Taxation Memory Aid

(1)

M

E

M

O

R

Y

A

I

D

CBO OVER-ALL CHAIRPERSON: Evangeline Co

ASSISTANT CHAIRPERSON: Rose Lyn Rabanera

ACADEMICS COMMITTEE - HEADS:

Reigel Prado, Omar Gabrieles

SECRETARIAT – HEAD: Romino Arzadon

FINANCE COMMITTEE – HEAD: Kyan Sioco

LOGISTICS COMMITTEE - HEAD: Janis Ruckenbrod

TAXATION COMMITTEE

HEAD: Jocelyn Manalo

CO-HEAD: Marlyn Reyes

GENERAL PRINCIPLES: Marissa Asencion

INCOME TAXATION: Cheryl Hernandez

MEMBERS: Fatima Kristine Franco, Aries Magpantay

TRANSFER TAXATION: Nieves Elegado

MEMBER: Rosevee Paylip

TAX REMEDIES AND LOCAL TAXATION: Marlyn Reyes,

Jocelyn Manalo

MEMBER: Claudine Mayor

SUBJECT ADVISERS:

(2)

In return for the taxes received, the government only secures to the citizen that general benefit which results from protection to his person and property and the promotion of those various schemes which have for their object the welfare of all. This theory spawned the doctrine of symbiotic relationship.

DOCTRINE OF SYMBIOTIC RELATIONSHIP

“Taxes are what we pay for a 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.”

NATURE OF THE TAXING POWER a. inherent attribute of sovereignty The power of taxation is an incident of

sovereignty as it is inherent in the State, belonging as a matter of right to every independent government. It does not need of constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more

pervading and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it.

(4)

[Churchill and Tait vs. Concepcion, 34 Phil. 969]

Being attribute of sovereignty, its relinquishment is never presumed. [Luzon Stevedoring Co. vs. CTA, L-30232, July 29, 1988]

Tax is an attribute of sovereignty which emanates from necessity upon which the very existence of the government is dependent.

b. legislative in character

"the power to tax is exclusively vested in the legislature and it cannot be delegated as a whole."

In short, only the legislature can impose taxes. This is why a person, activity, or property is subject to tax because and only because the law says so.

Further, about local government, taxation remains exclusively legislative. Meaning, only the local legislative body thru an ordinance may impose taxes.

Inherent limitations 1. Public Purpose 2. Inherently Legislative 3. Territorial

4. International Comity

5. Exemption from Taxation of Government Agencies/Instrumentalities Constitutional Limitations

1. Due Process Clause (Art. III, Sec. 1) 2. Equal Protection Clause (Art. III, Sec. 1) 3. Uniformity (Art. VI, Sec. 28[1])

4. Progressive system of taxation (Art. VI, Sec. 28[1])

5. Non-impairment of contracts (Art. III, Sec. 10)

6. Non-imprisonment for Non-payment of Poll Tax (Art. III, Sec. 20)

7. Appropriation, revenue and tariff bills must originate exclusively in the House of Representatives (Art. III, Sec. 24) 8. Presidential veto (Art. VI, Sec. 27[2]) 9. Presidential power to tax tariff rates

(Art. VIII, Sec. 28[2])

10. Freedom of the press (Art. III, Sec. 4)

11. Freedom of religion ((Art. III, Sec. 5) 12. Exemption from property tax of

properties of religious, educational, charitable institutions (Art. VI, Sec. 28[3])

13. Tax exemptions granted to non-stock, non-profit educational institutions (Art. XIV, Sec. [4,5])

14. No public money or property used for a particular sect, priest, religious minister, etc. (Art. VI, Sec. 29[1])

15. Grant of tax exemptions (Art. VI, Sec. 28[4])

16. Grant of power of taxation to local government units (Art. X, Sec. 5)

17. Money collected for a special purposes shall be considered a special fund (Art. VI, 29[3])

18. Exclusive appellate jurisdiction of the SC over judgments of lower courts involving the legality of taxes, imports, assessments, fees, penalty. (Art. VIII, Sec. 5)

ASPECTS, PROCESS, PHASES OF

TAXATION. (Code: LAP – Levying, Assessment, Payment)

a. Levying/Imposition of the tax. This is essentially legislative. It refers to the enactment of tax laws or statutes.

Note: Courts have no power to interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character. To do so would be tantamount to a violation of both the letter and spirit of the organic laws by which the Philippine Government was brought into existence to invade a coordinate and independent department of the Government and to interfere with the legitimate powers and functions of the Legislature. [Tolentino, et al. vs. Secretary of Finance, 235 SCRA 630]

b. Assessment and Collection. This is essentially administrative. It is the act of administration and implementation of tax law by the executive branch through its administrative agencies. Nonetheless, the delegation must pass the completeness and sufficient standard test in order to prevent the abuse of its exercise.

(5)

c. Payment. This signifies an act of compliance by the taxpayer.

SCOPE OF THE LEGISLATIVE POWER TO TAX

[Code: SPASM]

a. Subjects or Objects of Taxation. Coverage and the kind or nature of the tax. They may be persons (natural or juridical),

property (real or personal); tangible or intangible), businesses, transactions, rights or privileges.

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. [Walter Lutz vs. J. Antonio Araneta, 98 Phil. 148]

b. Public Purpose.

The legislature primarily determines the public purpose of taxation although the courts can inquire as to whether the purpose is really public or private. However, judicial action is limited to the determination of the validity of the tax in relation to constitutional precepts or provisions or the determination in an appropriate case of the application of a tax law.

c. Amount or Tax Rate.

The legislature is free to levy a tax on any amount, provided, it is exercised within the bounds of constitutional limitations.

Note: Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy.

d. Situs of taxation.

Taxation shall only be exercised on persons, properties and excises within the taxing power.

e. Manner, means and agencies of collection of the tax.

Corollary to the sole power to tax is the sole power to prescribe the mode or method by which the tax shall be collected and to designate the officers through whom its will shall be enforced.

Q. Is the power to tax the power to destroy?

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

But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy.

Note: While taxation is said to be the power to destroy, it is no means unlimited. If so great an abuse is manifested as to destroy natural and fundamental rights which no free governmental could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional. Hence, the modification: “the power to tax is not the power to destroy while the Supreme Court sits.”

PRINCIPLES OF A SOUND TAX SYSTEM (Code: FAT)

a. Fiscal Adequacy. The taxes envisioned to be collected must be sufficient for government expenditures and other public needs.

NOTE: Be careful as sometimes... "an approximate estimate of government expenditures" is sufficient to satisfy the requirement.

Fiscal adequacy... requires that the sources of revenues must be adequate to meet government expenditures and their variations" (Chavez v. Ongpin)

(6)

b. Administrative Feasibility. The tax law must be capable of convenient, just, effective and efficient enforcement and administration. Likewise, tax laws should close-up the loopholes for tax evasion and deter unscrupulous officials from committing fraud.

Equally applies to taxpayers.. meaning, they must not have difficulty understanding what the tax law is all about.

c. Theoretical Justice. The tax law or system must be based on the taxpayer’s ability to pay.

Rule of taxation must be uniform and equitable. The State must evolve a progressive system of taxation.

Q. Will a violation of these principles invalidate a tax law?

IT DEPENDS. A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. HOWEVER, if a tax law

runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. [Sec. 28(1), Art. VI, 1987 Constitution]

Rule that taxes are personal to the taxpayer

GEN. RULE: Taxes are personal to the taxpayer. Corporation’s tax delinquency cannot be enforced on the stockholder nor transfer taxes on the estate are assessed on the heirs. EXCEPTIONS:

1. Stockholders may be held liable for unpaid taxes of a dissolved corporation if corporate assets have passed into their hands;

2. Heirs may be held liable for the transfer taxes on the estate if the properties of the decedent have been distributed to them prior to the payment of the required transfer taxes.

TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSOTIONS

A. Taxation Police Power

Purpose To levied for the

purpose of raising revenues

To promote public welfare through regulation

Amt of Exaction No limits Limited to the cost of

regulation, issuance of the license or surveillance

Benefits No special or direct

benefit is received by the taxpayer other than that the government secures the general welfare of the citizens.

No direct benefited, yet a healthy economic standard of society is maintained.

Contracts Recognized the

obligations imposed by of

Does not apply to police power

Transfer Taxes paid form part

of the public funds

Allows merely the restraint on the exercise of property rights.

(7)

B. Taxation Eminent Domain

Purpose To raise public fund Taking of property for

public use

Compensation General benefit of the citizens Just compensation is given to the owner of the expropriated property Person Affected Applies to all persons, property

and excises that may be subject thereto

Only particular property is comprehended.

C. Taxation License

Power Exercise of the taxing power Exercise of police power

Purpose To raise government fund Imposed for regulatory

purposes

Amt. of exaction No limits Limited to the cost of

regulation, issuance of the license or surveillance EXCEPT: when the fees are imposed for the purpose of regulating non-useful business, occupation, or activity, the amount may now exceed the cost of regulation.

Imposition If the primary purpose is to generate funds and regulation merely incidental

If the primary purpose is to regulate and to generate funds merely incidental

Scope covers legitimate and

illegitimate business, etc...

only legitimate business Effect of Non-payment Non-payment of tax does not

render business illegal

Non-payment of fee renders the business illegal

D. Taxation Special Assessment

Not limited to land Can be levied only on land

As a rule, cannot be made a personal liability of the persons assessed

Personal liability Is based wholly on benefits

It is exceptional both as to time and locality. A charge imposed only on the property owners benefited is a special assessment rather than a tax.

The imposition of a charge on all property in a prescribed area is a tax not an assessment although the purpose is to make a local improvement on street or highway.

E. Taxation Toll

It is a demand of sovereignty for the purpose of raising public revenues.

It is a demand of proprietorship, an amount charged for the cost and maintenance of the property used

F. Taxation Penalty

It is a civil liability. Person is criminally liable only when he fails to satisfy his civil obligation to pay taxes

It is a punishment for the commission of a crime.

(8)

TAX as distinguished from DEBT

TAX DEBT

Basis

Law Contract or judgment.

Effect of non-payment

Imprisonment (except in case of poll tax) No imprisonment Mode of Payment

Generally payable in money Payable in money, property or services Assignability

Not assignable Assignable

Set –off May not be a subject of compensation or

set-off

May be a subject of compensation or set-off Interest

Does not draw interest unless delinquent Draws interest if stipulated or delayed Authority

Imposed by public authority It is a private transaction

Taxes are not debts because a tax does not depend upon the consent of the taxpayer and there is no express or implied contract to pay taxes.

Exceptions:

1. tax collection being enforceable by court action [ Sambrano v. TA, 101 Phil. ]

2. in the application of certain statutes of limitation [ Rep. Far Eastern American, Co., 7 SCRA 399]

3. in the matter of deductible items from gross income [ Commissioner v. Prieto, 109 Phil. 592] ( Vitug Book)

4. when it is secured by a bond, the tax is considered as a bond.

SET-OFF

General Rule: Taxes cannot be the subject of compensation or set-off.

Reasons:

1. Lifeblood theory

2. Taxes are not contractual obligation but arise out of duty to the government.

3. The government and the taxpayers are not mutually creditors and debtors of each other.

Exception: Where both claims already became overdue and demandable as well as fully liquidated, or where the government and the taxpayer are in their own right reciprocally debtors and creditors of each other, compensation takes place by operation of law. Doctrine of EQUITABLE RECOUPMENT not followed in the Philippines

Thus, a tax presently being assessed against a taxpayer may not be recouped or set-off against an overpaid tax the refund of which is already barred by prescription

REQUISITE OF A VALID TAX. (Code: PUJAN)

a. It should be for public purpose b. The rule of taxation should be uniform c. That either the person or property taxed be

within the jurisdiction of the taxing authority

(9)

d. That the assessment and collection be in consonance with the due process clause. e. The tax must not infringe on the inherent

and constitutional limitations of the power of taxation.

PURPOSES OF TAXATION a. Primary – to raise revenues

b. Secondary/non-revenue purposes (RIPE)

1. To reduce social inequality

2. To implement the police power of the State (regulatory purpose)

3. To protect our local industries against unfair competition

4. To encourage the growth of local industries

EXTENT/SCOPE OF THE TAXING

POWER (CUPS)

a. It is comprehensive. It covers persons, businesses, activities, professions, rights and privileges.

b. It is unlimited. “The power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it

c. It is plenary as it is complete.

d. It is supreme. “Taxation, although referred to as the strongest of all the powers of the government, cannot be interpreted to mean that it is superior to the other inherent powers of the government, only that it is supreme insofar as the selection of the subject is concerned

LIMITATIONS ON THE TAXING POWER A. Inherent limitations of the taxing power

1. Public purpose

Taxation is for public purpose when:

a. the thing to be furthered by the appropriation of public revenue is something which is the duty of the government to provide; or

b. When the proceeds of the tax will directly promote the welfare of the community in equal measure

NOTE: Incidental advantage to the public or to the State, which results from the promotion of private enterprise or business, does not justify their aid by the use of public money. Q. Who may determine “public purpose”?

A. This is a legislative prerogative. The power to determine whether the purpose of taxation is public or private resides in Congress. However, this will not prevent the court from questioning the propriety of such a statute on the ground that the law enacted is not for public purpose; but once it is settled that the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such tax measure.

It is the purpose which determines the public character of the tax law, not the number of persons benefited. As long as the ultimate result favors the welfare of the public in general, the appropriation of public revenue is deemed done for the public purpose.

Q. When must public purpose exist? A. "It must exist at the time the tax proceeds are being used or a tax law is being passed for a certain purpose, whichever comes first. [Pascual vs. Sec. of Public Works]

2. International Comity –- principle of sovereign equality among states and of their freedom from suit without their consent limit the authority of the government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities taken in that capacity.

Thus, if a tax law violates certain international laws, it is not only invalid but it is also UNCONSTITUTIONAL because the constitution says " the Philippines....

(10)

adopts the generally accepted principles of international law as part of the law of the land.... etc.."

3. Non-delegation of taxing power

GEN. RULE: Power of taxation is vested in Congress and may not be delegated.

EXCEPTIONS:

a. Local taxing power granted by the Constitution (Art. X, Sec. 5);

Suppose this provision does not exist, may LGU exercise the power of taxation?

Yes, under the Doctrine of Implied Necessity... meaning, the power to create municipal corporations carries with it by necessary implication the power to compel upon it the power to tax.

Now, the importance of this provision now is: in case of doubt as to whether the LGU has the power to tax or not, all doubts must be resolved in favor of the existence of such power. This is not the rule without such provision in the Constitution.

b. Authority of the President, under the Constitution, to fix tariff rates, import and export quotas (Art 6, Sec. 28[2])

c. When delegation relates merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standards expressed by law.

NOTE: Some authors often include this because when you talk of enforcement, it is no longer legislative in character; thus, there is nothing to delegate. In the ordinary set-up of our bureaucracy, Congress makes the law (impose the tax), the Executive (BIR) executes the law.

Whether Congress likes it or not, it can't collect the tax! So, what's being delegated? 4. Territoriality or situs of taxation –

persons or property must be within the jurisdiction of the taxing power.

The territoriality rule does not merely relate to "geographical" location, but to the jural concept or nexus or bond between the taxing authority and the taxpayers. And this nexus depends on the type of taxes imposed, the personal circumstances of the taxpayers, and also the location of the subject of taxation.

Rules Observed in Fixing Tax Situs a. POLL/CAPITATION/COMMUNITY TAX

Poll or capitation, or community taxes are based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer. b. PROPERTY TAX

b.1. Real Property- is subject to taxation in the state or country where it is located, regardless of whether the owner is a resident or a non-resident. [First National Bank vs. Marine, 284 U.S. 321. 77 ALR 401]

b.2. Personal Property- the situs is wherever it was actually kept or located, was held to be the domiciled of its owner, following the age-old Doctrine of Mobilia sequuntur personam (movables follow the person).

MOBILIA SEQUUNTUR PERSONAM Although a mere fiction of law, without any constitutional foundation, it is nevertheless applied when convenient, provided it is not inconsistent with express provisions of the law. To acquire a situs in a state other than the domicile of the owner, tangible property must have a definite location there, accompanied by some degree of permanency; mere temporary or transient presence in the state is not sufficient. Exception:

Actual or business situs [Wells Fargo v. CIR] which has been codified in Section 104, R.A. 8424 enumerates certain properties which acquired actual situs in the Philippines, viz:

b.2.1. franchise exercised in the Philippines; b.2.2 shares of stock, obligations, bonds issued by domestic corporations organized

(11)

and constituted in accordance with Philippine laws;

b.2.3 shares, obligation, bonds issued by foreign corporation where 85% of its business is located in the Philippines. It is subject to donor’s tax and estate tax;

b.2.4. shares/right in a partnership business or industry established in the Philippines; b.2.5. shares, obligations, bonds, issued by foreign corporations which acquired business situs, when such have been used in the furtherance of the business of the foreign corporation.

Thus, the RULE: irrespective of the owner, donor’s tax or estate tax can be imposed upon these properties. EXCEPT where the foreign corporation grants exemption or does not impose taxes on intangible properties of Filipino citizen.

c. BUSINESS TAX- place of business

d. EXCISE TAX- Where the act is performed or where occupation is pursued

e. SALES TAX- where the sale is consummated

f. INCOME TAX- consider citizenship residence and sources of income (Sec. 42, R.A. 8424)

g. TRANSFER TAX- residence or citizenship of the taxpayer or location of property h. FRANCHISE TAX- state which granted the

franchise

i. VALUE ADDED TAX- ‘Destination Principle’ is followed

5. Tax-exemption of the Government – as a matter of public policy, property of the State or any of its political subdivisions devoted to government uses and purposes are generally exempt from taxation. However, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing functions may be subject to tax. [ MCIAA vs. Marcos, 261 SCRA 667]

Agencies performing governmental functions distinguished from proprietary functions

Agencies performing

governmental functions Agencies performing proprietary functions

Tax-exempt unless expressly taxed Subject to tax unless expressly exempted.

Government-owned and controlled corporations perform proprietary functions; hence, they are subject to taxation.

General Rule: government is taxable.

Exception: when there is a law which says that it is exempt from tax. From these rules, you now make a distinction:

1) agencies performing governmental function as a rule are tax exempt (by reason of public policy) UNLESS expressly subject to tax; and, 2) agencies performing proprietary function are subject to tax UNLESS expressly exempt. (Posadas vs. Standard Well)

Now, with respect to government properties, NDC vs. Cebu City, enunciated these principles:

1. Properties owned by the Republic of the Philippines AND agencies without separate and distinct personality are exempt from taxation. (In other words, those agencies with charter are treated for tax purposes in accordance with the provisions of their respective charters.)

2. The exemption of public properties from taxation does not extend to the improvements introduced upon them by the present occupants at their expense.

(12)

B. Constitutional limitations of the taxing power:

1. DUE PROCESS OF LAW

“No person shall be deprived of life, liberty or property without due process of law….” (Art 3, Sec.1 of the Constitution)

Requisites of Due Process:

Substantive Limitation- The interests of the public generally as distinguished from those of a particular class require the intervention of the State; and

Procedural Limitation- The means employed must be reasonably necessary to the accomplishment of the purpose and not unduly oppressive.

The requirement of due process whether taken from the substantive to the procedural aspect simply means one thing -- reasonableness of the legislation.

Substantive means that it should not be harsh, confiscatory, unjust and oppressive. Procedural means that it must provide notice and opportunity to be heard. Thus, they simply mean that the law must be reasonable.

There must be evidence to support a claim of violation of this constitutional provision. Without proof, the presumption of constitutionality of law applies.

However, due process is violation by any of these situations: (Code: VCORP)

1. where the law is in violation of inherent limitations

2. if the tax amounts to a confiscation of property

3. if the subject of confiscation is outside the jurisdiction of the taxing authority

4. if the law which is applied retroactively imposes unjust and oppressive taxes

5. if the law is imposed for a purpose other than public purpose

2. EQUAL PROTECTION OF THE LAW “Nor shall any person be denied the equal protection of the law.” (Art. 3, sec.1 of the Constitution)

Note: it merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the obligations imposed.

Requisites for a valid Classification: a. It must be based on SUBSTANTIAL

distinctions

b. It must APPLY to both present and future conditions

c. It must be GERMANE to the purposes of the law

d. It must apply EQUALLY to all members of the same class

Substantial distinction - it must be real, material and not superficial distinction [See cases of Punzalan, Association of Customs Brokers, Hiu Tsong Pao, Ormoc Sugar, etc...]

3. UNIFORMITY OF TAXATION

“The rule of taxation shall be uniform and equitable.” (Art. 6, Sec.28(1) of the Constitution)

Uniformity in taxation is similar to equality in taxation, but equitable taxation means that the taxes must be reasonable, fair, etc... and therefore, ... ability to pay. [See case of Almanzor to illustrate this.]

UNIFORMITY AND EQUALITY

DISTINGUISHED

EQUALITY IN

TAXATION UNIFORMITY

Is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it

Equitability achieved when the burden of taxation falls to those better able to pay.

A tax is considered uniform when it operates with the same

force/effect in every place where the subject may be found.

All property belonging to the same class shall e taxed alike.

(13)

Constitutional Equality in Taxation

means that all persons who are similarly situated should be treated alike both in the privilege conferred and burdens imposed. the application of the concept of equal

protection of the laws which prohibits discrimination other than those instances where there is valid classification.

Thus, persons who are similarly situated, or who belong to the same class, should be given by law the same protection and privileges as well as imposed the same burdens and obligations.

Uniformity of taxation NOT the same as equality in taxation

Uniformity of taxation means that all articles or properties of the same class shall be taxed at the same rate. Different articles or other subjects like transactions, business, right, etc. may be taxed at different rates provided that the rate (not necessarily the amount) is uniform in the same class everywhere.

4. PROGRESSIVE SYSTEM OF

TAXATION

“Congress shall evolve a progressive system of taxation” (Art.6, Sec.28 (1) of the Constitution) Tax rate increases as tax base increases. The Constitution provides that the Congress

shall evolve a progressive system of taxation. However, this provision is merely a directive to Congress, NOT a right enforceable before the courts.

Q. Is a tax adopting a regressive system of taxation is valid?

A. Yes. The Constitution does not really prohibit the imposition of indirect tax is which like the VAT are regressive. The Constitution provision means simply that indirect taxes shall be minimized. The mandate to Congress is not to prescribe but to evolve a progressive tax system. [EVAT En Banc Resolution, Tolentino, et.al vs. Secretary of Finance, Oct. 30, 1995]

5. NON-IMPAIRMENT CLAUSE

“No law impairing the obligation of contracts shall be passed.”(Art. 3, Sec.10 of the Constitution)

Non-impairment clause of the Constitution constitutes a limitation on the power of taxation

The obligation or contract is impaired when its terms or conditions are changed by law or by a party without consent of the other thereby weakening the position of the latter. Thus, there is impairment by law when a tax

exemption based on a contract is revoked by a later taxing statute.

It may be well to point out that the non-impairment clause will only be violated if and when the taxing authority was a party to the contract in question.

Note: The rule, however, does not apply to public utility franchises on right since they are subject to amendment, alteration or repeal by the Congress when the public interest so requires. [Cagayan Electric and Light Co., Inc. vs. Commissioner, G.R. no. 60216, September 25, 1985]

NOTE: This provision was NOT REALLY thought of as a limitation on the power of taxation EXCEPT in case where tax exemption was granted for a valuable consideration. So the question now should be are tax exemptions falling under the subject constitutional provision revocable? You have to qualify, if the exemption is granted via a franchise, it can be revoked because of Section 11 Article 12 of the Constitution. However, if the exemption is via a contract, it cannot be revoked. Why the distinction? Because in the grant of franchise, the government is exercising a governmental function (thus, in so doing in the first place, it considered public good etc...) while in contract, the government merely exercises a proprietary function (presumably there was no prior determination of public good, etc...)

(14)

6. IMPRISONMENT FOR NON-PAYMENT OF POLL TAX

“No person shall be imprisoned for non-payment of a debt or poll tax.” (Art 3, Sec.20 of the constitution)

NOTE: But if acts, violative of laws were committed in the issuance and payment of the cedula, imprisonment is allowed. For instance, if a taxpayer was issued a cedula thru misrepresentation or falsification, the taxpayer could be imprisoned for falsification of public document.

7. BILLS TO ORIGINATE EXCUSIVELY

FROM THE HOUSE OF

REPRESENTATIVES

“All appropriation, revenue or tariff bills, bills authorizing the increase of the public debt, bills of local application and private bills, shall originate exclusively in the House of Representatives, but the senate may propose or concur with amendments.” (Art. 3, Sec. 24, of the Constitution)

NOTE: It is the BILL and not the LAW that should originate from the lower house. In other words, if the final version is substantially that bill passed by the Senate, for as long as the initiatory bill was commenced by the lower house, it's totally OK.

8. THE VETO POWER OF THE

PRESIDENT

“ The president shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the veto shall not affect the item or items to which he does not object.” (Art. 6, Sec. 27(2) of the Constitution)

9. PRESIDENT’S DERIVATIVE POWER TO TAX

“The Congress may, by law, authorize the President to fix within specified limits and subject to such limitations and restrictions it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national development program of the

government.”(Art. 8, Sec.28 (2) of the Constitution)

The term “FLEXIBLE TARIFF CLAUSE” refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution.

10. TAXATION AND THE FREEDOM OF THE PRESS

“No law shall be passed abridging the freedom of speech, of expression or of the press.”(Art.3, Sec. 4 of the Constitution)

There is curtailment of press freedom and freedom of thought and expression if a tax is levied in order to suppress this basic right and impose a prior restraint. [Tolentino, et.al vs. secretary of Finance, 235 SCRA 630]

11. TAXATION AND FREEDOM OF

RELIGION

“No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship without discrimination or preference shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.” (Art.3,Sec.5, of the Constitution)

The income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is taxable.

12. TAX EXEMPTION OF PROPERTIES

ACTUALLY, DIRECTLY AND

EXCLUSIVELY USED FOR

RELIGIOUS, CHARITABLE AND

EDUCATIONAL PURPOSES (Art. 6,sec.28(3) of the Constitution)

REASON FOR THE RULE:

Cemeteries are exempt from the payment of taxes because of the difficulty of collecting a tax thereon and the obvious impropriety of selling

(15)

the graves of the dead to defray the expenses of carrying on the government of the living.

Churches and parsonages or convents appurtenant thereto, etc. are exempt from taxation because such institutions perform work which would otherwise have to be carried on by the public at the expense of the taxpayers and that the expenses of such institutions from taxation lessens rather than increases the burden upon other taxpayers.

CONTROLLING DOCTRINE ON

EXEMPTION FROM TAXATION OF

REAL PROPERTY OF RELIGIOUS,

CHARITABLE AND EDUCATIONAL

INSTITYUTIONS

In the recent case of Lung Center of the Philippines vs. Q.C and Constantino p. Roxas, City Assessor of Q.C., G.R. no. 144104, June 29, 2004, 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 vs. 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 SC reexamined the intent of the Constitutional provision granting tax exemption of properties ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES.

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.

What is meant by actual, direct and exclusive use of property for charitable, religious and educational 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. [St. Louis Men’s Christian association vs. Genher, 47 S.W.2d776]

NOTE: The rule remains that it is the USE and not ownership that determines the exempt character of the property. What is meant by "use" remain a litigious issue, but should always be measured under the constitutional prescription of Actually-Directly-Exclusively purposes.

13. TAX EXEMPTIONS GRANTED TO

NON-STOCK, NON-PROFIT

EDUCATIONAL INSTITUTIONS All revenues and assets of non-stock, non-profit educational institution used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution and cessation of the corporate existence of such institution, their assets shall be disposed of in the manner provided by law. (Art. 14, Sec.4 (3) of the Constitution)

Subject to the conditions prescribed by law, all grants, endowments, donation or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax. (Art. 14, Sec.4 (4) of the Constitution)

ART. 14 and ART. 6 OF THE 1987 CONSTITUTION DISTINGUINSHED ART 14, SEC. 4(3) ART 6, SEC. 28(3) GRANTEE Non-stock, non-profit educational institution Religious, educational, charitable institutions TAXES COVERED Income tax Custom duties Property tax ( DECS Order No. 137-87) Property tax

14. NO PUBLIC MONEY OR PROPERTY USED FOR A PARTICULAR SECT, PRIEST, RELIGIOUS MINISTER, ETC. (Art. 6,Sec.29(1)Constitution)

GEN. RULE: No public money or property shall be appropriated, applied, paid or employed directly or indirectly for the use, benefit or support of any sect, church, denomination, sectarian institution, or system

(16)

of religious or of any priest, preacher, minister, or other religious teacher, or dignitary.

EXCEPT: when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution or government orphanage or leprosarium

15. GRANT OF TAX EXEMPTIONS

“No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.” (Art. 6, Sec.28 (4) of the Constitution) GEN. RULE: NO EXEMPTION

EXCEPT: When a statute provides that certain person or property is immune from taxation. Rule on Construction of Exemption: 1. Exemptions from taxation are not

presumed.

2. He who claims as exemption must be able to justify his claim by the clearest grant of organic or statute law by words too plain to be mistaken. If ambiguous, there is no exemption.

3. He who claims exemption should prove by convincing proof that he is exempted. 4. Taxation is the rule; tax exemption is the

exception.

5. Tax exemption must be strictly construed against the taxpayer and liberally in favor of the taxing authority.

6. Constitutional exemption is self-executing. 7. Tax exemptions are personal.

STRICT CONSTRUCTION RULE- It simply means that if, after the application of all rules of interpretation for the purpose of ascertaining the intention of the legislature, a well founded doubt exists, then the ambiguity occurs which may be settled by the rule of strict construction. EXCEPTION to Strict Construction Rule: a. The rule on strict construction rule does not

apply where the statute granting the exemption expressly provides for liberal interpretation;

b. The rule does not apply to special taxes relating to special cases and affecting only special classes of persons;

c. In case of property owned by the state an express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to public policy of the state, since as to such property” exemption is the rule and taxation the exemption”

d. Exemptions to traditional exemptees, such as religious and charitable institution; e. The rule does not apply in the case of

exemptions in favor of governmental political subdivision or instrumentality [Maceda vs. Macaraig, jr., 197 SCRA 771] f. If the taxpayer falls within the purview of

exemption by clear legislative intent. [CIR vs. Arnoldus Carpentry Shop, G.R. no. 71122, March 25, 1988]

TAX AMNESTY TAX EXEMPTION Is an immunity from

all criminal and civil obligations arising from non-payment of taxes.

It is a general pardon given to all taxpayers

Is an immunity from the civil liability only.

16. GRANT OF POWER OF TAXATION TO LOCAL GOVERNMENT UNITS

Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments. (Art. 10, Sec. 5, Constitution) Congress cannot abolish the local

government’s power to tax as it cannot abrogate what is expressly granted by the fundamental law.

(17)

17. SPECIAL FUND

“All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the government.” (Art. 6, Sec.29 (3), Constitution)

18. SUPREME COURTS JURISDICTION OVER TAX CASES (Art. VIII, Sec. 5)

Supreme Court may review, revise, reverse, modify or affirm on appeal or certiorari as the law or the Rules of Court may provide all cases involving the legality of any tax, impost, assessment or toll, or any penalty imposed in relation thereto.

KINDS OF TAXES DIFFERENTIATED

DIRECT INDIRECT

Tax for which a taxpayer is directly liable on the transaction or business it engages in

Tax primarily paid by persons who can shift the burden upon someone else

SPECIFIC AD VALOREM

Imposed and based on weight or volume capacity or any other physical unit of measurement

Based on selling price or other specified value of goods

GENERAL SPECIAL

Imposed solely to raise revenue for the government

Imposed and collected to achieve a particular legitimate object of government

NATIONAL LOCAL

Imposed by the national government Levied and collected by the local government

PERSONAL PROPERTY

Is of fixed amount imposed on individuals, whether citizens or not, residing within a specified territory, without regard to their property or occupation

Imposed on property, real or personal, in proportion to its value.

PROGRESSIVE REGRESSIVE

(18)

DOUBLE TAXATION

Double taxation- strictly, taxing twice same object/subject, same taxing jurisdiction, same purpose, same tax, same year.. this is called "direct duplicate"; should one of these is not the same, i.e., say not same year, then it is called "indirect duplicate"... in either case, there is no law which prohibits the same. there is not even a prohibition by the constitution as you say it.

However, in case of direct duplicate, if it amounts to confiscation of property for being unjust, oppressive, unfair, etc... then it is unconstitutional not on the ground of double taxation but for being violative of the due process clause.

Note: there is no constitutional prohibition against double taxation. It is not favored but permissible. [Pepsi Cola Bottling Co. vs. City of Butuan, 24 SCRA 789]

Kinds of Double Taxation

1. DIRECT -Occurs when the same property is taxed twice when it should be taxed once

-objectionable or prohibited sense

2. INDIRECT Allowed it the taxes are of different nature or character, imposed by different taxing authority -permissible double taxation

3. DOMESTIC Arises when the taxes are Imposed by the local or national government

4. INTERNATIONAL Refers to 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.

TREATY AS A MODE OF ELIMINATING DOUBLE TAXATION

1. EXEMPTION METHOD - the income or capital which is taxable in the state of source or situs is exempted in the state of residence

- the focus is on the income or the credit itself

2. CREDIT METHOD – the tax paid in the state of source is credited against the tax levied in the state of residence.

- focuses upon the tax.

FORMS OF ESCAPE FROM TAXATION (Key: ESCATE) 1. Shifting 2. Capitalization 3. Transformation 4. Avoidance 5. Exemption 6. Evasion-unlawful A. Shifting

Process by which tax burden is transferred from statutory taxpayer (impact of taxation) to another (incident of taxation) without violating the law.

Illustration: Value added tax. The seller is required by law to pay the tax, but the burden is actually shifted or passed on to the buyer. Impact of taxation – point on which tax

is originally imposed.

Incidents of taxation – point on which the tax burden finally rests or settles down.

(19)

B. Capitalization

Reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay.

C. Transformation

The manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production, thereby turning out his units at a lower cost.

D. Tax Avoidance

exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability.

E. Tax Evasion

Use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of the tax.

Indicia of Fraud in Tax Evasion

1. failure to declare for taxation purposes true and actual income derived from business for two consecutive years; or 2. substantial under declaration of income

tax returns of the taxpayer for four consecutive years coupled with intentional overstatement of deductions. F. Tax Exemption

A grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes.

Kinds of Tax Exemptions As to basis:

1. Constitutional: Immunities from taxation which originate from the constitution

2. Statutory: Those which emanate from legislation

As to form:

1. Express: Expressly granted by organic or statute law

2. Implied: When particular persons, properties, or excises are deemed exempt as they fall outside the scope of the taxing provision itself.

As to extent:

1. Total: Connotes absolute immunity.

2. Partial: One where a collection of a part of the tax is dispensed with.

As to object:

1. Personal: granted directly in favor of certain persons

2. Impersonal: granted directly in favor of a certain class of property

TAX EVASION vs. TAX AVOIDANCE

TAX EVASION TAX AVOIDANCE

Connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes

Legal means used by the taxpayer to reduce taxes

Scheme used outside of those lawful means

Tax saving device within the means sanctioned by law Rule of “No Estoppel Against the Government”

General Rule: The Government is not estopped by the mistakes or errors of its agents; erroneous application and enforcement of law by public officers do not block the subsequent correct application of statutes.

Exception: In the interest of justice and fair play, as where injustice will result to the taxpayer.

(20)

DOCTRINE OF IMPRESCRIPTIBILITY As a rule, taxes are imprescriptibly as they are the lifeblood of the government. However, tax statutes may provide for statute of limitations.

The rules that have been adopted are as follows: a. National Internal Revenue Code- the statute of limitation for assessment of tax if a return is filed is within three (3 )years from the last day prescribed by law for the filling of the return or if filed after the last day, within three years from date of actual filling. If no return is filled or the return is false or fraudulent, the period to assess is within ten (10) years from discovery of the omission, fraud or falsity.

b. Tariff and Customs Code- it does not express any general statute of limitation; it provides, however, that when articles have been entered and passed free of duty of final adjustments of duties made, with subsequent delivery, such entry and passage free of duty or settlements of duties will, after the expiration of three (3) years from the date of the final payment of duties, in the absence of fraud or protest or compliance audit pursuant to the provisions of this code be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative.

c. Local Government Code- Local taxes, fees, or charges shall be assessed within five (5) years from the date they become due. In case of fraud, or intent to evade the payment of taxes, fees, or charges the same may be assessed within ten (10) years from discovery of such. They shall also be collected either by administrative or judicial action within five (5) years from the date of assessment.

PRINCIPLE OF PROSPECTIVITY OF TAX LAWS

The general rule under the Civil Code that laws shall have prospective application applies to tax laws.

Retroactive application of revenue laws may be allowed if it will not amount to denial of due process.

TAXPAYER’S SUIT

♣ Requires illegal expenditure of public money.

A. INCOME TAXATION Definitions

1. Income Tax – tax on all yearly profits arising from property, possessions, trade or business, or as a tax on a person’s income, emoluments, profits and the like (61 CJS 1559)

– tax on income, whether gross or net. (27 Am. Jur. 308)

2. Income – all wealth which flows into the taxpayer other than as a mere return of capital. 3. Capital – resource of person which can be used in producing goods and services.

Income Capital

All wealth which flows into the taxpayer other than as a mere return of capital.

Fund or property which can be used in producing goods or services

Flow of Wealth Fund or property Source of wealth Wealth

Requisites for Income to be Taxable 1. There must be a gain or profit.

2. The gain must be realized or received. 3. The gain must not be excluded by law or

treaty from taxation.

Tests on Taxability of Income

1. Flow of Wealth Test – The determining factor for the imposition of income tax is whether any gain was derived from the transaction.

2. Realization Test - unless the income is deemed "realized," there is no taxable income.

3. Economic-Benefit Principle - flow of wealth realized is taxable only to the extent that the taxpayer is economically benefited.

(21)

Classification of Taxpayers a. Individuals 1) citizens 1.1 resident citizens (RC) 1.2 non-resident citizens (NRC) 2) aliens

2.1 resident aliens (RA) 2.2 non-resident aliens (NRA)

2.2.1 engaged in trade or business within the Philippines. (NRAETB) 2.2.2 Not engaged in trade or business within the Philippines (NRANETB)

b. Corporations 1) Domestic (DC) 2) Foreign

2.1 resident foreign corporation (RFC) 2.2 non-resident foreign corporation (NRFC)

c. Estates d. Trusts

e. Partnerships

INDIVIDUALS

Situs of Taxation (Who are taxable?) 1. Resident Citizen

2. Non-resident Citizen

A non-resident citizen means, a Filipino citizen:

a. who establishes to the satisfaction of the Commissioner the fact of their physical presence abroad with a definite intention to reside therein;

b. who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis;

c. who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year;

d. who is previously considered as a non-resident and who arrives in the Philippines at anytime during the taxable year to reside thereat permanently shall be considered non-resident for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival [Sec.22 (E)]

3. Resident alien - means an individual whose residence is within the Philippines and who is not a citizen thereof. [Sec.22 (F)] 4. Non-resident alien engaged in trade or business within the Philippines. (Key: NRAETB)

A non-resident alien means an individual whose residence is not within the Philippines and who is not a citizen thereof. [Sec.22 (G)]

The term trade or business includes the performance of the functions of a public office. [Sec. 22 (S)]

The term trade, business or profession shall not include performance of services by the taxpayer as an employee. [Sec. 22 (CC)]

A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines Section 22(G) notwithstanding [Sec. 25(A)(1)]

5. Non-resident aliens not engaged in trade or business within the Philippiness. (Key: NRANETB)

Note: ONLY RESIDENT CITIZENS are taxable for income derived from sources within and without the Philippines. All other individual income taxpayers are taxable only for income derived from sources within the Philippines.

Note: An overseas contract worker (OCW) is taxable only on income derived from sources within the Philippines. [Sec. 23 (B)(C)] Note: A seaman is considered as an OCW provided the following requirements are met:

1. receives compensation for services rendered abroad as a member of the complement of a vessel; and

2. such vessel is engaged exclusively in international trade.

(22)

CORPORATIONS

Jurisdiction to Taxation (who are taxable?) 1. Domestic Corporation – created or

organized in the Philippines. or under its law [Sec. 22(C)]

2. Resident Foreign Corporation – engaged in trade or business within the Philippines [Sec. 22(H)]

3. Non-resident Foreign Corporation – not engaged in trade or business within the Philippines [Sec. 22(I)]

Corporation •Includes:

1. Partnerships, no matter how created or organized;

2. Joint-stock companies;

3. Joint accounts (cuentas en participacion)

4. Associations; or

5. Insurance companies [Sec. 22 (B)]. •Excludes:

1. General professional partnerships;

2. Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government;

3. Co-ownership.

Corporations exempt from income taxation (for income realized as such) under RA 8424

1. Those enumerated under Sec. 30.

• Exempt corporations are subject to income tax on their income from any of their properties, real or personal, or from any other activities conducted for profit, regardless of the disposition made of such income.

2. With respect to GOCC’s, the general rule is that these corporations are taxable as any other corporation except:

a. GSIS b. SSS c. PHIC

d. PCSO [Sec. 27 (C)]

NOTE: Sec. 27 (c) of the NIRC amended by RA 9337, therefore, PAGCOR is not included in the GOCCC exception and subject to tax. 3. Regional or Area Headquarters under Sec.

22 (DD)

NOTE: Regional operating headquarters (ROH) under Sec. 22(EE) shall pay a tax of 10% of their taxable income.

Note: ONLY DOMESTIC

CORPORATIONS are taxable for income derived from sources within and without the Philippines. All other corporate income taxpayers are taxable only for income derived from sources within the Philippines.

(23)

(24)

(25)

ESTATES AND TRUSTS

Estate – refers to the mass of properties left by a deceased person.

Rules on Taxability of Estate:

1. An estate under administration or judicial settlement is a taxable entity.

2. An estate, the settlement of which is not the object of judicial testamentary or intestate proceedings is not a taxable entity. The income there of is taxable directly to the heir or beneficiary.

Estates under Judicial Settlement

General Rule: An estate under judicial settlement is subject to income tax in the same manner as individuals. Its status is the same as the status of the decedent prior to his death. Exceptions:

1. The entitlement to personal exemption is limited only to P20, 000.

2. No additional exemption is allowed.

3. The distribution to the heirs during the taxable year of estate income is deductible from the taxable income of the estate. Such distributed income shall form part of the respective heirs’ taxable income.

Where no such distribution to the heirs is made during the taxable year that the income is earned, and such income is subjected to income tax payment by the estate, the subsequent distribution thereof is no longer taxable on the part of the recipient.

Estates NOT under judicial settlement – subject to income tax as co-ownership.

The tax treatment of co-ownership is similar to general professional partnership. Hence, the tax liability on income is levied directly on the co-owners. The co-ownership income and deductions are simply apportioned to the co-owners to the extent of their respective interests therein, regardless of whether such income is distributed or not.

Irrevocable Trusts (irrevocable both as to corpus and as to income) – taxed exactly in the same way as estates under judicial settlement and its status as an individual is that of the trustor. It is entitled to the minimum personal exemption (P20, 000) and distribution of trust income during the taxable

(26)

tear to the beneficiaries is deductible from the trust’s taxable income.

Revocable Trusts – the trustor, not the trust itself, is subject to the payment of income tax on the trust income.

PARTNERSHIPS

General Rule: Partnerships, no matter how created, are subject to corporate income tax.

General co-partnerships (GCP) are partnerships which are by law assimilated to be within the context of, and so legally contemplated as, corporations. The partnership itself is subject to corporate taxation. The individual partners are considered stockholders and, therefore, profits distributed to them by the partnership are taxable as dividends.

Exception: General Professional Partnerships (GPPs) as such are not subject to income tax. GPP means:

1. a partnership formed by persons for the sole purpose of exercising their common profession; and

2. no part of the income of which is derived from engaging in any trade or business [Sec. 22(B)].

GPPs, however, are required to file returns of their income for the purpose of furnishing information as to the share in the net income of the partnership which the partners shall include in their individual returns

Members of the GPP are liable for income tax only in their separate and individual capacity. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

KINDS OF INCOME TAXES UNDER R.A. 8424

(1) Net Income Tax (2) Gross Income Tax (3) Final Income Tax

(4) Preferential Rates or Special Rates of Income Tax

(5) Improperly Accumulated Earnings Tax

(6) Minimum Corporate Income Tax (7) Fringe Benefits Tax

(8) Optional corporate Income tax (1) NET INCOME TAX

Definition: Means gross income less deductions and/or personal and additional exemptions (Sec. 31, RA 8424)

Net Income Tax Formula Entire Income

Less: Exclusions and Income subject to Final Tax(e.g. Passive Income)

Gross Income

Less: Deductions (Personal and/or Additional Exemptions)

Net Taxable Income X Tax Rates Net Income Tax Due Less: Tax Credit, if any

Tax Still due, if any/ Tax Payable

GROSS INCOME

Definition: Means all income derived from whatever source, including but not limited to the following (Sec. 32); (Key: CIG2_AR2_-P2_D)

1. Compensation;

2. Gross income from profession, trade or business;

3. Gains form dealings in property; 4. Interests;

5. Rents; 6. Royalties; 7. Dividends; 8. Annuities;

9. Prizes and winnings; 10. Pensions;

11. Partner’s share in the net income of the general professional partnership “all income derived from whatever source” - embraces all income not expressly exempted within the class of taxable income under the law, irrespective of the voluntary or involuntary action of the taxpayer