2017 Bar Examinations

Taxation Law

10. Taxpayers Suit

a. Nature and Concept

A taxpayer has sufficient personality and interest to seek judicial assistance with a view of
restraining what he believes to be an attempt to unlawfully disburse public funds.

Jurisprudence dictates that a taxpayer may be allowed to sue where there is a claim that
public funds are illegally disbursed or that public money is being deflected to any improper
purpose, or that public funds are wasted through the enforcement of an invalid or
unconstitutional law or ordinance (Landbank vs. Cacayuran, G.R. No. 191667, April 17, 2013).

b. As distinguished from a citizens suit

In a taxpayers suit, one can sue where there is an assertion that public funds are illegally
disbursed or deflected to an illegal purpose, or that there is a wastage of public funds through
the enforcement of an invalid or unconstitutional law. On the other hand, in a citizens suit,
the person complaining must allege that he has been or is about to be denied some right or
privilege to which he is lawfully entitled or that he is about to be subjected to some burdens
or penalties because of the statute or act complaint of (Province of North Cotabato vs.
Government of the Philippines, G.R. No. 183591, October 14, 2008).

c. Requisites of a Taxpayers suit challenging the constitutionality of a tax measure or act of a taxing
authority; concept of locus standi, doctrine of transcendental importance and ripeness for judicial
determination

Concept of locus standi as applied in taxation

Locus standi is a right of appearance in a court of justice on a given question (Abaya vs.
Ebdane, G. R. No. 167919, February 14, 2007). It is a partys personal and substantial interest
in the case, such that the party has sustained or will sustain direct injury because of the
government act being challenged. It calls for more than just a generalized grievance. A party
need not be a party to the contract to challenge its validity.

Doctrine of transcendental importance

In cases of paramount importance where serious constitutional questions are involved, the
standing requirements may be relaxed and a suit may be allowed to prosper even where there
is no direct injury to the party claiming the right of judicial review.

Ripeness for judicial determination

Nature of actual case or controversy - an actual case or controversy involves a conflict of legal
rights, an assertion of opposite legal claims susceptible of judicial adjudication (ABAKADA
Guro Party List, etc., vs. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Cruz,
Isagani, PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p. 23).

Criteria of being ripe for judicial determination - a closely related requirement is ripeness, that
is, the question must be ripe for adjudication. And a constitutional question is ripe for
adjudication when the governmental act being challenged has a direct adverse effect on the
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Taxation Law

individual challenging it (ABAKADA Guro Party List, etc., vs. Purisima, etc., et al., G. R. No.
166715, August 14, 2008).

PART II. NATIONAL TAXATION

A. Organization and Functions of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of the Secretary of Finance to promulgate rules and regulations the
Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful
rules and regulations for the effective enforcement of the provisions of the Tax Code (Section
244, Tax Code of 1997).

b. Specific provisions to be contained in rules and regulations

2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue

a. Powers and duties of the Bureau of Internal Revenue
o Assessment ad collection of all national internal revenue taxes, fees and charges;
o Enforcement of all forfeitures, penalties and fines connected therewith;
o Execution of judgements in all cases decided in its favor by the Court of Tax Appeals
(CTA) and the ordinary courts; and
o Give effect to and administer the supervisory and police powers conferred to or by
the National Internal Revenue Code (NIRC) or other laws (p.54 Ampongan IT)

b. Power of the Commissioner to interpret tax laws and to decide tax cases the power to
interpret the provisions of the National Internal Revenue Code (NIRC) and other tax laws shall
be under the exclusive and original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising
under the NIRC or other laws or portions thereof administered by the bureau is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals
(CTA). (p.54-55 Ampongan IT)

c. Non-retroactivity of rulings

B. National Internal Revenue Code (NIRC) of 1997, as amended

1. Income taxation
a. Definition, Nature and General Principles
a.1 Income Tax systems
o Global a system or tax treatment which views, indifferently the tax base, and
generally treats in common all categories of taxable income of the taxpayer (Tan vs.
del Rosario) (p.2 Dimaampao IT)
Provides for uniform tax rules/tax rates
Income Tax of Corporations (Secs. 27 and 28) generally does not
categorize/classify income
Imposes uniform corporate tax rates
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Taxation Law

o Schedular system in law, where the income tax rules/treatment varies and made to
depend on the kind/category of taxable income of the taxpayer (Tan vs. del Rosario).
It operates under the following characteristics: (p.1 Dimaampao IT)
Categorizes/classifies income: Sec. 32a; Secs. 24, 25 and 26 (imposes different
tax rates) categorizes income of individual taxpayers
Provides for different tax treatment
Imposes different tax rates

o Semi-schedular or Semi-Global Taxpayers Income - the compensation income,

business or professional income, capital gain and passive income not subject to final
tax, and other income are added together to arrive at the gross income, and after
deducting the sum of allowable deductions from business or professional income,
capital gain and passive income not subject to final tax, and other income, in the case
of corporations, as well as personal and additional exemptions, in the case of
individual taxpayers, the taxable income is subjected to one set of graduated tax
rates; method of taxation under the NIRC.

a.2 Features of the Philippine Income Tax Law

o Direct tax is imposed on the income-earner
o Progressive tax base increases as the tax rate increases
o Comprehensive - the Philippines adopts the citizenship principle, residence principle,
and the source principle
o Semi-schedular more schedular with respect to individual taxpayers but more global
treatment on corporations
o American origin

a.3 Criteria in imposing Philippine income tax

o Citizenship Principle
o Residence Principle
o Source Principle

a.4 Types of Philippine income tax

o National Tax
o Excise Tax
o Direct Tax
o General Tax

a.5 Taxable period

o Calendar year
o Fiscal year

a.6 Kinds of taxpayers

A.6.1. Individuals
Citizens
o Resident Citizens all sources inside and outside; net income.
o Engaged in trade or business or profession entitled to deductions on
his business income and personal and additional exemptions
2017 Bar Examinations
Taxation Law

o Purely compensation income earners not entitled to deductions; only

personal and additional exemptions
o Non-resident Citizens all sources inside

Aliens gross income

o Resident Aliens all sources inside
o Non-resident Aliens all sources inside
o Engaged in trade or business in the Philippines 180 days
o Not engaged in trade or business in the Philippines

NOTA BENE: For purposes of income tax, an overseas contract worker who is a Filipino citizen and
deriving income from abroad is deemed a non-resident citizen and therefore taxed only on income
sourced within the Philippines. However, in order to qualify as a non-resident citizen, the worker must be
physically present abroad most of the time or at least 183 days (continuous or not) during the calendar
year.

ADDENDUM: Certain aliens are entitled to preferential tax rates if they are employed by: (1) regional or
area headquarters and regional operating headquarters of multinational companies in the Philippines;
(2) offshore banking units established in the Philippines; and (3) foreign service-contractor or sub-
contractor engaged in petroleum operations in the Philippines. This is provided that their Filipino
counterparts are also afforded the same preferential tax rate. These Filipinos have the option to be taxed
under the preferential tax rate or under the graduated tax rates.

A.6.2. Estates and Trusts entitled to personal exemption of P20,000

NOTA BENE: Co-ownership is considered a separate taxable entity like estates and trusts. The co-owners
are subject to income tax on their individual distributive share only. However, if the co-owners, after
partition of property invest the income of co-ownership in any income-producing properties, this
constitutes an unregistered partnership and subject to income tax as a corporation. But if it is merely an
isolated transaction, then it cannot be said that a partnership has been formed.

A.6.3. Corporations net taxable income

Domestic all sources inside and outside the Philippines

Foreign

a. Resident Foreign Corporations engaged in trade or business in the

Philippines; ex. a Philippine branch of a foreign corporation

ENTITLED TO PREFERENTIAL TAX RATES (Engaged in trade or business in the

Philippines):
Regional operating headquarters of multinational corporations in the
Philippines

Offshore banking units and foreign currency deposit units of Philippine

branches of foreign banks international air carriers whether online or
offline and international shipping lines
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Taxation Law

Foreign service-contractors or sub-contractors engaged in petroleum

operations in the Philippines

Registered enterprises with the PEZA and SBMA

b. Non-resident Foreign Corporations not engaged in trade or business

in the Philippines; gross income from sources within the Philippines paid
to NRFC subject to final withholding tax (withheld by payor)

A.6.4. Partnerships
Taxable Partnership treated as corporations

NOTA BENE: The principle of constructive receipt of income is applied in partnerships. This means that
the partners are taxable on their distributive shares in the taxable year that the profit was made,
regardless of whether such has already been distributed and received by the partners.

Exempt Partnership
o General professional partnership partnerships formed by
persons for the sole purpose of exercising their common
profession; exempt from income tax but must still file an income
tax return - the partners are the ones liable for income tax based
on their respective distributive shares

o Joint venture or consortium undertaking construction activity, or

engaged in petroleum operations with operating contract with
the government