I. BASIC PRINCIPLES OF TAXATION
A. TAXATION AS AN INHERENT POWER OF THE STATE
Power to tax is inherent in sovereignty
the moment the State exists, the power to tax automatically exists
enforceable even without any delegation by the Constitution or legislation from Congress
LGUs have no inherent power to tax; but expressly granted by the Constitution or legislation
Lifeblood Theory (CIR v Algue)
Tax is necessary to meet the expenses of government without which the latter cannot operate
Every person must contribute his share in the running of the government
B. PHASES AND SCOPE OF TAXATION
Levy – where Congress enacts a statute to impose taxes
Subject Matter – refers to persons, things, transaction, privilege, etc.
C. INHERENT LIMITATIONS
1. Taxation should be for public use
a. Public welfare should be the penultimate objective.
b. Taxation may be used to implement the State’s police power.
2. Taxation is inherently legislative.
3. The Government is self-explanatory.
a. LGUs are expressly prohibited from levying tax from the NG
b. Ng may tax GOCCs, agencies and instrumentalities
a. Taxing authority cannot impose taxes on subjects beyond its territorial jurisdiction.
b. It may determine the tax situs.
D. CONSTITUTIONAL LIMITATIONS
Constitution is not the source of the taxing power. It simply defines and delimits the power.
1. Due Process Clause (Section 1, Art. III)
Enforced contribution from the people cannot be made without a law authorizing the same
Substantive Due Process
Requires that the tax statute must be within the constitutional authority of Congress and that it must be fair, just and reasonable.
Procedural Due Process
Requires notice and hearing, or at least an opportunity to be heard.
2. Equal Protection Clause (Section 1, Art. III)
Means that taxpayers of the same footing should be treated alike, both as to privileges conferred as well as on obligations imposed.
Violations (Villegas v Hsiu Chiong Tsai Poi)
When classification is made where there should be none
When no classification is called for
Valid Classification (Pp v Cayat)
There must be substantial distinctions that make real differences.
These must be germane and relevant to the purpose of law.
The distinction must not only be applicable to present but also to future conditions.
The distinction must apply to persons, things and transactions belonging to the same class.
3. Freedom of Religion (Section 5, Art. III)
Non Establishment Clause
Covers the prohibition to establish a national or official religion since in that case, there will be an appropriation from taxes paid by the people.
Free Exercise Clause
This is the basis of tax-exemption granted to religious institutions.
4. Non-Impairment of Contracts (Section 10, Art. III)
People’s right and freedom to contract
Sanctity of contracts
Does not apply to franchises
Not applicable to police power and eminent domain
5. Non-imprisonment for Non-Payment of Tax (Section 20, Art. III)
Poll tax – tax imposed on persons without any qualification (e.g. CTC); payment is not mandatory (merely permissive)
E. DOUBLE TAXATION
The imposition of the same taxing body of two taxes on what is essentially the same thing
The imposition of two taxes on the same property during the same period and for the same taxing purpose
Allowed in the Philippines because there is no prohibition in the Constitution or any statute
When not allowed?
The taxes are levied by the same taxing authority
Same subject matter
Same taxing period
Methods to minimize burden
By granting tax exemptions
By giving tax credits
By reducing the rate of tax
F. EXEMPTION FROM REAL ESTATE TAX
Note: The properties must be ACTUALLY, DIRECTLY and EXCLUSIVELY used for religious, educational and charitable purposes to be exempt from taxation. (Section 28, Art. VI).
II. INCOME TAXATION (RA 8242 Tax Reform Act of 1997)
Classification of taxpayers
1. Resident Citizen (RC)
a. Citizen of the Philippines residing therein
b. Citizen residing outside the Philippines without the intention of residing thereat permanently
c. Citizen who did not manifest to the total satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein perm.
2. Non-Resident Citizen (NRC)
a. Citizen who established to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
b. Citizen who leaves the Philippines during the taxable year to reside abroad as immigrants.
3. Overseas Contract Worker (OCW)
a. Covers only those individuals with a working contract abroad
b. TNTs are not considered OCWs but are usually classified as RCs
4. Resident Alien (RA)
a. An individual residing in the Philippines who is not a citizen thereof
b. Intention to reside in the Philippines is not necessary
5. Non-resident Alien Engaged in Trade or Business in the Philippines (NRA ETB)
a. Engaged in retail trade or business
b. Engaged in the exercise of profession therein
c. Staying for an aggregate period of more than 180 days for the calendar year
6. Non-resident Alien Not Engaged in Trade of Business in the Phils. (NRA NETB)
a. NRAs not engaged in business but deriving income in the country
7. Aliens Employed in MNCs, OBUs, & Petroleum Service Contractors
Definition: NIRC defines a corporation as including partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, insurance companies but does not include general professional partnerships and JV formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an agreement under a service contract with the government.
Classification of Corporations
1. Domestic Corporations
2. Resident Foreign Corporations ETB
3. Non-Resident Foreign Corporations NETB
III. KINDS OF INCOME TAXES
Net Income Tax; Gross Income Tax; Final Income Tax; MCIT, IAET; Optional Corporate Income Tax
A. NET INCOME TAX
Multiplied by: Tax Rate
Net Income Tax Payable
Less: Tax Credits
Net Income Tax Due
Note: This kind of income tax allows deduction, personal as well as additional exemptions
& tax credits.
The determination of actual gain or loss is material since the tax shall be based on NET
The rate of this tax is 32% for individual & 35% for corporate taxpayers.
B. GROSS INCOME TAX
Unlike the net income tax, the gross income tax does not allow deductions, hence he formula is:
Gross Income X Tax Rate = Tax Due
Notes: The application of this tax BARS the application of the income tax.
The gross income tax is always subject to the Final WHT.
C. FINAL INCOME TAX
This is the only income tax applicable to all types of taxpayers without distinctions. The formula is:
Gross Income X Tax Rate = Tax Due
Notes: Under final income tax, the rate is multiplied to each income individually as each income may have a different rate.
This tax does not allow deductions.
The determination of gain or loss is immaterial since the basis of taxation is the GROSS,
Hence actual gain or loss does not matter.
An income which is subject to final income tax is no longer subject to net income tax!
Withholding agent is responsible in filing the income tax returns.
Applicable only to passive income and income from sources within the Phils.
If the taxpayer fails to pay, the withholding agent shall be liable!!!
D. MINIMUM CORPORATE INCOME TAX – 2% on Gross Income
The 2% MCIT on gross income is imposed on corporations beginning the 4th year of the corporation. The formula is:
Gross Income X 2% = MCIT
Pay the MCIT or the Net Income Tax, whichever is higher!
Rationale: To prevent corporations from claiming too many deductions.
E. IMPROPERLY ACCUMULATED EARNINGS TAX – 10% of Taxable Income
This tax is imposed on the improperly accumulated earnings by corporations.
Purpose: To discourage the practice of corporations of accumulating earnings
& profits in avoidance of the payment of taxes.
To avoid this: Distribute earnings among the shareholders.
F. OPTIONAL CORPORATE INCOME TAX – 15% on Gross Income
Corporations may opt to be taxed at 15% of their gross income in lieu of the Net Income Tax or the MCIT. This may be imposed by the President upon the recommendation of the DOF.
IV. SOURCES OF INCOME
What is the relevance in determining the sources?
Its relevance relates to the income tax liability of the taxpayers. RC and domestic corporations are the only taxpayers liable for income derived from sources within and without the Philippines.
A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES. (Section 42[a])
1. Interest from sources within the Philippines
o Interests derived from sources within the Philippines
Interest earned from domestic bank deposits
o Interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise.
The determining factor is the residence of the obligor, whether individual or corporation.
o Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or property.
o Dividends issued by foreign corporations are considered income from sources within provided the 2 requisites are present:
At Least 50% of its gross income is from sources within the Phils.
Such gross income must be for the 3-year period ending with the close of the taxable year.
o This is the compensation for labor or personal services performed in the Phils.
o The determining factor is the place of performance. The place of payments is IRRELEVANT!
4. Rentals and Royalties from property located in the Phils.
o Use of copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right in the Phils.
o Use of industrial, commercial or scientific equipment in the Phils.
o The supply of scientific, technical, industrial or commercial info.
o 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.
o Technical advise, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking.
o The use or right to use motion picture films, films or video tapes for use or in connection with TV, & tapes use in connection with radio broadcasting.
5. Sale of Real Property
o Gains, profits and income from sale of real property located in the Phils.
o Location of the property is the controlling factor to determine the source of the income.
6. Sale of Personal Property
B. GROSS INCOME FROM SOURCES WITHOUT THE PHILS.
Any income not falling under any of the 6 above is an income derived from sources outside the Philippines.
C. INCOME FROM SOURCES PARTLY WITHIN & PARTLY WITHOUT THE PHILIPPINES
The taxable income is computed by first deducting the expenses, losses or other deductions apportioned or allocated thereto and 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 Phils.
Basic Formula: Gross Income Within
Gross Income World
= Rate X Expenses World
= Expenses to be allowed
To illustrate: Suppose the Gross Income Within is P10k; the Gross Income World is P100K; and the Expenses-World is P50k, thus:
P10k_ = 10% X P50K = P5K.
In this illustration, only P5k should be allowed as deduction against the gross income derived in the Phils.
D. SALE OF PERSONAL PROPERTY
1. For those 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 – the income shall be treated as partly within and partly without from sources within the Philippines and partly from sources without the Phils.
2. For those purchased within and sold without the Philippines, or for purchase of personal property without and sold without – the gains, profits or income shall be treated as derived entirely from sources within the country where the property is sold; EXCEPT – gains from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Phils., regardless of the place where the shares were sold.