Taxation Law Review

Part I

Laws and Regulation

Sec of Finance vs. Phil Tobacco Institute

Can a regulation be considered unconstitutional?

Clearly it can be considered as invalid since it goes against the tax code, but can it be considered as
unconstitutional? Yes, because it has the effect of amending the law and the amendment of a law is a
sovereign power of the congress, and BIR or Dept of Finance is part of executive branch of government.

Can the power to tax be delegated?

General Rule: No since the constitution vested it to the Congress. To avoid abuse of power and prevent
violation of separation of powers

Exception:

1. President- taxing powers is by law

2. Local Government Units-taxing power is by constitution

Pepsi Cola vs. Municipality of Tanuan

Legislative powers may be delegated to local gov units in matters of local concern, such is an exception
by immemorial practice. The power to delegate municipal corp for purposes of self governance
necessarily includes to grant the power to tax. Immemorial practice that the exception does not apply.

The congress can take away the power to tax from the local gov.

Section 5 Article 10 of Constitution; the power to tax granted by law to local gov is a grant of direct
authority. During 1935 Constitution, LGUs already have power to tax through the law enacted by the
congress. Under the current constitution, there is no need for an enabling law, the only thing that the
congress need to do is to set guidelines and limitations.

Can LGU tax call centers? Yes, it is the implication of the constitutional provision even if there is no law
granting neither a law prohibiting it then local gov have the power to tax it. LGU shall provide guideline
and limitation.

The delegated power given to the president to adjust tariff rates is by law, unlike the lgu’s power to tax
which is by the constitution. If there is no Flexible Tariff Clause the president cannot adjust tariff rates.
The president can only exercise the power to tax if congress is not in session. Also, the congress can
remove his power.
Abakada Guro Party- Constitutionality of reformed VAT Law

The taxing power of the president provided in the NIRC to increase the vat rate from 10 to 12% valid? SC
held that it is not a case of taxing power by the president this is just an act of delegation of
determination of facts. The legislature can always delegate the power to executive offices the power to
determine facts or conditions. The NIRC provision is valid even if it not one provided in flexible tariff
clause. The preliminary ascertainment of facts is not a legislative function.

Double taxation- taxing a property twice when it shall only be taxed once.

(49:21) Why is double taxation bad? Based on Acevedo case, when all the requisites are present, the law
is considered as invalid because it is prohibited double taxation. It is unconstitutional because it violates
substantive due process. Also, sec 28 is impliedly violated by obnoxious double taxation for the rule of
uniform and equitable taxation is violated, because the tax imposed is excessive.

2 kinds of Double Taxation

Obnoxious or prohibited double taxation

6 requisites

Classification of Taxation

Progressive- tax rate imposed increases as the value of the thing also increases

Regressive- tax rate imposed decreases the value of the thing also decreases

The true essence of progressive system of taxation is that the rich should pay more and the poor should
pay less. It shall be based on tax payer’s ability to pay like income tax.

VAT is regressive because it is equally borne by the rich and by the poor. It does not consider your ability
to pay. When congress passess regressive or indirect taxes, it does not necessarily violate the
consitution when the latter says the congress shall make a progressive system of taxation, it means
according to the SC is that direct taxes are preferred and in as much as possible indirect taxes should be
minimize because it is difficult if not impossible to enact tax laws solely based on one’s ability to pay.

(1:02:55) International Juridical Double Taxation- Based on S.C. Johnson case; it is the imposition of
comparable taxes to 2 or more states. In local taxation there are 6 requisites; same subject matter, same
purpose, same jurisdiction, same taxing authority, same taxing period, same??? (search for the 6th)
Requisities for International Juridical Double Taxation (3 only):

the same tax payer, same subject matter and for identical period.

What is the purpose of entering into a tax treaty?

Aside from preventing double taxation, purpose is to reconcile the national fiscal legislation of the
contracting parties in order to help the taxpayer avoid the imposition of simultaneous taxes in 2
different jurisdiction. The rationale behind avoidance of International Juridical double taxation to
encourage the free flow of goods and services and promote the movement of capital ,persons and
technology between countries for a robust economy.

What is the Most Favoured Nation Clause in a tax treaty? Can it be invoked by a 3rd party?

Requisites: public fund derived, petitioner is directly affected by such act

Taxpayer Suit

Requisites: 1. Public fund sourced from taxation. 2. The petitioner is directly affected by such act.

Cacayuran case

Landmark argued that the money used is one which is not sourced from taxation but through loan. SC
held that IRA which is taxpayer’s money was made as security for the loan granted by landbank. Also,
the money when it went to the hands of the municipality was automatically converted into public funds.
Court held that the money is a public fund. In this case, the injury test has been complied by cacayuran
even if he is not a party in the case, since cacayuran is a resident and a taxpayer and we are talking here
about a public plaza which according to the law is a property of public dominion which can be used by
anybody, thus, he has direct interest in insuring that the conversion of the public plaza will not be
exploited for commercial purposes, being a public dominion, no one can exert public rights over such
plaza, thus the injury test has been fulfilled. In relation to annulment, as long as taxes are involve,
taxpayers always have a right to question contracts entered into by the government, thus, being a party
to the case is not an issue.

Mamba vs. Lara Case

In this case, money came from funds and not from taxpayer’s money. SC held that a portion of the
amount to be paid the interest of the funds was appropriated by the sanggunian, thus, such money
appropriated was sourced from taxation. The SC held relaxed the application of the 2nd requisite which
is the direct injury test. The application of the test can be relaxed by invoking transcendental importance
paramount to public interest and far reaching implication, if issues involved are serious legal issues
and million pesos is involved.

Set Off

Why can’t taxes be a subject of a set off?

1. The government and the taxpayer are not mutually creditors Eand debtors of each other.

2. Taxes are due to the government in its sovereign capacity, debts are due to the government in
its corporate capacity

3. Taxaes is not matter of bargain but compulsory.

The SC allowed set off the estate inheritance taxes and in the case of Deutsche Bank.

In Domingo vs Garlitos, compensation/ set off takes place by operation of law, (the claim is overdue,
fully compensated and demandable?) Only time that you will apply this case is if there is already an
appropriation made by law.

*If the tax payer paid in excess, the dispositive portion would be the claim for refund is partially granted
only to the extent of the excess. But, if the tax payer’s payment is deficient, the dispositive portion will
be, the claim for refund is denied, and the dispositive portion cannot order the taxpayer to pay the
deficiency because according to the SC, such is an unrelated matter. The court should not do the duty of
BIR if it failed to do so. The court shall order the BIR to issue an assessment.

Air Canada Case- The commonality and the essence of the no set off rule is that according to the SC, a
tax payer cannot refuse to pay his tax liability on the ground that the government owes him an equal or
greater amount (francia case). Tax collection cannot await the results of a law suit against the
government.

Most Favoured Nation Clause in relation to International Juridical Taxation

There is International Juridical Taxation when tax is imposed on the same income by state of residence
and the state of source

The purpose of most favoured nation clause allows a particular taxpayer to allow liberal or better tax
rates in another tax treaty in order to level the playing field. The lowest tax rate in another tax treaty
with the Philippines then such country such as the US will invoke that particular rule. SC Johnson found
one in rp-germany treaty.
Most favoured nation clause applies based on 2 requisite: 1. It must be royalty of the same kind, 2. It
must be paid under similar circumstances. (both exemption or both credit method) With regard to
number 1, the BIR take note of the definition, same definition e.g. in the treaty, it covers copyright, thus
it will not apply because the royalty must be one which is of the same kind. Under the 2nd requisite in
relates to the relief that is granted, it means similar circumstances in payment of tax not royalties.

When both the state of source and the state residence stipulated both in the treaty to tax, it is
incumbent upon the state of residence to give relief/ way. 2 kinds of reliefs: 1.exemption method; of
already taxed in the state of source, no longer taxed in the state of residence; 2. Credit method; the
amount of tax paid in the state of source is creditable to the state of residence.

RP-US+ credit method/ ordinary credit method. The amount of tax of creditable to US tax provided the
tax due does not exceed 80. One not paid under RP US treaty is not same as paid under RP-Germany
treaty

RP-GERMANY- credit method. Its called a 20% matching credit.

Part II

Compensation Income- it must be an income received by an individual arising from services rendered
pursuant to an Er-Ee relationship, without such it cannot be considered as a compensation income.

Rule on International Air Carriers which do not have landing rights in the Philippines

BOAC Case

Issue: Whether the income is sourced from within or without Ph.

Doctrine: The source of income shall not be based where the service is performed but

Scenario:

The 2 sub issues that have to be resolved,

*Whether x is a resident or non resident citizen?

Sec 22 E provides that a non resident citizen is noe who works and derived from abroad , who’s
requirement requires him to be physically present abroad MOST OF THE TIME during the taxable year.
RR1-79, according to BIR when you say most of the time it shall be AT LEAST 180 DAYS.

*Determining the source of x’s income whether if it is an income from within or from without? It is
considered derived from sources derived outside PH, since X rendered service in china,for compensation
rendered, the situs is where the service is performed, as confirmed by the Juliane Baier- Nickel Case. In
order to prove that she derived from sources outside ph particularly Germany, she presented
documents which allegedly fax instructions or orders to the domestic corporation, but SC held that such
documents only prove the act of sending instructions but does not prove that orders are related to
consummated sales. Since, this is a refund case, the doubt shall be resolved against her, thus, denied.

If X is an OCW, the answer will not be the same, for the income will be exempt, per RR 1-2011, as far as
an OCW is concerned, length of stay abroad is immaterial. If one is considered as an OCW and you
derived income from sources without the PH, it is considred considered as non taxable under the situs
rule.

The 3 requisites for an OCW are: 1. Must be physically present abroad as a consequence of employment.
2. Salaries and wages are paid for by an employer abroad and not borne by entity or person in ph. 3.
Registered as an OCW with POEA.

Distinction between a non resident alien engaged and not engaged in business in PH. If a non resident
alien stays in ph below 180 days but he is engaged in business in PH, then that particular 180 rule does
not apply, because sec 25 is only a presumption rule.

The phrase “in any calendar year” under sec 25, it refers to a particular duration with respect to
Philippine asylum, it refers to the entire duration that will total to atleast 180 days. E.g year 1 = 30 days,
year 2- 185 days, year 3- 30 days. The count of 180 is aggregate but it only as per year basis, so you
cannot add 30 plus 180. The determination is on per year basis.

(2:10:00) Situs rules

In the absence of a specific provision under the tax code, ex. winnings and prizes, we go back to the
default rule of SC in the BOAC case which says that source is the property activity or service which
produced the income. With respect to winnings and prizes it’s the activity that was made by the
participant in relation to his income tax. EX. In a competition, it shall be where it was done since that is
where the activity is to which the prize was received.

You only apply the rule on the sale of tickets for international air carriers without any landing rights in
the PH, that is the only time to apply the BOAC test.

With respect to the sale of the tickets, it shall be the activity test.

Recap:

Interest= residence of the obligor or the debtor.

Royalty = where the royalty is used. E.g. franchise of a store in ph, it is considered as phil source because
it was used in ph.

Rentals= where the property is located whether real or personal property.

Personal property- depends on whether the personal prop is purchased or produces, if purchased;
where it was sold, if produced; if produced within and sold within Ph it is considered as entirely derived
from sources within; if produced within and sold without or produced without and sold within then both
is considered partly within and partly without. If produced without and sold without, it is considered
entirely from sources outside ph.

Only one exception for personal prop: shares of stock. In such case, regardless where it is sold and it
involves domestic corp shares then it is considered as from sources within. If a non resident foreign corp
conduct business in ph through a branch and derives income in the ph, single entity concept is followed,
the taxpayer shall be the branch. On the other hand if a non resident foreign corp conduct business in
ph independently even if it has a branch in ph, then the single entity concept is set aside, the taxpayer
will be the non resident foreign corp. A non resident foreign corp has no capital stock. A non resident
foreign corp act independently from its branch has capital stock.

The single entity concept is based on the principal agent relationship. The principal is the non resident
foreign corp and the agent is the branch. If it is foreign corp shares it is considered as income. That’s
why importations are exempt from income tax, also the point of sale is outside PH.

Regardless of the taxpayer, if income is derived from within it is taxable. The act of selling tickets will
make a foreign corp a resident foreign corp since it is considered as doing business, if no activity then it
is a non resident foreign corp.
BOAC case: place of payment or where contract was perfected was not material for purposes of situs.

DIVIDENDS

Usual misconception is if it’s a domestic corp it is within, and if it is foreign it is without. Pursuant to
NIRC section 42

Foreign corp shares 2 rules:

1. If gross income of foreign corp is atleast 50% for the 3 year period preceding the declaration of
dividends were derived from sources from within the ph. Subject to pro rata formula of gross income ph
over world wide gross income multiply by the dividends.

2. If the gross income is less than 50% for the 3 year period, automatically, 100% is considered as
income.

Illustraition:

In 2018, foreign corp declared cash dividend in the amount of 10 Million Pesos, since there is a
possibility that the dividend income declared by a foreign corp can be considdred as withoin , how to
determine if it is within or without. If 2018 is the year of declaration, count 3 years back so 2015 2016
2017, then determine how much gross income from said period comes from sources within, so if the
answer is 70% of its gross income where derived from sources from sources within it

Scenario 2, If only 30% is considered within in rel to considered to 2nd rule, then the entire 10 million is
considered without.

You only use the pro rata/ratio formula if the gross income derived from foreign corp for the 3 year
period immediately preceding the period when the dividends were declared if it is at least 50% if less
than 50%, entire dividends will be considered as without.

How do you evaluate problems in relation to foundation of income tax?

Step 1- Section 23

Step 2- Section 42

Step 3- tax table

**This is how you study income tax

Problem:

Resident alien debtor Non resident foreign corp creditor derives interest income

First determine income earner which is the non resident foreign corp (sec 23). If you know sec 23 and
you know the rule in situs, then apply rule 42. Since the debtor is the resident then it is within, then
refer to tax table what is the specific rule.

Ex. A resident alien, has real property but it is located in a foreign country, just apply 23 (within or
without), if within taxable. But he will not qualify to 6% capital gain tax. IF real property, the
determining factor is where the property is located. Master first the situs rule.

IF resident citizen, taxable worldwide, if non resident alien and engage or not engage not that relevant
since they are taxable within but remember that a non resident alien not engage in trade or business is
subject to a fix rate as a general rule to 25%, so it is not entitled to 8% since it is not subject to graduated
rates.

Minimum Wage Earner= the coverage as per sec 22 and last paragraph of sec 24.

Overtime pay, Hazard pay, holiday pay, night differential are exempt. (service charge if received by a
minimum wage earner is not included thus considered as taxable)

In Soriano case, the issue is with respect to the effectively since the law did not provide. Per SC status is
determined on the full year basis, the context is that it is premise of the fact of one’s status as a
statutory minimum wage earner so that if a person receives wages beyond the statutory minimum wage
then he ceases to be such. Question is how about the income earned while still at minimum wage-
earner, that’s fine, he is still exempt at that time. In comparison to 8% preferential rate. There is a 3
million threshold is for an annual basis. Just because it is annual, it doesn’t mean that such will be your
status for the whole year. The qualification to be a minimum wage earner is that you receive statutory
minimum wage. If you receives salaries and wages beyond then you cease to be but the exemption with
respect to income obtained as a statutory minimum wage earner remains. Determine status on a per
taxable year.

RR 10-08. Even if you receive a statutory minimum wage but you receive other income compensation
that is taxable then automatically you become disqualified and your entire income will be taxable.
However, in the Soriano case, SC held that BIR cannot do it since it is a qualification not found under the
law. It only says that if you are a minimum wage earner you are qualified to exemption. Thus, rule with
regard to the qualification is declared as invalid. The current rule is that 10k will be exempt, but 5k
(other income) will be taxable.

BIR stated that diminution and reduction of salaries and wages for purposes of availing exemption has 2
consequences:

1. Disallow as an expense

2. Offenders may be prosecuted criminally

PART III

Tax rates can be lowered to 10% but is based on the tax treaty. If you want to avail a tax code rate you
just avail it no admin requirement, with tax treaty, it will depend on the tax treaty relief application.

In the case of Deutsche Bank, the issue is whether the tax payer belatedly file their application will be
disqualify in availing the tax rates? SC held that the obligation to comply with the tax treaty obligations
for a lower tax rate, the BiR should not add additional requirements that will negate availment of lower
tax rate. Since tax treaties does not require such (TTRA?). In Deutsche Bank, the SC mentioned that the
objective with relation to non compliance by way only an imposition of administrative penalty. TTRA is
not a requirement to avail the tax treaty.

The doctrine in deutsche bank, the obligation to comply with tax treaty obligation precedes over the
objective of BIR in order to prevent erroneous application of tax treaty rates for tax payers not qualified.
There is no tax treaty which require a TRA, thus BIR should not add requirement that is not found in the
treaty.
8% Preferential rate under the TRAIN Law

Essentially, in general, there are 2 tax payers entitled to avail of the 8% rate

1. Purely income earner with respect to self employment or practice of profession

2. Mixed income earner which means you earn compensation income which relates to income
arising from services rendered pursuant to an ee- er relationship and income from practice of
profession.

The tax base is gross sales (seller of goods) or gross receipts (seller of services )(net of sales discounts
and return). The formula is gross sales/receipts less than cost of sales equals to gross income then less
allowable deductions, then that will be the taxable income. The 8% rate is optional for those who are
qualified. Can opt to the graduated rates. There is a possibility of availing the graduated rates is more
efficient than the 8%.

The 8% should be based on the income. There is difference between gross sales and income. For the
latter, even if there is no income you still have to pay, unlike in income, you will only be taxable if there
is gain or profit.

Requirement

1. Taxpayer must AVAIL the 8% for even if he is entitled the default is the graduated rates. In the
1st quarter of the year or upon registration. As amended by train law, April 15 is the deadline. If you
initially avail the 8% then the following year you can revert back to the graduated rate.

2. Ailment is irrevocable and not subject to amendments for the whole year, if you avail it on the
1st quarter you cannot go back to the graduated rate on the 2nd quarter.

3. The 8% rate is only available if gross sales/receipt does not exceed the 3 Million threshold under
sec 109. Thus there are 6 taxpayers that are not entitled to 8%- purely compensation income earners,
vat registered tax payers regardless of gross sales or receipts, non vat registered tax payers whos gross
sales or receipts exceed the vat threshold, partners of a general professional partnership, tax payers
that are subject to the percentage tax under title 5, individuals who are exempt.

Possible questions that may be asked in the bar. The 3 million threshold is an annual basis, compare to
minimum wage earners who even if the the taxpayer during the middle of the taxable year receives
wages or compensation beyond the statutory minimum wage, he loses his status but with respect to
income previously earned, the exemption will still apply. But with respect to the 8% since it is
determined on an annual basis.

Illustration:

1st- 1 million gross sales (tp avail of the 8%) still qualified, thus no need to pay VAT, no need to pay
percentage tax

2nd- 1.5 Million can still avail

3rd- 2 million (once the tp during the taxable year breaches the 3 million threshold even if initially the
taxpayer avails the 8% automatically the tp is disqualified starting with the 3rd quarter) but what
happen to the 8% during the 1st and 2nd quarter? It will be credited.

*quarterly return is cumulative

*The taxpayer is liable to pay VAT prospectively, meaning only during the time the taxpayer breaches
(4th quarter). With respect to percentage tax, the tp is liable retroactively, but without penalty.

Even if during the 1st quarter you are entitled, its not 3 million divided by 4, its an annual basis 3 million,
the amount of 8% will be automatically be credited. Why are you liable to pay percentage tax? Because
you are disqualified to avail of 8%. Why are you liable to pay the vat? Because you’ve reached the vat
threshold.

If you are a mix, and your compensation income and practice of profession, eg. Comp income is 300k,
practice of proff is 1 million, how much is taxable income? No more 250,000 exemption with respect to
gross sales/ receipts because the 250k is already incorporated in the first year, it will be a double
benefit. 250k can be availed of by those who practice of profession only and not mixed who availed of
the 8%, he can still avail of 250k, thus taxable income will just be 750k, unlike in mix income earner
(compensation and practice of profession), the taxable income is still 1 million. No more 250k special
deduction for mix since it was already incorporated.

If practice of proff availed of the 8% how much is the taxable income? 750k. As opposed to those
practice of proff but availed of the graduated rate the taxable income is 1 million., no special deduction
since already incorporated.
The excess of the compensation income over the 250k is not deductible against the income with respect
to practice of profession.

PART IV

Sec 22 B includes partnership but not a general profession partnership. The latter means partnership
organized for the practice of profession. Can a lawyer enter into a partnership with a doctor? Yes for tax
purposes.

It does not cover somebody who is a mere supplier of good to the construction site. A joint venture is
not a mere supplier. If a land owner and the developer enters into a joint venture in making a
subdivision. This is merely a capital contribution, no income tax. When the joint venture sells, the
income is exempt. However after distribution of profits, not subject to tax because it is a return of
capital.

In general profession partnership, a doctor and an engineer can enter into a contract of partnership,
there is no prohibition except for lawyers (legal ethics). GPP is exempt but as per Sec 26, when theres
already a distribution of income among the partners, they are tax as individual persons. In case of
unregistered partnership or regular partnership will be taxed at 30%.

Exempt with respect to gpp but the partners are liable as to their individual capacity. For vat purposes,
the gpp can be liable to the 12% vat or 8% percentage tax. On the other hand, when the partners
received they share they are no longer liable to 12%. VAT and income tax with respect to gpp is inverse,
gpp is exempt from income tax but liable to vat. Partners are not liable for vat but subject to income tax.
Regular partners in a regular partnership are subject to vat or 8% percentage tax.

If you look at sec 73 D in rel to sec 26, if a partnership is a regular partnership and the regular
partnership declares a taxable income of 700k by express provision of sec 73 D, mere declaration of
taxable income is DEEMED ACTUALLY AND CONSTRUCTIVELY RECEIEVED whether declared or not by the
partners. Once the regular partnership declares income, it is deemed actually and constructively
received by the partners whether or not actually declared. Will your answer be the same if it is a general
professional partner? No, Sec 73 D is not applicable to GPP.

Sec 26, the provision for gpps there is no deemed actually or constructively received. Expressly states
that you declare gross income when one received it and there should be distribution, thus, it is a valid
defense for gpps. 73 D applies only to corporation.
In rel to SC cases, co ownership and unregistered partnership, in the former, basis will be: isolated
transaction, no improvement, shared merely as co owners, not incidental to the purpose of the
partnership. If unregistered partnership, basis will be: common fund, common manager, series of
transaction, habitually in dealings. In rel to isolated transaction, remember the Pascual case, in such
case pascual bought 2 lots then 3 lots, then sell (no improvement) the property. Accdg to SC, it were an
isolated transaction unlike in Evangelista where 24 lots are involved. In series of transaction, consider
the length of time when it occurred. Remember that with respect to legal conclusion, you have to be
consistent with your basis.

In Pascual case, there is no evidence that they entered into a contract of partnership, it is a clear evid of
co ownership, mere share of profit as co owners is not partnership. (Pascual not good Juris)

Accdg to SC, under 22B, what is being taxed are corporations, it includes joint ventures which are not
necessarily partnership based on the phrase that no matter how created or formed. It means that it
does not necessarily be in compliance with requirement of partnership.

In the case of Obillos, when he transferred the lot to his heirs, they sold the lot and divide the profits.
The intention to dissolve the co ownership is evident. A signle transaction only.

In rel to Onyak case, a co ownership of inherited prop is automatically registered to an unregistered

partnership the moment property including the income derived therefrom. The moment heirs allowed
to onyak to use the property as a common fund, it is tantamount to actually contributing said incomes
to a common fund, thus, creating an unregistered partnership.

If there is no OVERT ACT (appointment of manager/ no improvement in the property) then it is a co

ownership. If there are overt acts then it is an unregistered partnership.

Marubeli case, single entity concept: when a foreign corp conducts business though a branch, the
principal agent. The tax payer is the branch. If fc conducts business independent to the branch the single
entity concept, the principal agent relationship is set aside, the tp is the FC.
Sec 28 a3- International Air Carrier

The international air carrier is subject to 2.5 % Gross Phil Billing tax, by amendment of the law. The
number 1 requisite for an international airline to be subject to 2.5 is that it must be a resident foreign
corp. E.g. cebu pacific, they are not liable even if they have international flight, unlike BOAC, it must
have landing rights in Ph. The following are the 2 requisites irrespective of place of sale , payment or
issue of passage documents. If 1 is absent then it is not covered by GPBT

1. The flight must originate from ph (if flight originally commences in any port in ph)

2. It must be on a continuous and uninterrupted flight (transhipment of a passenger outside ph is

by the same air line, if different airline it is no longer continuous)

*A flight is considered as still originating if the flight originates from hongkong then stop at the ph, then
boarded another plane belonging to the same airline.

*If it is a chartered flight and the aircraft stays for more than 48 hours in manila except in case of force
majeure or cause beyond the control of the passenger, it is already considered as originating.

*If it’s a commercial flight, if the aircraft stays in ph, the passenger alight from plane, then boards
another regardless of stay that is already considered as originate.

*The express provision of tax code, place of issuance, sale of ticket is no material in determining GPBT.

PART V. The tax implication of income received by a proprietary education institution that is non profit is
10% preferential rate based on their taxable income except for activities that are substantially unrelated
to the edu or hospital’s primary purpose. E.g. renting out a space in school.

In relation to unrelated activities it must not exceed 50% of total gross income. What is the effect if it
exceeds the 50% threshold? The excess will be subject to 27 (A). Once the proprietary edu institution
exceeds the 50% it is disqualified from preferential rate and become taxable.
St. Lukes invoke sec 30 (E) in availing the tax exemption which provides that charitable corp are exempt
provided that the income they receive shall inure for the benefit of the member.

How do we know if an entity can qualify as charitable? 4 tests:

1. organize exclusively for charitable purpose

2. operating exclusively for charitable purpose (st lukes lack this requisite)

3. no net income belongs to any or inures to the benefit of member, officer, or any specific person

Why is a claim of exemption strictly construed against the taxpayer? An exemption restricts tax
collection which is necessary for the government’s existence

A charitable institution is not ipso facto exempted. There should be an act of congress and fit in the
requisite.

Illustration. 1 million earnings= 90% is used to maintain the charitable ward and 10% is used for
maintaining the paying ward. Is the hospital tax exempt?

Sec 27 B did not remove the exemption of charitable hospital. The only effect of such provision is that
instead of being subject to 30% the taxable income of proprietary edu and hospital which are non profit,
now they are subject to 10%.

• 2 Legal conclusions based on St. lukes case

1. if you are a hospital that has a 1.3 billion revenues from paying patient it cannot be disputed that you
are not operating exclusively for charitable purposes.

(With respect to income from paying patient, st luke is considered as proprietary non profit tax which is
subject to 10% income.)

2. Income from paying patient is equivalent to income from an activity conducted for profit.
PART VI

**Capital losses sustained during the taxable year may be deducted against capital gain currently as
opposed to year end

Non stock non profit edu institution is covered by sec 30 H, sec 4 of article 14 .

Per De Lasalle case, when you say revenues the coverage of exemption would be income tax, VAT on
foods and services and local business tax. On the other hand, if you say assets exemption covered will be
real property tax, vat on importation and customs fees.

The last paragraph of sec 30 is without force and effect to a non stock no profit provided that its
revenue are used actually, directly and exclusively for educational purposes. The rationale for the grant
of tax exemption with respect to revenues and asset, it was deemed beneficial to students which could
otherwise be charged with unreasonable amount. The school must provide factually that the revenues it
wish to exempt falls within such criteria. The word revenues under the constitution is unqualified as to
the source. Rental income is not included even as per Sec 30 H.

You can say that it is taxable as provided in the constitution or as per sec 30 H, as such it is exempted.
The only requirement is you have an income as a non stock.

If the school a public school? Being a government edu institution, the tuition fee is exempt while the
rental income is taxable even if it is used actually, directly and exclusively for edu purposes because it is
provided by the law.

A medical school, having tuition fee and income from paying patients. Exempt provided that its owned
and operated by the non stock non profit edu institution and that it is an indispensable requirement is
operating a medical school. The law provide the exemption for revenues derived from asset used in the
operation of a medical school.

PART VII Exclusions

Under sec 32 B, there are 2 kinds of prices and awards. Normally, when a new law was passed to
increase the amount of prices to be received by athletes, surprisingly, there was no tax exemption
provision in the new law, thus sec 32 B applies. CTA held that when national sports association, the
competition by sanctioned by national sports association, meaning Philippine Olympic committee. That
is the reason why prices received by pacquiao cannot be considered an exclusion from gross income.
Same applies with chess players here in ph, the prize received for a chess federation international
competition, the CTA held that is taxable because it was sanctioned by the Phil Olympic committee.

In relation to condition of rendering future service, it must be a substantial future service.

Life Insurance, only relates to life and not to health insurance, what is being excluded is the proceeds of
life insurance. In order to be excluded the only requirement is that the insured must die. It doesn’t
matter who pay for premium or who is the beneficiary if the issue is whether or not the proceeds is
excluded from gross income. If the life insurance is one that pays interest, then the intrest is covered by
the gross income, it cannot be covered by the exemption even if the insure dies. The rationale for that is
because when you say proceeds to life insurance it cannot be considered as gain or profit but more of an
indemnity.

If the employer pays the premium, the issues are whether or not the premium is subject to fringe
benefit tax if there is insurable interest. A far as deductibility is concerned, it will depend on w/n the
taxpayer/corp/employer is the beneficiary directly or indirectly of the proceeds. If yes, it is non
deductible. E.g if the president dies and the beneficiary is a corp, then the premium is non deductible.
The basis for saying that premium are deductible is sec 34 A and it is considered as ordinary and
necessary expense. If non decutible sec 36. BIR has been generous enough to extend the income tax
exemption of premiums for rank and file employees, the basis is equity.

Gift and inheritance. If something is donated, then it is an exclusion from gross income. If x own an
income generating property then donates it to Y, the donation is an exclusion form gross income.
However, the income that Y will receive from such property will be subject to gross income. It will only
apply if the transfer is by way of divided interest, otherwise, general rule apply that if it is by donation of
property, then excluded.

In rel to damages, in determining whether damages are taxable or not. 2 criteria: 1. Express provision of
sec 32 B sub section 4 and 2. The rule that the amount of damages received is merely compensatory or
to recover what was lost.
Ex. X has an MVA, the car was totally wrecked but X did not incur any injury. The at fault party offered 1
million as compensation. The injury referred to by law is physical injury, thus, if there is no physical
injury, the 1 million he received cannot be considered as excluded under subsection 4. There should be
physical injuries. However, it can be excluded on the basis that what he merely received is
compensatory. But the exempt is only up to the extent that is compensatory, anything in excess is
taxable. If X received 1 million, but his car only cost 20k, then the 980k is taxable. But if it falls under
subsection 4, there is no limit, even if X only incurred scratches, the 1 million will not be taxable. If it
doesn’t fall within the 2 requirements then it is taxable. In the case of exemplary damages, it is not
excluded, because damages received must be on account of, it must relate to or because of such injury
or sickness. Accdg to US SC, exemplary damges is awarded because of the reprehensible conduct of the
offender. As a general rule exemplary damges are taxable, an exception is when it is awarded in
consideration of ER-EE relationship regardless of the kind of damages, it is exempted from tax.
Backwages, allowances and benefits awarded in a labor dispute constitute remunerations for services
that have been performed by the employee thus it is taxable.

In case of retirement, if an employee receives a retirement pay from the cba, accdg to SC if the CBA is
not registered with the BIR, then CBA is taxable. 50-10 (tax code) service requirement apply. What will
apply is the retirement plan that is registered with the BIR and provide for a better benefit. If retirement
plan provdes for equal to less benefits, per BIR, if retirement pay is equal whenever exempt whether as
provided by the tax code or labor code. But if less, automatically the labor code applies. Retirement plan
prevails over the tax code provision. If there is a plan but not BIR registered then labor code applies.

Income from foreign government. Sec 32 B vs. Sec 27 C. If it is income in related to governmental
function it is excluded under 32 B even if you are not enumerated under 27 C. On the other hand, if
youre under 27C, you are exempt whether income from governmental or proprietary function, as long
as you are a 27 C corporation. In the case of ATLAS, when ATLAS paid the interest to Mitsubishi, SC held
that the loan agreement is distinct from another loan agreement. The mere expedient of a phil corp
entering with contract of loan with foreign corp.