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2012 UP LAW BAR REVIEWER TAXATION LAW

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UPLAWBAR REVIEWER2012TAXATIONTaxation Law 1Taxation Law 2LAWDean Danilo L. ConcepcionDean, UP College of LawProf. Concepcion L. JardelezaAssociate Dean, UP College of LawProf. Ma. Gisella D. ReyesSecretary, UP College of LawProf. Florin T. HilbayFaculty Adviser, UP Law Bar OperationsCommission 2012Ramon Carlo F. MarcaidaCommissionerEleanor BalaquiaoMark Xavier OyalesAcademics Committee HeadsKaren Andrea TorresCamille UmaliTaxation Law Subject HeadsGraciello Timothy ReyesLayoutUP LAW BAR OPERATIONS COMMISSION

TAXATION LAW REVIEWER2UPLAWBAR REVIEWER2012TAXATIONBAR OPERATIONS COMMISSION 2012EXECUTIVE COMMITTEERamon Carlo Marcaida CommissionerRaymond Velasco Mara Kriska Chen Deputy CommissionersBarbie Kaye Perez SecretaryCarmen Cecilia Veneracion TreasurerHazel Angeline Abenoja AuditorCOMMITTEE HEADSEleanor Balaquiao Mark Xavier Oyales AcadsMonique Morales Katleya Kate Belderol Kathleen MaeTuason (D) Rachel Miranda (D) Special LecturesPatricia Madarang Marinella Felizmenio SecretariatVictoria Caranay Publicity and PromotionsLoraine Saguinsin Ma. Luz Baldueza MarketingBenjamin Joseph Geronimo Jose Lacas LogisticsAngelo Bernard Ngo Annalee Toda HRAnne Janelle Yu Alyssa Carmelli Castillo MerchandiseGraciello Timothy Reyes LayoutCharmaine Sto. Domingo Katrina Maniquis Mock BarKrizel Malabanan Karren de Chavez Bar Candidates’ WelfareKarina Kirstie Paola Ayco Ma. Ara Garcia EventsLAWTAXATION LAW TEAM 2012Faculty Editor Dina LucenarioSubject Heads Karen Andrea Torres Camille UmaliLAYOUT TEAM 2012Layout Artists Alyanna Apacible NoelLuciano RM Meneses Jenin Velasquez Mara Villegas Naomi Quimpo LeslieOctaviano Yas Refran Cris BernardinoLayout Head Graciello Timothy ReyesOPERATIONS HEADSCharles Icasiano Katrina Rivera Hotel OperationsMarijo Alcala Marian Salanguit Day-OperationsJauhari Azis Night-OperationsVivienne Villanueva Charlaine Latorre FoodKris Francisco Rimban Elvin Salindo TranspoPaula Plaza LinkagesUP LAW BAR OPERATIONS COMMISSION

TAXATION2012 UP Law Bar Reviewer\Copyright and all other relevant rights over thismaterial are owned jointly by the University of thePhilippines College of Law and the Student EditorialTeam.The ownership of the work belongs to the University ofthe Philippines College of Law. No part of this bookshall be reproduced or distributed without the consentof the University of the Philippines College of Law.All Rights reserved.UP LAW BAR OPERATIONS COMMISSIONLAW

TAXATION LAW REVIEWER4Taxation Law 1I. General Principles of Taxation . 8A. Definition and Concept of Taxation . 8B. Nature of the Power of Taxation . 8C. Characteristics of Taxation . 10D. Power of Taxation Compared WithOther Powers . 10E. Purpose of Taxation. 10F. Principles of Sound Tax System . 11G. Theory and Basis of Taxation. 11H. Doctrines in Taxation . 12I. Scope and Limitation of Taxation . 17J. Stages of Taxation . 22K.Definition,Nature,andCharacteristics of Taxes . 22L. Requisites of a valid tax . 22M. Tax as distinguished from other formsof exactions . 22N. Kinds of Taxes . 23II. National Internal Revenue Code of1997 as amended (NIRC) . 24A. Income Taxation. 241. Income Tax Systems . 242. Features of the Philippine IncomeTax Law . 253.Criteria in Imposing PhilippineIncome Tax . 254. Types of Philippine Income Tax . 255. Taxable Period . 256. Kinds of Taxpayers . 267. Income Taxation . 278. Income . 289. Gross Income . 3010. Taxation of Resident Citizens,Non-resident Citizens, and ResidentAliens . 5611. Taxation of Non-resident AliensEngaged in Trade or Business . 6512. Exclude Non-resident Aliens NotEngaged in Trade or Business . 6613. Individual Taxpayers Exempt fromIncome Tax . 6614. Taxation of Domestic Corporations. 6615.Taxation of Resident ForeignCorporations . 7016. Taxation of Non-resident ForeignCorporations . 7217. Improperly Accumulated Earningsof Corporations . 7318.Exemption from tax oncorporations . 7419. Taxation of Partnerships . 75A. Classification of Partnerships forTax Purposes . 75B. Other Partnerships (or GeneralCo-partnerships) . 7520. Taxation of General ProfessionalPartnerships . 7621. Taxation on Estates and Trusts . 7722. Withholding tax . 77A. Definition . 83B. Tax Rate and Tax Base . 83C. Fringe Benefits Which Are NotTaxable . 83Taxation Law 21. Estate Tax.86I. Basic principles .86II. Nature . 86III. Purpose or object . 86IV. Time and Transfer of Properties 86V. Classification of decedent . 86VI. Gross estate v. Net estate . 87VII. Determination of gross estate andNet estate. 87VIII. Composition of gross estate . 88IX. Items to be included in grossestate . 88X. Deductions from estate . 89XI. Exclusions from estate . 94XII. Tax credit for estate tax paid in aforeign country . 94XIII.Exemptionfromcertainacquisitions and transmissions . 95XIV. Filing of notice of death . 95XV. Estate tax return . 952. Donor’s Tax .98I. Basic principles . 98II. Definition . 98III. Nature . 98IV.Purpose or object . 98V.Requisites of valid donation . 98VI.Transfers which may be constitutedas donation . 98VII. Transfer for less than adequateand full consideration . 99VIII.Classification of donor . 99IX. Determination of gross gift . 99X. Composition of gross gift . 99

TAXATIONXI. Valuation of gifts made in property. 99XII. Tax credit for donor‘s taxes paidin a foreign country . 100XIII. Exemptions of gifts from donor‘stax . 100XIV. Computation of Donor‘s Tax . 101XVI. Tax Basis . 1023. VAT. 102I. Concept. 103II. Characteristics . 103III. Impact of tax . 104IV.Incidence of tax . 104V.Tax credit method . 104VI. Destination principle . 104VII. Persons liable (Sec. 105) . 105VIII. VAT on sale of goods orproperties. 105IX. Zero-rated sales of goods orproperties, and effectively zero-ratedsales of goods or properties . 106X. Transactions deemed sale (§ 106, B)[DR TC] . 108XI. Change or cessation of status asVAT-registered person (Sec. 106(C)). 109XII. VAT on importation of goods . 109XIII. VAT on sale of service and use orlease of properties . 109XIV. Zero-rated sale of services (§ 108,B) . 110XIV. VAT exempt transactions . 111XV. Input tax and output tax, defined. 114XVII. Persons who can avail of inputtax credit . 114XVIII. Determination of output/inputtax; VAT payable; Excess input taxcredits . 115XIX. Substantiation of input tax credits. 116XX. Refund or tax credit of excessinput tax . 116XXI. Invoicing requirements . 117XXII. Filing of return and payment . 118XXIII. Withholding of final VAT on salesto government (§ 114, C) . 119LAW4. Tax Remedies . 119I. Taxpayer‘s Remedies .119II. Government Remedies .134IV. Compromise and Abatement oftaxes .1405. Organization and Function of BIR . 144I. Rule-making authority of theSecretary of Finance .144II. Power of the Commissioner tosuspend the business operation of ataxpayer.1456. Local Taxation . 145I. Fundamental principles (UEPIPI) .146II. Nature and source of taxing power.146III. Local taxing authority .146IV. Scope of taxing power.147V. Specific taxing power of localgovernment unit (LGUs) .147III. Common limitations on the taxingpowers of LGUs.154IV. Collection of business tax .154V. Taxpayer‘s remedies .155VI. Civil remedies by the LGU forcollection of revenues .1557. Real Property Taxation . 159I. Fundamental principles .159II. Nature of real property tax .159III. Imposition of real property tax .159IV. Appraisal and assessment of realproperty tax .160V. Collection of real property tax .161VI. Refund or credit of real propertytax .163VII. Taxpayer‘s remedies .1638. Tariff and Customs Code . 168I. Tariff and duties, defined.168II. General rule: All imported articlesare subject to duty. Importation bythe government taxable. .168III. Purpose for imposition .168IV. Flexible tariff clause .168V. Requirements of importation .168VI. Importation in violation of TCC170

TAXATION LAW REVIEWER6VII. Classification of goods . 171VIII. Classification of duties . 175IX. Drawbacks . 178X. Remedies. 1799. Judicial Remedies . 183I. Jurisdiction of the Court of TaxAppeals . 183II. Judicial Procedures . 185III. Taxpayer‘s suit impugning thevalidity of tax measures or acts oftaxing authorities . 190

UPLAWBAR REVIEWER2012TAXATIONTaxation Law 1BAR OPERATIONS COMMISSION 2012EXECUTIVE COMMITTEERamon Carlo Marcaida CommissionerRaymond Velasco Mara Kriska Chen Deputy CommissionersBarbie Kaye Perez SecretaryCarmen Cecilia Veneracion TreasurerHazel Angeline Abenoja AuditorCOMMITTEE HEADSEleanor Balaquiao Mark Xavier Oyales AcadsMonique Morales Katleya Kate Belderol Kathleen Mae Tuason (D) RachelMiranda (D) Special LecturesPatricia Madarang Marinella Felizmenio SecretariatVictoria Caranay Publicity and PromotionsLoraine Saguinsin Ma. Luz Baldueza MarketingBenjamin Joseph Geronimo Jose Lacas LogisticsAngelo Bernard Ngo Annalee Toda HRAnne Janelle Yu Alyssa Carmelli Castillo MerchandiseGraciello Timothy Reyes LayoutCharmaine Sto. Domingo Katrina Maniquis Mock BarKrizel Malabanan Karren de Chavez Bar Candidates’ WelfareKarina Kirstie Paola Ayco Ma. Ara Garcia EventsOPERATIONS HEADSCharles Icasiano Katrina Rivera Hotel OperationsMarijo Alcala Marian Salanguit Day-OperationsJauhari Azis Night-OperationsVivienne Villanueva Charlaine Latorre FoodKris Francisco Rimban Elvin Salindo TranspoPaula Plaza LinkagesUP LAW BAR OPERATIONS COMMISSIONLAWTAXATION LAW TEAM 2012Faculty Editor DinaLucenarioSubject Heads Karen AndreaTorres Camille UmaliLAYOUT TEAM 2012Layout Artists AlyannaApacible Noel Luciano RMMeneses Jenin Velasquez Mara Villegas NaomiQuimpo Leslie Octaviano Yas Refran Cris BernardinoLayout Head GracielloTimothy Reyes

TAXATION LAW REVIEWERTaxation Law 18Taxation Law 1Taxation Law 2I.II.TAXATION LAWGeneral Principles of TaxationNational Internal Revenue Code of1997 as amended (NIRC)I. General Principles of TaxationA. Definition and Concept of TaxationB. Nature of TaxationC. Characteristics of TaxationD. Power of Taxation ComparedE. Purpose of TaxationF. Principles of Sound Tax SystemG. Theory and Basis of TaxationH. Doctrines of TaxationI. Scope and Limitation of TaxationJ. Stages of TaxationK. Definition, Nature and Characteristics of TaxesL. Requisites of valid taxM. Tax as distinguished from other forms ofexactionsN. Kinds of TaxesA. Definition and Concept of TaxationTAXATIONis a mode by which governments makeexactions for revenue in order to supporttheir existence and carry out theirlegitimate objectives.a mode of raising revenue for publicpurpose; the exercise of sovereign power toraise revenue for the expense of thegovernment;the act of laying a tax, i.e., the process ormeans by which the sovereign, through itslaw-making body, raises income to defraythe necessary expenses of government.(1Cooley 72-73)the process or means by which thesovereign, through its law-making body,raises income to defray the necessaryexpenses of government; a method ofapportioning the cost of government amongthose who in some measure are privilegedto enjoy its benefits and must, therefore,bear its burdens, (see 51 Am. Jur. 341; 1Cooley 72-93.)as a power, it refers to the inherent powerof the state to demand enforcedcontributions for public purpose orpurposes.TAXES--are enforced proportional contributionsfrom persons and property levied by thelaw-making body of the State by virtue ofits sovereignty for the support of thegovernment and all public needs.The enforced proportional and pecuniarycontributions from persons and propertylevied by the law-making body of the state-having jurisdiction over the subject of theburden for the support of the governmentand public needs.CIR v. Algue: Taxes are the lifeblood of thegovernment and so should be collectedwithout unnecessary hindrance. On theother hand, such collection should be madein accordance with law as any arbitrarinesswill negate the very reason for governmentitself. It is said that taxes are what wepay for civilized society. Without taxes, thegovernment would be paralyzed for lack ofthe motive power to activate and operateit. Hence, despite the natural reluctance tosurrender part of one's hard earned incometo the taxing authorities, every person whois able to must contribute his share in therunning of the government. The governmentfor its part, is expected to respond in theform of tangible and intangible benefitsintended to improve the lives of the peopleand enhance their moral and materialvalues. This symbiotic relationship is therationale of taxation and should dispel theerroneous notion that it is an arbitrarymethod of exaction by those in the seat ofpower.Underlying theory and basis of taxationThe power of taxation proceeds upon the theorythat the existence of government is a necessity; thatit cannot continue without means to pay itsexpenses; and that for those means it has the rightto compel all citizens and property within its limitsto contribute.The basis of taxation is found in the reciprocalduties of protection and support between the Stateand its inhabitants. The State receives taxes that itmay be enabled to carry its mandates into effect andperform the functions of government and the citizenpays the portion of taxes demanded in order that hemay, by means thereof, be secured in the enjoymentof the benefits of an organized society, (see 51 Am.Jur. 42-43.)This is the so-called benefits-receivedprinciple. One is compensation or consideration forthe other: protection for support and support forprotection.B. Nature of the Power of TaxationThe power to tax, being inherent in an independentstate for its existence and survival by thefurtherance of its multifarious functions, the samedoes not require delegation from the Constitution.However, exercise of such power upon theinhabitants is subject to limitations inhabitants issubject to limitations.The power of taxation is inherent in sovereignty asan incident or attribute thereof, being essential tothe existence of every government. It exists apartfrom constitutions and without being expresslyconferred by the people (71 Am.Jur.2d 397-398).Hence, it can be exercised by the government evenif the Constitution is entirely silent on the subject.

TAXATION LAW REVIEWERConstitutional provisions relating to the power oftaxation do not operate as grants of the power tothe government. They merely constitute limitationsupon a power which would otherwise be practicallywithout limit. (1 Cooley 150). While the power to taxis not expressly provided for in our Constitution, itsexistence is recognized by the provisions relating totaxation (infra).It is essentially a legislative function. Even in theabsence of any constitutional provision, the powerfalls to the legislature as a part of the more generalpower of law-making. The power to tax is peculiarlyand exclusively legislative and cannot be exercisedby the executive or judicial branch of thegovernment (1 Cooley 160-161). Hence, onlyCongress, our national legislative body, can imposetaxes. The levy of a tax, however, may also bemade by a local legislative body subject to suchlimitations as may be provided by law.TheConstitution expressly grants the power to tax tolocal government units (see Sec. 5, Art. X,Constitution).It is subject to constitutional and inherentlimitations. These limitations are those provided inthe fundamental law (e.g., equal protection of thelaws, due process of law, rule of uniformity, etc.) orimplied therefrom (e.g., public purpose and nondelegation of legislative power which are alsoinherent limitations), while the rest spring from thenature of the taxing power itself although they mayor may not be provided in the Constitution(e.g.,territoriality, international comity, and exemption ofgovernment entities).Scope of taxationSubject to constitutional and inherent restrictions,the power of taxation is regarded as supreme,unlimited and comprehensive. The principal checkon its abuse rests only on the responsibility of themembers of the legislature to their constituents.Extent of the legislative power to taxThe power of taxation being legislative, all itsincidents are naturally within the control of thelegislature. Subject to constitutional and inherentrestrictions, the legislature has discretion todetermine the matters mentioned subsequently.(1) The subjects or objects to be taxed. - Theserefer to the coverage and the kind or natureof the tax. They may be persons, whethernatural or juridical; property, whether realor personal, tangible or eges. A state is free to select thesubject of taxation and it has beenrepeatedly held that that inequalities whichresult from a singling out of one particularclass for taxation or exemption infringe noconstitutional limitation so long as suchexemption is reasonable and not arbitrary.(see Lutz vs. Araneta, 98 Phil. 148; City ofBaguio vs. De Leon, 25 SCRA 938 [1968];Sison, Jr. vs. Ancheta, 130 SCRA 654 [1984])Thus, the power to tax carries with it thepower to grant exemption therefrom.(2) The purpose or object of the tax so long asit is a public purpose. - The legislative bodycan levy a tax or make an appropriationprovided it is for a public purpose. Itsdetermination, however, on the question ofwhat is a public purpose is not conclusive.The courts can inquire into whether thepurpose is really public or private.In the final analysis, therefore, the decisionon the question is not a legislative but ajudicial function. But once it is settled thatthe purpose is public

Taxation Law 1 Taxation Law 2 I. General Principles of Taxation II. National Internal Revenue Code of 1997 as amended (NIRC) I. General Principles of Taxation A. Definition and Concept of Taxation B. Nature of Taxation C. Characteristics of Taxation D. Power of Taxation Compared E. Purpose of Taxation .