TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
COVERAGE OF TAXATION LAW REVIEW I. Basic Principles of Constitutional
Limitations
a) Due process clause which could be either substantive due process and procedural due process clause
b) Equal protection clause Read:
Ormoc Sugar Central vs. City Treasurer 22 SCRA 603
Tiu vs. CA 301 SCRA 178 c) Article III sec. 1 of the
1987 Constitution – non-impairment clause
d) Article III sec. 5 – freedom of religion
e) Article III sec. 20 – non-payment of poll tax
f) Article VI sec. 28 par. 2 – flexible tariff clause
g) Article VI sec. 28 par. 3 – exemption from real property tax
Read:
Herrera vs. Quezon City 3 SCRA 186
Abra vs. Hernando 107 SCRA 104
Abra Valley vs. Aquino 52 SCRA 106
Philippine Lung Center vs. Quezon City 433 SCRA 119 h) Article VI sec. 28 par. 4 – qualified majority in tax exemption
i) International double taxation
CIR vs. Johnson 309 SCRA 87
j) Doctrine of equitable recoupment k) Doctrine of Set-off or compensation in
taxation
Republic vs. Mambulao 4 SCRA 622
Domingo vs. Garlitos 8 SCRA 443
Francia vs. IAC 162 SCRA 753
Caltex vs. COA 208 SCRA 726
Philex vs. CIR 294 SCRA 687
II. Income Tax Law
Section 22-26 of the National Internal Revenue Code
a) Read in the commentaries or magic notes the different kinds of:
1. Income Taxpayers 2. Income Taxes
3. Sources of Income sec. 42 of NIRC - Income Taxpayers
a) Individuals b) Corporation
c) Estates and Trusts – -Individuals are classified
Resident Citizens sec. 23 (A), sec 24 (A) (a)
Non-Resident Citizens sec 23 (B), 24 (A) (b) 22 (E)
Overseas Contract Workers Sec. 23 (C), 24 (A) (b)
Resident Aliens Rev. Reg. sec 5, 23 (D), 24 (A) (c)
Non-Resident Aliens Engaged in trade or business sections 25 (A) (1)
Non-Resident Aliens Not Engaged in trade or business sec. 25 (B)
Aliens Employed in
Multi-National Corporations sec. 25 (C) and Rev. Reg. 12-2001
Aliens Employed in Offshore Banking Units sec 25 (D)
Aliens Employed in petroleum Service Contractors &
Subcontractors sec. 25 (E) -Corporate Income Taxpayers
Domestic Corporations sec. 23 (E), and sec 27 of NIRC
Resident Foreign Corporations sec. 22 (H) and (28)A
Non-Resident Foreign Corporations sec. 22 (1) and 28 (B)
-Estates and Trusts sec. 60-66 of NIRC Different Kinds of Income Tax
1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and 32 (A)
2. Gross Income Tax secs. 25 (B) first part and 28 (B) (1)
3. Final Income Taxes sec. 57 (A) 4. Minimum Corporate Income Tax
of 2% of the Gross Income secs. 27 (E), 28 (A) (2)
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
5. Improperly Accumulated Earnings Tax of 10% of its taxable income sec. 29 NIRC Rev. Reg. 2-2001
Optional Corporate Income Tax of 15% of its gross income sections 27 (A) 4th to 10th par. And 28 A(1)
but only up to the 4th paragraph
-Proceed to section 42 and 23 of the NIRC
NDC vs. Comm 151 SCRA 472
Comm. Vs. IAC 127 SCRA 9 -Then go to sec. 39 of NIRC
Calazans vs. Comm. 144 SCRA 664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
Comm. Vs. Manning 66 SCRA 14
Anscor vs. Comm. 301 SCRA 152 -Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) (7) (D); 32 B (7) (a)
- Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) last par. 27 (D) (5)
China Bank vs. Court of Appeals 336 SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 13-1999
-Upon reading sec. 27 (A) go to sec. 22 (B)
Batangas vs. Collector 102 Phil. 822
Evangelista vs. Collector 102 Phil 140
Reyes vs. Comm. 24 SCRA 198
Ona vs. Bautista 45 SCRA 74
Obillos vs. Comm 139 SCRA 436
Pascua vs. Comm. 166 SCRA 560
Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA 9337 then go to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC, sec. 154 of the LGC.
Pagcor vs. Basco 197 SCRA 52
Mactan vs. Cebu 261 SCRA 667
LRT vs. City of Manila 342 SCRA 692 -Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B)
(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5) (b)
Marubeni vs. CIR 177 SCRA 500
Proctor & Gamble vs. Comm 160 SCRA 560
Same case Proctor and Gamble on the Motion for Reconsideration 204 SCRA 377
Wonder vs. Comm 160 SCRA 573 -Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2) -Go to sec. 28 (A) (3) read RR 15-2002 -Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs. Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a)
Read Mitsubishi vs. Comm 181 SCRA 214
-Then go to sec. 29 and Rev. Reg. 2-2001 -Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e), sec. 108A and sec. 123 of the NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98 -then go to sec. 34 (A) (1) (a) see Aguinaldo vs. Comm. 112 SCRA 136, RR 10-2002 -Under Sec. 34 (B) read RR 13-2000 -Upon reading sec. 49 read Banas vs. CA 325 SCRA 259 and Filipina vs. Comm. 316 SCRA 480
-Upon reading sec. 60-66, read Ona vs. Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal de Roces vs. Posadas 58 Phil. 108 Dizon vs. Posadas 57 Phil 465 -Sec. 85 (G) compare with sec. 100 -sec. 85 (H) compare with sec. 86 (C) -Upon reading sec. 86 see RR 2-2003 -Upon reading sec. 94 see Marcos vs. Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
- G and Cumulative methods of filing donor’s tax returns sections 99 (A), 103 (A) (1) and RR 2-2003
- Sections 100 and 85 (9)
V. Value Added Tax
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
-Read RA 9337
-Read ABAKADA vs Comm. GR 168056, Sept. 1, 2005
VI. Remedies Under the Internal Revenue Code
-Sections 202-229 -RR 12-99
Phoenix vs Comm 14 SCRA 52
Basilan vs. Comm. 21 SCRA 17
Yabut vs. Flojo 115 SCRA 278
Union Shipping vs. Comm 185 SCRA 547
Comm. vs. TMX 205 SCRA 184
Comm. vs. Philamlife 244 SCRA
Comm. vs. CA & BPI 301 SCRA 435
BPI vs. Comm. 363 SCRA 840 -Prescription sections 203 and 222 of NIRC, sec. 194 of the LGC, sec. 270 of the LGC, sec. 1603 of Tariff and Customs Code
-Protest sec. 228 of NIRC and RR 12-99 sec. 195 of LGC, 252 LGC, sec. 2313 of Tariff & Customs Code and RA 7651
VII. Local Taxation
- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442 -Then proceed to 187 -Then to 151
-128
-Under sec. 133 (e) read Palma vs. Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron 198 SCRA 82
-Under 133 (i) read First Holdings Co. vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO 322 SCRA 805
-Under 137 read sec. 193 of LGC
Misamis vs. Cagayan de Oro 181 SCRA 38
Reyes vs. San Pablo City 305 SCRA 353
Meralco vs. Laguna 306 SCRA 750
PLDT vs. Davao City 363 SCRA 522
- Co-relate sec. 139 and 147 of LGC - Under sec. 140 of the LGC see sec. 125 of the Internal Revenue Code
- Under sec. 150 of the LGC read the following:
Phil. Match vs. Cebu 81 SCRA 99
Allied Thread vs. Manila 133 SCRA 338
Sipocat vs. Shell 105 Phil. 1263
Iloilo Bottles vs. Iloilo City 164 SCRA 607
VIII. Real Property Tax
- Sections 197-294 - Sec. 235
LRT vs. Manila 342 SCRA 692
Cebu City vs. Mactan 261 SCRA 667
IX. Tariff & Customs Code
- Special Customs Duty sec. 301-304 of TCC
- Regukar Customs Duty sec. 104 of TCC - RA 7631
X. Court of Tax Appeals
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
Rules in the Classroom:
1. do not be absent
if you are absent, you have to transcribe what happened in class when you were out.
The next meeting you attend class, consider yourself a resident of balic-balic, babalikbalikan ka sa recit.
Exception: if you get married.
2. read the assignment. Wag zapote ang aral.
3. holiday – make up class probably on a Sunday
4. allowed to glance at your notes, wag lang pahalata/garapal
5. materials: codal
commentaries (any author will do) magic notes (Sababan Lecture and
Q&A) Book stand
Coverage of Taxation Law Review:
1. Basic Principles including Constitutional Provisions 2. Income Tax 3. Estate Tax 4. Donor’s Tax 5. Remedies 6. Local Tax
7. Real Property Tax
8. Tariff and Customs Code 9. Court of Tax Appeals
10. VAT (although not part of the coverage of the Bar Exams, questions have been asked since 1999)
Title 5,6 and 7 are always included in the coverage
No computations in the bar
There are only 1 or 2 questions in the Bar about Basic Principles
What are the favorite topics in the Bar? → 12 questions on Income Tax
→ 8-10 questions on remedies
→ 8-10 questions allocated to the 7 topics
BASIC PRINCIPLES:
► Taxation is an inherent power of the State.
Q: What do you mean by INHERENT?
A: The power to tax is not provided for in
the law, statute or constitution; it depends on the existence of the state. No law or legislation for the exercise of the power to tax by the national government.
Q: Do local governments exercise this
inherent power?
A: No. Only the National Government
exercises the inherent power to impose taxes.
Q: The taxing power of local governments is
a DELAGATED power. Delegated by whom?
A: Delegated by Congress through law in
case of autonomous regions, and delegated by the constitution in case of LGUs not considered an autonomous region.
► Cities, provinces and municipalities → power granted under Art. X Sec. 5&6 of the Constitution
► Autonomous Regions → power conferred
by Congress through law. Art. X Sec. 20 #2 of the Constitution is a non-self-executing provision. Thus the power is granted by Congress because said provision requires an enabling law.
► Article X, Section 5 is self-executing thus the power is granted by the constitution.
CONSTITUTIONAL LIMITATIONS
Due Process Clause
Q: why is it a limitation to the power to tax? A: The due process clause as a limitation to
the power to tax refers both to substantive and procedural due process. Substantive due process requires that a tax statute must be within the constitutional authority of Congress to pass and that it be reasonable, fair and just.
Procedural due process, on the other hand, requires notice and hearing or at least the opportunity to be heard.
Ex: On Substantive Due Process- when the Congress passes a law exempting the 13th
month pay from tax but with the concurrence only of the majority of the quorum – law would be invalid because the Constitution provides that any grant of tax exemption
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
shall be passed with the concurrence of the majority of all the members of the Congress.
Q: Does it follow that the adverse party must
always be notified?
A: No. As a rule, notice and hearing or the
opportunity to be heard is necessary only when expressly required by law. Where there is no such requirement, notice and the opportunity to be heard are dispensable.
Ex. Before Oct. 1, 1995, you can secure a TRO without notifying the adverse party. If you are a suspect in a criminal case, you have the right to have an opportunity to be heard (if there is a law).
Before July 1, 1998, no notice need be given to a party declared in default. After the amendment, the party declared in default has to be notified of subsequent proceedings albeit without the right to participate therein.
In the case of a search warrant, the person to be searched was not notified. The person searched cannot claim that there was a violation of due process because there is no law requiring that the person to be searched should be notified.
Regarding delinquent tax payers, before levy, there must be notice.
REASON:
No provision of law requires notice to the adverse party. If the adverse party is notified, he may abscond. Thus, in adversarial proceedings, in connection with procedural due process, the adverse party need not be notified all the time.
Equal Protection Clause
► As a rule, taxpayers of the same footing are treated alike, both as to privileges conferred and liabilities imposed. Difference in treatment is allowed only when based on substantial distinction. Difference in treatment not based on substantial distinction is frowned upon as “class legislation.” This is violated when taxpayers belonging to the same classification are treated differently form one another; and taxpayers belonging different classifications are treated alike.
Requirements of Reasonable Classification:
1) There must be substantial distinctions that make a real difference.
2) It must be germane or relevant to the purpose of the law.
3) The distinction or classification must apply not only to the present but also to future situations.
4) The distinction must apply to persons, things and transactions belonging to the same class.
Ex: In one case, a tax ordinance was assailed on the ground that the ordinance failed to distinguish a worker form casual, permanent or temporary. The SC said that the ordinance was invalid because of the failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court mandated the requisites for a valid classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of Olonggapo? A: The Congress, with the approval of the
President, passed RA 7227, an act creating the conversion of the military bases into other productive uses.
Q: Who was the President at that time? A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
→ The first led to the creation of the Subic Special Economic Zone (SSEZ). The latter set the limitations and boundaries of the application of the incentives (no taxes, local and national, shall be imposed within SSEZ. In lieu thereof, 3% of the Gross Income shall be remitted to the national gov’t) to those operating their businesses within the said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino businessmen
who are operating their business outside the secured area. The petitioners contended that the law in question was violative of their right to equal protection of laws since they are also Filipino businessmen.
H: The Supreme Court ruled that there was no violation since the classification was based on a substantial distinction.
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
The element invoked here is element #1 that there must be substantial distinction in the classification of taxpayers on whom the tax will be imposed.
The Court observed that those foreign businessmen operating within the secured area have to give a larger capital to operate in the secured area (to spur economic growth and guarantee employment).
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc do? A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing upon any and all centrifugal sugar milled at the Ormoc Sugar Central a municipal tax on the net sale of the same to the United States and other foreign countries.
Q: Did the owner accept this imposition? A: No. the tax due was paid under protest,
then filed a complaint against the City of Ormoc.
H: The Supreme Court said there was a violation of the equal protection clause. The element invoked here was element #3, that it must be applicable to both present and future circumstances. The Supreme Court said that one must go to the provision itself, in the case at bar, there was a violation of element #3 because the law was worded in such a way that it only applies to Ormoc Sugar Central alone and to the exclusion of all other sugar centrals to be established in the future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise one’s religion 3. prohibition upon the national government to establish a national religion
Q: Which one limits the power to tax?
A: Prohibition upon the national government
to establish a national religion because this will require a special appropriation of money coming from the national treasury which is funded by the taxes paid by the people.
Non-impairment Clause
Q: What are the sources of obligation in the
Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Quasi-Delict.
Q: What is the obligation contemplated in
this limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant to law, therefore, the obligation to pay taxes is imposed by law, thus the non-impairment clause does not apply.
► You have to determine first the source of obligation:
1. If the law merely provides for the fulfillment of the obligation then the law is not the source of the obligation.
2. When the law merely recognizes or acknowledges the existence of an obligation created by an act which may constitute a contract, contract, delict, and quasi-delict, and its only purpose is to regulate such obligation, then the act itself is the source of the obligation, not the law.
When the law establishes the obligation and also provides for its fulfillment, then the law itself is the source of the obligation
Q: So, in what instance does the
non-impairment of contracts clause becomes a limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise agreement with the government. In this instance, the obligation to pay the tax is now based on the contract between the taxpayer and the government pursuant to their compromise agreement.
Take Note: the requirement for its application: the parties are the government and private individual.
Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on individuals
residing within a particular territory, whether citizens or not, without regard to their property or to the occupation in which they may be engaged.
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
It is a tax imposed on persons without any qualifications. persons may be allowed to pay even if they are not qualified as to age or property ownership.
Example of Poll Tax: Community Tax Certificate under Section 162 of the Local Government Code.
Q: Why is it a limitation to the power to tax? A: It is a limitation to the power to tax
because Congress is prohibited from passing a law penalizing with imprisonment a person who does not pay poll tax. (funds for sending a person to jail is taken from the national treasury which is funded by the taxes paid by the people)
Exemption from payment of Real Estate Tax
Q: What is the requirement for exemption
from payment of real property tax under the 1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution –
Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings and improvements used EXCLUSIVELY for RELIGIOUS, CHARITABLE or EDUCATIONAL purposes shall be exempt for taxation.
Art. 8, Sec. 17 (3), 1973 Constitution –
charitable institutions, churches, parsonages or convents appurtenant thereto, mosque, and non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY, and EXCLUSIVELY used for RELIGIOUS and CHARITABLE purposes shall be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution –
charitable institutions, churches, and parsonages or convents appurtenant thereto, mosque, non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY used for RELIGIOUS, EDUCATIONAL and CHARITABLE purposes shall be exempt from taxation.
HERRERA v. QC-BOARD OF ASSESSMENT
(1935 Constitution)
Q: What is involved in this case?
A: A charitable institution, St. Catherine’s Hospital. The hospital was previously exempt from taxation until it
was reclassified and subsequently assessed for the payment of real property tax.
The contention of the respondent is that the hospital was no longer a charitable institution because it accepts pay-patients, it also operates a school for midwifery and nursing, and a dormitory. Since it is not exclusively used for charitable purposes it is not exempt from taxation.
H: The Court ruled that petitioner is not liable for the payment of real estate taxes. It is a charitable institution, thus exempt from the payment of such tax.
The hospital, schools and dormitory are all exempt fro taxation because they are incidental to the primary purpose of the hospital.
NOTE: this arose during the 1935 Constitution.
“Exempted by virtue of incidental purpose” was merely coined by the Supreme Court. Thus, it does not apply to other taxes except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO
Q: What is involved in this case?
A A religious institution was involved in this case, the Roman Catholic Bishop of Bangued, Inc. (bishop filed declaratory relief after assessed for payment of tax). The respondent judge granted the exemption from taxes of said church based only on the allegations of the complaint without conducting a hearing/trial. The assistant prosecutor filed a complaint contending that petitioner was deprived of its right to due process.
SC: the Court ordered that the case be remanded to the lower court for further proceedings. The Court observed that the cause action arose under the 1973 Constitution, not under the 1935 Constitution (note the difference). Tax exemption is not presumed. It must be strictly construed against the taxpayer and liberally construed in favor of the government.
ABRA VALLEY COLLEGE INC. v. AQUINO
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
A: An educational institution is involved in this case. The ground floor of the school was leased to Northern Marketing Corp., a domestic corporation. The 2nd
floor thereof was used as the residence of the school director and his family.
The Province of Abra now contends that since the school is not exclusively used for educational purposes, the school is now liable to pay real estate tax.
H: The Court held that the school is PARTIALLY liable for real estate tax. 1. Residence – exempt by virtue of
incidental purpose; justified because it is necessary.
2. Commercial – not exempt because it is not pursuant to the primary purpose; not for educational purposes.
Q: is the doctrine in the case of Herrera the
same with this case?
A: NO. in the Herrera case, the exemption
was granted to all the real property (hospital, school and dorm). But in this case, the Supreme Court made a qualification. The Supreme Court said it depends.
NOTE: both cases arose under the 1935 Constitution despite having been decided in 1988.
Q: At present, do we still apply the
exemption from tax by virtue of the Doctrine of Incidental Purpose?
A: Not anymore. The cause of action in said
case arose under the 1935 Constitution and it does not apply to the provisions of the 1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
Q: What is involved in this case?
A: A charitable institution, a hospital. It is provided in the charter of the Lung Center of the Philippines is a charitable institution. However, part of its building was leased to private individuals and the vacant portion of its lot was rented out to Elliptical Orchids. Respondent contends that since the hospital is not used actually, directly, an d exclusively for charitable purposes, it is liable to pay real estate taxes.
H: The Supreme Court held that the petitioner is liable to pay tax for those parts leased to private individuals for commercial purposes. For the part of the hospital used for charitable purposes (whether for pay or non-pay patients), petitioner is exempt from payment of real estate tax.
NOTE: petitioner contended that the profits derived from the lease of its premises were used for the operation of the hospital. The Court held that the use of the profits does not determine exemption, rather it is the use of the property that determines exemption.
The case of Herrera does not apply because said case arose under the 1935 Constitution and the present case arose under the 1987 Constitution. The requirements for exemption are different. In the 1935 Constitution, the property must be EXCLUSIVELY used for religious, educational or charitable purposes. Under the 1987 Constitution, the property must be used ACTUALLY, DIRECTLY, and EXCLUSIVELY for religious, educational and charitable purposes.
Q: Was the doctrine laid down in Abra Valley
affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935 Constitution. The Supreme Court reiterated the ruling in the Abra Valley case which arose under the 1935 Constitution. The Supreme Court made a qualification, it held that it depends on whether or not the use is incidental to the primary purpose of the institution.
NOTE: at present, “exemption from tax by virtue of incidental purpose” is not applicable to all taxes including real estate tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax treaty 3. implication of most favored nation
clause
Q: What is the corporation involved in this
case?
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
SC Johnson and Sons, Inc. entered into a license agreement with SC Johnson and Sons U.S.A (Non-Resident Foreign Corp, NRFC) whereby the former was allowed to use the latter’s trademark and facilities to manufacture its products. In return, the DC will pay the NRFC royalties as well as payment of withholding tax.
A case for refund of overpaid withholding tax was filed. Apparently, the DC should have paid only 10% under the most favored nation clause.
H: The Supreme Court coined the term International Double Taxation or International Juridical Double Taxation.
Q: What prompted the SC to coin such term?
A: Because a single income (tax royalties paid by a DC) was subjected to tax by two countries, the Philippines income tax and the U.S. tax.
International Juridical Double Taxation applies only to countries where the tax liabilities of its nationals are imposed on income derived from sources coming from within and without.
Q: Is there an instance where international double taxation does not apply?
A: Yes. If it involves nationals of countries wherein the tax liability is imposed only from income derive from sources within and not including those derived from sources without.
(Ex: Switzerland)
→ The controversy in the case at bar involves the income tax paid in the Philippines.
After paying 25%, the US firm discovered that they are entitled to 10% under the most favored nation clause. The question is: was the tax paid under similar circumstances with that of the RP-West Germany Treaty?
The CTA and Court of Appeals ruled that it was paid under similar circumstances. The phrase referred to the royalties in payment of income tax. The Supreme Court ruled that the lower courts’ interpretation of the phrase was erroneous. Rather, the phrase applies to the application of matching credit.
Q: What is matching tax credit?
A: RP-Germany Treaty provides for that 20% of the tax paid in the Philippines shall be credited to their tax due to be paid in Germany.
The 10% does not apply because there is no matching credit. Thus, there is no similarity in the circumstances.
EQUITABLE RECOUPMENT AND DOCTRINE OF SET-OFF
Equitable Recoupment
This doctrine provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. This is not allowed in this jurisdiction, because of common law origin. If allowed, both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their respective claims within the period prescribed by law.
Q: What is the doctrine of Equitable
Recoupment?
A: When the claim for refund is barred by
prescription, the same is allowed to be credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and government official from being negligent in the payment and collection of taxes. (furthermore, you have to be honest for this to work, hence, the government is preventing corruption)
There is no exception at all otherwise, the BIR would be flooded with so many claims.
Set-off
Presupposes mutual obligation between the parties. In taxation, the concept of set-off arises where a taxpayer is liable to pay tax but the government, for one reason or another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
creditors and debtors of each other. In taxation, the concept of taxation arises where a taxpayer is liable to pay taxes but the government, for one reason or another, is INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A: They are liable to pay forest charges (under the old tax code).
NOTE: under our present tax code, the NIRC, we do not have forest charges as the same was abolished by President Aquino.
Q: What did the lumber company do?
A: The lumber company claimed that since the government did not use the reforestation charges it paid for reforestation of the denuded land covered by its license, the amount paid should be reimbursed to them or at least compensated or applied to their liability to pay forest charges.
H: The Court ruled that the reforestation charges paid is in the nature of taxes.
The principle of compensation does not apply in this case because the parties are not mutually creditors and debtors of each other. A claim for taxes is not a debt, demand, contract or judgment as is allowed to be set-off under the statute of set-off which is construed uniformly, in the light of public policy, to exclude the remedy in connection or any indebtedness of the State or any municipality to one who is liable for taxes. Neither are they a proper subject for recoupment since they do not arise out of contract or the same transaction sued on.
General Rule: no set-off is admissible against demands for taxes levied in general or local governmental purposes.
Reason: Taxes are not in the nature of contracts or debts between the taxpayer and the government, but arises out of a duty to, and are positive acts of the government to the making and enforcing of which, the consent of the individual is not required. Taxes cannot be the subject matter of compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case? A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes anymore because the same was abolished by Lolo Macoy.
Q: Who is the administratrix? A: The surviving spouse.
Q: What did the surviving spouse do?
A: The surviving spouse suggested that the compensation to which the decedent was entitled to as an employee of the Bureau of Lands be set-off from the estate and inheritance taxes imposed upon the estate of the deceased.
H: Both the claim of the government for estate and inheritance taxes and the claim of the (intestate) for the services rendered have already become overdue hence demandable as well as fully liquidated, compensation therefore takes place by operation of law, in accordance with Art. 1279 and 1290 of the Civil Code and both debts are extinguished to the concurrent amount.
Compelling Reason: Congress has enacted RA 2700, allocating a certain sum of money to the estate of the deceased.
FRANCIA v. IAC
Q: This happened in what city? A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?
A: Payment for real estate taxes for the property of Francia. It appears that petitioner was delinquent in the payment of his real estate tax liability. The same is being collected by the Treasurer of Pasay.
Q: What is the suggestion of petitioner? A: Suggested that the just compensation
for the payment of his expropriated property be set-off from his unpaid real estate taxes. (the other part of his property was sold at a public auction) H: The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A taxpayer cannot refuse to pay a tax on the ground that the government owes him an amount.
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- ATTY. FRANCIS J. SABABAN -
Internal Revenue taxes cannot be the subject of compensation because the government and the taxpayer are not mutually creditors and debtors of each other, and a claim for taxes is not a debt, demand, contract or judgment as is allowed to be compensated or set-off.
Furthermore, the payment of just compensation was already deposited with PNB Pasay, and the taxes were collected by a local government, the property was expropriated by the national government. (diff parties, not mutual creditors and debtors of each other.)
CALTEX PHIL v. COA
Q: What is being collected?
A: Caltex’s contribution to the Oil Price Stabilization Fund (OPSF).
COA sent a letter to Caltex asking the latter to settle its unremitted collection stating that until the same is paid, its claim for reimbursement from the OPSF will be held in abeyance.
Q: Why is Caltex entitled to reimbursement? A: Because of the fluctuation of the oil
prices in the Middle East and Europe. Caltex wanted to off-set its unremitted collection from its reimbursements. H: The Court did not allow the set-off,
and reiterated its ruling in the case of Mambulao and Francia. Furthermore, RA 6952 expressly prohibits set-off from the collection of contributions to the OPSF. The Court likewise stated that Caltex merely acted as agent of the government in collecting contributions for the OPSF because such is being shouldered by the consumers when they purchase petroleum products of oil companies, such as Caltex.
Taxation is no longer envisioned as a measure merely to raise revenues to support the existence of the government. Taxes may be levied for regulatory purposes such as to provide means for the rehabilitation and stabilization of a threatened industry which is vested with public interest, a concern which is within the police power of the State to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment of excise taxes, which it wanted to be set-off
from its pending claim for a VAT Input credit/refund.
The Court did not allow set-off. Taxes cannot be the subject of compensation for the simple reason that the government and taxpayer are not mutual creditors and debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the claim for VAT refund is still pending. The collection of a tax cannot await the results of a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because there is no prohibition in the Constitution or statute.
Obnoxious double taxation is the synonym of double taxation.
Elements of Double Taxation:
1) Levied by the same taxing authority 2) For the same subject matter
3) For the same taxing period and 4) For the same purpose
There is no double taxation if the tax is levied by the LGU and another by the national government. The two (2) are different taxing authorities.
LGUs are expressly prohibited by the provisions of RA 7160 or the LGC of 1991 from levying tax upon: (1) the National Government; (2) its agencies and instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to the provisions of RA 8424 of the Tax Reform Act of 1997, can levy tax upon GOCCs, agencies and instrumentalities (Section 27 c)), although income received by the Government form:
1) any public utility or
2) the exercise of any essential governmental function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
1. individual; 2. corporate; 3. estate and trust.
I. INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers
are there?
A: There are seven (7). Namely:
1. Resident Citizen (§23A and 24A); 2. Nonresident Citizen (§23B and 24A); 3. OCW and Seaman (§23C and 24A); 4. Resident Alien (§22F, 23D and 24A); 5. Nonresident Alien Engaged in Trade
or Business (§22G, 23D and 25A) 6. Nonresident Alien NOT Engaged in
Trade or Business (§22G, 23D and 25B)
7. Aliens Engaged in Multinational Companies, Offshore Banking Units, Petroleum Service Contractors (§25C,D and E)
Resident Citizen (RC)
Q: How many types of RC? A: There are two (2), namely:
1. RC residing in the Philippines; and 2. Filipino living abroad with no
intention to reside permanently therein.
Q: If you are abroad, and you have the
intention to permanently reside therein, can you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the Commissioner and the fact of your physical presence therein, you may still be considered a RC.
OCW and Seamen
OCW was used and not OFW in the CTRP, because the classification shall cover only those Filipino citizens working abroad with a contract. TNTs are not covered.
A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade.
Consequently, if he is not a member of the complement or even if he is but the vessel where he works is not exclusively engaged in international trade, said seaman is not deemed to be an OCW. He is either a RC or a NRC depending on where he stays most of the time during the taxable year.
If he stays in the Philippines most of the time during the taxable year, he is considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you are not the one being referred to.
The importance of ascertaining whether or not a seaman is a RC or a NRC, is that if he is a RCm he is taxable on ALL income derived from all sources within and without. If he is a NRC, he is taxable only on income derived form sources within the Philippines.
Q: What is the significance of using OCW? A: It only covers Filipinos who works abroad
with a contract. It does not cover TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this
classification, they are considered RC because they work abroad without a contract and they have not manifested their intention to permanently reside abroad. (distinguish from an immigrant)
Requirements for a seaman to be considered an OCW:
1. must be a member of the compliment of a vessel;
2. the vessel must be exclusively engaged in international trade or commerce.
Resident Alien (RA)
An individual whose residence is within the Philippines and who is not a citizen thereof.
Intention to reside permanently in the Philippines is not a requirement on the part of the alien.
The requirement under RR#2 is that he is actually present in the Philippines, neither a sojourner, a traveler, not a tourist.
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Whether he’s a transient or not is determined by his intent as to the nature and length of his stay.
Q: Is the intention to permanently reside in
the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.
Non-Resident Alien Engaged in Trade or Business (NRAETB)
A foreigner not residing in the Philippines but who is engaged in trade or business here. RR 2-98 has expanded the coverage of the term, “engaged in trade or business” to include the exercise of a profession. Furthermore, by the express provision of the law, a NRA who is neither a businessman nor a professional but who come to and stays in the Philippines for an aggregate period of more than 180 days during any calendar year is deemed to a NRAETB in the Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business (25a1);
2. NRA who practices a profession (Revenue Regulation 2-98);
3. foreigner who comes and stays in the Philippines for an aggregate period of MORE THAN 180 days during any calendar year.
Q: What is the status of a Chinese who stays
here for 200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in
2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
such, he must stay for an aggregate period of more than 180 days during a calendar year.
Q: What is the income tax applicable to said
taxpayer?
A: Net Income Tax (NIT) on all its income
derived form sources within the Philippines.
Non-Resident Alien Not Engaged in Trade or Business
Q: How many kinds? A: Only one.
The reason why the NRANETB are included in any income tax law is because they may be deriving income form sources within the Philippines.
They are subject to tax based on their GROSS INCOME received form all sources within the Philippines.
Aliens Employed by Regional or Area Headquarters & Regional Operating Headquarters of Multinational Companies/ Aliens Employed by Offshore Banking Units (Aliens Employed by MOP)
► Status: either a RA or NRA depending on their stay here in the Philippines.
► Their status may either be RA or NRA because Section 25 C and D does not distinguish.
► Liable to pay 15% from Gross Income received from their employer
► Income earned from all OTHER sources shall be subject to the pertinent income tax, as the case may be.
Aliens Employed in Multinational and Offshore Banking Units
Q: How are they classified?
A: If they derived income from other sources
aside from their employer, you may classify them either as RA, NRAETB, or NRANETB.
Aliens Employed in Petroleum Service Contractors and Subcontractors
► Status: ALWAYS NRA. If they derive income from other sources, such income shall be subject to the pertinent income tax, as the case may be.
► Income derived or coming from their employer shall be subject to a tax of 15% of the gross.
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
1. Domestic Corporation (DC) – created or organized under Philippine laws. 2. Resident Foreign Corporation (RFC) –
corporation created under foreign law, and engaged in trade or business.
3. Nonresident Foreign Corporation (NRFC) – created under foreign law,
and NOT engaged in trade or business.
Q: What are deemed corporations under the
NIRC?
A: The term corporation shall include
partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, or insurance companies, but DOES NOT includes general professional partnerships and a joint venture or consortium formed of the purpose of undertaking construction projects or operations pursuant to or engaging in petroleum, coal, geothermal or consortium agreement under a service contract with the Government.
1. Partnerships and others no matter how created
2. Joint Stock Companies 3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no “matter how created or organized” was interpreted.
Even if the partnership was pursuant to law or not, whether nonstick, nonprofit, it is still deemed a corporation.
Reason: because of the possibility of earning profits form sources within the Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule: a partnership is a
corporation.
Exception: General Professional Partnerships (GPP)
Q: What is a GPP?
A: It is a partnership formed by persons for
the sole purpose of exercising their
profession, no part of the income of which in derived from any trade or business. (what if a partner has other businesses not related to the GPP? > read section 26 quoted hereunder) Two (2) Kinds of GPP formed for:
1) Exercise of a profession – not a corporation; exempt from Corporate Income Tax (CIT)
2) Exercise of a profession and engaged in trade or business – a corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a corporation
exception: GPP
exception to the exception: if the GPP derives income from other sources, it is considered a corporation, thus liable to pay corporate income tax.
Rule:
1. if the income is derived from other sources and such income is subject to NET INCOME TAX, it is not exempt and it is considered a corporation.
2. if the income is derived from other sources and such income is subject to FINAL INCOME TAX, it is still EXEMPT and it is not deemed a corporation. ( separate return for this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will not reflect in the ITR of the GPP since the withholding agent is liable for the payment of the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of the individual partners of the GPP.
► Section 26 (1st paragraph) provides: “a
GPP as such shall not be subject to the Net Income Tax…” however, “…persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities.”
In short, each partner will be paying NIT, and the distributive shares they will be receiving from the net income of the GPP will be included in the gross income of the partner.
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
Q: If the GPP is deemed a corporation, will the
partners have to pay for the income tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable dividend which is subject to FIT.
Q: Is a joint venture a corporation? A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we have?
A: Three, namely Corporation X, Y, and X+Y.
the joint venture has a separate and distinct personality from the two corporations.
Q: When is a joint venture not considered a
corporation?
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a (“construction?) project or engaging in petroleum, gas, and other energy operations pursuant to “?” or consortium agreement under a service contract with the government.
Domestic Corporation
Is one created or organized in the Philippines or under its laws.
Taxable on all income derived from sources within or without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade or business in the Philippines.
Taxable for income derived within the Philippines.
Non-Resident Foreign Corporation
Foreign corporations not engaged in trade or business in the Philippines.
Taxable for income derived within the Philippines.
Both DC and RFC are liable for the payment of the following:
1) NIT – Net Income Tax
2) FIT – Final Income Tax
3) 10% income tax on corporations with properly accumulated earnings. 4) MCIT (Minimum Corporate Income
Tax) of 2% of the Gross Income
5) Optional Corporate Income Tax of 15% of the Gross Income
A NRFC is liable for payment of the ff: 1) GIT- Gross Income Tax
2) FIT – Final Income Tax
III. TRUST AND ESTATE Q: How many for each?
A: Seven (7) kinds for each because the trust
or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent.
The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien.
When a person who owns property dies, the following taxes are payable under the provision of income tax law:
1) Income Tax for Individuals – to cover the period beginning January to the time of death.
2) Estate Income Tax – if the property is transferred to the heirs.
3) If no partition is made, Individual or Corporate Income Tax, depending on whether there is or there is no settlement of the estate. If there is, depending on whether the settlement is judicial or extrajudicial.
Judicial Settlement
1) During the pendency of the settlement, the estate through the executor, administrator, or heirs is liable for the payment of ESTATE INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial settlement, when the decision of the court shall have become final and executory, the heirs still do not divide the property, the following possibilities may arise:
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
a) If the heirs contribute to the estate money, property or industry with the intention to divide the profits between and among themselves, an UNREGISTERED PARTNERSHIP is created and the estate becomes liable for payment of CIT (Evangelista vs. Collector (102 Phil 140))
b) If the heirs without contributing money, property or industry to improve the estate, simply divide the fruits thereof between and among themselves, a CO-OWNERSHIP is created and Individual Income Tax (IIC) is imposed on the income derived by each of the heirs, payable in their separate and individual capacity (Pascual vs. COMM (165 scra 560) and Obillos vs. COMM (139 SCRA 436))
Extrajudicial Settlement and if NO Settlement
Some possibilities may arise. The income tax liability depends on whether or not the unregistered partnership or co-ownership is created.
Trust
Trusts can be created by will, by contract or by agreement. The status of a trust depends upon the status of the grantor or trustor or creator of the trust. Hence, a trust can also be a citizen or an alien.
Q: Where the trust earns income and such
income is not passive, who among the parties mentioned is liable for payment of income tax thereon?
A: The TRUST itself, through the trustee or
fiduciary but only if the trust is irrevocable. If it is revocable, or for the benefit of the grantor, the liability for the payment of income tax devolves upon the trustor himself in his capacity as individual taxpayer.
KINDS OF INCOME TAX
Q: How many kinds of income tax? A: There are Six (6), namely:
1. Net Income Tax (NIT); 2. Gross Income Tax (GIT); 3. Final Income Tax (FIT);
4. Minimum Corporate Income Tax of 2% of the Gross Income (MCIT)
5. Income Tax on Improperly Accumulated Earnings subject to 10% of the Taxable Income;
6. Optional Corporate Income Tax of 15% on the Gross Income
I. NET INCOME TAX Q: what is the formula?
A: Gross Income – Deductions and Personal
Exemptions = Taxable Income
Taxable Income x Tax Rate = Net Income
Taxable Net Income – Tax Credit = Taxable Net Income Due
Net Income means Gross Income less deductions and Formula: GI - deductions Net Income x Tax Rate Income Tax Due
Q: What is the rate? A: Individual: 32%
Corporation: 35%
NOTE: the formula allows for deduction, personal exemptions and tax credit.
Q: What are the other terms for NIT? A: NIRC:
a. taxable income
b. gross income (wlang kasunod) → only income tax from improperly accumulated earnings does not use this term.
1. CFA: “to be included in the gross income”
2. Revenue Regulations and Statutes: a. ordinary way of paying income
tax;
b. normal way of paying income tax .
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
Q: Who are not liable to pay NIT? A: 1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP, if they derive income from other sources;
Q: Is the taxable net income subject to
withholding tax?
A: It is subject to withholding tax if the law
says so.
Q: What if the law is silent?
A: If the law is silent, it is not subject to
withholding tax.
Q: What is another term for withholding tax? A: It is also known as the creditable
withholding tax system under the income tax law.
Q: Do we have to determine if there is an
actual gain or loss?
A: Yes because the formula for deductions,
etc.
Q: If you fail to pay, will you be held liable? A: Yes, you will be held liable.
II. GROSS INCOME TAX (GIT) Q: What is the formula?
A: Gross Income x Rate
Q: How many taxpayers pay by way of the
gross?
A: There are two (2)
individual - NRANETB corporation - NRFC
NOTE: the formula does not allow any deduction, personal exemptions and tax credit.
Characteristics:
► NRANETB and NRFC, though not engaged in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners. This rule is ABSOLUTE
NOTE: there are two (2) ways of paying taxes depending on which side of the bench you are.
III. FINAL INCOME TAX (FIT) Q: What is the formula?
A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where you add all the income from all the sources and multiply the sum thereof by the rate of 25% or 35%, as the case may be, in final income tax, you cannot join all the income in one group because each income has a particular rate.
Q: What is the rate?
A: 35% as the case may be.
NOTE: like GIT, the formula does not allow deductions, personal exemptions, and tax credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT
provided the requisites for its application are present.
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to
pay NIT or else there will be double taxation. NOTE: as time passed by, the number of FIT increased.
► before 1979 – proceeds from the sale of real property not exempt, it is subject to NIT or GIT, as the case may be.
after 1979 – capital gains tax. Proceeds from the sale of real property is exempt.
Q: If you fail to pay, will you be liable?
A: No. the withholding agent is liable to pay
FIT.
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
► For one to be liable for the payment of NIT, the income must be derived on the basis of an employer – employee relationship. Employer – Employee Relationship (3 Cs):
1. contract; 2. control;
3. compensation;
► However, in the case of celebrities, there is no employer – employee relationship, they are merely receiving royalties. Royalties are subject to final withholding tax, thus the agent is liable to pay. (so, distinguish nature of income, whether royalty or compensation) RULE:
1. for NIT, whether or not subject to Creditable Withholding Tax (CWT), the taxpayer is always liable if he fails to pay.
2. for GIT and FIT, absolute liability to pay is upon the withholding agent.
Q: Why is it that the rate of withholding is
always lower, and why is it that the rate of GIT and FIT is always equal?
A:
1. NIT allows deductions;
2. GIT and FIT do not allow deductions.
Q: Do you have to determine whether there
is an actual loss or gain?
A: No need to determine because the
formula does not allow deductions. Gain is presumed. No liability for final withholding tax except for the sale of shares of stock. (?)
IV. MINIMUM CORPORATE INCOME TAX (MCIT)
Q: What is the formula? A: Gross Income x 2% Q: Who pays this tax? A: DC and RFC only.
Q: May it be applied simultaneous with NIT? A: No. there must be a computation of the
NIT first then apply which ever is higher. The MCIT is paid in lieu of the NIT.
Reason: to discourage corporations from claiming too many deductions.
V. OPTIONAL CORPORATE INCOME TAX Q: Under what section is this found?
A: Section 27A 4th paragraph and Section 28
A(1) 4th paragraph.
Q: Is this applicable now?
A: No. this is not yet implemented.
Q: To what kind of taxpayer does this apply? A: To DC and RFC.
Q: What kind of taxes are applicable or
imposed upon the 1st five individual
taxpayers?
A: Only two (2) kinds are applicable out of
the six (6) kinds of income taxes. 1. NIT;
2. FIT;
Q: What kind of income tax will apply to
AEMOP?
A: Generally, only one kind, 15% FIT with
respect to income derived from their employer.
Income from other sources:
1. Determine the status of the AEMOP; a. NIT
b. FIT 2. NRANETB
a. GIT b. FIT
Q: What kind of income tax applies to DC? A: Only four (4) kinds will apply out of the
six (6) 1. NIT 2. FIT 3. MCIT
4. Improperly Accumulated Earnings
Q: May all of these be applied simultaneously?
A: No. only the NIT, FIT and Improperly
Accumulated Earnings be applied simultaneously. NIT and MCIT cannot be applied simultaneously. Only one will apply, whichever is higher between the two.
TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
A: Out of the six (6) kinds, only two (2) will
apply: 1. GIT 2. FIT
Q: What is the significance of knowing the
classification of these taxpayers?
A:
1. to determine the kind of income tax applicable to them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for
income within and income without?
A: Only
1. RC 2. DC
► The rest of the taxpayers will be liable for income coming from sources within.
► Income from sources without, no liability, therefore exempt.
NOTE: The income taxpayer is not a RC or a DC. Determine if the income came from sources within or without to know the taxpayer’s liability.
► If the facts are specific, do not qualify your answer. Answers must be responsive to the question.
Q: Is section 42 relevant to all the taxpayers? A: NO. SECTION 42 IS NOT MATERIAL TO
ALL taxpayers, particularly the RC and DC because these two are liable for both income within and without.
► Section 42 is applicable only to taxpayers who are liable for income within, the rest of the taxpayers are otherwise exempt.
Q: Section 42(A)(1) provides for how many
kinds of interests?
A: It establishes two (2) kinds of interests,
namely:
1. interest derived from sources within the Philippines.
2. interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise.
Q: What is the determining factor in order to
know if the income is from within?
A:
1. location if the bank is from within the Philippines (pursuant to a Revenue Reg.)
2. residence of the obligor (whether an individual or a corp.) – contract of loan with respect to the interest earned thereon.
► For example the borrower is a NRAETB, he borrowed money from a RA. The interest earned by the loan will be considered as an income without. RA is not liable to pay tax since RA is liable only for income within, therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F: The National Development Company (NDC) entered into a contract with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The contract was made and executed in Tokyo.
The payments were initially in cash and irrevocable letters of credit. Subsequently, four promissory notes were signed by NDC guaranteed by the Government.
Later on, since no tax was withheld from the interest on the amount due, the BIR was collecting the amount from NDC.
The NDC contended that the income was not derived from sources within the Philippines, and thus they are not liable to withhold anything. NDC said that since the contract was entered into and was executed in Japan, it is an income without.
H: The government’s right to levy and collect income tax on interest received by a foreign corporation not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the income flowed had its situs in the Philippines. Nothing in the law (Section 42(1)) speaks of the act or activity of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical
