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INCOME TAXATION
A. Income taxation
1. Income tax systems
a) Global tax system
Global treatment is a system where the tax treatment views indifferently the tax
base and generally treats in common all categories of taxable income of the
taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)
b) Schedular tax system
Schedular approach is a system employed where the income tax treatment varies
and made to depend on the kind or category of taxable income of the taxpayer.
(TAN v. DEL ROSARIO, JR. 237 SCRA 324)
c) Semi-schedular or semi-global tax system
A non-resident German citizen, president of a domestic corporation, filed a claim
for refund with the BIR, contending that her sales commission income is not
taxable in the Philippines because the same was a compensation for her services
rendered in Germany and therefore considered as income from sources outside
the Philippines.

(ii) Foreign corporations

Marubeni Japan claimed a refund for excess taxes it had paid, contending that since it had a
Philippine branch, it is a resident foreign corporation liable to pay only 10% intercorporate final
tax on dividends received from a domestic corporation (and not to the branch profit remittance
tax) following the principal-agent theory.

Partnerships
Pursuant to “reinsurance treaties,” a number of local insurance firms formed themselves into a
“pool” in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company. The insurance pool is deemed a partnership or association taxable as a
corporation under the NIRC because Section 24 (on tax on corporations) [now Sec. 27 of the
1997 NIRC] covered these unregistered partnerships and even associations or joint accounts,
which had no legal personalities apart from their individual members;

(a) Types of properties

Capital assets
The proceeds from the inherited land of petitioners, which they subdivided into small lots and in
the process converted into a residential subdivision and given the name Don Mariano
Subdivision, is taxable as ordinary income. Property initially classified as a capital asset may
thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to
show that the activity was in furtherance of or in the course of the taxpayer's trade or business;

(2) Stock dividend

Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. So that the mere issuance thereof is not yet subject to income tax as they are
nothing but an enrichment through increase in value of capital
investment. However, the redemption or cancellation of stock dividends, depending on the time

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and manner it was made, is essentially equivalent to a distribution of taxable dividends, making
the proceeds thereof taxable income to the extent it represents profits.

(1) Requisites for deductibility

(a) Nature: ordinary and necessary
The expenses paid by Atlas for the services rendered by a public relations firm, aimed at
creating a favorable image for Atlas, is not an allowable deduction as business expense under
the NIRC. Efforts to establish reputation are akin to acquisition of capital assets and, therefore,
expenses related thereto are not business expense but capital expenditures. (Atlas Consolidated
Mining & Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27,
1981)
(b) Paid and incurred during taxable year

Salaries, wages and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value of the fringe benefit subjected
to fringe benefit tax which tax should have been paid
Payment by the taxpayer-corporation to its controlling stockholder (Hoskins) of 50% of its
supervision fees (paid by a client of the corporation for the latter's services as managing agent
of a subdivision project) or the amount of P99,977.91 is not a deductible ordinary and
necessary expense because it does not pass the test of reasonable compensation

(c) Taxes
Margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York
head office are not allowable deductions as taxes because it is not a tax but an exaction
designed to curb the excessive demands upon our international reserve.

(e) Bad debts

In claiming deductions for bad debts, the only evidentiary support given by PRC was the
explanation posited by its accountant, whose allegations were not supported by any
documentary evidence. One of the requisites to qualify as “bad debt” is that the debt must be
actually ascertained to be worthless and uncollectible during the taxable year, and the taxpayer
must prove that he exerted diligent efforts to collect the debts by (1) sending of statement of
accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.

(f) Depreciation
Depreciation is the gradual diminution in the useful value of tangible property resulting from
wear and tear and normal obsolescense. The term is also applied to amortization of the value of
intangible assets, the use of which in the trade or business is definitely limited in duration.
Depreciation commences with the acquisition of the property and its owner is not bound to see
his property gradually waste, without making provision out of earnings for its replacement.

(5) Personal and additional exemption (R.A. No. 9504, Minimum

Wage Earner Law)
The increased personal and additional exemptions under the NIRC cannot
be availed of by the petitioner for purposes of computing his income tax

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liability for the taxable year 1997. Since the NIRC took effect on January
1, 1998, the increased amounts of personal and additional exemptions
under Section 35, can only be allowed as deductions from the individual
taxpayer’s gross or net income, as the case maybe, for the taxable year
1998 to be filed in 1999; the NIRC made no reference that the personal
and additional exemptions shall apply on income earned before January
1, 1998, and it is a rule that tax laws are to be applied prospectively
unless its retroactive application is expressly provided

(iii) Income from the sale, exchange, or other disposition of other capital assets
The acquisition by the Government of private properties through the exercise of the power of
eminent domain, said properties being justly compensated, is embraced within the meaning of
the term “sale” or “disposition of property” and the definition of gross income

Taxation of domestic corporations

(i) Minimum Corporate Income Tax (MCIT)
For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL incurred zero taxable income and
did not pay MCIT, for which BIR assessed PAL for deficiency MCIT. PAL is not liable to pay
MCIT because under its franchise, PAL has the option to pay basic corporate income tax or
franchise tax, whichever is lower; and the tax so paid shall be in lieu of all other taxes, except
real property tax.

(a) Imposition of MCIT

MBC being a new thrift bank is not yet liable to the MCIT since it will apply only beginning on
the 4th years from commencement of its operations. The date of commencement of operations
of a thrift bank is the date it was registered with the SEC or the date it was granted authority
by BSP to operate as such, whichever comes later.

Tax on proprietary educational institutions and hospitals

St. Luke’s is a proprietary non-stock and non-profit hospital catering to non-paying patients but
also derives profit from paying patients. It is subject to the preferential tax rate of 10% for its
profit-generating

Improperly accumulated earnings of corporations

Petitioner cannot avoid paying surtax on improperly accumulated earnings because the
purchase of the U.S.A. Treasury bonds were in no way related to petitioner’s business of
importing and selling wines liquors. the reasonable needs of the business (Manila Wine
Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-26145, February 20,
1984)
Final withholding tax at source
Citytrust and Asianbank are domestic corporations which paid gross receipts tax and claimed a
refund on the basis of a CTA ruling that the 20% FWT on a bank’s passive income does not
form part of the taxable gross receipts.

Post-mortem dispositions typically –

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(1) Convey no title or ownership to the transferee before the death of the
transferor; or, what amounts to the same thing, that the transferor should retain
the ownership (full or naked) and control of the property while alive;

(2) That before the [donor’s] death, the transfer should be revocable by the
transferor at will, ad nutum; but revocability may be provided for indirectly by
means of a reserved power in the donor to dispose of the properties conveyed;

(3) That the transfer should be void if the transferor should survive the
transferee;

[4] [T]he specification in a deed of the causes whereby the act may be revoked
by the donor indicates that the donation is inter vivos, rather than a
disposition mortis causa;

[5] That the designation of the donation as mortis causa, or a provision in the
deed to the effect that the donation is “to take effect at the death of the donor”
are not controlling criteria; such statements are to be construed together with
the rest of the instrument, in order to give effect to the real intent of
the transferor; and

D. Value-Added Tax (VAT)

1. Concept

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in
the chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not
just on the value added by the taxpayer, but on the entire selling price of his goods, properties
or services. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION,
G.R. No. 187485, February 12, 2013)

However, the taxpayer is allowed a refund or credit on the VAT previously paid by those who
sold him the inputs for his goods, properties, or services. The net effect is that the taxpayer
pays the VAT only on the value that he adds to the goods, properties, or services that he
actually sells. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER
CORPORATION, G.R. No. 187485, February 12, 2013)

2. Characteristics/Elements of a VAT-Taxable transaction

VAT is not a singular-minded tax on every transactional level; its assessment bears direct
relevance to the taxpayer's role or link in the production chain. Hence, as affirmed by Section
99 [now Sec. 105] of the Tax Code and its subsequent incarnations, the tax is levied only on
the sale, barter or exchange of goods or services by persons who engage in such activities, in
the course of trade or business.

The Court rules that given the undisputed finding that the transaction in question was not made
in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT

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pursuant to Section 99 [now Sec. 105] of the Tax Code, no matter how the said sale may hew
to those transactions deemed sale as defined under Section 100 [now Sec. 106].
(COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., G.R. No. 146984. July
28, 2006)

3. Impact of tax

Under Section 105 of the Tax Code, VAT is imposed on any person who, in the course of trade
or business, sells or renders services for a fee. In other words, the seller of services, who in this
case is the tollway operator, is the person liable for VAT.

4. Incidence of tax

The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the seller's liability
but merely the burden of the VAT. Thus, the seller remains directly and legally liable for
payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former
is added to the selling price.

5. Destination principle

According to the Destination Principle, goods and services are taxed only in the country where
these are consumed. In connection with the said principle, the Cross Border Doctrine mandates
that no VAT shall be imposed to form part of the cost of the goods destined for consumption
outside the territorial border of the taxing authority.

6. VAT on sale of goods or properties

Goods, as commonly understood in the business sense, refer to the product which the VAT-
registered person offers for sale to the public. With respect to real estate dealers, it is the real
properties themselves which constitute their goods

a) Requisites of taxability of sale of goods or properties

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not
follow that an isolated transaction cannot be an incidental transaction for purposes of VAT
liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction
"in the course of trade or business" includes "transactions incidental thereto

7. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods

or properties

Zero-rated transactions generally refer to the export sale of goods and supply of services. The
tax rate is set at zero and when applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no output tax, but
can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

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8. VAT on sale of service and use or lease of properties

Service has been defined as the art of doing something useful for a person or company for a
fee or useful labor or work rendered or to be rendered another for a fee.

By qualifying "services" with the words "all kinds," Congress has given the term "services" an
all-encompassing meaning. The listing of specific services are intended to illustrate how
pervasive and broad is the VAT's reach rather than establish concrete limits to its application;

9. VAT exempt transactions

An exempt transaction involves goods or services which, by their nature, are specifically listed in
and expressly exempted from the VAT under the Tax Code, without regard to the tax status —
VAT-exempt or not — of the party to the transaction. Indeed, such transaction is not subject to
the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

a) VAT exempt transactions, in general

By extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of
VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the
goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities
or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.

10. Input tax and output tax, defined

Under the present method that relies on invoices, an entity can credit against or subtract from
the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.
If at the end of a taxable quarter the output taxes charged by a seller are equal to the input
taxes passed on by the suppliers, no payment is required.

11. Sources of input tax

As regards Section 110, while the law only provides for a tax credit, a taxpayer who erroneously
or excessively pays his output tax is still entitled to recover the payments he made either as a
tax credit or a tax refund. In this case, since petitioner still has available transitional input tax
credit, it filed a claim for refund to recover the output VAT it erroneously or excessively paid for
the 1st quarter of 1997. Thus, there is no reason for denying its claim for tax refund/credit.

a) Who may claim for refund/apply for issuance of tax credit certificate

Having determined that respondent's purchase transactions are subject to a zero VAT rate, the
tax refund or credit is in order. To repeat, the VAT is a tax imposed on consumption, not on

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business. Although respondent as an entity is exempt, the transactions it enters into are not
necessarily so.

b) Period to file claim/apply for issuance of tax credit certificate

In a nutshell, the rules on the determination of the prescriptive period for filing a tax refund or
credit of unutilized input VAT, as provided in Section 112 of the Tax Code, are as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of
the taxable quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in
support of the administrative claim within which to decide whether to grant a refund or
issue a tax credit certificate. The 120-day period may extend beyond the two-year
period from the filing of the administrative claim if the claim is filed in the later part of
the two-year period.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the
CIR’s decision denying the administrative claim or from the expiration of the 120-day
period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day periods.

12. Invoicing requirements

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a
VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts:

a) Invoicing requirements in general

The requisite that the receipt be issued showing the name, business style, if any, and address
of the purchaser, customer or client is precise so that when the books of accounts are subjected
to a tax audit examination, all entries therein could be shown as adequately supported and
proven as legitimate business transactions. Failure to print the word “zero-rated” on the
invoices or receipts is fatal to a claim for credit of refund of input VAT on zero-rated sales
(J.R.A. Philippines, Inc. v. CIR, G.R. No. 177127, October 11, 2010)

TAX REMEDIES UNDER THE NIRC

a) Assessment
An assessment contains not only a computation of tax liabilities, but also a demand for
payment within a prescribed period. It also signals the time when penalties and protests
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begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies
thereon, due process requires that it must be served on and received by the taxpayer.

2. Government remedies
a) Administrative remedies

The National Internal Revenue Code of 1997 (NIRC) expressly provides that no court shall have
the authority to grant an injunction to restrain the collection of any national internal revenue
tax, fee or charge imposed by the code. The situation, however, is different in the case of the
collection of local taxes as there is no express provision in the LGC prohibiting courts from
issuing an injunction to restrain local governments from collecting taxes.

3. Statutory offenses and penalties

a) Civil penalties
It is mandatory to collect penalty and interest at the stated rate in case of delinquency.
The intention of the law is to discourage delay in the payment of taxes due the
Government and, in this sense, the penalty and interest are not penal but compensatory
for the concomitant use of the funds by the taxpayer beyond the date when he is
supposed to have paid them to the Government.
4. Compromise and abatement of taxes
a) Compromise
Compromise may be the favored method to settle disputes, but when it involves taxes, it
may be subject to closer scrutiny by the courts. A compromise agreement involving
taxes would affect not just the taxpayer and the BIR, but also the whole nation, the
ultimate beneficiary of the tax revenues collected. (PNOC vs CA, G.R. No. 109976, April
26, 2005)

III. Local Government Code of 1991, as amended

A. Local government taxation

The fundamental law did not intend the delegation to be absolute and unconditional; the
constitutional objective obviously is to ensure that, while the local government units are being
strengthened and made more autonomous, the legislature must still see to it that (a) the
taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b)
each local government unit will have its fair share of available resources, (c) the resources of
the national government will not be unduly disturbed; and (d) local taxation will be fair,
uniform, and just

Local governments do not have the inherent power to tax except to the extent that such
power might be delegated to them either by the basic law or by statute. Presently, under
Article X of the 1987 Constitution, a general delegation of that power has been given in favor of
local government units. (Manila Electric Company vs Province of Laguna, G.R. No. 131359, May
5, 1999)

a) Authority to prescribe penalties for tax violations

b) Authority to grant local tax exemptions
c) Withdrawal of exemptions
d) Authority to adjust local tax rates
e) Residual taxing power of local governments
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f) Authority to issue local tax ordinances

IV. Tariff and Customs Code of 1978, as amended

A. Tariff and duties, defined

"Customs duties" is "the name given to taxes on the importation and exportation of
commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a
foreign country. (Nestle Philippines, Inc. v. Court of Appeals, G.R. No. 134114, July 06, 2001)

Importation in violation of tax credit certificate

Smuggling

Smuggling is committed by any person who: (1) fraudulently imports or brings into the
Philippines any article contrary to law; (2) assists in so doing any article contrary to law; or (3)
receives, conceals, buys, sells or in any manner facilitate the transportation, concealment or
sale of such goods after importation, knowing the same to have been imported contrary to law.

V. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the
Court of Tax Appeals)

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases
a) Cases within the jurisdiction of the court en banc

The appellate jurisdiction of the CTA is not limited to cases which involve decisions of
the CIR on matters relating to assessments or refunds. Section 7 of Republic Act No.
1125||| covers other cases that arise out of the National Internal Revenue Code (NIRC) or
related laws administered by the Bureau of Internal Revenue (BIR). (Commr. v. Hambretch &
Quist Philippines, Inc., G.R. No. 169225, November 17, 2010)

Distinguished from citizen’s suit

Taxpayers have been allowed to sue where there is a claim that public funds are illegally
disbursed or that public money is being deflected to any improper purpose, or that public funds
are wasted through the enforcement of an invalid or unconstitutional law. On the other hand,
as citizens, petitioners have must fulfill the standing requirement given that the issues they
have raised may be classified as matters "of transcendental importance, of overreaching
significance to society, or of paramount public interest

1. Requisites for challenging the constitutionality of a tax measure or act of taxing

authority
a) Concept of locus standi as applied in taxation

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“Legal standing” or locus standi has been defined as a personal and substantial
interest in the case such that the party has sustained or will sustain direct injury
as a result of the governmental as that is being challenged. The gist of the
question of standing is whether a party alleges “such personal stake in the
outcome of the controversy as to assure the concrete adverseness which
sharpens the presentation of issues upon which the court depends for
illumination of difficult constitutional questions.
To invest him with locus standi, the plaintiff has to adequately show that he is
entitled to judicial protection and has a sufficient interest in the vindication of the
asserted public right. In case of taxpayer’s suits, the party suing as a taxpayer
must prove that he has sufficient interest in preventing the illegal expenditure of
money raised by taxation. (Public Interest Center vs. Roxas, 513 SCRA 457)

b) Doctrine of transcendental importance

What is “transcendental importance”? There being no doctrinal definition of
transcendental importance, the following instructive determinants are instructive:
(1) the character of the funds or other assets involved in the case, (2) the
presence of a clear case of disregard of a constitutional or statutory prohibition
by the public respondent agency or instrumentality of the government, and the
(3) the lack of any other party with a more direct and specific interest in raising
the questions being raised. The Court has adopted a liberal attitude on locus
standi where the petitioner is able to craft an issue of transcendental significance
to the people, as when the issues raised are of paramount importance to the
public. (Francisco, Jr. vs. Nagmamalasakit na mga Manananggol ng mga
Manggagawang Pilipino, 415 SCRA 44)

Impact of tax

Under Section 105 of the Tax Code, VAT is imposed on any person who, in the course of trade
or business, sells or renders services for a fee. In other words, the seller of services, who in this
case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees. (RENATO V. DIAZ and AURORA MA. F. TIMBOL
vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Incidence of tax

The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the seller's liability
but merely the burden of the VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE
SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears
its burden since the amount of VAT paid by the former is added to the selling price. Once
shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must
pay in order to purchase the good, property or service. (RENATO V. DIAZ and AURORA MA. F.
TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

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A seller who is directly and legally liable for the payment of an indirect tax, such as the VAT on
goods or services is not necessarily the person who ultimately bears the burden of the same
tax. It is the final purchaser of consumer of such goods or services who, although not directly
and legally liable for the payment thereof, ultimately bears the burden of the tax. (Contex v.
CIR, G.R. No. 151135, July 2, 2004)

In the case of the VAT, the law minimizes the regressive effects of indirect taxation by providing
for zero rating of certain transactions, while granting exemptions to other transactions. On the
other hand, the transactions which are subject to the VAT are those which involve goods and
services which are used or availed of mainly by higher income groups. (ARTURO M. TOLENTINO
v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No.
115455, October 30, 1995)

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