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TAXATION

GOLDEN NOTES 2011


UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
MANILA

Academic Year 2011-2012


CIVIL LAW STUDENT COUNCIL
Lester John A. Lomeda
Wilfredo T. Bonilla, Jr.
Raissa S. Saipudin
Bernadette Faustine C. Balao
Marc Mikhaele J. Santos
Victor Lorenzo L. Villanuea

President
Vice-President
Secretary
Treasurer
Auditor
Public Relations Officer

TEAM: BAR-OPS 2011


Diane Camilla R. Borja
Carlo Artemus V. Diaz
Mary Grace L. Javier
Ronn Robby D. Rosales
Mark Arthur M. Catabona
Angeli P. Albaa
Vicente Jan O. Platon III
Kimverly A. Ong

Chairperson
Vice-Chairperson
Secretary
Logistics Committee Head
Asst. Logistics Committee Head
Finance Committee Head
Hotel Accommodations Head
Asst. Hotel Accommodations Head

The UST GOLDEN NOTES is a student-edited work of the University


of Santo Tomas, Faculty of Civil Law. It is updated annually.
Communications regarding the NOTES should be addressed to the
Academics Committee of the Team: Bar-Ops.
ADDRESS:

TEL. NO.:

Team Bar-Ops
Academics Committee
Faculty of Civil Law
University of Santo Tomas
Espaa, Manila 1008
(02) 731-4027
(02) 4061611 loc. 8578

2011 ACADEMICS COMMITTEE


Lester Jay Alan E. Flores II
Karen Joy G. Sabugo
John Henry C. Mendoza
Jeanelle C. Lee
Theena C. Martinez
Earl Louie M. Masacayan

Chairperson
Vice-Chair for Academics
Vice-Chair for Academics
Vice-Chair for Administration and Finance
Vice-Chair for Layout and Design
Vice-Chair for Layout and Design

TAXATION LAW COMMITTEE


Rodolfo N. Ang, Jr.
Vannessa Rose S. Hernandez
Edison U. Ortiz
Jose Duke Bagulaya
Charles L. Grantoza
Christine L. Gutierrez
Clarabel Anne R. Lacsina
Divine C. Tee
Keith S. Valcos

Taxation Law Committee Head


Asst. Taxation Law Committee Head
Asst. Taxation Law Committee Head
Member
Member
Member
Member
Member
Member

ADVISER
Atty. Prudence Angelita A. Kasala

FACULTY OF CIVIL LAW


UNIVERSITY OF SANTO TOMAS
Academic Year 2011-2012

ACADEMIC OFFICIALS

Atty. NILO T. DIVINA


Dean
Rev. Fr. ISIDRO C. ABAO, O.P.
Regent
Atty. ARTHUR B. CAPILI
Faculty Secretary
Atty. ELGIN MICHAEL C. PEREZ
Legal Counsel
UST Chief Justice Roberto Concepcion Legal Aid Clinic

Judge PHILIP A. AGUINALDO


SWDB Coordinator

LENY G. GADIANA, RGC


Guidance Counselor

Our deepest appreciation to our


Mentors & Inspiration
Hon. Justice Japar B. Dimaampao
Atty. Prudence Angelita A. Kasala
Atty. Marian Joanne K. Co-Pua

For activating our magnets of curiosity, knowledge and


wisdom and helping us understand the intricate
sphere of Taxation Law.

- Academics Committee 2011

DISCLAIMER
U

The risk of use, non-use and misuse of


this material shall be borne solely
by the user.

TABLE OF CONTENTS
SYLLABUS FOR 2011 BAR EXAMINATIONS
TAXATION
November 6, 2011
(First Sunday, Afternoon)
GENERAL PRINCIPLES 1
DEFINITION AND CONCEPT OF TAXATION........................................ 1
NATURE OF TAXATION.. 1
CHARACTERISTICS OF TAXATION...... 4
POWER OF TAXATION COMPARED WITH OTHER POWERS OF THE STATE 4
PURPOSE OF TAXATION. 4
PRINCIPLES OF SOUND TAX SYSTEM. .5
Fiscal Adequacy 5
Administrative Feasibility. 5
Theoretical Justice. 5
THEORY AND BASIS OF TAXATION. 6
Lifeblood theory.. 6
Necessity theory. 6
Benefits-Protection theory.. 6
DOCTRINES OF TAXATION 7
Prospectivity of tax laws 7
Imprescriptibility. 7
Double taxation 7
Escape from taxation 9
Exemption from taxation.. 11
Compensation and Set-off 12
Compromise 13
Tax amnesty 13
Construction and Interpretation of Tax laws.. 14
SCOPE AND LIMITATION OF TAXATION. 15
Inherent limitations.. 15
Constitutional Limitations. 22
Stages of Taxation.. 33
TAXES. 34
Definition, Nature and Characteristics of Taxes 34
Requisites of valid tax. 34
Tax as distinguished from other forms of exactions.. 35
Kinds of Taxes.. 36
NATIONAL INTERNAL REVENUE CODE.................................................................................................. 37
INCOME TAXATION.37
INCOME TAX SYSTEMS 37
FEATURES OF PHILIPPINE INCOME TAX LAW. 37
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX 37
TYPES OF PHILIPPINE INCOME TAX.. 38
TAXABLE PERIOD.. 39
KINDS OF TAXPAYERS 39
Individual Taxpayers 39
Special Class of Individual Employees. 41
Corporations. 41
Partnerships.. 43
Estates and Trusts. 43
Co-ownerships. 44
INCOME TAXATION. 45

TABLE OF CONTENTS
INCOME. 46
Definition. 46
Nature 46
When income is taxable 47
Tests in determining whether income is earned for tax purposes.. 47
Realization test.. 47
Claim of right doctrine.. 47
Economic benefit test 47
Severance test 47
GROSS INCOME.. 49
Definition. 49
Concept of income from whatever source derived 49
Gross income vis--vis Net Income vis--vis Taxable Income..50
Classification of Income as to Source 51
Compensation Income 51
Fringe Benefits. 52
Professional Income 53
Income from business. 53
Income from Dealings in Property. 53
Capital Assets 53
Ordinary assets. 54
Types of Gains from dealings in property... 54
Passive Investment Income. 62
Royalty Income. 66
Rental income 67
Annuities.. 68
Prizes and Awards.... 68
Pensions, retirement benefit, separation pay.. 68
Income from any source whatever... 68
Exclusions from Gross Income..69
Rationale for the exclusions. 69
Taxpayers who may avail of the exclusions.. 69
Under the Constitution 69
Under the Tax code 70
Under Tax treaty. 78
Under Special laws. 78
Deductions from Gross Income.. 79
General rules. 79
Itemized deductions.. 80
Expenses.. 80
Interests. 85
Taxes. 86
Losses.... 88
Bad debts. 89
Depreciation.. 90
Charitable and other contributions.. 92
Optional Standard deduction .96
Personal and additional exemption (R.A. 9504) 96
TAXATION OF RESIDENT CITIZENS, NON-RESIDENT CITIZENS AND RESIDENT ALIENS. 100
General rule 103
Taxation on Compensation Income.. 103
Taxation of Domestic Corporations.. 107
Taxation of Resident Foreign Corporations. 110
Taxation of Non-Resident Foreign corporations. 114
Improperly Accumulated Earnings of Corporations. 114
Exemption from tax on corporations. 115
Taxation of Partnerships. 116
Taxation on Estates and trusts 117

TABLE OF CONTENTS
WITHHOLDING TAX
Concept.
Kinds
Withholding of final tax on certain incomes..
Withholding of creditable tax at source
Withholding on wages

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118
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119

ESTATE TAX.. 123


BASIC PRINCIPLES.. 123
DEFINITION 124
NATURE 125
PURPOSE OF OBJECT 125
TIME AND TRANSFER OF PROPERTIES. 126
CLASSIFICATION OF DECEDENT 126
GROSS ESTATE VIS--VIS NET ESTATE. 126
DETERMINATION OF GROSS ESTATE AND NET ESTATE...126
COMPOSITION OF GROSS ESTATE..128
ITEMS TO BE INCLUDED IN GROSS ESTATE129
DEDUCTIONS FROM ESTATE133
EXCLUSIONS FROM ESTATE.139
TAX CREDIT FOR ESTATE TAXES PAID IN FOREIGN CURRENCY 140
EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS140
FILING OF NOTICE OF DEATH. 140
ESTATE TAX RETURN. 141
DONORS TAX 144
BASIC PRINCIPLES.. 144
DEFINITION.. 144
NATURE
145
PURPOSE OR OBJECT 145
REQUISITES OF VALID DONATION. 145
TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION 147
TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION 147
CLASSIFICATION OF DONOR.. 147
DETERMINATION OF GROSS GIFT. 147
COMPOSITION OF GROSS GIFT 149
VALUATION OF GIFTS MADE IN PROPERTY. 149
TAX CREDIT FOR DONORS TAXES PAID IN A FOREIGN COUNTRY.. 149
EXEMPTIONS OF GIFTS FROM DONORS TAX 149
PERSON LIABLE 153
VALUE-ADDED TAX (VAT)153
CONCEPT 153
CHARACTERISTICS. 155
IMPACT OF TAX.. 155
INCIDENCE OF TAX.. 155
TAX CREDIT METHOD. 155
DESTINATION PRINCIPLE. 155
PERSONS LIABLE 155
VAT ON SALE OF GOODS OR PROPERTIES 157
ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERO-RATED SALES
OF GOODS OR PROPERTIES.. 158
TRANSACTIONS DEEMED SALE 162
CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON.. 162
VAT ON IMPORTATION OF GOODS.. 163
TRANSFER OF GOODS BY TAX EXEMPT PERSONS.. 163
VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES 165
REQUISITES FOR TAXABILITY. 166

TABLE OF CONTENTS
ZERO-RATED SALE OF SERVICES..
VAT EXEMPT TRANSACTIONS
Vat Exempt Transactions, In General.
Exempt Transaction, Enumerate..
INPUT TAX AND OUTPUT TAX, DEFINED
SOURCES OF INPUT TAX
PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT.
DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS.
Determination Of Output Tax.
Determination Of Input Tax Creditable
Allocation Of Input Tax Creditable
Determination Of The Output Tax And Vat Payable And Computation
Of Vat Payable Or Excess Tax Credits.
SUBSTANTIATION OF INPUT TAX CREDITS..
REFUND OR TAX CREDIT OF EXCESS INPUT TAX.
Who May Claim For Refund/ Apply For Issuance Of Tax Credit Certificate.
Period To File Claim/Apply For Issuance Of TCC.
Manner Of Giving Refund..
INVOICING REQUIREMENTS..
Invoicing Requirements In General.
Consequences Of Issuing Erroneous Vat Invoice Or Vat Official Receipt.
FILING OF RETURN AND PAYMENT..
WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT..

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172

COMPLIANCE REQUIREMENTS (INTERNAL REVENUE TAXES).


ADMINISTRATIVE REQUIREMENTS
REGISTRATION REQUIREMENTS.
PERSONS REQUIRED TO REGISTER FOR VAT
SUPPLYING TAXPAYER IDENTIFICATION NUMBER (TIN).
ISSUANCE OF RECEIPTS OR SALES OR COMMERCIAL INVOICES
Printing of receipts or sales or commercial invoices
Invoicing requirements for VAT.
Exhibition of certificate of payment at place of business
Continuation of business of deceased person.
REMOVAL OF BUSINESS TO OTHER LOCATION.

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180

TAX RETURNS.
INCOME TAX RETURNS
Individual Tax Returns.
Corporate Returns..
Estate Tax Returns..
Donors Tax Returns..
Vat Returns..
Withholding Tax Returns

180
186
180
182
184
185
185
186

TAX PAYMENTS.
INCOME TAXES
ESTATE TAXES .
DONORS TAXES.
VAT

186
186
187
189
189

TAX REMEDIES UNDER THE NIRC..


TAXPAYERS REMEDIES....
ASSESSMENT..
CONCEPT OF ASSESSMENT..
Requisites for valid assessment
Constructive methods of income determination.
Inventory method for income determination.

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191
192

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TABLE OF CONTENTS
Jeopardy assessment.. 193
Tax delinquency and tax deficiency 193
POWER OF THE COMMISSIONER TO MAKE ASSESSMENTS AND
PRESCRIBE ADDITIONAL REQUIREMENTS FOR TAX ADMINISTRATION
AND ENFORCEMENT... 194
Power of the Commissioner to obtain information, and
to summon/examine, and take testimony of persons.. 195
WHEN ASSESSMENT IS MADE.195
Prescriptive period for assessment. 196
Suspension of running of statute of limitations. 198
ASSESSMENT PROCESS.. 199
Tax audit. 199
Notice of informal conference.. 199
Notice of informal conference.. 200
Issuance of preliminary assessment notice (PAN) 200
Exceptions to Issuance of PAN 201
Reply to PAN 201
Issuance of formal letter of demand and assessment
notice/final assessment notice.. 201
Disputed assessment. 202
Administrative decision on a disputed assessment. 202
Protesting assessment. 202
Rendition of decision by Commissioner 204
COLLECTION 206
Requisites. 206
Prescriptive period.. 206
REFUND 208
GOVERNMENT REMEDIES. 214
ADMINISTRATIVE REMEDIES. 215
DISTRAINT AND LEVY.. 215
LEVY AND SALE OF REAL PROPERTY 217
FORFEITURE OF REAL PROPERTY TO THE GOVERNMENT FOR WANT OF BIDDER.. 219
FURTHER DISTRAINT AND LEVY. 220
TAX LIEN. 220
JUDICIAL REMEDIES. 225
STATUTORY OFFENSES AND PENALTIES.. 229
Civil penalties. 229
Surcharge 229
Interest.. 231
In General 231
Deficiency interest 231
Delinquency interest 231
Interest on extended payment 231
COMPROMISE AND ABATEMENT OF TAXES 220
ORGANIZATION AND FUNCTION OF BUREAU OF INTERNAL REVENUE.. 231
RULE MAKING AUTHORITY OF THE SEC. OF FINANCE. 233
AUTHORITY OF SEC. OF FINANCE TO PROMULGATE RULES AND REGULATIONS. 233
SPECIFIC PROVISIONS TO BE CONTAINED IN RULES AND REGULATIONS.. 233
NON-RETROACTIVITY OF RULINGS 235
POWER OF THE COMMISSIONER TO SUSPEND BUSINESS OPERATIONS OF
A TAXPAYER 235
LOCAL GOVERNMENT CODE OF 1991, AS AMENDED. 236
LOCAL GOVERNMENT TAXATION 236
FUNDAMENTAL PRINCIPLES.. 236

TABLE OF CONTENTS
NATURE AND SOURCE OF TAXING POWER.. 236
Grant of local taxing power under the Local Government Code. 236
Authority to prescribe penalties for tax violations.. 238
Authority to grant local tax exemptions 238
Withdrawal of exemptions. 239
Authority to adjust local tax rates. 240
Residual taxing power of local governments. 240
Authority to issue local tax ordinances.. 240
LOCAL TAXING AUTHORITY. 240
Power to create revenues exercised thru LGUs.. 240
Procedure for approval and effectivity of tax ordinance.. 241
SCOPE OF TAXING POWER.. 241
SPECIFIC TAXING POWER OF LOCAL GOVERNMENT UNITS. 242
Taxing powers of provinces.. 243
Taxing powers of cities.. 246
Taxing powers of municipalities. 246
Tax on various types of businesses.. 247
Ceiling on business tax impossible on municipalities within
Metro Manila.. 249
Tax on retirement on business 249
Rules on payment of business tax 249
Fees and charges for regulation & licensing.. 249
Situs of tax collected.. 250
Taxing powers of barangays. 251
Common revenue raising powers. 251
Service fees and charges.. 251
Public utility charges.. 251
Toll fess or charges.. 251
Community tax 252
COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS 253
COLLECTION OF BUSINESS TAX.. 254
Tax period and manner of payment. 255
Accrual of tax. 255
Time of payment.. 255
Penalties on unpaid taxes, fees or charges 255
Authority of treasurer in collection and inspection of books 255
TAXPAYERS REMEDIES.. . 256
Periods of assessment and collection of local taxes, fees or charges. 257
Protest of assessment.. 258
Claim for refund of tax credit for erroneously or illegally collected tax, fee
or charge... 259
CIVIL REMEDIES BY THE LGU FOR COLLECTION OF REVENUES 259
Local governments lien for delinquent taxes, fees, charges.259
Civil remedies, in general. 260
Procedure for administrative action 260
Distraint of personal property.. 260
Levy of real property, procedure..261
Further distraint or levy. 262
Exemption of personal property from distraint or levy.262
Penalty on local treasurer for failure to issue and execute
warrant of distraint or levy.. 262
Procedure for judicial action.. 262
REAL PROPERTY TAXATION.. 265
FUNDAMENTAL PRINCIPLES.. 266
NATURE OF REAL PROPERTY TAX 267
IMPOSITION OF REAL PROPERTY TAX. 267
Power to levy real property tax.. 267

TABLE OF CONTENTS
Exemption from real property tax
APPRAISAL AND ASSESSMENT OF REAL PROPERTY TAX.
Rule on appraisal of real property at fair market value.
Declaration of real property.
Listing of real property in assessment rolls
Preparation of schedules of fair market value
Authority of assessor to take evidence
Amendment of schedule of fair market value.
Classes of real property
Actual use of property as basis of assessment
Assessment of real property...
Assessment levels..
General revisions of assessments and property classification ..
Date of effectivity of assessment or reassessment
Assessment of property subject to back taxes.
Notification of new or revised assessment
Appraisal and assessment of machinery.
COLLECTION OF REAL PROPERTY TAX.
Date of accrual of real property tax
Collection of tax.
Collecting authority
Duty of assessor to furnish local treasurer with assessment rolls.
Notice if time for collection of tax..
PERIODS WITHIN WHICH TO COLLECT REAL PROPERTY TAX
SPECIAL RULES ON PAYMENT..
Payment of real property tax in installments.
Interests on unpaid real property tax.
Condonation of real property
REMEDIES OF LGUS FOR COLLECTION OF REAL PROPERTY TAX..
Issuance of notice of delinquency for real property tax payment..
Local governments lien
Remedies in general
Resale of real estate taken for taxes, fees or charges.
Further levy until full payment of amount due
REFUND OR CREDIT OF REAL PROPERTY TAX
Payment under protest.
Repayment of excessive collections.
TAXPAYERS REMEDIES
Contesting an assessment of value of real property..
Appeal to the Local Board of Assessment Appeals..
Appeal to the Central Board of Assessment Appeals.
Effect of payment of tax.
Payment of real property under protest..

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281
281
282
282
283
283
283
283
284
284
284

TARIFF AND CUSTOMS CODE OF 1978, AS AMENDED.........................................................................................

289

TARIFF AND DUTIES, DEFINED.


FLEXIBLE TARIFF CLAUSE..
REQUIREMENTS OF IMPORTATION.
Import entry
Declaration of correct weight or value.
Liability for payment of duties
Liquidation of duties..
IMPORTATION IN VIOLATION OF TCC
Smuggling.
Other fraudulent practices...
CLASSIFICATION OF GOODS
Taxable importation..

289
297
305
305
303
306
308
310
310
316
293
293

TABLE OF CONTENTS
Prohibited importation293
Conditionally-free importation..294
CLASSIFICATION OF DUTIES298
Ordinary/Regular Duties 299
Ad valorem; Methods of valuation299
Specific 299
Specific duties.. 299
Dumping duties..300
Countervailing duties.300
Marking duties.300
Retaliatory/Discriminatory duties..300
Safeguard.301
REMEDIES. 3 17
Government 317
Administrative/Extrajudicial. 317
Judicial 317
Taxpayer 318
Protest 318
Drawback, Abatement and refund..319
Abadonment ..320
JUDICIAL REMEDIES; COURT OF TAX APPEALS 324
JURISDICTION OF THE COURT OF TAX APPEALS.. 325
JUDICIAL PROCEDURES 328
Judicial action for collection of taxes.. 328
Local taxes.. 328
Civil cases. 328
Who may appeal, mode of appeal, effect of appeal.. 328
Suspension of collection of tax.. 330
Taking of evidence.. 330
Motion for reconsideration or new trial 330
Appeal to the CTA, en banc.. 331
Petition for review on certiorari to the Supreme Court.. 331
Criminal cases 334
Institution and prosecution of criminal actions. 334
Institution on civil action in criminal action. 334
Appeal and period to appeal.. 335
Petition for review on certiorari to the Supreme Court.. 335
TAXPAYERS SUIT IMPUGNING THE VALIDITY OF TAX MEASURES
OR ACT OF TAXING AUTHORITY. 336
Taxpayers suit, defined.. 336
Distinguished from citizens suit 336
Requisites for challenging the constitutionality of a tax . 336
Concept of Locus Standi as applied in taxation.. 337
Doctrine of transcendental importance.. 337
Ripeness for judicial determination.337
INDEX 340
BIBLIOGRAPHY.. 342

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