THE DEPARTMENT OF LEGAL MANAGEMENT

College of Arts and Sciences

San Beda College
Mendiola, Manila
Income Taxation
1st Semester, A.Y. 2014-2015
Atty. Sarah Jeane Cardona
4BLM 4DLM
Required References:
Codal- National Internal Revenue Code of 1997
Assigned Cases
Suggested Annotations
For General Principles: Law of Basic Taxation in the Philippines, Benjamin B. Aban
For Income Taxation: Philippine Income Tax, Victorino C. Mamalateo
GENERAL PRINCIPLES OF TAXATION
I. Taxation
A. Definition
B. Nature of Internal Revenue Law
Hilado v. Commissioner of Internal Revenue G.R. No. L-9408, October 31, 1956
C. Scope and Nature of Taxation
1. Inherent Attribute of Sovereignty
2. Legislative in Character
Sec. 28, Art. VI, 1987 Constitution
Sison v .Ancheta, G.R. No. L-59431, July 25, 1984,
Commissioner of Internal Revenue v. Pineda, G.R. No. 22734,
September 15, 1967
Phil. Guaranty v. Commissioner of Internal Revenue, G.R. No. L-22074,
April 30, 1965
Commissioner of Internal Revenue v. Algue, Inc., L-28896, Feb. 17,1988
D. Theory and Basis of Taxation
1. Life-blood theory
2. Necessity theory
3. Benefits-Protection/ Reciprocity Theory ( Doctrine of Symbiotic Relationship)
Commissioner of Internal Revenue v. Algue, Inc.,supra
Lorenzo v. Posadas, G.R. No. 43082, June 18, 1937
E. Purposes of Taxation
1. General / Fiscal/ Revenue
Commissioner of Internal Revenue v. Algue, Inc.,supra
PAL v. Edu, G.R. No. L-41383, August 15, 1988
Tolentino v. Secretary of Finance, G.R. No. 115455, October 30, 1995
2. Non-Revenue/Special or Regulatory
Osmena v. Orbos, G.R. No. 99886, March 31, 1993
Caltex v. Commission on Audit G.R. No. 92585, May 8, 1992
F. Characteristics of a Sound Tax System
1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice
Chavez v Ongpin, G.R. No 76778, June 6, 1990
Taganito Mining v. Commissioner of Internal Revenue, CTA Case 4702,
April 28,1995
G. Taxation Distinguished from Police Power and Eminent Domain
1. As to purpose
2. As to amount of exaction
3. As to benefits received
4. As to whether contracts may be impaired
5. As to whether there is a transfer of property rights
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6. As to scope
7. As to who exercises the power
Republic v. Bacolod-Murcia Milling Co., Inc., et al.,G.R. No. L-1982426,
July 9, 1966
Tanada v. Angara, G.R. No. 118295, May 2,1997
Osmena v. Orbos, supra
H. When is Tax Considered as an Implement of Police Power?
Lutz v. Araneta, G.R. No. 7859, December 22, 1955
Tio v. Videogram Regulatory Board 151 SCRA 208
I.May the Power of Taxation be used as an Implement of the Power of Eminent Domain?
Commissioner of Internal Revenue v. Central Luzon Drug Corp 456
SCRA 414
II. Taxes
A. Definition
B. Essential Characteristics of Taxes
1. Imposed by the State
2. Levied by the law-making body of the State
3. Enforced contribution
4. Payable in money
Borja v. Gella G.R. No. L-18330, July 31, 1963
5. Proportionate in character
6. Levied on persons property and excise (privilege)
7. Levied for public purpose
8. Paid at regular periods or intervals
9. Personal to the taxpayer
Tan v. Del Rosario, G.R. No.109289, October 3, 1994
Commissioner of Internal Revenue v. Santos, GR 119252, Aug. 18,1997
C. Requisites of a valid tax
1. Taxable subject must be within the jurisdiction of the taxing authority
2.Taxable subject must be accorded due process in the assessment and
collection of taxes
3. Imposition be for public purpose
4. Rule of taxation be uniform
5. Must not violate inherent and constitutional limitations
D. Classification of Taxes
I. As to subject matter
a. Personal, poll or capitation
b. Property
c. Excise
II. As to who bears the burder and incidence
a. Direct
b. Indirect
Tolentino v. Secretary of Finance, G.R. No. 115455, October 30,
1995)
III. As to purpose
a. General, fiscal or revenue
b. Special, regulatory or sumptuary
IV. As to how amount is determined
a. Specific
b. Ad Valorem (Value)
V. As to taxing authority
a. National
b. Local
VI. As to rate
a. Progressive
b. Regressive
c. Proportionate

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D. Taxes distinguished from other Impositions

1. Debts
Caltex v. Commission on Audit supra
Francia v Intermediate Appellate Court, G.R. No. 67649, June 28, 1988
Republic v. Mambulao Lumber Company, G.R. No. 17725, February 28,
1962
Domingo v Carlitos, G.R. No.L-18994, June 29, 1963
2. License Fees
Victorias Milling Co., Inc. v. Municipality of Victorias, Negros Occidental,
L-24813, September 27, 1968
3. Special Assessments/Levies
4. Tolls
5. Penalties
National Development Company vs. Commissioner of Internal Revenue,
G.R. No. 53961 June 30, 1987
6. Custom Duties
III. Limitations on the Taxing Power
1. Inherent Limitations on the Taxing Power
a. Public Purpose of Taxes
Pascual vs. Secretary of Public Works and Communications, et. al.,
G.R. No. L-10405
December 29, 1960
b. Non-Delegability of the Taxing Power
Osmena v. Orbos, Etc., Et al., supra
c. Situs of Taxation
Philippine Guaranty Co., Inc. V. Commissioner of Internal Revenue, L-22074
April 30, 1965
Reagan vs. Commissioner of Internal Revenue, G.R. No. L-26379, December 27,
1969
d. Exemption of Government from Taxes
Social Security System vs. City of Bacolod et.al., G.R. No. L-35726,
July 21, 1982
e. International Comity
Section 159, Local Government Code
2. Constitutional Limitations on Taxing Power
a. Due Process of Law
Sec. 1, Art. Ill, 1987 Constitution
Province of Abra vs. Hernando, G.R. NO. L-49336, August 31, 1981
b. Equal Protection of the Law
Sec. 1, Art. Ill, 1987 Constitution
Tiu v Court of Appeals, G.R. No. 127410, January 20, 1999
Sison vs. Ancheta, G.R. No. L-59431, July 25, 1984
Ormoc Sugar vs. Treasurer of Ormoc City, G.R. No. L-23794, February 17, 1968
c. Freedom of Speech and of the Press
American Bible Society v. City of Manila, April 30, 1957
Lladoc vs. Commissioner of Internal Revenue, June 16, 1965
d. Non-Infringement of Religious Freedom
Sec. 5, Art. Ill, 1987 Constitution
e. Non-Impairment of Contracts
Sec. 10, Art. Ill & Sec. 11, Art XII, 1987 Constitution
Casanovas v. Hord, 8 Phil. 125, March 22, 1907
Meralco v. Province of Laguna, G.R. No. 131359, May 5, 1999
Cagayan Electric Power and Light Co. V. Commissioner of Internal Revenue,
G.R. No. 60126, Septemeber 25, 1985
f. Non-Imprisonment for Debt or Non-Payment of Poll Tax
Sec. 20, Art. Ill, 1987 Constitution
g. Origin of Appropriation, Revenue and Tariff Bills
h. Uniformity, Equitability and Progressivity of Taxation
Sec. 28(1), Art. VI, 1987 Constitution
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Villegas vs. Hiu Chiong Tsai Pao Hao, G.R. No. L-29646, November 10, 1978
Association of Customs Brokers, Inc. Vs. Municipal Board of Manila et. al.,
G.R. No. L-4376, May 22, 1953
i. Non-delegation of legislative power
Abakada Guro Party List v. Ermita, G.R.168056, October 30, 1995
j. Delegation of Legislative Authority to Fix Tariff Rates, Import and Export Quotas
k. Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, l.
Charitable and Educational Purposes
Sec. 28(3), Art. VI, 1987 Constitution
Abra Valley College v. Aquino, June 15, 1988
Commissioner of Internal Revenue v. Court of Tax Appeals and YMCA,
G.R. No. 124043, October 14, 1998
m. Voting Requirements in Connection with the Legislative Grant of Tax Exemption
Sec. 24, Art. VI, 1987 Constitution
Sec. 28(4), Art. VI, 1987 Constitution
n. Tax Exemption of Revenues and Assets, including Grants, Endowments, Donations or
Contributions to Educational Institutions
Sec. 4(3), Art. XIV, 1987 Constitution
Sec. 28(3), Art. VI, 1987 Constitution
3. Double Taxation and Tax Exemptions
a. Double Taxation Defined
Victorias Milling Co., Inc. V. Municipality of Victorias, G.R. NO. L-21183,
September 27, 1968
b. Elements of Double Taxation
a. Subject matter is taxed twice when it should be taxed only once
b. Both taxes are levied for the same purpose
c. Imposed by the same taxing authority within the same jursidiction, during the
same taxing period and covering the same kind of tax
Villanueva v. City of Iloilo, G.R. No. L-26521, December 28, 1968
Procter and Gamble Philippines Manufacturing Corp. V. Municipality of
Jagna, G.R. No. L-24265, December 28, 1979
c. Kinds of Double Taxation
1. Direct Double Taxation
2. Indirect Double Taxation
3. International Juridical Double Taxation
d. Means Employed to Avoid Double Taxation
1. Tax Credits
2. Tax Deductions
3. Tax Exemptions
4. Tax Treaties
e. Tax Avoidance, Tax Evasion and Tax Fraud
Delpher Trades Corporation v. Intermediate Appellate Court et. al., G.R. No. L69259, January 26, 1988
Commissioner of Internal Revenue vs. Estate of Benigno Toda Jr., G.R. No.
147188, September 14, 2004
INCOME TAXATION
1. Income Taxation
a. Definition
b. Nature
2. Income Tax Systems
a. Global Tax System
b. Schedular Tax System
c. Semi-Schedular or Semi-Global Tax System
3. Features of the Philippine Income Tax Law
a. Direct Tax
b. Progressive
c. Comprehensive
d. Semi-Schedular or Semi-Global Tax System

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4. Criteria in imposing Philippine Income Tax

a. Citizenship Principle (Section 23, NIRC)
b. Residence Principle (Section 23, NIRC)
c. Source Principle (Section 42, NIRC)
5. Kinds of Taxpayers
a. Individual Taxpayers (Section 22, NIRC)
b. Corporations (Section 22, NIRC)
c. Partnerships (Section 22, NIRC)
d. General Professional Partnerships (Section 22, NIRC)
e. Estates and Trusts (Section 60, NIRC)
f. Co-ownerships (Section 22, NIRC)
6. Income
a. Definition
Madrigal v. Rafferty, 38 Phil. 414, August 7, 1918
b. Requisites of a Taxable Income
1. There must be gain or profit
2. The gain must be realized or received actually or constructiely
3. It is not exempted by law or treaty from income tax
Commissioner of Internal Revenue vs. Tours Specialists, G.R. NO. 66416
March 21, 1990
c. Realized Income vs. Recognized Income
d. Test in Determining Income
i. Flow of Wealth Test
ii. Realization Test
iii. Claim of Right Doctrine
Commissioner of Internal Revenue v. CTA, G.R. No. 25043,
August 26, 1968
iv. All-events Test
Commissioner of Internal Revenue vs. Isabela Cultural Corporation,
G.R. No. 172231, February 12, 2007
INDIVIDUAL INCOME TAXATION (Section 24-26, NIRC Inclusive)
1. General Principles (Section 23, NIRC)
2. Source of Income (Section 42, NIRC)
Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377,
December 18, 2001
Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue, G.R. No. L-2707,
April 30, 1965
Alexander Howden & Co. Ltd v. Commissioner of Internal Revenue, L-19392,
April 14, 1965
Philamlife v. Court of Tax Appeals and Commissioner of Internal Revenue,
CAGR SP No. 31283, April 25, 1995
3. Taxable Income (Section 31, NIRC)
4. Exemption of Minimum Wage Earners
5. Income Subject to Graduated Rates
a. Compensation Income
b. Business and professional income
c. Capital Gains NOT subject to final tax
d. Passive Income NOT subject to final tax
e. Other Income
6. Rule of Passive Income Subject to Final Tax
a. Interest Income
b. Royalties
c. Prizes and Winnings
d. Dividends
e. Capital Gains
7. Special Classes of Individual Employees
Those employed by:
a. Regional or Area Headquarters (RAH) or Regional Operating Headquarters (ROH)
of Multinational Companies in the Philippines
b. Offshore Banking Unit in the Philippines established in the Philippines
c. Foreign Service Contractor or subcontractor engaged in petroleum operations
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CORPORATE INCOME TAXATION (Section 27-30 Inclusive)

1. Normal Corporate Income Tax (NCIT)
2. Capital Gains Tax (CGT)
3. Final Tax on Passive Income
4. Minimum Corporate Income Tax (MCIT)
CREBA vs. Romulo G.R. No. 160756, March 9, 2010
5. Gross Income Tax (GIT)
6. Improperly Accumulated Earnings Tax (IAET)
7. Branch Profit Remittance Tax (BPRT)
8. Final Tax on (other) Gross Income from Sources Within the Philippines
GROSS INCOME
a. Definition (Section 32-A, NIRC)
b. Concept of Gross Income from whatever sources derived
c. Classification of Income as to Source
d. Sources of Income Subject to Tax
i. Compensation Income
ii. Fringe Benefits
iii. Professional Income
iv. Income from Business
v. Income from Dealings in Property
vi. Passive Investment Income
Interest Income
Dividend Income (Cash, Stock, Property and Liquidating Dividends)
Royalty Income
Rental Income
vii. Annuities, proceeds from life insurance or other types of insurance
viii. Prizes and Awards
ix. Pensions, retirement, benefit or separation pay
x. Income from any source whatever
Forgiveness of Indebtedness
Recovery of accounts previously written-off
Receipt of tax refunds or credit
e. Source rules in determining income from within and without (Sec. 42, NIRC)
EXCLUSIONS FROM GROSS INCOME (Section 32-B, NIRC)
a. Rationale for the exclusions
b. Taxpayers who may avail of the exclusions
c. Exclusions v. Deductions v. Tax Credit
d. Exclusions under the Tax Code
a. Proceeds of life insurance policies
b. Return of Premium Paid
c. Gifts, Bequests and Devises
d. Compensation for Injuries and Sickness
e. Income exempt under treaty
f. Retirement Benefits, Pensions. Gratuities
g. Miscellaneous items
h. Gains from Redemption of Shares in Mutual Fund
e. Other Exclusions
Damages recovered in a libel or slander suits
Damages recovered for alienation of affection
Damages recovered for breach of promise to marry
Damages recovered for loss of life of spouse
Damages recovered in annulment of marriage
FRINGE BENEFITS TAX (Section 33, NIRC)
a. Taxability of Fringe Benefits
b. Nature; Rate
c. Basis
d. Valuation of Fringe Benefits
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Read: Revenue Regulations 3-98 (RR No. 3-98)

DEDUCTIONS FROM GROSS INCOME (Section 34, NIRC)
a. Deductions in general
b. Basic Principles
c. Summary Rules on Claimable Deductions
i. For Individuals
ii. For Corporations
d. Kinds of Deductions
i. Optional Standard Deduction
ii Special Deduction
iii Itemized Deduction
e. Taxpayers who cannot avail of deductions from gross income whether OSD or
Itemized Deductions
f. Itemized Deductions
i. Ordinary and Necessary Expenses
Aguinaldo Industries Corp v. Commissioner of Internal Revenue, G.R. No.
L-29790, February 25, 1982
Commissioner of Internal Revenue v. General Foods (Phils.) Inc.
G.R. No. 143672, April 24, 2003
Esso Standard Eastern Inc. V. Commissioner of Internal Revenue,
G.R. Nos. L-28508-9, July 7, 1989
Atlas Consolidated Mining and Development Corp v. Commissioner of
Internal Revenue, G.R. No. 26911, January 27, 1981
Republic of the Philippines v. Manila Electric Company, G.R. No. 141314,
November 15, 2002
Kuenzle & Streiff Inc. v. Commissioner of Internal Revenue, G.R. Nos.
L12010 and L-12113, October 20, 1959
ii. Interest
Commissioner of Internal Revenue v. Palanca Jr. G.R. No. L-16626,
October 29, 1966
iii. Taxes
Commissioner of Internal Revenue v. Vda. De Prieto, G.R. No. L-13912,
September 30, 1960
iv. Losses
v. Bad Debts
Philippine Refining Co. v. Court of Appeals G.R. No. 118794,
May 8, 1996
vi. Depreciation of Property
Basilan Estates, Inc. v. Commissioner of Internal Revenue,
G.R. No. L-22492, September 5, 1967
vii. Depletion of Oil and Gas wells and mines
viii. Charitable and other contributions
Roxas v, Court of Tax Appeals, G.R. No. L-25043, April 26, 1968
ix. Research and Development
x. Pension trust contributions of employees
xi. Premium payments on health and/or hospitalization insurance
g. Special Deductions
i. Private proprietary educational institutions (Section 34 (A) (2), NIRC)
ii. Insurance companies (Section 37, NIRC)
iii. Estates and Trusts (Section 61, NIRC)
h. Optional Standard Deduction (OSD) (Section 34 L, NIRC)
PERSONAL AND ADDITIONAL EXEMPTIONS (Section 35, NIRC)
a. Basic Personal Exemptions
b. Additional Exemptions for taxpayer with dependents
c. Status at the end of the year rule
ITEMS NOT DEDUCTIBLE (Section 36, NIRC)
a. Personal, living or family expenses
b. Amount paid for new buildings of for permanent improvements
c. Amount expended in restoring property
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d. Premiums paid on life insurance policy covering the life of any officer financially
interested
e. Interest expense, bad debts and losses from sales of property between related parties
f. Losses from sales or exchange of property
g. Losses from wash sales of stocks or securities.
WITHHOLDING TAXES (Section 57-58 Inclusive; Section 78-82 Inclusive)
1. Withholding Tax System
2. Kinds of Withholding Tax
a. Withholding Tax at Source
i. Final Withholding Tax
ii. Creditable Withholding Tax
b. Withholding Tax on Compensation
i. Withholding Tax on Wages
ii. Withholding Tax on Fringe Benefit
c. Withholding Tax on Creditable Value Added Tax (VAT)
d. Withholding on Percentage Tax
3. Persons Required to Withhold
4. Persons NOT Required to Withhold
5. Consequences of Failure to Withhold
Read Revenue Regulations No. 2-98 (RR No. 2-98)
Commissioner of Internal Revenue v. Wander Philippines Inc and Court of Tax Appeals,
G.R. No. L-68375, April 15, 1988
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, G.R. No. 155682, March
27, 2007

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