Internal revenue taxes

1. Income tax

1) In terms of coverage, income tax has the most since there are so many persons liable, even
aliens and foreign corporations are included

2) The subject of taxation is income

3) Income may come from various sources

4) There are many taxable events

5) Income realized every second is a subject in Title II

2. Transfer taxation

1) The object of taxation here the transfer of property

2) The transfer covered by this title is (1) the transmission of property upon the death of the
person and another is (2) transmission of property within during the lifetime of the transferor.
Both these transfers are gratuitous in kind

So ownership of the property may pass to another

But the modes of transfer is Title 3 is by way of succession and donation

So the common characteristic again is the gratuitous nature of the transfer property

This is what is subjected to tax under Title 3

3. Value Added Tax

1) The object of taxation are 3 known activities

 (1) 3 of them are sales activities
(2) One is importation

It is also sales transaction basically, but the one made liable is the importer or purchaser

But the two other transactions, (1) sales of goods or properties in the course of trade or
business and (2) sale of services in the course of trade or business, are activities which are
performed by the seller, who statutorily is made liable for the tax

So it will be basically sales transactions that will be covered by value added tax

So income in Title II, transfer of properties in Title III, and certain activities in Title IV

2) Take note that the subject of income in Title II comes from various sources

The sources of income may be property

It may be activity as well

Also services

These concepts are also mentioned in Title III and Title IV

3) Title III is transfer of property. This cannot be labeled as property tax, though properties are
dealt with. It is not a tax on property, because the excise is on the privilege to transfer or
transmit property

4) In Title IV, the excise is on the privilege to engage in those kinds of activities or transactions

5) So in Title II, whenever income tax is talked about, it may come from various sources

One possible source may be the activity

And this activity may very well be one that is subject to the tax in Title IV

That activity that is a sale or transaction in the course of trade or business

 So when income is realized on a particular activity, there is a possibility that the same person
may be made liable for 2 kinds of internal revenue taxes

That is on the activity itself there is already an excise on the privilege and that is the value added
tax, and provided that there is an income realized on the same activity, then another internal
revenue tax may take place, and that is the income tax

So basically if you one particular transaction, it can result to two or more possible taxes or tax
liabilities

Of course, if on the same sale activity there is no income realized then there is no corresponding
liability under Title 2

Because the application of Title 2 would depend on an income realized

6) But though in the same activity there is no liability for income tax, property may be transferred
to another

As for instance in sale or transaction, ownership of property may pass to another

That is by delivery or tradition

It is by delivery that ownership is cast to another

The title is passed to another

Of course, we cannot say that the transfer tax would apply

Out of the same transaction where income is also realized, for which there is liability for income
tax

And there is a chance for property of one to be transferred to another

There is income tax because there is income realized and there will be transfer tax because
there is transfer of property from one to another
 Because in internal revenue tax, whether or not income tax is in place, that transfer tax is
applicable only in connection with transmission of properties which are gratuitous in nature

If it was a sale transaction, the premise is that there is a consideration

It is an onerous transmission, not gratuitous

Unless, the problem says that the sale is for insufficient consideration. That matter will be
discussed in taxation law 2

But the basic rule is that, whenever a transfer of property is with consideration, Title 3 on
transfer taxation will not be relevant or applicable

Again, we talk about estate tax or donors tax only in transfer taxation, with one caveat, and that
is if the sale is for insufficient consideration. There are certain sections in the tax code relating to
transfers for insufficient consideration

Because there is a portion of the transmission that is gratuitous in nature

That is the difference in the market value and the consideration

So that will be the coverage of transfer taxation. The object is the transfer of property itself

7) While the sale in insufficient consideration, there is a possibility of the seller still realizing
income. Again, even if we say that it is for insufficient consideration, the amount realized may
even be above the amount of the cost of investment

That is why if one invests in property say for instance the profit is 100,000 pesos, but presently
the market value of the property is 2M pesos, yet selling price is fixed at 1 million only.

Definitely, it is a sale for insufficient consideration, yet there is income realized resulting out of
the profit of the seller

If the fund existed at one time, it is 100,000 pesos. That in return is a greater amount.
 8) In one particular transaction, there can be two or more tax liabilities

One cannot say that there is a prohibited double taxation

There may be a form of double taxation, but not really in its strict sense. This is because there
are two different objects of taxation, and therefore 2 different kinds of taxes

One is income tax because of the income realized from the transaction. And the other one could
very well be a transfer tax, because it is a gratuitous transmission of property

9) If the sale is in the course of trade or business, then still there is likewise another title on value
added tax that imposes this particular kind of tax on the activity itself so long as it is done in the
course of trade or business

10) So it will be erroneous to say therefore that the Value Added Tax cannot apply since there
already is income which is subject of another tax

That will be an erroneous proposition because there are two different objects of taxation. One
cannot compare with another

4. Income tax (title 2)

1) So long as there is an income realized or received, then this can be the subject of taxation in the
Philippines

2) It is the most important tax, without this it would cripple the government

Unless there is another source of revenue, income tax will be part of our lifetime in many
generations to come. It has been there since time immemorial

It cannot be removed from our law

Removing income tax as possible sources of revenue may eliminate our ability to meet the
expenses of the government

Incomes earned by many persons are taxed every day. Aliens are even subjected to income tax
5. Sec 11 General Principles

1) Sec 23 When is income taxable

(1) Different criteria of the congress to determine taxability of income

(2) Even income of aliens may be subject to this kind tax

(3) One criteria is the residence of the person

Even if a person is not a citizen of the Philippines, that person may be subjected to this
compulsion on the basis of being a resident of the Philippines

The underlying reason for this taxation affecting the resident or inhabitant of the
Philippines is that protection is afforded to the person who resides in here in Philippines

So even if he is not a citizen of the Philippines, there is a protection and consequent

benefits afforded to that person

That consideration is the contribution to be made by this person for operating under the
protection of the government

He must therefore contribute in the expenses of the government

(4) Sources can be labor or capital, it can also be property, activity or service

(5) If they are situated in the Philippines, then it may be said that the income came from
sources in the Philippines

(6) If the property, activity or service that generates the income is located outside of the
Philippines, then the income comes from source outside the Philippines
(7) When is the alien made liable for the income tax here in the Philippines?

Income coming from sources within the Philippines

Aliens are taxable from income derived from sources within the Philippines (Sec 23)

In no instance should an alien be made liable for the Philippine income tax based on
their income derived from sources outside

This is the present law

(8) Citizens of the Philippines

There are two types of citizens of the Philippines for purposes of taxation

Resident and non resident

They are differently situated according to their taxability

All resident citizens are taxable for his income derived from his sources within the
Philippines and outside the Philippines

Liability is on the basis of income from all sources

Vastly different from the situation of a non resident

Because congress chose to tax only those income coming from sources within the
Philippines

So it is important to know the particular class of a citizen. One purpose is in determining

their taxability

As to the source of their income, if a citizen is also a resident of the Philippines, then
liability will encompass all income from all sources
 But if he is a non resident citizen, one needs to determine which classes of income were
coming from sources from within and that which may come from source from outside
the Philippines. Meaning, there is a need to investigate further what is the generating
source of his income

Is it his property? If that is the case, then generally we look where that property is
situated. If it is in the Philippines, then its source is within the Philippines

That is the subject of principle in Sec 23

(9) If the source is an activity outside the Philippines, and the person is a non resident
citizen, liability will not exist

For our law provides that a non resident citizen is only taxable for his income coming
from sources within the Philippines

(10) Resident citizens

3 possible criteria, which are the basis for taxation

a) Citizenship
b) Residence
c) Source

(11) Income coming from sources outside, just rely on the facts that the person is both a
citizen and a resident of the Philippines

(12) Is it possible for the Congress to subject even income derived from source
outside, by a non resident citizen or a resident alien?

Could a law be passed subjecting to tax, an income derived from source outside but
earned by a citizen who is not a resident of the Philippines or a resident but not a
citizen of the Philippines?
 And if yes, whether this law can be justified?

There are many theories of taxation

What underlies taxation?

There is protection theory

But there are other theories on underlying basis of taxation which can be used in
justifying that kind of legislation, in the exercise of the taxing power

All 3 (Citizenship, residence, sources) can be used to justify taxation. Congress can rely
on one in order to justify taxation

A person who is a resident enjoys protection on the basis of his being a resident of the
Philippines

Even if this protection cannot be afforded to the source of income, which is outside of
the Philippines, yet the person affected is a resident who enjoys again protection from
our government, and he may be made accountable or subjected for the compulsion

(13) For comparison sake, in transfer taxation, the subject of taxation is the transfer of
property

Specifically, if we talk about estate taxation, then there are four persons made liable for
the transfer tax

It is the (1) estate belonging to citizens and residents in one group, and on the other
group, (2) estate belonging to non resident aliens

In the first group, there are 3 classes there. (1) resident- citizens, (2) non-resident
citizens, and (3) resident aliens

6. Tax base of the estate tax

 1) The tax base, as provided in Sec 84 is net estate

It is not the gross amount of the estate left by the decedent but net estate

The transfer tax is imposed on the net estate

Net estate is gross estate less deductions

The gross estate of the first group or decedents who are classified as (1) resident- citizens, (2)
non-resident citizens, and (3) resident aliens is found in Sec 85

The composition of their gross estate for purposes of Philippine transfer tax is found in Sec 85

The law defines gross estate in Sec 85, to include properties which are real, personal, tangible or
intangible, wherever situated

The subject of the tax is not really the property itself, but the transfer of property

But even a property situated outside can be affected by this Philippine tax

2) The gross estate of the alien who is a resident of the Philippines, is his properties wherever
situated

Congress chose to tax even the transfer of properties outside the Philippines as affecting that
particular group of decedents

Like aliens who are residents of the Philippines

The reason for this is that they are residents of the Philippines

Protection theory can be utilized insofar as classifying this exercise of taxing power

7. Can protection theory be utilized in classifying taxation for incomes coming from sources outside?
 Yes, if the person affected is a resident even if that person is an alien

Or if a person is a citizen even if that person is not anymore a resident of the Philippines

That is enough justification. But congress chose to tax non-resident citizens and aliens of whatever
kinds or class, only on the basis of their income from within

8. If the person falls within any of the 3 criteria, then that becomes the basis for justifying the
taxability of the income, even if the income is from source outside for as long as the person affected
is a citizen or a resident of the Philippines

9. Under our present law, only 2 persons are mainly liable for tax on the basis of income coming from
all sources. These are (1) resident citizens and (2) domestic corporations. All others will be limited
from their sources within the Philippines for them to become liable for the tax here in the
Philippines

10. There was a time, prior to the present tax code, when non-resident citizens are in fact made liable
on the basis of income coming from all sources

But under the present law, Congress decided to unload non-resident citizens from additional burden

So they are not taxed if income is derived from sources outside

But in terms of justification for taxation, it can be justified based on the citizenship of the persons
covered, even if the incomes may be coming from sources outside the Philippines

11. What would have moved Congress in changing the rules?

That they now limit the liability of the persons from income coming from sources within the
Philippines

That consideration is it could be subject to international juridical double taxation phenomena

That is in respect to the same income that is derived from source outside the Philippines, there may
also be in place in the foreign country, an income
 Therefore, there is an income tax payable there, and there is also an income tax payable here

So that even if our laws provide that income derived from sources outside the Philippines may be
taxable, that cannot be double burdensome for income earners

12. But there can be taxing facilities that can be adopted to minimize or offset the effects of double
taxation

In fact we have that in our local domestic law

Aside from treatises that contracting parties may enter into

13. There are tax devices and tax facilities which can be used or adopted to minimize or offset the
effects of double taxation
1) Tax deduction
2) Tax credit
3) Income taxes assessed made in foreign countries

14. Inconvenience on the part of the person made liable for the tax

If the person is a non resident, how would he comply with his tax obligations?

If the person is no longer here in the Philippines, then who is going to the country where he is
located to collect the tax?

If we appoint an agent, then that is an additional inconvenience on the part of the persons who are
not anymore residents of the Philippines, though they remain citizens of the Philippines

15. But for resident citizens and domestic corporations, it may not be a valid excuse because they are
here. They can easily comply with the tax obligations and other requirement compared to those
who are not anymore residing here in the Philippines
 So even if the income is coming from sources outside, Congress chose to tax the same, and still they
may comply with lesser inconvenience compared to non-resident citizens

This, Congress chose to do

16. At the same time, Congress also inserted in the same tax code certain facilities that may mitigate
the effect of double taxation.

As we mention, this is what we call (1) tax deduction, (2) tax credit, or (3) tax state in foreign
countries

1. A boxer from the Philippines, a resident citizen, who participated in the boxing competition in the
US, and he was paid 300M pesos in prize money

The activity, which is the generation source of the income is not here in the Phil, but in the US

Whether this prize money is taxable in the Phil

Considering that the source of income is outside, will it be taxable in the Phil?

Yes, it is taxable in the Philippines

Because the income earner is a resident citizen

A resident citizen is taxable for all his income derived within and outside the Philippines

It is in Sec 23 of the NIRC

OR
 Use the law on exclusion

Here, there is a sports competition where prize or award was received by an athlete. In our law, the
tax treatment there is exclusion

It is taxable, but it is exempted by law

It means that the income will not be subject to tax

This is Sec 32B, par 7, on prizes and awards won in competition sanctioned by our national sports
association

So, if it is sanctioned by NSA, then the prizes or awards received may not be taxable. The treatment
assigned in our law is exclusion, meaning exemption

May it qualify as an exclusion in gross income?

Or insist using exempting provision is not applicable because of one missing element:

Example:

In the absence of any showing that the activity is sanctioned by the NSA, the prize and award won in
the competition is taxable

2. Norma donated property worth 1M to Teresa. Is this property taxable income on the part of
Teresa?

Explain by way of exemption in gifts and donations

It is not taxable because anything received as gifts, bequest, inheritance or devise is an exclusion in
gross income

Or insist that the exempting provision that is not applicable because one missing element: in the
absence of any showing that the activity is sanctioned by the NSA, the prize and award won in the
competition is taxable
 In other words, for the exclusion to apply, the prizes and awards must be won in a competition
sanctioned by NSA

3. Income is taxable when it is realized or received, except when otherwise exempted by law

4. General rule is income is taxable

(1) Income must be received

(2) No income, no liability for tax
(3) If there is income received, then it is taxable unless there is an exempting provision of law

5. Whether held in the Philippines or abroad, the exempting provision on prizes or awards in
competition, even if the place of activity is abroad

Exemption is the treatment, rather than taxability

6. Gratuitous transmission of property is taxable

(1) But there are gratuitous transmission of property that are not taxable

1) When the decedent is a NRA, the transmission of property happening is the transmission
of his properties here in the Philippines

So, the transmission of his property happening outside is exempted

There are gratuitous transfers of his properties which are outside the Philippines, but it is
taxable where it is located

2) In favor of charitable institution

 Not more than 30% shall be used for administration purposes

It is gratuitous in kind, but it is not taxable because exclusion treatment is assigned by law

Whenever the person appointed as heir is a charitable institution, social welfare, cultural
institution, then it is expressly specified by law as exempted from taxation

7. VAT

(1) Sale of goods in the course of business

1) Is there a sale or transaction?

2) Is the sale in the court of business?

Because if this one is taken out, the sale is an isolated transaction, and the person is not
engaged in any business, and the sale is not in the course of sellers trade or business, then
VAT will not attach to that particular transaction

VAT is not applicable because the sale was not in the course of trade or business

Only sales in the course of trade or business are included

3) Sales in the course of trade or business, yet not vatable

Generally, sales in the course of trade or business are vatable, but there are sales in the
course of trade or business that are not subject to VAT

Exempt transactions

These exempt transactions are also done in the course of trade or business, yet VAT is not
applicable by express exclusion

They are exempt, rather than taxable

These items are exempt, all others are taxable

8. Incomes that are already realized and received, yet if they come from source outside, it is exempted.
That is because, congress chose to exempt them from taxation
9.

10.
(1)
(2)
(3)