tickets. Q. What are incomes considered derived

from sources within the Philippines? Sec. 42(A) of the Tax Code enumerates the items of gross income from sources within the Philippines, namely:

(1) Interests paid by residents of the Philippines, corporate or

otherwise;

(2) Dividends paid by domestic corporations; or foreign

corporations at least 50% of their gross income in the last three taxable years coming from sources within the Philippines;

(3) Compensation for services performed in the Philippines;

(4) Rentals and royalties from properties located in the Philippines;

(5) Gains from sale of real properties located in the Philippines; and (6) Gains from sale of personal

properties, the sale taking place in the Philippines.

Q. Who are the income taxpayers?

In general, the income taxpayers are classified into individual, estate, trust and corporation. (Sec. 22A, NIRC)

ST. LUKE'S MEDICAL CENTER, INC., ORGANIZED AS A

NON-STOCK AND NON-PROFIT CHARITABLE INSTITUTION

IS NOT IPSO FACTO ENTITLED TO A TAX EXEMPTION

There is no dispute that St. Luke‘s is organized as a non-stock and non-profit charitable institution. However, this does not automatically exempt St. Luke‘s from paying taxes. This only refers to the organization of St. Luke‘s. Even if St. Luke‘s meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be ―organized and operated exclusively‖ for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be ―operated exclusively‖ for social

welfare. [Commissioner of Internal Revenue v.

St. Luke's Medical Center, Inc., 682 SCRA 66 (26 September 2012)]

Q. State the rule on construction of tax exemptions.

Laws granting exemption from tax are

construed strictissimi juris against the taxpayer

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Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed (Commissioner v. Mitsubishi Metal Corp., 181 SCRA 215).

Q. Is terminal leave pay taxable?

No. In the case of Re: Request of Atty.

Bernardo Zialcita (Adm. Matter No. 90-6-015-SC, October 18, 1990; 190 SCRA 851), the SC held that terminal leave pay is the cash value of an employee‘s accumulated leave credits, hence, it cannot be considered compensation for services rendered; it cannot be viewed as salary. It falls within the enumerated exclusions from gross income, and is therefore not subject to tax.

Q. What are taxable unregistered partnerships?

The SC in Evangelista v. CIR, 102 Phil.

140, held that Sec. 24 [now Section 22(B)] covered unregistered partnerships and even associations or joint accounts which had no legal personalities apart from their individual

members. xxx Accordingly, a pool of

machinery insurers was a partnership taxable

as a corporation (Afisco Insurance Corp. v. CA,

302 SCRA 1).

Q. Obillos sold his rights over two parcels of land to his four children so that they can build their residence, but the latter after one (1) year sold them and paid the capital gains. Acting on the theory that the children had formed an unregistered taxable partnership or joint venture, the BIR required the brothers to pay corporate income tax. Resolve.

The children should not be treated as having formed an unregistered partnership and taxed corporate income tax on their shares of the profits from the sale. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things in

a temporary state (Obillos Jr. v. CIR, 139

SCRA 438, 439).

Q. May a withholding agent file a written claim for refund?

YES. In CIR v. Procter and Gamble

PMC , 204 SCRA 377, the SC held that a

withholding agent is subject to and liable for

deficiency assessments, surcharges and

penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under the law. A ―person liable for tax‖ has been held to be a ―person subject to tax‖ and properly considered a ―taxpayer‖ x x x By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes.

Q. The BIR disallowed PRC‘s claim for deduction for failure to prove the worthlessness of the debts. Is the disallowance correct?

YES. There was no iota of

documentary evidence (e.g. collection letters,

reports from investigating fieldsman, police report/affidavit, etc.) to give support to the allegation of worthlessness. For debts to be considered ―worthless,‖ and qualify as ―bad debts‖ making them deductible, the taxpayer should show that:

a. There is valid and subsisting

debt;

b. The debt must be actually

ascertained to be worthless and uncollectible during the taxable year;

c. The debt must be charged off

during the taxable year;

d. The debt must arise from the

business or trade of the taxpayer;

e. The taxpayer must also show

that it is indeed uncollectible

even in the future (PRC v. CA,

256 SCRA 667).

f. It must not arise from

transactions between related

taxpayers (RR 5-99, RR

25-2002).

Q. Is theoretical interest on capital deductible?

NO. It is not deductible as it does not represent a charge arising under an

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No. 2, cited in the case of PICOP v. CA, 250 SCRA 434).

Q. How are assets classified for income taxpayers?

The assets of a taxpayer are classified for income tax purposes into ordinary and capital assets. However, there is no rigid rule or formula by which it can be determined with finality whether property sold by a taxpayer was held primarily for sale to costumers in the ordinary course of his trade or business or whether it was sold as a capital asset. A property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer‘s trade or business. Thus, a sale of inherited property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it saleable. However, if the inherited property is substantially improved or very actively sold or both, it may be treated as held primarily for sale to customers in the

ordinary course of the heir‘s business (Calasanz

v. CIR, 144 SCRA 664).

Q. Is an equity investment a capital or ordinary asset?

An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or loss is ordinary when the property sold or exchanged

is not a capital asset (China Banking

Corporation v. CA, 336 SCRA 178).

Q. Who are the individual income taxpayers?

They are the resident citizen, nonresident citizen, OCW and seamen, resident alien (Sec.24A) and non-resident alien engaged in trade/business or exercise of profession in the Philippines (Sec 25A).

EXCLUDE non-resident alien NOT engaged in trade/business or exercise of profession in the Philippines (Sec. 25A).

Q. How are the incomes of individuals taxed?

In general, individuals are taxed on the basis of their taxable income, that is, gross income less deduction and personal and

additional exemption. This tax is referred to as ordinary income tax or regular income tax. (Sec. 24A and 25A in relation to Sec. 31 and Sec. 32A, NIRC).

By way of exception, final tax, instead of ordinary tax, shall be imposed on certain kinds of passive income. Subject to certain requisites, these are:

a. Interests, royalties, prizes and winnings;

b. Cash or property dividends;

c. Capital gains derived from the sale of shares of stocks; and

d. Capital gains derived from the sale

of realty. (Sec. 24B1,

24B2,24C,24D1,25A2 and 25A3,

NIRC)

Other incomes subject to final tax are: a. Fringe benefits (Sec. 33, NIRC) b. Informer‘s reward (Sec. 282, NIRC) Q. Distinguish ordinary tax from final tax Ordinary tax and final tax are distinguished as follows:

(a) In the former, the tax base is taxable income; in the latter, the tax base is the gross income; (b) In the former, deductions and

personal or additional exemptions are allowed; in the latter, no such deductions and personal or

additional exemptions are

allowed;

(c) The tax base of the former is computed on the basis of one taxable year; the tax base of the latter is usually computed on a per transaction basis;

(d) The former is paid at the end of the taxable year; the latter is paid at source;

(e) In the former, liability for payment rests on the payee; in the latter, liability for payment rests on the payor;

(f) In the former, the payee is required to file an income tax return; in the latter, the payee is no longer required to file the

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return since it is to be made by the payor;

(g) Creditable withholding tax is, in certain cases, imposed on incomes subject to ordinary tax; final withholding tax is usually imposed on incomes subject to final tax. Q. Distinguish final withholding tax from

creditable withholding tax

FWT CWT The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

The liability for payment of the tax rests primarily on the payor as a withholding agent. Payee of income is required to report the income and/or pay the difference between the tax

withheld and

the tax due on the income. The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

The payee is not required to file an income tax return for

the particular income. The income recipient is still required to file an income tax return, as prescribed in

Sec. 51 and Sec. 52 of the NIRC, as amended.

(Revenue Regulation 2-98, Sec. 2.57A; CREBA vs. Romulo, 9 March 2010)

Q. What is passive income?

It is income generated by the taxpayer‘s assets. The BIR defines passive

income by stating what it is not: ―if the income is generated in the active pursuit and performance of the corporation‘s primary purposes, the same is not passive income.‖ (CREBA vs. Romulo, 9 March 2010)

Q. Are all passive incomes subject to withholding tax?

No. There are only certain kinds of passive income that are subject to final tax and, consequently, to final withholding tax. These are specifically enumerated in various

provisions of the NIRC (see Sec. 57A, NIRC).

All others are generally considered part of gross income, and consequently, subject to ordinary tax wherein creditable withholding tax is, in particular cases, applicable. Under present regulations, creditable withholding tax is usually applied to income payments not involving passive income.

NOTE: From the above, it is clear that not only passive incomes may be subject to withholding tax. Sec. 57 (A) of the NIRC expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. On the other hand, Section 57 (B) provides that the Secretary (of Finance) can require a CWT on ―income payable to natural or juridical persons, residing in the Philippines.‖ There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so. (see CREBA vs. Romulo, supra) Q. Give some example of ordinary

incomes subject to CWT

Some notable income payments that are subject to CWT are (1) wages; (2) professional fees; (3) rentals of realty; (4) income payments to partners of GPPs and (5) income payment to realtors for the sale of realty. (Sec. 78, NIRC and Sec. 2.57.2 of RR No. 2-98, as amended) Q. What is the proper tax treatment of

interest incomes earned by individual? As a rule, the interests earned by individuals shall be included in gross income and, thus, subject to regular income tax. This includes interest earned by a resident citizen from sources abroad.

By way of exception, interest from bank deposit (or monetary benefits from deposit substitutes or similar arrangements)