University of the Philippines College of Law

Taxation 1, Fridays 3 p.m. to 6 p.m. (Prof. Carina C. Laforteza) First Semester SY 2014-2015

FUNDAMENTALS OF TAXATION A. Meaning and Nature of Tax(es) 1. “Taxation” and “tax” defined Commissioner of Internal Revenue v. Algue, Inc. G.R. No. L-28896.

February 17, 1988 2. Essential characteristics of taxes

3. Tax as distinguished from other forms of impositions

a. Tax v. license and regulatory fee

Osmeña v. Orbos G.R. No. 99886. March 31, 1993 Philippine Airlines Inc. v. Edu G.R. No. L-41383. August 15, 1988 Progressive Development Corporation v. Quezon City G.R. No. L-36081. April 24, 1989 Compañia General de Tabacos de Filipinas v. City of Manila G.R. No. L-16619. June 29, 1963 Angeles University Foundation v. City of Angeles, et al., G.R. No. 189999. June 27, 2012 Smart Communications, Inc. v. Municipality of Malvar, Batangas. G.R. No. 204429, February 18, 2014.

b. Tax v. special assessment

Sec. 240 Local Government Code RA 7160 Republic v. Bacolod Murcia G.R. No. 19824-26. July 9, 1999

c. Tax v. toll

Sec. 155 Local Government Code

d. Tax v. tariff and customs duties

Garcia v. Executive Secretary G.R. No. 101273. July 3, 1992

e. Obligation to pay tax v. obligation to pay debt

Article 1279, New Civil Code of the Philippines Caltex v. Commission on Audit G.R. No. 92585. May 8, 1992 Francia v. Intermediate Appellate Court G.R. No. L-67649. June 28, 1988

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Republic v. Mambulao Lumber Company G.R. No. 17725. February 28, 1962 Re: internal revenue taxes cannot be the subject of the set-off or compensation Philex Mining v. Commissioner of Internal Revenue G.R. No. 125704. August 28, 1998 Domingo v. Garlitos G.R. No. L-18994. June 29, 1963

B. Purposes/Objectives of taxation

1. Revenue-raising PAL v. Edu, ibid. Osmeña v. Orbos, ibid.

2. Non-revenue/special or regulatory

Republic v. Bacolod-Murcia Milling Co. G.R. No. L-19824-26. July 9, 1999 Tio v. Videogram Regulatory Board G.R. No. 75697. June 18, 1987 Caltex v. Commission on Audit, ibid. Esso Standard Eastern v. Commissioner of Internal Revenue G.R. No. L-28508-9. July 7, 1989

C. Theory and Basis of Taxation 1. Necessity Theory Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue G.R. No.

L-22074. April 30, 1965 Commissioner of Internal Revenue v. Algue ibid. Ferdinand R. Marcos II v. Court of Appeals G.R. No. 120880. June 5,

1997 NPC v. City of Cabanatuan G.R. No. 149110. April 9, 2003

2. Benefits-received Theory Gomez v. Palomar G.R. No. L-23645. October 29, 1968 Lorenzo v. Posadas G.R. No. 43082. June 18, 1937 D. Aspects of taxation

1. Levy/Imposition by the legislative body

2. Collection / Administration / ways / methods of collection

“pay as you earn” “pay as you go” withholding system “pay as you are assessed” “pay as you file” E. Nature and Scope of and Limitations on the Power of Taxation

1. Power to tax as differentiated from the powers of eminent domain and police power

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2. Essential characteristics of taxation

a. Inherent in sovereignty Roxas v. Court of Tax Appeals G.R. No. L-25043. April 26,

1968 b. Exclusively legislative in nature c. Subject to inherent and constitutional limitations

3. Inherent Limitations

a. Purpose must be public in nature Pascual v. Secretary of Public Works G.R. No. L-10405

December 29, 1960 Caltex v. Commissioner of Internal Revenue, ibid. Gaston v. Republic Planter G.R. No. 77194, March 15, 1988 Planters Product, Inc. v. Fertiphil Corp. G.R. No. 66006.

March 14, 2008 b. Prohibition against delegation of taxing power

i. Extent of the legislative power to tax Tan v. Del Rosario G.R. No. 109289 and G.R. No. 109446. October 3, 1994 Sison v. Ancheta G.R. No. L-59431. July 25, 1984 Kapatiran v. Tan G.R. No. 81311, 81820, 81921, 82152. June 30, 1988

ii. Exceptions from the prohibition (a) Delegation to local governments

Sec. 5 Art. X, Constitution Local Government Code RA 7160 Book II Basco v. PAGCOR G.R. No. 91649. May 14,

1991 (b) Delegation to the President

Sec. 28(2) Art. VI, Constitution Sec. 401 Tariff and Customs Code Garcia v. Executive Secretary ibid. Abakada Guro Party List v. Ermita, G.R. No.

168056. September 1, 2005

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Feliciano, Deconstruction of Constitutional Limitations and the Tariff Regime of the Philippines: The Strange Persistence of a Martial Law Syndrome, 84 Phil L.J. 311 (2009).

(c) Delegation to administrative agencies

Maceda v. Macaraig G.R. No. 88291. May 31, 1991; June 8, 1993 Maceda v. ERB G.R. No. 96266. July 18, 1991 Osmeña v. Orbos ibid. Commissioner of Internal Revenue v. Court of Appeals G.R. No. 119761. August 29, 1996

c. Exemption of government entities agencies and instrumentality

Sec. 24(c) NIRC Executive Order 93 and Pres. Decree 1931

Mactan Cebu International Airport Authority v. Marcos G.R. No. 120082. September 11. 1996

Manila International Airport Authority v. CA G.R. No. 155650 July 20, 2006

Philippine Fisheries Development Authority v. CA G.R. No. 169836. July 31, 2007 GSIS v. City Treasurer of Manila,. G.R. No. 186242. December 23, 2009 Philippine Fisheries Development Authority v. Central Board of Assessment Appeals et al. Lucena City, G.R. No. 178030, 15 December 2010. Republic of the Philippines represented by the Philippine Reclamation Authority v. City of Parañaque, G.R. No. 191109, July 18, 2012.

d. Limitation of international comity Sec. 2, Art. II Constitution Sec. 159 Local Government Code Tañada v. Angara G.R. No. 118295. May 2, 1997 Commissioner of Internal Revenue v. Mitsubishi Corporation-

Manila Branch C.T.A. E.B. No. 5. May 24, 2006

e. Limitation of territorial jurisdiction/personal jurisdiction

Commissioner of Internal Revenue v. British Overseas Airways Corporation G.R. Nos. 65773-74. April 30, 1987 Iloilo Bottlers v. City of Iloilo G.R. No. L-52019. August 19, 1988 Hopewell Power v. Commissioner of Internal Revenue C.T.A. Case No. 5310, November 18, 1998 BPI v. CIR, G.R. No. 137002, July 27, 2006 Smith v. Commissioner of Internal Revenue C.T.A. Case No. 6268, September 12, 2002

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Commissioner of Internal Revenue v. Juliane Baier-Nickel G.R. No. 153793. August 29, 2006

4. Constitutional Limitations a. Due process of law

Tan v. Del Rosario ibid. Sec. I, Art. III, Constitution Sison v. Ancheta ibid.

b. Equal protection of the laws

Sec. I, Art. III, Constitution Sison v. Ancheta, ibid. Villegas v. Hiu Chiong Tsai Pao G.R. No. L-29646. November 10,

1978 Tan v. Del Rosario, ibid. PHILRECA v. Secretary G.R. No. 143076. June 10, 2003

c. Uniformity and equity in taxation

Sec. 28(1) Art. VI, Constitution (i) adoption of a progressive system of taxation Tolentino v. Sec. of Finance, G.R. No. 115455.

October 30, 1995

(ii) valid classification of taxpayers/subject or items to be taxed Pepsi Cola v. City of Butuan G.R. No. L-22814. August

28, 1968 Manila Race Horse Trainors Association v. Dela

Fuente G.R. No. L-2947. January 11, 1951 Eastern Theatrical Co. v. Alfonso G.R. No. L-1104. May 31, 1949 Shell v. Municipal Treasurer of Cordova G.R. No. L-6093. February 24, 1954 Commissioner of Customs and the District Collector of the Port of Subic v. Hypermix Feeds Corporation, G.R. No. 179579, February 1, 2012

d. Prohibition against imprisonment for non payment of poll tax Sec. 20 Art. III, Constitution Community tax v. poll tax Sec. 156-164 Local Government Code RA 7160

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e. Prohibition against impairment of obligation of contracts Sec. 10, Art. III, Constitution Sec. 11, Art. XII, Constitution Casanovas v Hord 8 Phil 125 (1907)

Tolentino v. Sec. of Finance, ibid. f. Prohibition against infringement of religious freedom Sec. 5, Art. III, Constitution American Bible Society v. City of Manila 101 Phil. 386 Tolentino v. Sec. of Finance, ibid. g. Prohibition re: appropriation of proceeds of taxation The use of tax levied for special purpose Sec. 29, Art. VI, Constitution Osmeña v. Orbos, ibid. Gaston v. Republic Planters Bank, ibid. h. Prohibition against taxation of religious, charitable entities and educational entities

Sec. 28(3), Art. VI, Constitution Abra Valley College v. Aquino G.R. No. L-39086. June 15, 1988 Lung Center of the Philippines v. Quezon City G.R. No. 144104. June

29, 2004

i. Prohibition against taxation of non-stock, non-profit institution Sec. 4(3) Art. XIV Constitution Sec. 4(4) Art. XIV, Constitution Sec. 28 (3) Art. VI, Constitution Sec. 24 (b) NIRC Secs. 27(B) and 30(H) of NIRC

Commissioner of Internal Revenue V. CA G.R. 124043. October 14,1998

j. Others

i. Grant of tax exemption Sec. 28(4), Art. VI, Constitution ii. Veto of appropriation, revenue, tariff bills by the president Gonzales v. Macaraig G.R. No. 87636. November 19, 1990 iii. Non-impairment of the jurisdiction of the Supreme Court Secs. 2 and 5(b), Art. VIII, Constitution

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San Miguel Corp. v. Avelino G.R. No. L-39699. March 14, 1979

iv. Revenue bills shall originate from the House of Representatives

Sec. 24, Art. VI Constitution Tolentino v. Secretary of Finance, ibid.

v. Infringement of press freedom Sec. 4, Art. III Constitution Tolentino v. Secretary of Finance, ibid.

vi. Grant of franchise Sec. 11 Art. XII, Constitution Tolentino v. Secretary of Finance, ibid. 5. Who may question the validity of a tax measure of expenditure of taxes – taxpayer’s suit

Lozada v. COMELEC G.R. No. L-59068. January 27, 1983 Maceda v. Macaraig, ibid. Gonzales v. Marcos G.R. No. L-31685. July 31, 1975

Renato V. Diaz and Aurora Ma. Timbol v. The Secretary of Finance and The Commissioner of Internal Revenue, G.R. No. 193007. July 19, 2011

F. Tax Systems

1. Classification Sec. 28 (1), Art. VI, CONSTITUTION – Progressive system of taxation Progressive system v. progressive rate of tax Tolentino v. Secretary of Finance, ibid. 2. Basic principles of a sound tax system Chavez v. Ongpin G.R. No. 76778. June 6, 1990

G. Classification of taxes 1. As to scope of the tax: National / local taxes Benguet Corporation v. CBAA G.R. No. 100959. June 29, 1992 2. As to who shoulders the burden of the tax: Direct / Indirect taxes Sec. 1 RA 7716 (Expanded VAT) Tolentino v. Sec. of Finance, ibid.

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Philippine Acetylene v. Commissioner of Internal Revenue G.R. No. L-19707. August 17, 1967

Maceda v. Macaraig G.R. No. 88291. June 8, 1993 Commissioner of Internal Revenue v. John Gotamco G.R. No. L-31092.

February 27, 1987 Commissioner of Internal Revenue v. PLDT G.R. No. 140230.

December 15, 2005 Exxonmobil Petroleum and Chemical Holdings, Inc. Philippine Branch v CIR, G.R. No. 180909, January 19, 2011 Diageo Philippines, Inc. v. CIR, G.R. No. 183553, November 12, 2012

3. As to the object or subject matter of the tax: Property / personal / poll or capitation / excise

Villanueva v. City of Iloilo G.R. No. L-26521. December 28, 1968 Commissioner of Internal Revenue v. Court of Appeals G.R. Nos. 104151

and 105563. March 10, 1995) Association of Customs Brokers v. Municipal Board G.R. No. L-4376.

May 22, 1953 4. As to the manner of computing the tax

a. Ad valorem b. Specific

We Wa Yu v. City of Lipa G.R. No. L-9167. September 27, 1956

5. As to graduation or rate a. Proportional Example: Real estate tax Sec. 233 Local Government Code b. Progressive Example: Sec. 21(a) NIRC Meaning of “digressive tax rate” Tolentino v. Secretary of Finance, ibid. ABAKADA v. Ermita, ibid. Chavez v. Ongpin, ibid. c. Regressive

H. Some Fundamental Doctrines in Taxation 1. Situs of Taxation

a. Meaning of situs of taxation b. Situs of subjects of taxation

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Commissioner of Internal Revenue v. British Overseas Airways

Corporation, ibid. Wells Fargo v. Collector of Internal Revenue G.R. No. 46720.

June 28, 1940 Tan v. Del Rosario, ibid. Sec. 42 NIRC c. Multiciplicity of Situs Collector of Internal Revenue v. de Lara G.R. Nos. L-9456 and

L-9481. January 6, 1958 Commissioner of Internal Revenue v. Juliane Baier-Nickel, ibid. 2. Double Taxation a. Meaning of double taxation in the strict sense/in the broad sense b. Instances of double taxation in its broad sense Villanueva v. City of Iloilo, ibid. Commissioner of Internal Revenue v. Solidbank Corp. G.R. No.

148191. Nov. 25, 2003 Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc. G.R. Nos. 139786 and 140857. September 27, 2006

c. Constitutionality of double taxation City of Baguio v. De Leon G.R. No. L-24756. October 31, 1968

Pepsi Cola Bottling Co. v. City of Butuan, ibid. Commissioner of Internal Revenue v. Manila Jockey Club, 108 Phil 281

3. Escape from Taxation a. Shifting of tax burden

i. Ways of shifting the tax burden ii. Taxes that can be shifted

Sec. 105 NIRC

iii. Meaning of impact and incidence of taxation Relations among impact, shifting, and incidence of a tax b. Tax evasion Elements of tax evasion Republic v. Gonzales G.R. No. L-17962. April 30, 1965

Commissioner of Internal Revenue v. Estate of Benigno Toda G.R. No. 147188. September 14, 2004

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c. Tax avoidance

Delpher Trades Corp. v. IAC G.R. No. 69259. January 26, 1988 Yutivo Sons Hardware v. CTA G.R. No. L-13203. January 28,

1961 Commissioner of Internal Revenue v. Lincoln Philippine Life

Insurance Company, Inc. G.R. No. 119176. March 19, 2002 d. Exemption from taxation i. Meaning of exemption from taxation Greenfield v. Meer G.R. No. 156. September 27, 1946

Commissioner of Internal Revenue v. Magsaysay Lines, Inc. G.R. No. 146984. July 28, 2006

ii. Compared with/differentiated from other terms (a) Tax remission/tax condonation Juan Luna Subdivision v. M Sarmiento G.R. No. L-3538.

May 28, 1952 Surigao Consolidated Mining v. Collector G.R. No.

L-14878. December 26, 1963 (b) Tax amnesty Republic Act No. 9399 (March 20, 2007)

Republic Act No. 9480 (May 24, 2007) Commissioner of Internal Revenue v. Court of Tax Appeals G.R. No. 108358. January 20, 1995

Republic v. Intermediate Appellate Court G.R. No. 69344. April 26, 1991

People v. Castañeda, Jr. G.R. No. L-46881. September 15, 1988

Pascual v. Commissioner of Internal Revenue G.R. No. 78133. October 18, 1988

Commissioner of Internal Revenue v. Marubeni G.R. No. 13737. December 18, 2001 Asia International Auctioneers, Inc. v. CIR, G.R. No. 179115, September 26, 2012

(c) Zero-rating (VAT) Sec. 106 NIRC (d) Exclusion/deduction iii. Kinds of tax exemption

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Atlas Fertilizer v. Commissioner of Internal Revenue G.R. Nos. L-26686 and L-26698. October 30, 1980

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Commissioner of Internal Revenue v. Phil. Ace Lines G.R. Nos. L-20960-61. October 31, 1968

Caltex v. Commission on Audit, ibid. iv. Nature of the power to grant tax exemption Basco v. Pagcor, ibid. Maceda v. Macaraig, ibid. v. Rationale/grounds for tax exemption

Tolentino v. Sec. of Finance, ibid. Maceda v. Macaraig, ibid. (1993) Davao Light v. Commissioner of Customs G.R. Nos.

L-28739 and L-28902. March 29, 1972. Tan Kim Kee v. CTA G.R. No. L-18080. April 22, 1963 NPC v. Presiding Judge G.R. No. 72477. October 16, 1990 Davao Gulf v. Commissioner of Internal Revenue G.R. No.

117359. July 23, 1998 vi. Nature of tax exemption Philippine Acetylene v. Commissioner of Customs, ibid. Wonder Mechanical Engineering Corp. v. CTA G.R. No.

L-22805. June 30, 1975 PLDT v. City of Davao G.R. No. 143867. March 25, 2003

and August 22, 2001 Commissioner v. PAL, Inc. G.R. No. 180043. July 14, 2009 Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497. April 23, 2012; G.R. No. 188497; February 19, 2014.

vii. Laws granting tax exemption/tax incentives (a) Constitution Art. 28(3) Art. VI, Constitution Sec. 4(3,4) Art. XIV, Constitution

(b) National Internal Revenue Code (c) Special laws (d) Treaty/international agreement

I. Philippine Tax Laws and Regulations 1. Nature of Tax Laws Hilado v. Collector of Internal Revenue G.R. No. L-9408. October 31,

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1956 Republic v. Vda. de Fernandez G.R. No. L-9141. September 25, 1956

2. Sources of Tax Laws

a. Constitution b. National Internal Revenue Code c. Tariff and Customs Code d. Local Government Code Book II (RA 7160) e. Local tax ordinance/city or municipal tax codes f. Tax treaties/international agreements g. Special laws h. Decisions of the SC/CTA i. Revenue rules and regulations/Administrative rulings and opinions

Sec. 245 NIRC Secs. 511 and 519 Tariff and Customs Code Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance G.R. No. 108524. November 10, 1994 i. Validity of revenue rules and regulations Tan v. del Rosario, ibid. Commissioner of Internal Revenue v. CA G.R. No. 104151

and 105563. March 10, 1995, ibid. Phil. Petroleum Corp. v. Mun. of Pililia G.R. No. 90776.

June 3, 1991 Umali v. Estanislao G.R. Nos. 104037 and 104069. May

29, 1992 La Suerte Cigar & Cigarette Factory v. CTA G.R. Nos.

L-36130 and L-36131. January 17, 1985 Commissioner of Internal Revenue v. Seagate Technology

G.R. No. 153866. February 11, 2005 ii. BIR Rulings

3. Interpretation/Construction of Tax Laws Hilado v. Collector of Internal Revenue, ibid. a. Rule when legislative intent is clear

Umali v. Estanislao, ibid. Lorenzo v. Posadas ibid. Commissioner of Internal Revenue v. Solidbank Corp.,

ibid. b. Rule when there is doubt

Collector of Internal Revenue v. La Tondeña G.R. No. L-10431. July 31, 1962

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c. Provisions/laws granting tax exemptions i. General rule

Commissioner of Internal Revenue v. CA G.R. No. 124043, ibid. Misamis Oriental Asso. v. Department of Finance, ibid. Commissioner of Internal Revenue of Customs v. Phil. Acetylene Company, ibid. Manila Electric Company v. Vera G.R. No. L-29987 and L-23847. October 22, 1975 Benguet Corporation v. CBAA, ibid. Coconut Oil Refiners Association Inc. v. Torres G.R. No. 132527. July 29, 2005

ii. Exceptions

Maceda v. Macaraig, ibid. 4. Application of Tax Laws/Revenue Regulations and Rulings a. General Art. 2, Civil Code Umali v. Estanislao, ibid. Lorenzo v. Posadas, ibid. Hijo Plantation v. Central Bank G.R. No. L-34526. August 9, 1988 Commissioner of Internal Revenue V. Filipinas Compania de

Seguros G.R. No. L-14880. April 29, 1960 Cebu Portland v. Collector of Internal Revenue G.R. No.

L-20563. October 29, 1968 Commissioner of Internal Revenue v. Rio Tuba Nickel Mining

G.R. Nos. 83583-84. March 25, 1992

b. Application of revenue rules and regulations/rulings

Revenue Memo Circular 20-86 Sec. 246 NIRC Tuzon v. CA G.R. No. 90107. August 21, 1992 Commissioner of Internal Revenue v. Mega General G.R. No. 69136. September 30, 1988 ABS-CBN v. Court of Tax Appeals G.R. No. L-52306. October 12, 1981 Commissioner of Internal Revenue v. Court of Appeals G.R. No. 119761. August 29, 1966 Commissioner of Internal Revenue v. Telefunken Semiconductor G.R. No. 103915. October 23, 1995 Commissioner of Internal Revenue v. Benguet Corporation G.R. Nos. 134587 and 134588. July 8, 2005 Commissioner of Internal Revenue v. Michel Lhuillier Pawnshop G.R. No. 150947. July 15, 2003

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c. Effectivity and validity of tax ordinances

Hagonoy Market Vendors Asso. V. Municipality of Hagonoy G.R. No. 137621. February 6, 2002 Jardine Davies Insurance Brokers, Inc. v. Aliposa G.R. No. 118900. February 27, 2003

4. Mandatory and directory provisions of tax laws

Roxas v. Rafferty G.R. No. L-12182. March 27, 1918 Aragon v. Jorge G.R. No. L-2678. December 29, 1949 Pecson v. Court of Appeals G.R. No. 105360. May 25, 1993

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INCOME TAXATION A. INTRODUCTION

Fisher v. Trinidad G.R. No. 17518. October 30, 1922 1. History of the Philippine Income Tax Law Madrigal v Rafferty, G.R. No. 12287. August 7, 1918.

2. Meaning of Income Eisner v Macomber, 1920, 252 US 189, 40 SCt 189, 64 Led, 521, 9ALR 1570

3. Classification of income taxpayers 4. General Principles of Income Taxation

Sec. 23, NIRC

B. TAX ON INDIVIDUALS

1. Kinds of individual taxpayers Sec. 24, Sec. 25

2. Definition of each kind of taxpayer

Sec. 22

a. Resident citizens and resident aliens (Sec. 5, Sec. 6, RR-2, RR 2-98, April 17, 1998)

b. Non-resident citizens (RR 1-79 and RR 9-99, April 19, 1999, definition and

requirements for information return) c. Non-resident aliens engaged in business in the Philippines

d. Senior Citizen Law, RA 7432, as amended by RA 9257 and RA 9994 Carlos Superdrug Corp. vs. DSWD, ibid. Mercury Drug Corporation v. Commissioner of Internal Revenue. G.R. No. 164050. July 20, 2011

3. Kinds of income and income tax of individuals a. Income subject to ordinary income tax

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b. Income subject to final income tax – interests, dividends, royalties, awards, capital gains, on sale of shares, realty (RR 10-98, August 25, 1998, RR 8-98, August 25, 1998, as amended by RR 17-2003 and RR 30-2003.)

c. Compensation Income

5. Personal exemptions

Sec. 35

6. Premium payments on health and/or hospitalization insurance (Sec. 34 (m))

6. Estates and Trusts

Sections 60-66 NIRC (Sec. 207-213, RR 2)

1. General rule on taxability: fiduciary or beneficiary

2. Personal exemption allowed

3. Decedent’s estate administration

Revocable trusts

4. Income for benefit of grantor C. TAX ON CORPORATIONS 1. Definition of corporations

Sec. 22 Collector of Internal Revenue v. Batangas Transportation Co. G.R. No. L-9692. January 6, 1958 Oña v. Commissioner of Internal Revenue G.R. No. L-19342. May 25, 1972 BIR Ruling 317-92, October 28, 1992 Obillos v. Commissioner of Internal Revenue G.R. No. L-68118. October 29, 1985

2. Classification of corporations and the tax rates

a. In general Sec. 27-28

1. Domestic 2. Resident 3. Non-resident

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b. Special corporations

1. Private educational institutions and non-profit hospitals

Sec. 4 [3] Article XIV, Constitution 2. Non-resident cinematographic film owner, lessor or distributor

3. International carriers

Commissioner v BOAC, ibid. United Airlines, Inc., v CIR, G.R. No. 178788, 29 September 2010

4. Non-resident owner of vessels

5. Non-resident lessor of aircraft, machineries and other equipment

6. Foreign currency deposit system/Offshore banking units

7. Petroleum service contractor and sub-contractor

PD 1354, PD 87

8. Enterprise Registered under Bases Conversion and Development Act of 1992 and Philippine Economic Zone Act of 1995. Clarification of coverage of 5% preferential rate by RR 20-2002, October 14, 2002, as amended by RR 2-2005 (February 8, 2005) amending RR 1-95 and RR 16-99 and as amended by RR 11-2005, RR-12-2005 and RR 13-2005.

John Hay Peoples Alternative Coalition v. Victor Lim, BCDA G.R.

119775. October 14, 2003, March 29, 2005

Coconut Oil Refiner’s Association, et al. v. Ruben Torres, ibid.

9. R.A. No. 9400 gives tax privileges to Clark & John Hay, R.A. No. 9399 Grants tax amnesty to locators of Clark & John Hay

3. Kinds of Taxes

a. Income subject to corporate income tax

Commissioner of Internal Revenue v. Procter & Gamble G.R. No. 66838. April 15, 1988 and December 2, 1991

Commissioner of Internal Revenue v. Wander Phils. G.R. No.

68375. April 15, 1988 b. Income subject to final income tax

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4. Branch Profit Remittance Tax

Rev. Memo Cir. 55-80, Sec. 28 [A][5], NIRC

5. Minimum Corporate Income Tax

Sec. 27[e] and Sec. 28[A][2], NIRC (RR 9-98, August 25, 1998)

6. Improperly Accumulated Earnings Tax

Sec. 29 NIRC (Rev. Regs. 2-2001, February 12, 2001) Cyanamid Philippines, Inc. v. CA G.R. No. 108067. January 20, 2000

Fringe Benefits Tax

Sec. 33 D. EXEMPT ENTITIES

1. Partnership/joint ventures formed for the purpose of undertaking construction projects or engaging in energy operations

Sec. 26, NIRC

Professional partnership of real estate brokers exempt from income tax (BIR ruling 294-88, July 5, 1988)

2. Co-ownership

Obillos, Jr. v. Commissioner of Internal Revenue, ibid.

3. Section 30, NIRC

Sec. 23-35, NIRC Sinco v. Collector of Internal Revenue, No. 2229, May 20, 1955, 100 Phil. 127

3. Under special laws Omnibus Investment Code – income tax holiday incentive, as amended by EO 226

Special Economic Zone Act of 1995 (RA 7916) Bases Conversion and Development Act (RA 7227, as amended)

F. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

Sec. 32, NIRC (Sec. 39-60, RR 2)

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1. Definition of Gross Income

2. Exclusions from Gross Income

Sec. 61-64, NIRC RR 2, RA 4917, RA 7641 – An Act granting retirement benefits to private sector employees in absence of qualified plan

3. Exclusion of 13th Month Pay

RA 7833, January 1994, Rev. Reg. 2-95, Rev. Memo, Cir. 36-94, December 14, 1994 – Inventors and Inventions Incentives Act of the Philippines

4. Tax Treaties

Deutsche Bank v. Collector of Internal Revenue, G.R. No. 188550, August 19, 2013

G. ITEMS OF GROSS INCOME (Sec. 32) 1. Compensation for personal services a. In money b. In kind

i. “Convenience-of-the-employer rule”

Henderson v. Collector of Internal Revenue, G.R. No. L-12954. February 28, 1961

ii. RR 2-98, as amended and RR 3-98, as amended H. INTEREST INCOME 1. Taxable 2. Not taxable

5. Imputed interest on inter-company loans/Advances

Sec. 50, NIRC (RMO 63-99, July 1999) Commissioner of Internal Revenue v. Filinvest Development Corp

G.R. No. 163653; 167689. July 19, 2011 I. INCOME UNDER LEASE AGREEMENTS

(Sec. 49, RR 2)

1. Rent 2. Obligations of lessor to third parties assumed and paid by lessee

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3. Advance rental

4. Leasehold improvements. Options to report income for right of reversion of improvements to lessor:

a. Option 1 – Report fair market value upon completion b. Option 2 – Report over remaining life of lease depreciated value after expiration

of lease period

J. DIVIDEND INCOME Sec. 73, NIRC (Sec. 250-256, RR 2) 1. Kinds of dividends recognized in law a. Cash b. Property

BIR Ruling 108-93, May 7, 1993

c. Stock

Commissioner of Internal Revenue v. Manning G.R. No. L-28398, August 6, 1975, 66 SCRA 14 Fisher v. Trinidad, ibid.

2. Measure of income in cash and property dividend 3. Stock dividend a. When taxable 1. Measure of income b. When not taxable 1. Adjusted cost per share 4. Liquidating “dividend”

Wise & Co., Inc. v. Meer G.R. No. L-48231. June 30, 1947 Commissioner of Internal Revenue v. CA G.R. No. 108576.

January 20, 1999

K. INCOME FROM ANY SOURCE WHATSOEVER 1. Bad debt recovery Sec. 50, RR 2

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2. Forgiveness of indebtedness

Sec. 50, RR 2 3. Tax refunds

RMC 13-80, April 10, 1980 4. Damage recovery 5. Prizes and winnings 6. Income from any source whatsoever

Gutierrez v. Court of Tax Appeals. G.R. Nos. L-9738 and L-9771. May 31, 1957

L. CLASSES OF DEDUCTIONS

Sec. 34, NIRC 1. Optional standard deduction 2. Itemized deductions

M. EXPENSES IN GENERAL

Sec. 65-76, RR 2 1. Requisites for deductibility (ordinary, necessary)

Visayan Cebu Terminal Co. v. Collector of Internal Revenue, G.R. No. L-12798. May 30, 1960 Commissioner of Internal Revenue v General Foods (Phils) Inc., G.R. No. 143672, April 24, 2003.

2. Compensation for personal services

Kuenzle & Streif, Inc. v. Commissioner of Internal Revenue IR G.R. No. L-12010 and L-12113. October 20, 1959

3. Traveling/Transportation expenses

RR 3-98, as amended 4. Cost of materials

Sec. 67, RR 2 5. Repairs

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Sec. 68, RR 2

6. Expenses under lease agreements

Sec. 74, RR 2

7. Expenses for professionals

Sec. 69, RR 2 8. Expenses for farmers

Sec. 75, RR 2 9. Entertainment expenses

RR 3-98, as amended 10. Expenses of private educational institutions Alhambra Cigar & Cigarette Manufacturing Co. v. Collector of Internal Revenue G.R.

No. L-12026.May 29, 1959 Calanoc v. Collector of Internal Revenue G.R. No. L-15922. November 19, 1961 Expense for police protection is illegal 11. Constructive dividends (Sec. 70, RR 2)

RR 10-2002, Ceilings for entertainment, amusement and recreational expenses

(July 10, 2002) N. INTEREST

1. Interest deductible from gross income

2. Interest not deductible from gross income

3. Prepaid interest of individual on cash method of accounting

Commissioner of Internal Revenue v. Vda. de Prieto G.R. No. L-13912. September 30, 1960

4. Reduction of interest expense on interest income subjected to final tax

RR 13-2000, November 20, 2000 requirement for deductibility of interest expense

O. TAXES

Sec. 80-82, RR 2

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1. Deductible from gross income 2. Not deductible from gross income

Sec. 82-83, RR 2 3. Meaning of the term “taxes”

4. Tax Credits v. Tax Deduction

Commissioner of Internal Revenue v. Lednicky, et al. G.R. No. L-18169. July 31, 1964 Commissioner Internal Revenue v. Bicolandia Drug Corp., G.R. No. 148083. July 21, 2006 Mercury Drug Corporation v. Commissioner of Internal Revenue, ibid.

5. Fines and penalties

Gutierrez v. Collector of Internal Revenue. G.R. No. L-19537. May 20, 1965

P. LOSSES (Sec. 93-101, RR 2) 1. Kinds of taxpayers and their losses 2. Completed transactions

Fernandez Hermanos v. Commissioner of Internal Revenue G.R. No. L-21557. September 30, 1969

3. Special rules on losses a. Voluntary removal of buildings b. Lose of useful value of assets c. Shrinkage in value of stocks 4. Wagering losses 5. Rev. Regs. 12-77, substantiation of losses

6. Foreign exchange losses

BIR Ruling 144-85, August 26, 1985 Rev. Memo Circular 26-85, July 15, 1985, inter-bank guiding rate

7. Abandonment losses

8. Net operating loss carry-over (as implemented by RR 14-2001, August 27, 2001)

a. Three-year period

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b. No substantial change in ownership (75% rule) Q. BAD DEBTS

Sec. 102-104, RR 2

1. Requirements for deductibility

Collector of Internal Revenue v. Goodrich G.R. No. L-22265. December 22, 1967 2. Tax benefit rule

RR 5-99, March 10, 1999, as amended by RR 25-2002 3. Bad debts between related parties

Sec. 36 [B], NIRC

4. RR 5-99, March 10, 1999, requirements for deductibility of bad debts including banks Philex Mining v. Commissioner of Internal Revenue G.R. No. 148187. April 16,

2008 R. DEPRECIATION (Sec. 105-115, RR 2) 1. Depreciation base

Zamora v. Collector of Internal Revenue G.R. Nos. 15290, 15280, 15289, 15281. May 31, 1963

2. Methods of depreciation (straight line, declining balance, sum of the digits)

3. Depreciation rates

i. Bulletin “F” ii. Rev. Regs. 19-86, Annex “A” S. DEPLETION (Rev. Regs. 5-76, April 2, 1976) T. PENSION TRUST (Sec. 118, RR 2) U. CHARITABLE AND OTHER CONTRIBUTIONS (BIR-NEDA Regs. 1-81, BIR-NEDA Regs.

1-82) 1. Fully deductible 2. Deductible, subject to limitations a. Corporation

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b. Individuals

3. RR – 13-98 (December 8, 1998), implementing Section 34(H), RA 8424 “deductibility by actually paid or made to accredited donee institution”

V. RESEARCH AND DEVELOOPMENT EXPENSES

Sec. 34, NIRC a. When paid or incurred; or b. Amortized for 60 months W. IMPOSITION OF CEILINGS ON DEDUCTIONS BY THE SECRETARY OF FINANCE

Sec. 34, last par., NIRC X. ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY

Sec. 34 [k] NIRC (RMO 38-83, November 14, 1983 on deficiency withholding) Y. ITEMS NOT DEDUCTIBLE

Sec. 36 NIRC (Sec. 119-122, RR 2) Atlas Consolidated v. Commissioner of Internal Revenue G.R. No. L-26911. January 27, 1981

Z. SALE OR EXCHANGE OF PROPERTY

A. Capital assets

Sec. 38 (Sec. 132-135, RR 2) 1. Definition of capital asset (RR 7-2003, February 11, 2003)

Guidelines in determining whether a real property is capital or ordinary asset

Definition of ordinary income

Sec. 22 (Z) Calasanz v. Commissioner of Internal Revenue G.R. No. L-26284. October 8, 1986

3. Net capital gain, net capital loss 4. Ordinary loss

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5. Percentage taken into account (long term – short term) by taxpayers other than a corporation

6. Limitation on capital loss

7. Meaning of sale or exchange – requirement for capital gain

B. Determination of gain or loss from sale or transfer of property

Sec. 40 NIRC (Sec. 136-143, RR 2)

1. Computation of gain or loss

CIR v. Aquafresh Seafood, Inc., G.R. No. 170389, 20 October 2010

2. Cost or basis for income tax purposes 3. Exchange of property – tax-free exchange Sec. 40(c)(2), NIRC

i. Merger or consolidation –

BIR Ruling 383-87, November 25, 1987

Commissioner of Internal Revenue v Vicente Rufino G.R. No. L-33665-68. February 27, 1987

ii. Transfer of “substantially all” the assets

iii. Transfer of property for shares of stocks

iv. Administrative requirements in case of tax-free exchanges

v. De facto merger

4. Cost basis in tax-free exchanges 5. Assumption of liability in tax-free exchanges 6. Business purpose

Gregory v. Helvering, 293 U.S. 465, 55 SCT 266 C. Losses from wash sales of stocks or securities

Sec. 32 NIRC (Sec. 131, RR 2)

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D. Exemption from capital gains tax of certain individuals from the sale or exchange of principal residence

Sec. 24, (D)(2)

E. R.A. 9480 (Tax Amnesty) effective June 16, 2007 F. RR 6-2008, Taxation of Shares of Stocks (April 22, 2008), as amended by RR 16-2012

and RR 6-2013

AA. SITUS OF TAXATION – SOURCES FROM WITHIN AND WITHOUT THE PHILIPPINES

Sec. 42 NIRC (Sec. 152-165, RR 2) 1. Gross income from sources within Philippines 2. Taxable income from sources within the Philippines

Commissioner of Internal Revenue v. CTA and Smith Kline & French Overseas G.R. No. L-54108. January 17, 1984 as amended by RAMO 1-95 (audit guidelines on determination of income tax of branches of multinationals)

Rev. Audit Memo Order 1-86 (income from constructive trading of multinationals) Rev. Regs. 16-86 RAMO 4-86 (allocation of head office overhead expenses) 3. Gross income from sources without the Philippines 4. Income from sources partly within or without the Philippines 5. Situs of sale of stocks in a domestic corporation 6. Definition of royalties

Philamlife v. CTA CA-G.R. SP No. 31283. April 25, 1995 Commissioner of Internal Revenue v. Marubeni Corp. G.R. No. 137377. December 18,

2001 Rev. Memo Circular No. 44-2005 (September 1, 2005) Guideline for computer software payment, royalty, services or business income

BB. ACCOUNTING PERIODS AND METHODS

Sec. 43-50 NIRC (Sec. 166-179, RR 2, Sec. 51-53, RR 2) i. General rule

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ii. Accounting period iii. Accounting method (cash (actual or constructive) or accrual) Hybrid method (Consolidated Mines, Inc. v. CTA G.R. Nos. L-18843 and 18844, L-

18853 and 18854. August 29, 1974) Percentage of completion method (Sec. 44, RR 2, Sec. 48 (Tax Code as amended by Tax

Reform Act) iv. Change of accounting period v. Installment basis vi. Allocation of income and deductions

Yutivo Sons Hardware Co. v. Commissioner of Internal Revenue ibid. vii. Networth method

Perez v. Court of Tax Appeals G.R. No. L-10507. May 30, 1958 Collector of Internal Revenue v. Reyes G.R. Nos. L-11534 and 11558. November 25, 1958

viii. Tax Evasion v. Tax Avoidance

Commissioner of Internal Revenue v. Benigno Toda, ibid.

CC. RETURNS AND PAYMENT OF TAX 1. Individual return (Sec. 51, Sec. 56), NIRC a. Who are required to file b. Those not required to file c. Where to file d. When to file e. Where to pay f. Capital gains on shares of stocks and real estate g. Quarterly declaration of income tax (Sec. 74)

h. RR 3-2002, March 22, 2002 (substituted filing of ITR of salaried individuals), as amended by RR 19-2002 (November 25, 2002)

i. RR 16-2002, October 11, 2002 (modes of payment of taxes through banks) 2. Corporate regular returns (Sec. 52, Sec. 50, Sec. 56, NIRC)

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a. Quarterly income tax (Sec. 75, NIRC) b. Final adjustment return (Sec. 76, NIRC) Commissioner v BPI. G.R. No. 178490. July 7, 2009

Commissioner of Internal Revenue v. PL Management International Philippines, Inc. G.R. No. 160949, April 4, 2011

c. When to file d. Where to file (Sec. 77, NIRC) e. When to pay f. Capital gains on shares of stock g. Return of corporations contemplating dissolution/reorganization (Sec. 244, RR 2) BPI v. Commissioner of Internal Revenue CA-G.R. SP No. 38304, April 14, 2000

DD. WITHHOLDING TAX A. 1. Final withholding tax at source (Sec. 57, NIRC)

Withholding of creditable tax

RR 2-98 as amended Filsyn v. CA G.R. 118408 and 124377. October 12, 1999 RR 3-2004, March 12, 2004

3. Return and payment of tax (Sec. 58, NIRC)

4. Tax deemed paid on dividends

Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation G.R. No. 66838. December 2, 1991

5. Withholding agent can file claim for refund 6. Withholding tax on dividends

Marubeni Corp. v. Commissioner of Internal Revenue G.R. No. L-76573. September 14, 1989

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7. Withholding tax on royalties

Commissioner of Internal Revenue v. Court of Appeals & SC Johnson & Sons, Inc. G.R. No. 127105, June 25, 1999, August 30, 1999

8. Rev. Memo. Cir. 46-2002, tax on royalty payments to US entity adopts most

favored nation clause under RP-China Tax Treaty effective January 1, 2002

Golden Arches Dev’t. Corp. v. Commissioner of Internal Revenue CTA Case No. 6862, July 13, 2007.

9. Withholding on wages (Sec. 78-81, RR 2-98, as amended) C. Withholding tax by government agencies (RR 2-98, as amended)