WRAP-UP NOTES IN

TAXATION Based on the SYLLABUS FOR THE 2013 BAR EXAMINATION IN TAXATION (Except Income Taxation)

by

Abelardo T. Domondon AB, BSC, LLB, MA, LLM, DCL (Cand.)

Lawyer-CPA-Customs Broker

How to use the WRAP-UP NOTES. The WRAP-UP NOTES in the form of textual materials and representative review questions were specially prepared by Prof. Domondon for the exclusive use of Bar Candidates who attended his 2013 lectures on TAXATION, conducted for Magnificus Juris, at different places on various dates. It may also be utilized by other persons he has personally authorized. Included in the presentation are contained in selected Supreme Court decisions up to July 31, 2013.

The WRAP-UP NOTES provide the Bar Reviewees with a handy review material that serves as a memory-jogger for the October 13, 2013 Bar Examinations in Taxation. The author tries to second guess what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in the same manner as the WRAP-UP NOTES. However, the doctrines tested in the Bar would in all probability be included in these Notes. The topics and sub-topics in the Syllabus are in bold letters and underlined. The reader should note that some of the questions do not have answers. Some line-items in the coverage also do not contain any discussion. This is so because the author assumes that the reader knows the elementary concepts behind the questions or that the areas not discussed are those where questions would, in all probability, not be drawn.

Reviewees are pressed for time so it is NOT advisable to read the Notes in their entirety. The author suggests that they should focus on the items marked as follows:

Nice to know Should know Must know

WARNING:

These materials are copyrighted and/or based on the writers books on Taxation and future revisions. No part of these Notes should be reproduced in any form or any means, electronic or mechanical, including photocopying without the written permission of the author. These materials are authorized for the use only

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of Magnificus Juris Reviewees and others the author has personally authorized. Unauthorized users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author.

Only copies with the signature of Prof. Domondon, or Magnificus Juris coordinators on this page are considered authorized copies. Copies without this 1st page are unauthorized copies. Holders of authorized copies are requested not to lend their copies for reproduction through xerox or otherwise.

AUTHORIZED SIGNATURE:

TAXATION

I. GENERAL PRINCIPLES OF TAXATION

A. Definition and concept of taxation

B. Nature of taxation

1. What is the nature of the States power to tax ? Explain briefly.

SUGGESTED ANSWER: The nature of the states power to tax is two-fold. It is both an inherent power and a legislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without the taxes, the states existence would be imperiled. There is thus, no

need for a constitutional grant for the state to exercise this power. It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax should be paid.

C. Characteristics of taxation

1. What are characteristics of taxation ? SUGGESTED ANSWER: The following are the characteristics of taxation: a. It is an inherent power of the sovereign; b. It is basically legislative; c. It is territorial because it may be exercised only within the territorial boundaries of the taxing authority; d. Its scope is unlimited; e. It is an intrusion in the property rights of taxpayers; f. Generally, it is imprescriptible. g. It is exercised for a public purpose.

D. Power of taxation compared with other powers

1. Police power

1) How is taxation distinguished from police power ? a . Purpose: Taxation is for revenue while police power is for general welfare.

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b. Amount: In taxation, the amount of tax collected is practically unlimited while under police power, the license fee should not exceed cost of regulation.

c. Compensation: In taxation, the enjoyment of public services while in police power, the feeling of having done something good for society in general.

d. Property taken: In taxation, generally money while under police power, any property, other than money, which is the source of the danger health, safety or morals.

e. What is done with the property taken: Taxation is constructive because the money collected is spent for building infrastructure or providing public services while police power is destructive. The property taken is usually destroyed.

f. Relation to the non-impairment clause: Taxation is inferior to the non-impairment clause and could not override the same while police power is superior to the non-impairment clause.

g. Scope. Taxation interferes with property rights only while police power regulates both liberty and property. h. Surrender. Taxation may be bargained away through a contract such that if the government issues a tax-exempt bond, it could not withdraw the

exemption because it would violate the non-impairment clause while police power cannot be bargained away. i. Means to implement public good goals. Taxation is distinguishable from police power as to the means employed to implement public good goals.

Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects of taxation, and the belief that taxes are the lifeblood of the state. These considerations necessitated the evolution of taxation as a distinct legal concept from police power. Yet at the same time, it has been recognized that taxation may be made to implement of the states police power. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

2. Power of eminent domain

1) Distinguish taxation from eminent domain. SUGGESTED ANSWER: a. Who could exercise. Taxation could be exercised by the legislative department and in certain cases by the President or the local government

units only, while eminent domain may be exercised by private entities. b. Property taken. In taxation, it is money that is taken, while in eminent domain, it is property usually land. E. Purposes of taxation

1. Discuss briefly but comprehensively the objectives or purposes of taxation. SUGGESTED ANSWER: The purposes or objectives of taxation are the following: a. The primary purpose:

1) Revenue purpose.

b. The secondary or the non-revenue purposes 1) Sumptuary or regulatory purpose. 2) Compensatory purpose.

3) To implement the power of eminent domain.

1. Revenue-raising

1) Explain the revenue raising purpose of taxation ?

2. Non-revenue/special or regulatory

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a. Give instances when taxes may be levied for a regulatory purpose. Stated differently, what is the sumptuary purpose of taxation. 1) The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected.

Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government. Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. (Caltex Philippines, Inc., v. Commission on Audit, 208 SCRA 726; Osmena v. Orbos, 220 SCRA 703)

Thus, the power of taxation may be exercised to implement police power. (Gaston v. Republic Planters Bank, 158 SCRA 626) The motivation behind many taxation measures is the implementation of police power goals. (Southern Cross Cement Corporation v. Cement Manufacturers

Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products.

(Southern Cross Cement Corporation, supra) 2) A law imposing burdens may be both a tax measure and an exercise of police power; in which case the license fee may exceed

the necessary expenses of police surveillance and regulation.

b) How may the power to tax be utilized to carry out the social justice program of our government ? SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive

system of taxation, which would result to equal distribution of wealth, etc. Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the

Philippines, et al., G. R. No. 158540, August 3, 2005) In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social

justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004)

Tax measures are but enforced contributions exacted on pain of penal sanctions and clearly imposed for public purpose. In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

c) How may the power of taxation be used to implement power of eminent domain ? SUGGESTED ANSWER: The constitutional concept of eminent domain may be subsumed in the provision that, private property shall not be taken for

public use without just compensation. (1987 Phil. Constitution, Art. II, Sec. 9) The deduction of the 20% senior citizens discount from the gross income of establishments that granted the same is considered as just compensation for giving the discount. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]

F. Principles of a sound tax system

1) What are the three basic principles of a sound tax system ? SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics or, principles of a sound tax system, are used as a

criteria in order to determine whether a tax system is able to meet the purposes or objectives of taxation. They are: a. Fiscal adequacy. b. Administrative feasibility. c. Theoretical justice.

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2) Explain the meaning of fiscal adequacy as a characteristic of a sound tax system.

3) What is meant by administrative feasibility as a characteristic of a sound tax system ?

4) What do you understand by theoretical justice, as a characteristic of a sound tax system ?

G. Theory and basis of taxation

1) What are the theories underlying the power of taxation ? SUGGESTED ANSWER: The theories are the a. Lifeblood theory; b. Necessity theory; d. Benefits-protection theory (symbiotic relationship) e. Jurisdiction over subject and object.

1. Lifeblood theory

a. What is meant by the life-blood theory of taxation ?

2. Necessity theory

a. Explain briefly the meaning of the necessity theory of taxation. SUGGESTED ANSWER: The theory behind the exercise of the power to tax emanates from necessity, without taxes, government cannot fulfill its

mandate of promoting the general welfare and well-being of the people. (Commissioner of Internal Revenue v. Bank of Philippine Islands, G. R. No. 134062, April 17, 2007)

3. Benefits-protection theory (Symbiotic relationship)

a. Explain and exemplify the meaning of the benefits-protection theory also known as the symbiotic relationship. SUGGESTED ANSWER: The reciprocal relation of protection and support between the state and the taxpayers. The state gives protection and for it to

continue giving protection it must be supported by the taxpayers in the form of taxes. 1) Taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate

it. 2) Despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities, every person who is able must contribute

his share in running the government. 3) The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and

enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat

of power. (Commissioner of Internal Revenue v. Algue, Inc., et al., 158 SCRA 8, 16-17)

4. Jurisdiction over subject and objects

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1) Discuss the concept of jurisdiction over the subjects and objects in relation to taxation. SUGGESTED ANSWER: Taxation is basically territorial in character because it is only within the territorial boundaries of the taxing authority where tax

laws may be enforced. Otherwise stated, taxation could be exercised only in the instances where it has jurisdiction and it exercises jurisdiction only within its territorial boundaries.

H. Doctrines in taxation

1. Prospectivity of tax laws

1) Do tax laws have prospective application ? Explain briefly. SUGGESTED ANSWER: Yes. Revenue laws are substantive laws which should be given prospective application

Tax laws do not have retroactive application and their application must not be equated with remedial laws (Commissioner of Internal Revenue v. Acosta, etc., G. R. No. 154068, August 3, 2007), which are given retroactive application, To give retroactive application to tax laws would violate the due process rights of the taxpayer who should know his obligation in order to be able to comply with them. Furthermore, the public purpose principle concept is likewise infringed. The public need must exist t the time of the enactment of the tax measure.

Thus, a previously assessed and demanded tax may still be collected because the repeal is to be construed as an exemption that must be strictly construed. After all tax laws do not have any retroactive application even if favorable to the taxpayer because tax laws are not considered as part of criminal law.

2. Imprescriptibility

a) What is meant by the doctrine of imprescriptibility in taxation ? SUGGESTED ANSWER: As a general rule, the right of the government to collect taxes is imprescriptible because the very existence of the state depends

upon the exercise of this power. Where the government has not by express statutory provision, provided a limitation upon its right to assess unpaid taxes, such right is imprescriptible.

[Kasamahan Realty Development Corporation (now known as Stag Trading Corporation) v. Commissioner of Internal Revenue, CTA Case No. 6204, February 16, 2005) Statutes may, however, provide for prescriptive periods for the collection of particular kinds of taxes

3. Double taxation

a. Strict sense

1) Explain double taxation in its strict sense. SUGGESTED ANSWER: Double taxation in its particular sense, may mean direct duplicate taxation, which has the following elements: (a) Sameness

1) The same subject or object is taxed twice 2) by the same taxing authority 3) for the same taxing purpose 4) during the same taxable period

(b) Taxing all of the subjects or objects within the same territory for the first time without taxing all of them for the second time.

2) Give an example of double taxation in its strict sense which violates the concept of equal protection because there is discrimination.

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SUGGESTED ANSWER: An ordinance imposing a tax on centrifugal sugar produced and exported only by a specific sugar company and not upon those produced and exported by other sugar companies was declared null and void. (Ormoc Sugar Co. v. Treasurer of Ormoc City, 22 SCRA 603)

The law is discriminatory singling out for taxation a specific company only.

b. Broad sense

1) Discuss the meaning of double taxation in its broad sense. SUGGESTED ANSWER: Double taxation in its generic sense, means that a subject or object was subject to a tax twice during the same taxable period.

It is also known as indirect duplicate taxation

2) Give an example of double taxation in its broad sense which also known as indirect duplicate taxation. SUGGESTED ANSWER: There is no prohibited double taxation where a 20% final withholding tax (FWT) on interest income and a 5% gross receipts tax

(GRT) are both imposed upon banks. a) The taxes are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on

deposits and yield on deposit substitutes. WHILE the subject matter of the GRT is the privilege of engaging in the business of banking. A tax based on receipts is a tax on business rather than on the property, hence it is an excise rather than a property tax. It is not an income tax, unlike the

FWT. One can be taxed for engaging in business and further taxed differently for the income derived therefrom. These two taxes are entirely distinct and are assessed under different provisions. (Commissioner of Internal Revenue v. Solidbank Corporation, G. R. No. 148191, November 25, 2003)

b) Although both taxes are national in scope because they are imposed by the same taxing authority the national government under the Tax Code and operate within the same Philippine jurisdiction for the purpose of raising revenues, the taxing periods they affect are different.

The FWT is deducted and withheld as soon the income is earned, and is paid every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned.

c) These two taxes are of different kinds or character. The FWT is an income tax subject to withholding, WHILE the GRT is a percentage tax not subject to withholding. (Commissioner of Internal Revenue v. Solidbank Corporation, supra; Commissioner of Internal Revenue v. Bank of Commerce, G. R. No. 149636, June 8, 2005)

c. Constitutionality of double taxation

1) Is double taxation prohibited under the Philippine Constitution ? SUGGESTED ANSWER: Unlike the United States Constitution, double taxation is not specially prohibited in the Philippine Constitution. (Manufacturers

Life v. Meer, 89 Phil. 210) However, where there is direct duplicate taxation, then there may be violation of the constitutional precepts of equal protection and uniformity in taxation.

If only the 1st element of direct duplicate taxation is present (taxing the same subject or object twice, by the same taxing authority, etc.), there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the same burdens and granted the same privileges without any discrimination whatsoever,

The presence of the 2nd element, taxing all of the subjects and objects within the territory for the first time, without taxing all for the second time, results to discrimination among subjects and objects that are similarly situated, hence violative of the equal protection clause.

2) What is meant by international indirect duplicate taxation ? SUGGESTED ANSWER: When an item of income is taxed in the Philippines and the same income is taxed in another country, this would be known as

international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)

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d. Modes of eliminating double taxation

1) What are the different modes of eliminating double taxation (referring to indirect duplicate taxation) ? SUGGESTED ANSWER: The following are the methods for easing the economic burden of double taxation (indirect duplicate) because the taxpayer has to

pay a tax twice: a) Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity.

b) Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid. c) Allowing foreign taxes as a deduction from gross income. d) Reduction of tax rate. A lower tax rate is imposed where there is indirect duplicate taxation.

4. Escape from taxation

1) What do you understand by the term escape from taxation ? SUGGESTED ANSWER: Escape from taxation refers to the means employed by a taxpayer, whether legal or illegal, so as not to pay or absorb the

burden of a tax that is imposed. Among the means employed to escape taxation is to shift the tax burden to another party, tax avoidance and tax avoidance. Escape from taxation may be distinguished from tax exemption from the view point of the party who initiates it. In escape from taxation, it is the taxpayer

who resorts to it. On the other hand, in tax exemption it is the State that exercises the prerogative not to collect taxes.

2) Give some methods of escaping the effects of taxation. SUGGESTED ANSWER: a. Shifting of tax burden; b. tax avoidance; and c. tax evasion.

a. Shifting the tax burden

1) Explain the meaning of shifting the tax burden. SUGGESTED ANSWER: Shifting the burden of taxation means transferring the economic burden from the one who pays the tax to another.

i) Ways of shifting the tax burden

1) What are the ways by which the burden of taxation may be shifted ? Explain briefly. SUGGESTED ANSWER: a. One way of shifting the economic burden of the tax is to include the tax as part of the selling price. b. The method of listing the price separately and defining taxable gross receipts as the amount received less the amount of the tax added merely

avoids payment by the seller of a tax on the amount of the tax. It is still the seller who is subject to the tax and not the buyer. The additional amount paid by the buyer is not payment for the tax but payment for the purchase of the electric cables, etc. (Phil. Acetylene v. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967)

ii) Taxes that can be shifted

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1) What are the kinds of taxes where the burden may be shifted. Explain and give examples of such taxes. SUGGESED ANSWER: As a general rule only the burden of indirect taxes may be shifted. Most business taxes are indirect taxes. Among such

business taxes are the following: a. franchise tax; b. contractors tax; c. value-added tax; d. documentary stamp taxes; e. excise taxes, and f. the percentage taxes.

iii) Meaning of impact and incidence of taxation 1) What is the meaning of the impact and incidence of taxation ?

SUGGESTED ANSWER: In indirect taxation, there is a need to distinguish between the liability for the tax (impact of the tax) and the burden (incidence) of the tax.

The amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden (incidence). In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden (incidence) of the tax.

Stated differently, a seller who is directly and legally liable for 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 or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax. (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December 15, 2005)

b. Tax avoidance

1) What is tax avoidance. ? SUGGESTED ANSWER: The exploitation by the taxpayer of legally permissible alternative rates or methods of assessing taxable property or income in

order to reduce or entirely avoid tax liability. Example: Availing of all deductions allowed by law of refraining from engaging in activities subject to tax.

c. Tax evasion

1) What is meant by tax evasion ? SUGGESTED ANSWER: A scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil

or criminal liabilities. (Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., etc., G. R. No. 147188, September 14, 2004)

2) What three factors are integrated in the concept of tax evasion ? SUGGESTED ANSWER: a) The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a

tax is due; b) an accompanying state of mind which is described as being evil on bad faith, willful, or deliberate and not accidental; and c) a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188,

September 14, 2004)

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3) What are the consequences of tax evasion ? SUGGESTED ANSWER: A deficiency tax is due which should be paid plus a fraud surcharge of 50% of the deficiency for filing a fraudulent return. Furthermore, the act may be the subject of criminal prosecution for tax evasion.

4) Distinguish tax avoidance from tax evasion. SUGGESTED ANSWER: a) Tax avoidance is legal while tax evasion is illegal. b) The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion the object is to entirely escape the

payment of taxes. c) Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax avoidance does not.

4) Does resort to tax-saving devices constitute fraud under our tax law? Explain your answer. SUGGESTED ANSWER: No. Mere tax-saving devices do not constitute fraud under our tax laws so long as the methods used are legally permissible

and not violative of the law.

5) A sell his residential house and lot to B for P2.5 Million. At the time of the sale, the property had a zonal value of P2.0 Million. Upon the advice of a tax consultant, the parties agreed to execute two deeds of sale, one indicating the zonal value of P2.0 Million as the selling price and the other showing the true selling price of P2.5 Million. The tax consultant filed the capital gains tax return using the deed of sale showing the zonal value of P2.0 Million as the selling price.

Discuss the tax implications and consequences of the action taken by the parties. SUGGESTED ANSWER: The action taken by the parties is fraudulent consisting of means that are violative of the tax laws to deliberately deprive the

government of its right to collect taxes. The parties knew the correct taxes that should be paid but they used a device (the falsified deed of sale showing a lower valuation for tax purposes) that is

characterized as tax evasion. They would be subject to deficiency taxes, fraud surcharge and may even be criminally charged.

5. Exemption from taxation

a. Meaning of exemption from taxation

1) What is meant by exemption from taxation ? SUGGESTED ANSWER: Exemption from taxation is the act of the State in divesting itself of its prerogative to collect taxes upon certain subjects and

objects of taxation .

b. Nature of tax exemption 1) What is the nature of tax exemption ? SUGGESTED ANSWER: Tax exemption is in the nature of a waiver by the State of an act of sovereignty hence to be strictly construed against the

taxpayer. It is to be granted only upon the clearest intention and should not exist by mere implication otherwise the very existence of the State would be imperilled for lack of wherewithal to perform its functions.

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c. Kinds of tax exemption 1) What are the kinds of tax exemptions ? SUGGESTED ANSWER: The different kinds of tax exemptions are:

(a) Express; (b) implied; and (c) contractual.

i) Express

1) When is a tax exemption considered as express ? SUGGESTED ANSWER: There is express exemption where the law is specific in the identification of the subjects and objects that are not to be taxed.

ii) Implied

1) When is there implied tax exemption or accidental tax exemption ? SUGGESTED ANSWER: The exemption results from a failure of the tax law to include the subject or object as among those to taxed.

iii) Contractual. The exemption results from the rendition of the subject or object of a service in exchange for the exemption.

d. Rationale/grounds for exemption.

1) What are the grounds for the grant of tax exemptions ? SUGGESTED ANSWER: The rationale or grounds for tax exemption are the same as the non-revenue/special or regulatory purposes of taxation: a. Sumptuary or regulatory purpose. The sumptuary purpose of tax exemptions is to promote the general welfare and to protect the health, safety or

morals of the inhabitants. b. Tax exemptions may be made the implement of the states police power. The motivation behind many taxation measures is the implementation of

police power goals. c. Compensatory purpose. The compensatory purpose of tax exemption is to implement the social justice provisions of the constitution through the

progressive system of taxation, which would result to equal distribution of wealth, etc. In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social

justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004)

Tax exemptions may be granted to lower the price of certain commodities and services, e.g. prime commodities, electricity, etc. Employment opportunities may also be created as a result of tax exemptions which would encourage the establishment of business enterprises

e. Revocation of tax exemption

1) May a tax exemption be revoked ? SUGGESTED ANSWER: Yes. A tax exemption may be revoked. REASON: It is an act of liberality which could be taken back by the Government.

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Since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. (Mactan Cebu International Airport Authority v. Marcos et al., 261 SCRA 667)

A tax exemption being a mere privilege may be withdrawn at any time but there must be observance of the restrictions on revocation of tax exemptions.

2) What are the restrictions on the power of the State to revoke tax exemptions ? SUGGESTED ANSWER: The restrictions on the power of the State to revoke tax exemptions are the following: a. Non-impairment clause. Where the exemption was granted to private parties based on material consideration of a mutual nature, which then

becomes contractual and, is covered by the non-impairment clause of the Constitution. (Mactan Cebu International Airport Authority v. Marcos, et al., 261 SCRA 667) A municipal franchise once granted as a contract cannot be altered or amended except by actual consent of the parties concerned. (Darmouth College

v. Woodward, 4 Wheat, 578) b. Adherence to form. If the exemption is granted by the Constitution, its revocation may be effected through constitutional amendment only. Where the tax exemption grant is in the form of a special law and not by a general law even if the terms of the general act are broad enough to include the

codes in the general law unless there is manifest intent to repeal or alter the special law (Commissioner of Internal Revenue v. Court of Appeals, 207 SCRA 487)

6. Compensation and set-off

1) May taxes be the subject of set-off or compensation ? Explain. SUGGESTED ANSWER: As a general rule, there could be no compensation or set-off between a tax and a debt for the following reasons:

1) Lifeblood theory. 2) Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of government, to the making and enforcing of which the

personal consent of the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA 622) 3) Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a

claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Thus, it is correct to say that the offsetting of a taxpayers tax refund with its alleged tax deficiency is unavailing under Art. 1279 of the Civil Code. (South

African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)

2) Are there any exceptions to the prohibition on the compensation or set-off between a tax and a debt ? Briefly explain your answer.

SUGGESTED ANSWER: Yes, there instances where there could compensation or set-off between a tax and a debt. Among such instances are the following:

1) Where both claims already become overdue and demandable as well as fully liquidated. Compensation takes place by operation of law under Art.

1200 in relation to Arts. 1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443) 2) Compensation takes place by operation of law, where the government and the taxpayer are in their own right reciprocally debtors and creditors of

each other, and that the debts are both due and demandable. This is in consequence of Article 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)

3) The Supreme Court upheld the validity of a set-off between the taxpayer and the government. In both cases, the claims of the taxpayers therein

were certain and liquidated. The claims were certain since there were no doubts or disputes as to their refundability. In fact, the government admitted the fact of over-payment. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc., 172 SCRA 364)

4) In case of a tax overpayment, the BIRs obligation to refund or off-set arises from the moment the tax was paid. REASON: Solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc., 172 SCRA 364)

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3) May there be an offsetting of taxes against a taxpayers claim against the government ? SUGGESTED ANSWER: No. A person cannot refuse to pay a tax on the ground that that the government owes him an amount equal to or greater than

the tax being collected. The collection of the tax cannot await the results of a lawsuit against the government. (Francia v. Intermediate Appellate Court, 162 SCRA 753)

4) What is the doctrine of equitable recoupment ? Is it applicable in our jurisdiction ? SUGGESTED ANSWER: Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by prescription, a tax presently

being assessed against a taxpayer may be recouped or set-off against the tax whose refund is now barred by prescription. (U.S.T. v. Collector, 104 Phil. 1062)

The doctrine of equitable recoupment not followed in the Philippines. REASON: Lifeblood theory. Taxpayers would become lazy in paying taxes because they could offset the alleged illegally or erroneously collected or overpaid taxes. The same could also be said of tax collectors relative to their duty to collect taxes because they know that the taxpayers would not pay anyway because of the offset with previous illegally or erroneously collected or overpaid taxes. (U.S.T., supra)

7. Compromise.

1) What is a compromise ? SUGGESTED ANSWER: A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one

already commenced. (CCP, Art. 2028)

2) When may compromise be considered as a means for avoiding the burden of taxation? SUGGESED ANSWER: Compromise is one way of escaping the burden of taxation only in those instances where the law specifically provides for it.

The Commissioner of Internal Revenue is authorized to compromise the payment of any internal revenue tax. [NIRC of 1997, Sec. 204 (A)]

8. Tax amnesty

a. Definition

1) What is tax amnesty ? SUGGESTED ANSWER: A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons

otherwise guilty of evasion or violation of a revenue or a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a

clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. (Philippine Banking Corporation, etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)

2) What is the purpose of tax amnesty ? SUGGESTED ANSWER: The purpose of tax amnesty is to

a. give tax evaders who wish to relent a chance to start a clean slate, and to b. give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. (Banas, Jr. v.

Court of Appeals, et al., G.R. No. 102967, February 10, 2000)

b. Distinguished from tax exemption

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1) Distinguish tax amnesty from tax exemption. SUGGESTED ANSWER: The distinctions are the following: a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from nonpayment of taxes (People v. Castaneda, G.R. No.

L-46881, September 15, 1988) WHILE a tax exemption is an immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)

b. Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda, supra) WHILE tax exemption has prospective application.

9. Construction and interpretation of:

a. Tax laws

i) General rule

1) What is the general rule of statutory construction involving tax law? What is the reason therefore? SUGGESTED ANSWER: In case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer because

a) taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc. v. Court of Appeals, et al., 293 SCRA 92) b. No person or property is subject to taxation unless they fall within the terms or plain import of a taxing statute. (Commissioner of Internal Revenue v. Court of Appeals, 204 SCRA 182, 189) c. Since taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government, tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. (Mactan Cebu International Airport Authority v. Marcos, et al., 261 SCRA 667)

ii) Exception

1) Is there any exception or instance when there is strict interpretation of tax laws against the taxpayer and liberally in favor of the government ?

SUGGESTED ANSWER: Yes. If the provisions of the tax law is so clear that it brooks of no other interpretation than to apply the law as it is. It is a cardinal principle of statutory construction that where a provision of law speaks categorically; the need for interpretation is obviated, no plausible

pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms (Sea-Land Service, Inc. v. Court of Appeals, et al., G.R. No. 122605, April 30, 2001),

b. Tax exemption and exclusion

i) General rule

1) State the rule on the construction or interpretation of laws granting exemptions or allowing tax deductions. What is the rationale behind it ?

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SUGGESTED ANSWER: Statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra)

The rationale behind the concept of strict interpretation of tax exemption is that taxes are necessary for the continued existence of the State. Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation.

2) Is there any exception to the rule that tax exemptions are to be strictly construed against the taxpayer and liberally in favor of the government ?

SUGGESTED ANSWER: Yes. The following are the instances where tax exemptions are not to be liberally construed in favor of the taxpayer and strictly against the taxing authority:

a. When the statute granting exemption provides for liberal construction thereof, b. In case of special taxes relating to special cases and affecting only special classes of persons; c. If exemptions refer to the public property; d. In cases of exemptions granted to charitable and educational institutions or their property. (Cooley) e. In cases of exemptions in favor of a government political subdivision or instrumentality. (Maceda v. Macaraig, Jr., 197 SCRA 771) f. A tax refund based on solutio indebeti.

c. Tax rules and regulations

i) General rule only

1) What is the general rule with regard to tax rules and regulations ? In the alternative, explain what is meant by the doctrine of primary jurisdiction. SUGGESTED ANSWER: Regulations deserve respect of courts.

Rules and regulations interpreting the tax code and promulgated by the Secretary of Finance, who has been granted the authority to do so by Section 244 of the NIRC, deserve to be given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields. (Gulf Air Company, Philippine Branch (GF) v. Commissioner of Internal Revenue, G. R. No. 182045, September 19, 2012)

d. Penal provisions of tax laws

1) How shall prescriptive periods for criminal statutes construed ? Explain briefly your answer ?

SUGGESTED ANSWER: Prescriptive periods for criminal statutes strictly construed in favor of the government.

In criminal cases, statutes of limitations are acts of grace, a surrendering by the sovereign of its right to prosecute. They receive a strict construction in

favor of the Government and limitations in such cases will not be presumed in the absence of clear legislation. (Lim, et al., v. Court of Appeals, G. R. No. 48134-37, October 18, 1990)

e. Non-retroactive application to taxpayers

1) Do tax laws have retroactive application ?

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SUGGESTED ANSWER: No. Tax laws do not have any retroactive application even if favorable to the taxpayer because tax laws are not considered as part of criminal law nor remedial law.

Tax laws, unlike remedial laws, are not to be applied retroactively. Revenue laws are substantive laws and their application must not be equated with remedial laws.

Tax exemption laws are not given retroactive application, considering that taxes are the lifeblood of the government. In Holmes memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. (Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007)

2) What is the effect of the repeal of a revenue law on a tax previously assessed and demanded ? SUGGESTED ANSWER: There is no effect of the repeal of a revenue law on a tax previously assessed and demanded. The previously assessed and

demanded tax may still be collected because the repeal is to be construed as an exemption that must be strictly construed. Tax laws, not being penal in nature, are not given retroactive effect even if favorable to the taxpayer.

3) Are Bureau of Internal Revenue (BIR) and issuances administrative issuances given retroactive application ? SUGGESTED ANSWER: No. Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the authority of the

Secretary of Finance or Commissioner of Internal Revenue, or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayer. [NIRC of 1997, Sec. 246, paraphrasing supplied; Commissioner of Internal Revenue v. Filinvest Development Corporation, 654 SCRA 56 (2011)]

i) Exceptions

1) May administrative issuances be given retroactive application ? If not explain why ? If they may be given retroactive application, then enumerate in what instances ?

SUGGESTED ANSWER: Administrative issuances, even if prejudicial to taxpayers, may be given retroactive application in the following cases: a. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal

Revenue; b. Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or

c. Where the taxpayer acted in bad faith [NIRC of 1997, Sec. 246, arrangement supplied; Commissioner of Internal Revenue v. Filinvest Development Corporation, 654 SCRA 56 (2011)]

I. Scope and limitation of taxation

1) What is the scope of the power of taxation ? Are there any limitation is imposed upon the exercise of this power ? Explain briefly your answer ?

SUGGESTED ANSWER: As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax in the constituency who are to pay it. (FELS Energy, Inc. v. The Province of Batangas, et al., G. R. No. 168557,February 16, 2007)

While this may be so, there are inherent and constitutional limitations to the power of taxation in order to prevent abuse on the exercise of the otherwise unlimited power of taxation.

1. Inherent limitations

1) State the inherent limitations on the power to tax.

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SUGGESTED ANSWER: The following are the inherent limitations on the power of taxation: a. The revenues collected from taxation should be devoted to a public purpose.

b. There should be no improper delegation of legislative authority to tax. c. The taxing power should be exercised only within territorial boundaries of the taxing authority. d. There should be respect for government exemptions; and e. The principle of comity should be observed such that the property of other sovereign nations are not subject to taxation. Some authorities include double taxation. However, double taxation is properly a constitutional limitation.

a. Public purpose

1) When is the imposition of a tax not violative of the inherent limitation of public purpose ? Explain. SUGGESTVED ANSWER: There is no violation of the public purpose limitation a. if the tax measure is for the welfare of the nation or greater portion of the population although it may benefit particular taxpayers. b. affects the area as a community rather than as individuals and need not specifically benefit the taxpayer. c. is designed to support the services of government for some of the recognized objects of the country. Stated otherwise, the revenues collected from taxation should be devoted to achieve the purposes of government.

2) The Congress passed a law imposing a tax on the manufacturer of sugar by sugar centrals and another tax on owners of land planted to sugar cane. The collections from said taxes were to accrue to a special fund to be used exclusively for the rehabilitation of the sugar industry. The constitutionality of the law is assailed on the grounds that it is discriminatory and that the levy is not for a public purpose. Decide with reasons. (Adapted from 1972)

SUGGESTED ANSWER: The levy is for a public purpose. It is an exercise of police power which is for the general welfare of the entire country because the sugar

industry is one of the pillars of the Philippine economy which affects the welfare of the State. (Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966)

b. Inherently legislative

i. General rule

1) Explain briefly the concept of the inherent limitation upon the power of taxation that the power of taxation is inherently legislative.

SUGGESTED ANSWER: The limitation means that there should be no improper delegation of legislative authority to tax. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are

taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be

exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008) This principle is in recognition of the maxim, Delegata potestas non potest delegari. (A delegated power cannot be further delegated.)

2) What is the extent of legislative power to tax that may not be the subject of improper delegation ? SUGGESTED ANSWER: The legislative power that may not be the subject of improper delegation is the power to determine the a. Coverage of the tax law (subjects and objects to be taxed or exempted from taxation); b. Purpose of the imposition or the tax; c. Nature (kind) of the tax; d. Extent (amount or rate) of the tax;

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e. The authority that shall implement or collect the tax (situs); and f. the method and period for payment of the tax.

3) The VAT law provides that, the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied. (i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

Was there an invalid delegation of legislative power ? SUGGESTED ANSWER: None. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is

constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his

authority. In the above case the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare the even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various cases]

ii. Exceptions

a) Delegation to local governments

1) Is the power of local governments to tax a direct grant or a mere constitutional delegation ? Explain. SUGGESTED ANSWER: There is a paradigm shift in the exercise of the taxing power of LGUs from Congress to local government t units through a

direct grant for them to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution The power is exercised by the local sangguniangs through an appropriate taxing ordinance. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004)

While a direct grant, the same is limited and subject to such guidelines as Congress may provide. It is exercised only by the local legislative bodies. Its application is bounded by the territorial limits of the local government unit concerned. It is progressive in character, uniform, and equitable.

In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation

assumes even greater significance with the ratification of the 1987 Constitution. (Ib id.)

b) Delegation to the President

1) Are there any instances when the power of taxation may be exercised by the President of the Philippines ? SUGGESTED ANSWER: Yes. The following are the instances when the President of the Philippines may participate in the exercise of the power of

taxation: a. When the Congress is authorized by the Constitution to delegate to the President the exercise of certain taxing power. For example the

delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2), Article VI of the Constitution. b. The delegation under the Constitution to exercise powers of taxation under the emergency powers to the President under Section 23 (2) of

Article VI of the Constitution. c. The delegation to the President of the Philippines to enter into executive agreements, and to ratify treaties which may contain tax exemption

provisions subject to the concurrence by the Senate in the ratification made by the President. [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005]

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c) Delegation to administrative agencies

1) In what manner may administrative agencies participate in the exercise of the power of taxation ? SUGGESTED ANSWER: Administrative agencies may participate in the exercise of the power of taxation through the implementation of tax laws duly

enacted by Congress and approved by the President of the Philippines through the promulgation of implementing rules and regulations to implement such laws,

This is sometimes referred to as subordinate legislation. [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005], In this instance, there is a requirement that the law is complete in all aspects so what is delegated is merely the implementation of the law or there exists

sufficiently determinate standards to guide the delegate and prevent a total transference of the taxing power.

c. Territorial

1) What is meant by the inherent limitation of territoriality upon the power of taxation ? SUGGESTED ANSWER: Stated simply, this means that the power of taxation could be exercised only within the territorial boundaries of the taxing

authority. Of course, there are exceptions.

i. Situs of taxation

a) Meaning

1) Explain briefly the meaning of situs of taxation. SUGGESTED ANSWER: The situs of taxation is the place or authority that has the right to impose and collect taxes. (Commissioner of Internal Revenue

v. Marubeni Corporation, G.R. No. 137377, December 18, 2001)

2) What determines situs of taxation? (Adapted from 1973) SUGGESTED ANSWER: In general, the following are the bases for or determinants of situs of taxation. a. The symbiotic relationship. The reciprocal relation of protection and support between the taxpayer and the state. The state gives protection and

in order to continue giving protection, it must be support in the form of taxes. b. Jurisdiction. The state or political unit that gives protection has the right to demand support. Technically tax laws are jurisdictional, or operate only within the territorial jurisdiction of a state because that is where it could give protection. This is

subject to the concept of mobilia sequuntur personam.

3) Are there instances where the territoriality rule does not find application ? If so, state them. SUGGESTED ANSWER: Yes. The following are the instances where the rule on territoriality does not find application:

a. Where tax laws operate outside the territorial jurisdiction. Where there is an application of the maxim, mobilia sequuntum personam, such as in the case of taxation of resident citizens on their incomes derived from sources without the Philippines. b. Where tax laws do not operate within the territorial jurisdiction of the state such as:

1) when the subject or object is exempted from taxation as a result of treaty obligations; or

2) when exempted by international comity or under reciprocity.

4) Do tax laws operate beyond the jurisdictional limits of a country? (Adapted from 1967)

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SUGGESTED ANSWER: As a general rule, tax laws do not operate beyond the jurisdictional limits of a country. This is so because taxation is an act of sovereignty which could only be exercised within a countrys territorial limits. This is the result of the concept that taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial boundaries of the taxing state

b) Situs of income tax

1) In general, on what does the taxability of income depends as regards individuals and corporations ? Explain your answer, citing the incomes taxable under our Income Tax Law. (Adapted from 1969, 1970, 1982, 1998

SUGGESTED ANSWER: The taxability of incomes is determined accordance with the following concepts:

a. As regards individuals, the taxability of income depends upon: 1) citizenship; or 2) residence of the recipient; or

3) the place where such income is derived. b. With respect to corporations, the taxability of income depends upon;

1) whether the corporation is a domestic or a foreign corporation; 2) whether the foreign corporation is a resident or non-resident.

Specifically, the situs of income taxation is determined by the general principles of income taxation in the Philippines or the source rule of income taxation as provided in the NIRC of 1997, as follows:

a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

b. A nonresident citizen is taxable only on income derived from sources within the Philippines; c. An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; e. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within

the Philippines. (NIRC of 1997, Sec. 23, emphasis supplied) The important factor which determines the source of income of personal services is not the residence of the payor, or the place where the contract for

service is entered into, or the place of payment, but the place where the services were actually performed. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)

2) Mr. XYZ, a U.S. citizen hired for five (5) years as operations manager of a local business processing company, derives income from investments and real property he owns in the United States. Besides his salary and bonuses from the local business processing company, he is provided with a house and allowances for the salaries of his driver and three maids. The business processing company reimburses all his gasoline and oil expenses for the use of the company car, plus expenses for his grocery.

a) What income items, if any, should he declare in his Philippine income tax return ? Explain. SUGGESTED ANSWER: Mr. XYZ, is a resident alien because he is a U.S. citizen working and, necessarily, residing in the Philippines.

As such he should declare in his income tax return only income derived from sources from within the Philippines and should not include the in his Philippine income tax return the income derived from investments and real property he owns in the U.S. because they are considered as incomes derived from sources from without the Philippines. The incomes from without are not subject to inclusion in in his income tax return and Philippine taxation under the benefits protection theory. There is no protection given by the Philippine government on his privilege to earn incomes from without because the source of the income earning activity is in the U.S.

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Only his salary and bonuses (to the extent not excluded from gross) are to be included in his Philippine income tax return. The value of the house, allowances for the driver and three maids, and reimbursement for the gasoline and oil expenses for the company care and the expenses for his grocery are all subject to the fringe benefits tax, a final tax, which the employer should pay. Hence, not to be included in Mr. XYZs Philippine income tax return.

b) Under the same facts, except that Mr. XYZ is a Filipino citizen working in Dubai and his investments and real property are located in the Philippines. What income items, if any, should be declared in his Philippine income tax return ? (Adapted from 1967, 1979, 1987, 1990, 1991, 1997, 1999, 2000, 2002, 2007)

SUGGESTED ANSWER: Under the foregoing circumstances Mr. XYZ is considered as an overseas contract worker since he is working in Dubai. Consequently, only his income derived from sources from within the Philippines, which are his income from investments and real property located in the Philippines, should be included in his Philippine income tax return. This is so because he is to be taxed only on his income derived from sources from within the Philippines and not from sources from without the Philippines such as his income derived from working in Dubai.

The basis for this the benefits-protection theory. His privilege to earn income derived from sources within the Philippines, such as those derived from his investments and real property located in the Philippines, is given protection by the Philippine government so he must contribute to the upkeep of said government.

1) From sources within the Philippines

1) What incomes are considered as originating from sources within the Philippines and therefore considered as taxable income of all kinds of taxpayers, whether individual or corporate ?

SUGGESTED ANSWER: The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents,

corporate or otherwise; (2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty

percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

(3) Services. - Compensation for labor or personal services performed in the Philippines. (4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or

royalties for - (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. [NIRC

of 1997, Sec. 42 (A)]

2) From sources without the Philippines

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1) What incomes are considered as originating from sources within the Philippines and therefore considered as taxable income only of resident citizens and domestic corporations ?

SUGGESTED ANSWER: The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section. (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section. (3) Compensation for labor or personal services performed without the Philippines. (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for

the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines. [NIRC of 1997, Sec. 42 (C)]

3) Income partly within and partly without the Philippines

1) What incomes are considered as originating partly from within and partly from without within the Philippines ? SUGGESTED ANSWER:

Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance.

Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.

Gains, profits and income derived from the purchase of personal property within and its sale with- out the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The transfer by a non-resident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation, the shares of which are sold or transferred, to advise the

transferee of this requirement. [NIRC of 1997, Sec. 42 (E)]

c) Situs of property taxes

1) Taxes on real property

1) Where is the situs of taxation of real property ? Explain briefly the reasons behind your answer. SUGGESTED ANSWER: The situs of taxation of real property is the place where the property is located or lex rei sitae or lex situs.

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This is so because: a. the taxing authority has control because of the stationary and fixed character of the property. b. the place where the real property is situated gives protection to the real property, hence the property or its owner should support the

government of that place.

2) Upon what is the situs of taxation of personal property dependent ? Why ? SUGGESTED ANSWER: The situs of taxation of personal property is dependent upon the nature of the property, whether it is tangible or intangible. a. If it is tangible personal property, generally, the place where the owner is found is the situs of taxation under the rule that movables follow the

person under the rule of mobilia sequuntur personam. This is usually where the owner is located which is the owners domicile. The owner is given protection by the place where the owner of the tangible personal property is found hence he should support the government of that

place. b. If the property is intangible personal property the situs of taxation is the place where the property has obtained a business situs. For example,

domestic corporations have obtained a business situs in the Philippines. Hence, taxes imposed on the sales of Philippine stocks (stocks in domestic corporations) are payable in the Philippines irrespective where they may be found, or where owners domicile is.

d) Situs of excise tax

1) What place may impose the excise tax ? SUGGESTED ANSWER: Situs of excise tax is where transaction performed. The power to levy an excise upon the performance of an act or

the engaging in an occupation does not depend upon the domicile of the person subject to the exercise, nor upon the physical location of the property and in connection with the act or occupation taxed, but depends upon the place in which the act is performed or occupation engaged in.

Thus, the gauge for taxability does not depend on the location of the office, but attaches upon the place where the respective transaction (s) is perfected

and consummated. (Allied Thread Co., Inc. v. City Mayor of Manila, 133 SCRA 338, 343)

1) Estate tax

1) How is the situs of the estate tax determined ? SUGGESTED ANSWER: The situs of estate tax is determined by a combination of the concepts of nationality, residence and location. The gross estate of a citizen and resident alien comprises all property wherever situated to the extent of the decedents interest in the said estate existing

at the time of his death while the gross estate of a non-resident alien only those property that are situated in the Philippines, also to the extent of the decedents interest in that estate existing at the time of his death.

2) Donors tax

1) What elements determine the situs of taxation of the donors tax ? SUGGESTED ANSWER: The situs of taxation is the place where the donation was made, or the location of the property donated, or the state of which

the donor or done is a citizen or resident.

e) Situs of business tax

1) Sale of real property

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1) Where should the sale of real property be taxed ? SUGGESTED ANSWER: The situs of the sale of real property is the place where the real property sold is located because it is that place that gives

protection.

2) Sale of personal property

1) Where is the situs of taxation of the proceeds of the sale of personal property ? SUGGESTED ANSWER: The situs of taxation is the place place where the sale was consummated and perfected. This is so because it is that place

that gives protection towards earning the income.

2) Orders for encyclopedias were placed upon a U.S. company by its distributor a Philippine company. Where should the sale be taxed ? Would your answer be the same if the subject of the sale were shares of stock in Philippine corporations that were listed and traded at the New York, U.S.A. stock exchange ? Reason out your answers.

SUGGESTED ANSWER: The sale should be taxed in the U.S. Sales of encyclopaedias were considered as perfected and consummated in the U.S. because of when the Philippine distributors placed and/or sent their specific orders to P.F. Collier, U.S., they already knew the price of the books. Such orders were shipped by the vendor in the U.S. direct to the different buyers in the Philippines. [P.F. Collier, Inc. (Philippine Branch) v. Commissioner of Internal Revenue, CTA Case No. 4355, November 9, 1995] Protection was given by the U.S. government to the sale so its there that it is taxable.

The answer would be different if the subject were shares of stock in Philippine corporations which are categorized as domestic corporations. This is so because they have obtained a business situs in the Philippines because of the protection given to them. They are organized and existing by virtue of Philippine law. The disposal would be subject to taxation in the Philippines irrespective of the place where they were sold. The residence of the owner is also considered for purposes of taxing the sale.

3) Value-Added Tax (VAT)

1) Where is the situs of value-added taxation. SUGGESTED ANSWER: It is the place where the goods are consumed or where the service is rendered which determines the jurisdiction (Commissioner

of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005) because the tax is a consumption tax. The place of payment is immaterial (Commissioner, supra), much less is the place where the output of the service will be further or ultimately used.to

impose the VAT (Commissioner, supra) Performed in the Philippines, the service is necessarily subject to its jurisdiction for the State necessarily has to have a substantial connection to it in

order to enforce a zero rate. (Ib id.) If the goods or service are consumed outside of the Philippines the VAT may not be imposed. No state may tax anything not within its jurisdiction

without violating the due process clause of the [C]constitution. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900, January 17, 1936)

d. International comity

1) Define comity. SUGGESTED ANSWER: Comity is the respect accorded by nations to each other because they are sovereign equals.

2) Explain briefly the limitation of international comity on the power of taxation. (Adapted from 1989)

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SUGGESTED ANSWER: The property or income of a foreign state or government may not be the subject of taxation by another. This is based on: a. The Latin maxim, in par parem non habet imperium, as between equals there is no sovereign. Taxation is a high prerogative of sovereignty,

hence may not be imposed upon foreign sovereigns. b. The rule of international law that a foreign government may not be sued without its consent so that it is useless to impose a tax which could not

be collected. c. The concept that when a foreign sovereign enters the territorial jurisdiction of another, it does not subject itself to the jurisdiction of the other.

e. Exemption of government entities, agencies, and instrumentalities

1) May the State subject itself or its subdivisions or instrumentalities to tax? If so, when? Reason. (Adapted from 1964, 1967 1976) SUGGESTED ANSWER: Generally, the state may not be subject to taxation. One of the inherent limitations on the power of taxation is recognition of tax exemptions of the government. This is premised on the concept that with

respect to the government, exemption is the rule and taxation is the exception. Government is usually exempt from taxation in order to reduce the amount of money that the government is handling. (Maceda v. Macaraeg, Jr. 197 SCRA

771) While this may be so, sovereignty being absolute and taxation being an act of high sovereignty, the state, if it is so minded, could tax itself, including its

political subdivisions. In taxing itself the State ultimately suffers no loss. To all intents and purposes, real property taxes are funds taken by the State with one hand and given

to the other. In no measure can the government be said to have lost anything. (Philippine Ports Authority v. City of Iloilo, G.R. No. 109791, July 14, 2003) For example, all importations by the government for its own use or that of its subordinate branches or instrumentalities, or owned or controlled by the

government, shall be subject to the duties, taxes, fees and other charges provided for in the Tariff and Customs Code. (TCC, Sec. 1205) To illustrate, Importations of the Philippine National Police (PNP) are released from customs custody only if there is a certification from the Department of

Budget and Management that there are funds provided for in the Gen