A.

Taxation

Definition Taxation is the process or means by which the sovereign, through its lawmaking body,
raises income to defray the necessary expenses of the government. Purposes of taxation The
purposes of taxation maybe classified into primary and secondary, to wit:

1. Primary purpose: To provide funds or property with which to promote the general welfare and
protection of its citizens and to enable it to finance its multifarious activities.

2. Secondary purposes a. To strengthen anemic enterprises by giving tax exemptions; b. To

protect local industries against foreign competition through imposition of high customs duties on
imported goods; c. To reduce inequalities in wealth and income by imposing progressively
higher tax rates; and d. To prevent inflation by increasing taxes or ward off depression by
decreasing them.

Scope of taxation

In the absence of constitutional restrictions and subject to the will of the legislative bodies with
whom it is entrusted and the discretion of the authorities which exercise it, the power of taxation
is unlimited, comprehensive, plenary and supreme, the principal check upon its abuse resting in
the responsibility of the members of the legislature to their constituents. Since the power to tax
is the strongest of all the powers of the government, the legislature is free to select the subjects
or objects to be taxed. They may be persons, whether natural or juridical; property, whether real
or personal, tangible or intangible businesses, transactions, rights, or privileges. It is of course
to be admitted for all its plenitude, the power to tax is not without restrictions (Comm. vs. Algue,
G.R. No. L-28896, 17 Feb. 1988). Despite all its tenacity, taxation is nonetheless subject to
established limitations, such as those inherent in the power itself or mandated by the
constitutional precepts (Vifug, Tax Law and Junsprudence, 3 Ed., p. 4).

Case 1-1

After having been informed that some massage parlors are being used as fronts for prostitution,
the Sangguniang Panlungsod passed an ordinance subjecting the massage parlors to such
onerous taxes that leave them no other alternative but to stop operating. Is the ordinance valid?

(17- Answer:

Yes. The power to tax may include the power to destroy if it is used validly as an implement of
the police power in discouraging and ultimately. prohibiting in effect certain things or enterprises
inimical to the public welfare (Cruz Constitutional Law (1987). P. -9). A tax does not cease to be
valid merely because it regulates, discourages, or even definitely deters the activities taxed. The
power to impose tax is one so unlimited in force and so searching in extent, that the courts
scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in
the discretion of the authority which exercises it (Tio us. Videogram Regulatory Board, G.R. No.
75697, to June, 1987).
Theory and basis of taxation

1. Theory. — The power of taxation proceeds upon the theory that the existence of the
government is a necessity; that it cannot continue without means to pay its expenses; and that it
has a right to compel all its citizens and property within its limits to contribute (see 51 Am. Jr..
42-43).

Case 1-2 The government has called upon its residents and citizens to pay taxes and assume
monetary burdens so that it can meet its widely expanding services and carry out its other
functions. Miss Cory refused to pay taxes. Accordingly, she does not care whether the
government shall continue to exist or not, and she wants her millions to remain intact. Is the
contention of Miss Cory justified?

Answer:

No. The continued existence of the government is the responsibility of every citizen.
Consequently, they have to pay their taxes religiously. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard-earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government (Comm. vs. Algue,
Inc., G.R. No. L-28896, 17 Feb.1988). 2. Basis. - The basis of taxation is found on the reciprocal
duties of protection and support between the State and its inhabitants. The state receives taxes
that it may be enabled to carry out its mandates into effect. and perform functions of government
and the citizen pays the portion of taxes demanded in order that he may, by means thereof, be
secured in the enjoyment of benefits of an organized society (ibid.). This is otherwise known as
benefit-received principle."

Case 1-3 Mr. Maco refuses to pay taxes because according to him, while some people are
receiving full protection, he has not been receiving any protection to his life, liberty and property
from the government. Is the contention of Mr. Maco tenable?

Answer.

No. While it may be true that not all taxpayers receive benefits from the government, the theory
is that they are presumed to have received such benefit even in unequal proportions for
uniformity in this respect is impossible of attainment. Nowadays, it is hardly believable to
conclude that there are taxpayers who receive no benefits at all from projects sponsored by the
government, all of which improvements are used, directly or indirectly by all people or
inhabitants (NoUedo, Reuiewer in Taxation (29901, p.)

Basic principles of a sound tax system

1. Fiscal adequacy. The sources of revenue should be sufficient to meet the demands of public
expenditures (Report of 1 Tax Commission. Vol. 1, pp. 21-23 cited in Teodoro and De Leon. The
Law on income Taxation (1974) p 3) This can be obtained by creating new taxes or new tax
machinery, or by merely changing the rates applicable to existing taxes so that the revenue
would substantially respond to the expanding needs of public expenditures.

2. Equality or Theoretical Justice. The tax burden should he proportionate to the taxpayers
ability to pay (this is the so-called Ability-To-Pay Principle) Old and

3. Administrative Feasibility. The tax laws should be capable of convenient. Just. and effective
administration (id)

Each tax should be clear and plain to the taxpayer, capable of uniform enforcement by
government officials, convenient as to time, place. and manner of payment. and not unduly
burdensome upon, or discouraging to business activity.

Nature or characteristics of the state's power to tax 1. It is inherent in sovereignty. The power of
taxation may be exercised by the State although not expressly granted by the constitution.

Case

Assuming that the constitution drafted by a Constitutional Convention :old ratified by the people
failed to provide for the enactment of law imposing taxes, may the Congress created by the
same constitution enact tax laws?

Answer: Yes, the power to lax is an inherent power of the state and can be exercised by the
legislature without a previous constitutional authority; it is not merely a constitutional grant.
Note, however, that this is vested only in a sovereign state. Local government units such as
barangays, municipalities, cities and provinces do not have an inherent power of taxation.

2. Legislative in character. It is only the legislature that can enact tax laws.

Case 1-5

The President of the Philippines and the Prime Minister of Japan entered into an executive
agreement in respect of a loan facility to the Philippines from Japan whereby it was stipulated
that interest on loans granted by private Japanese financial institutions in the Philippines shall
not be subject to Philippine income taxes. Is the exemption valid?

Answer:
No. The President of the Philippines is not empowered to grant tax exemption as this power is
lodged solely with Congress. Taxation being legislative in character can be exercised only by
the lawmaking body. This rile is also true to the granting of tax exemption. 'What one cannot
impose, one cannot condone."

3. Subject to constitutional and inherent limitations. Taxation is not an absolute power that can
be exercised by the legislature anyway it pleases.

Case 1-6 A law is passed requiring all real property owners to pay real property tax retroactive
5o years back. The government's justification is that the power of taxation is unlimited,
comprehensive, plenary and supreme. Is the justification tenable?

Answer:

No, because the power of taxation is subject to constitutional and inherent limitations. Any tax
law that may be passed by the legislature should not go beyond these limitations. Requiring the
real property owners to pay said taxes violates the constitutional limitation on due process
because the justification made by the government is inferior to constitutional and inherent
limitations. Hence, the tax law is not valid.

A tax law may be given retroactive effect if it is favorable to the taxpayers.

Limitations on the power of taxation I Constitutional limitations. Those restrictions found in the
constitution or implied from its provisions. 2. Inherent limitations. Those which restrict the power
although they are not embodied i•lhe constitution.

Constitutional limitations I Due process. No person shall be deprived of life. liberty. or property
without due process of law nor shall any person be denied the equal protection of the law (Sec.
I. Art. HI. NC).

Case 1-7 A law is passed requiring all Filipino income earners to pay an income tax of 80% of
thei r gross income. IS the law valid?

Answer: No. Taxes which are excessive and beyond the paying, capacity of the taxpayers are
confiscatory, oppressive and could be unquestionably shutdown as deprivation of the taxpayer's
property without due process. 2 Equal protection of the laws -- (Same with the provision iii No 1)

The constitutional provision on equal protection of laws means that no person or class of
persons shall be deprived of the same protection of laws enjoyed by other persons or other
classes in the same place and in like circumstances (Phil Rural Electric Cooperalites Ass.. inc
vs. DILL 403 SCRA 538)
Case 1-8 Gonzales, a Copra dealer claims that he should be exemptirom payment of taxes
considering that coconut farmers and producers are exempt. , lifer all, he said, they both sell
copra in its original stale. Should Gonzales be given the same exemption?

Answer:

No. There is substantial difference between copra producers on one hand, and copra traders on
the other. There is no violation of the equal protection clause here because there could only be
denial of the equal protection of the law if there is discrimination that finds no support in reason.
In this case, the former produces and sells copra while the latter merely sell them (Mis. Oriental
Ass. of Coco Thuters, Inc. vs. Sec. of Finance, et. at., G.R. No. 10854 Nov. to, 1994).

3. Rule of uniformity and equity in taxation. - The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation (Sec. 28 (1), M. VI, Ibid.).

Case 1-9 A municipal council passed an ordinance imposing an occupation tax on the
profession or occupation of an "installation manager". Manny is the only salaried person with
such occupation in the municipality. Can he successfully challenge the validity of the ordinance
as being discriminatory since he is the only one adversely affected?

Answer:

No, because the occupation tax could be imposed on all installation managers who may come
within the jurisdiction of the municipality. What the ordinance taxes is the occupation itself and
not the person. Hence, the number of persons exercising the occupation is not material (Shell
vs. vono, 94 Phil. 382).

Uniformity of taxation means that all the taxable persons or property of the same class shall be
taxed at the uniform or same rate. There is uniformity of taxation when the tax operates with the
same force and effect on this subject wherever found (Churchill vs. Concepcion. 24 Phil. 969)

4. Non-imprisonment for non-payment of poll tax. - No person shall be imprisoned for debt or
non-payment of a poll tax (Sec. 20, Ad. II!, id.)

Case 10

Evander refused to pay the basic community tax of P5.00 and the additional tax of P i.00 for
every P 1,000 of his income from business. May he be imprisoned for non-payment?

Answer: He cannot be imprisoned for non-payment of the basic tax of P5.00. However,
imprisonment is a sanction for his failure to pay the additional community tax because it is not a
poll tax.

5 Non-impairment of the obligations of contracts. — No law impairing the obligations of

contracts shall he passed (Sec 10. Art Ill rd ) There is 'impairment" when a law substantially
invalidates. releases or extinguishes the obligations of a contract, or that derogates substantial
contractual rights (Home Building & Loan Association vs Blaisdell. 290 U.S 398. cited rn
Domondon. Bar Reviewer in Taxation)

Case Hi The government entered into a contract with Abala Lines. The condition provides that
Abala Lines shall carry government mails. In return, the former shall be exempt from the
payment of income tax. Can the Congress later on pass a law revoking such exemption without
the consent of Abala Lines?

Answer:

No. Since the granting of tax exemption is based on a valid contract, its withdrawal would impair
the obligation of contracts. The obligation of contract is impaired when its terms or conditions
are changed by law or by treaty without the consent of the other, thereby weakening the position
of the latter (Edwards us. Keartey.96 U.S. 6r).

Case 1-12

ABC Corporation was a recipient of a law approved in Congress which grants tax exemption on
companies engaged in an operation of public utilities. Prior to its expiry date, the law extending
lax exemption was revoked by Congress. Is there an impairment plan obligation of contracts?

Answer:

None. There is no contractual relation between the government and ABC Corporation because
the grant of tax exemption was gratuitous in character which could be withdrawn at any time.

A contract which is protected by the non-impairment clause is one in which the Government,
acting in a private capacity sheds its cloak of authority and waives its government immunity
(Mero/co vs. Provbzce of Laguna, G.R. No. 131359, May 9,1999). There was no material
consideration received by the government as a result of the tax exemption; thus, it does not fall
within the purview of a contract protected by the non-impairment clause.

6. Non-infringement of religious freedom. — No law shall be made respecting the establishment

of religion, or prohibiting the free exercise thereof. The free exercise of religious profession and
worship, without discrimination or preference, shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights (Sec. 5, Art. id).

Case 1-13 A religious group engaged in the sale of bibles and other religious articles was
required to pay taxes on the sales of the merchandise. Is the imposition of the tax valid?

Answer:

No. To require such religious group to pay taxes would impair its free exercise and enjoyment of
religious freedom and worship, as well as its rights and dissemination of religious beliefs
(American Bible Society vs. City of Manila, 101 Phil. 396).
7. No appropriation for religious purposes. - No pUblic money or properly shall be appropriated,
applied, paid or employed, directly or indirectly, for the use, benefit, or support of any sect,
church, denomination, sectarian institution, or system of religion, or of any priest, preacher,
minister, or other religious teacher, or dignitary as such, except when such priest, preacher,
minister, or dignitary is assigned to the armed forces, or to any penal institution, or government
orphanage or leprosarium (Sec. 29 (2), Art VI, id).

Case 1-14 , The Barangay Council of May-Ogob disbursed a certain amount of its Economic
Development Fund in the Annual Budget of the barangay for the construction of the barangay
chapel. Is the action valid?

Answer:

No. The constitution strictly prohibits public money from being appropriated, applied, paid or
used, directly or indirectly, for the use, benefit or support of any sect, church, denomination,
sectarian institution, or system of religion.

8 Exemption of religious. charitable or educational entities. non-profit cemeteries. and churches

from taxation. - Charitable institutions, churches: and parsonages or convents appurtenant
thereto. mosques. non-profit cemeteries, and all lands. buildings and improvements directly. and
exclusively used for religious. charitable, or educational purposes shall be exempt from taxation
(Sec 28;31 4,r Vi in 1

The word 'exclusive" means primarily rather than solely (Hospital de San Juan de Dios v Pasay
City 16 SCRA 226). Thus, the admission of pay patients does not detract from the charitable
character of a hospital if all its funds are devoted exclusively to the maintenance of the
institution as a public charity

9. Exemption of revenues and assets of non-stock, non-profit educational institutions, and

donations for educational purposes from taxation. — All revenues and assets of non-stock.
non-profit educational institutions used, directly. and exclusively. for educational purposes shall
be exempt from taxes and duties Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law. Proprietary
educational institutions, including those cooperatively owned may likewise be entitled to such
exemptions, subject to the limitations provided by law. including restrictions on dividends and
provisions for reinvestments Subject to the conditions prescribed by law, all grants,
endowments, donations, or contributions used, directly, and exclusively for educational
purposes shall be exempt from tax (Art. XIV. Sec 4[31 (4))
Case 13.5

The Lung Center of the Philippines, a charitable institution, is erected in the middle of a twelve
(12) hectare lot. A big space at its ground floor is being leased to private parties, for canteen
and small store spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional services. Almost
one-half of the entire area of the lot on the left side of the building is vacant and idle, while a big
portion on the right side is being leased for commercial purposes to a private enterprise known
as the Elliptical Orchids and Garden Center. Are the real properties consisting of the building
and the lot exempt from real property taxes?

Answer:

What is meant by actual, direct, and exclusive use of the property for charitable purposes is the
direct and immediate actual application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax exempt purposes. Thus: a. The portions of
the land leased to private entities such as the Elliptical Orchids and Garden Center as well as
those parts of the hospital leased to private individuals (canteen, small stores and medical and
professional practitioners) are not exempt from property tax. b. The portions of the land
occupied by the hospital and portions of the hospital used for its patients, whether paying or
non-paying are exempt from real property taxes (Lung Center of the Philippines us. Quezon (Ity,
433 SCk4 119)• c. The vacant portion is, undoubtedly, subject to property tax since it is not
being used, directly, and exclusively for charitable purposes.

WHO ARE EXCEMPT

Case i-16 Hanap Taypa Corporation, a non-stock corporation which owns and operates a
memorial park, contests the real estate assessment made by the City of Manila. Sued by the,
city, Hanap Taypa Corporation contends that burial grounds are exempt from real estate tax. It
appears that two years prior to the assessment, Hanap Taypa Corporation had declared
dividends to its stockholders. Is the corporation justified in disputing the assessment?

Answer:

No. Only non-profit cemeteries are exempt from the real property tax. One of the requisites for a
non-profit institution is that it must declare no dividends. The fact that the company declared
dividends to its stockholders clearly shows that it is a profit-oriented corporation. Moreover, the
lot must also be used, directly and exclusively for religious or charitable purposes. Considering
that these requisites are not satisfied, it is not included within the exemptions. "He who claims
exemption must be able to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implication,
otherwise state revenues will suffer."

Case 1-17 The ARTS College of Business and Arts (ACBA) is a non-stock, non-profit
educational institution. It owns a 5-hectare lot. One half of which is used as its school campus
while the other one-half is vacant. The school plans to do the following effective January 1 of
next year. a. Rent out to Aristocrat, Inc. the vacant portion of the lot for P1 million a year; h.
Lease a two story building owned by Mrs. Lee to he used as library, facilities for student nurses
and computer room for students of computer courses; c. Increase tuition fees by 6% in
accordance with government regulations; and d. Import loci computers for use in its computer
courses. Q Is the school subject to real estate lax on its 5-hectare lot for the current year and
succeeding year?

Answer:

nly the One-half portion which is vacant and was subsequently rented out to Aristocrat is
subject to real property tax because it is not actually, directly and exclusively used for
educational purposes.

Is the two-storey building 'exempt from real property tax?

Answer:

Yes. The test of exemption from property lax is.the use of the property for the purposes
mentioned in the constitution• and. not the ownership. Thus, even if the building is not owned by
the school, it is exempt from property tax because it is being used actually, directly, and
exclusively for educational purposes.

Will the school be subject to income tax on its rental income from Aristocrat, Inc.?

Answer:

The rental income is subject to income tax because the.property is not being used actually,
directly and exclusively for educational purpose.

If the increase in tuition fees results in net income from school operations next year, will the
school be subject to income tax on the said income?

Answer

No. The income to be derived from increase in tuition lees is exempt because all revenues of
non-stock non-profit educational institutions are exempt from income tax.
Is the importation of the computers subject to tax?

Answer:

No. The provision of the constitution is clear that all assets of non-stock non-profit educational
institutions are exempt from taxes and duties. The word -duties- refers to customs duties on
importation.

10. Concurrence by a majority of all the members of the Congress for the passage of a law
granting any tax exemption — No law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of the Congress (Sec. 28(41, Ad. VI. id.).

11. Power of the President to veto any particular item or items in a revenue or tariff bill. — The
President shall have the power to veto any particular item or items in an appropriation, revenue
or tariff bill, but the veto shall not affect the item or items to which he does not object (Sec.
27121 Ad. VI)

12. non-impairment of the jurisdiction of the Supreme Court in tax cases. —The Supreme Court
shall have the power to review, revise, reverse, modify or affirm on appeal or certiorari as the
law or the Rules of Court may provide, final judgments and orders of lower courts in all cases
involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation
thereto (Sec. 5(21 Art VIII, id ).

Case ►-►8 The Congress enacted a law declaring that the decisions of the Court of Tax
Appeals shall be final and non-appealable for purposes of improving the tax collection of the
government. Is the law valid?

Answer:

No, such law shall violate the constitutional limitation on the non-impairment of the jurisdiction of
the Supreme Court in tax cases.

Inherent limitations on the power of taxation 1. Requirement that levy must be for a public
purpose.

Case 1-19 A law is passed imposing a tax of five pesos (P5.00) on every citizen for the purpose
of raising funds to be given as loans to earthquake victims in Mindanao. The victims are
required to give collateral for the loans and to pay interest. Is the tax valid?

Answer:

The tax is valid because raising funds for earthquake victims is for public purpose. The true test
of what is public purpose is that which requires that the work shall he essentially public and for
the general good of all inhabitants of the taxing body. This does not mean, however, that a tax is
not for a public purpose unless the benefits from the funds to be raised are to be spread equally
over the whole community or a large portion thereof. A use may be public although it is of
benefit primarily to the inhabitants of a small and restricted municipality.

2. Non-delegation of the legislative power to tax. The rule is "potestas delegate non delegare
potest" — what has been delegated cannot be delegated. The people created a legislative
department for the exercise of legislative power. Thus, this power should not be delegated to
any other person or body. However, delegation of this power is permitted in the following cases:

a. Delegation to the President. This is based on Section 28 (2) of Article VI of the Constitution
which provides that "the Congress may by law authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts, within the framework of
the national development program of the government.

b. Delegation to local governments. The reason for this is that local legislatures are in a better
position to enact necessary and appropriate legislation considering that they are more
knowledgeable than the national lawmaking body on matters of purely local concern. Section 5,
Article X of the Constitution provides that death local government unit shall have the power to
create its own sources of revenues and levy taxes, fees and charges, subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of local autonomy.
Such taxes, fees and charges shall accrue exclusively to the local governments

An ordinance of Quezon City on the operation of its market stall and the collection of market
stall fees created a market committee to formulate, recommend and adopt, subject to the
ratification of the municipal hoard and approval by the City Mayor, policies and rules and
regulations in the cre.it ion of market stalls." is the creation of the committee a violation of the
rule on non-delegation of the legislative power of taxation?

Answer:

No, because the authority to pass the ordinance has not been delegated. Clearly, the
recommendations of the market committee are not yet final, because they are still subject to
ratification by the Sangguniang Panlungsod, the body that is empowered to pass tax ordinances
(Bugatsing vs.i -maw, L-41632, Dec. 17, 19"o).

c Delegation to administrative bodies. — This is otherwise known as the -"power of subordinate

legislation." To be valid. (1) the delegation must be complete in itself. setting forth therein the
policy to be executed, carried out, or implemented by the delegate. and (2) the law must fix a
standard — the limits of which are sufficiently determinate and determinable — to which the
delegate must. conform in the performance of his functions (Abakada Gum Party List vs Erma
G.R. 168056. Sept 1, 2005)

3 Exemption from taxation of government entities.

CICV 1-21

The Congress passed a law requiring government agencies to pay taxes to the government.
Should the government be liable for taxes?

Answer. Asa rule, the government is not liable for taxes on the theory that it would be
tantamount to taking money from one's pocket and putting it in another. To levy a tax upon
public property would require new taxes to meet the demand of this imposition and no one
would be benefited but the officers employed whose compensation would go to increase the
useless levy (I Cooky 263). Congress is not, however, precluded by the constitution from
requiring the government, or any of its agencies or instrumentalities such as the Armed Forces
of the Philippines to pay taxes if it so desires (Collector. vs. Bisayo Land Trans., 105 Phil. 1338).
The rule is: AgenCies performing governmental functions are exempt from tax unless expressly
taxed, while those performing proprietary functions are subject to tax unless expressly
exempted (De Leon, Comprehensive Review of Taxation (988), p. 28).

4. International comity. The term comity means recognition or respect accorded by one
jurisdiction within its territory over the law of another because they are sovereign equals. As a
consequence of international comity, no state can claim jurisdiction over another (par in parem
non habet imperium).

Case 1-22 The United States Embassy in the Philippines is being required by the Bureau of
Customs to pay customs duties on all properties being transported to the Philippines, for use in
the embassy by the ambassador and other diplomatic officers. May the U.S. government he
required to pay?

(2.- Answer:.

No, under international comity the property of a foreign state or government may not he the
subject of taxation by another. This principle is based on the sovereign equality among states
under international law, by virtue of which one state cannot exercise its sovereign power over
another.

5. Territorial jurisdiction Case 1-23 A law is passed requiring owners of lands in Indonesia to pay
real property tax in the Philippines. -

Q is Is the law valid?

rb •

Answer:

No. A state may not tax property lying outside its borders or lay an excise , or privilege tax upon
the exercise or enjoyment of a right or privilege in another .
state. The reason is that tax laws do not operate beyond a country's jurisdictional. limits. Mother
reason is that properties located within • the jurisdiction of another state generally do not receive
protection from the Philippine government (6t CJ. 87-88).

Q 2: How about if the tax being imposed is on income earned by Filipinos abroad?

cr. Answer:

The law is valid because the imposition falls within the exception to the rule. When there is
between the taxing state and the object of the tax a privity of relationship (such as citizenship in
cases of income tax). the taxing state can operate beyond its jurisdictional limits •(Union
Refrigerator ps. Kentociat. 188 U.S. 3851.

Aspects of taxation 1. Levy. Deals with the provisions of law which determines the person or
property to be taxed, the sum or sums to be raised, the rate thereof, and the time and manner of
levying, receiving And collecting the taxes. 2 Collection. Constituted of the provisions of law
which prescribe the manner of enforcing the obligation on the part of those taxed to pay the
demand thus created.

B. Taxes

Definition The enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of the government and
all public needs.

Essential elements of a tax 1. Enforced contribution. 2. Generally payable in money. 3.

Proportionate in character.

4. Levied on persons, property, or the exercise of a right or privilege 5. Levied by the state which
has jurisdiction over the subject or object of taxation. ••• 6. Levied by the lawmaking body of the
state.

The power of taxation can only be levied by the Congress of the Philippines through enactment
of tax statutes. But this power is.also granted by the Constitution to local government units,
subject to such limitations as may be provided by law. It should be noted that Executive Order
No. 273, otherwise known as the "Value Added Tax Law" was enacted through issuance of an
Executive Order by former President Corazon C. Aquino. During that time, the country was
under a Revolutionary Government where the executive and the legislative powers were vested
solely in the President of the Philippines. During the Martial Law era, then President Marcos
exercised also legislative powers despite the existence of the Interim Batasang Pambansa,
including the power to tax, through issuance of Presidential Decrees because he was vested
such power in the 1973 Constitution.

7. Levied for publit purpose or purposes.

The term "public purpose' includes the following: a. Construction of roads and bridges; b.
Pensions to retired government employees and their widows and children; c. Assistance to
victims of calamities; and • d. Social welfare and health care projects - •

Classification of taxes 1. As to subject matter or object a. Personal, poll or capitation. - Tax of a

fixed amount imposed on individuals. whether citizens or not, residing within a specified territory
without regard to their property or the occupation in which they may be engaged. Example:
Community tax

b. Property. - Tax imposed on property, whether real or personal. in proportion either to its value,
or in accordance with some other reasonable method of apportionment. Example: Real Property
Tax c. Excise (Privilege Tax). - A tax imposed upon the performance of an act, the enjoyment of
a privilege, or the engaging in an occupation; any tax which does not fall within the classification
of a poll tax or a property tax. Example: Income tax, donor's tax, estate tax

2. As to who bears the burden

a. Direct. — A tax that is demanded from the person who also shoulders the burden of the tax.

Examples: Income tax, estate tax, .donor's tax

b. Indirect. — A tax demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another. Examples: Value-added tax

3. As to determination of amount a. Specific. — Tax of fixed amount imposed by the head or

number, or by some standard of weight or measurement; it requires no assessment other than a
listing of classification of the subjects to be taxed. Examples: Excise tax on distilled spirits,
cigars, cigarettes b. Ad valorem. — Tax of a fixed proportion of the value of the property with
respect to which the tax is assessed; it requires the intervention of assessors or appraisers to
estimate the value of such property before the amount due from each taxpayer can be
determined. Example: Real property tax

4. As to purpose a. General, fiscal or revenue. - Tax that is imposed solely to raise revenue for
government expenditures.

Examples. Income tax, value-added tax

. b. a Special or regulatory. — Tax imposed for special purpose, i.e. to achieve some social or
economic ends irrespective of whether revenue is actually raised or not. • Examples: Sugar
adjustment taxes: Oil Price Stabilization Fund (OPSF)

5. As to authority imposing the same • a. National. — Tax imposed by the national government.
Examples' Internal revenue taxes, customs duties

b. Municipal or local. - Tax imposed by municipal corporations. Examples: Sand and gravel tax,
occupation tax 6. As to graduation or rate a. Proportional. - Tax based on a fixed percentage of
the amount of the property, receipts. or other basis to be taxed. Example: Value-added tax,
estate tax. donor's tax

b. Progressive. - Tax the rate of which increases as the tax base or bracket increases.
Examples: income tax c Regressive. - Tax rate of which decreases as the tax base increases.

Three inherent powers of the government The three inherent powers of the government are the
following: 1. Eminent domain. The power of the state or those to whom the power has been
delegated to take private property for public use upon paying to the owner a just compensation.
2. Police power. The power of the state to enact such laws in relation to persons and property
as may promote public health, public morals, public safety, and the general welfare of the
people

3. Taxation. The power by which the sovereign, thru its. legislature, raises revenue to support
the necessary expenditures of the government. Distinctions - eminent domain, police power and
taxation The three inherent powers of the State differ from each other in the following ways: 1.
The police power regulates both liberty and property. The power of eminent domain and the
power of taxation affect only property rights. 2. The police power and the power of taxation may
be exercised only by the government. The power of eminent domain may be exercised by some
public utilities or public service companies. 3. The property taken in the exercise of the police
power is destroyed because it is noxious or intended for a noxious purpose. The properly taken
under the power of eminent domain and the power of taxation is intended for a public use or
purpose and is therefore wholesome. 4. The compensation of the person subjected to police
power is the intangible altruistic feeling that he has contributed to the general welfare: The
compensation involved in the other powers is more concrete, to wit, a full and fair equivalent of
the property expropriated or protection and public improvements for the faxes paid (Cruz,
Political Law (1987) p. 37). 5. There is generally no limit on the amount of tax that may be
imposed. In police powetherefore, that there was as. to Richard a taking under the power of
eminent domain. he is entitled to lust compensation. •

Case i-us law is passed providing for compulsory vaccination and subjects a person to
imprisonment for refusing to submit to vaccination, except when it is apparent or it can he
shown that the person is not fit for vaccination because of his physical condition. is the law
valid?

Answer:

The law is valid under the police power of the state for the purpoSe of protecting and preserving
public health.

Tax distinguished from license fee Permit or license fee is a charge imposed under the. police
power for purposes of regulation.

1 Taxes are levie by virtue of the 'taxing power: license fees are imposed• by virtue of the police
power,
2. Taxes are levied for revenue. license fees are imposed for regulation

3 There is generally no limit on the amount of tax that may be imposed, license fees may not
exceed the amount necessary to defray the •cost of 'regulation. 4. Taxes are imposed •on
persons. property. business. occupation. or the exercise of any privilege, whether legal or illegal,
license fees may be imposed only on legitimate businesses and occupation and 5 Failure to
'pay a tax do'es not render the business or occupation, illegal: non-payment of a license fee
renders the business or occupation illegal . • . •

Tax distinguished from toll Toll is a sum of money for, the use of something. generally applied to
the consideration which 'is paid tor the use of a road, bridge or the like, of a public nature. 1'. Toll
is a demand of proprietorship; tax is a demand of sovereigrity, •

r, the amount is limited to cover the cost of the license and the necessary expenses of police
surveillance and regulation; whereas, in eminent domain, there is no imposition, rather the
owner of the property taken is paid its market value.

Case 1-24

An exhaust fan was installed in a tunnel to clear it of smoke after the passage of the trains. Most
of the smoke, however, blew directly into the house of Richard. Is he entitled to just
compensation? cr.

Answer.

Yes, the damage caused was not merely consequential; it was the character of the invasion that
determines whether there was the taking. Considering,

2. Toll is a compensation for the use of another's property, or of improve-ments made by him;
taxes are levied for the support of the government, and their amount is regulated by necessities;
and 3. A toll may be imposed by the government or private individuals or entities; a tax may be
imposed only by the Slate.

Tax distinguished from special assessment Special assessment is an enforced proportional

contribution from owners of lands for special benefits resulting from public improvements. 1. Tax
has general application; special assessment has special application only as to a particular time
and place; 2. Tax can be levied on land, persons, property, income, business, etc.; special
assessment is levied only on land; and 3. Tax is based on necessity and partially on benefits;
special assessment is based wholly on benefits (Apostolic Prefect vs Treasurer of Baguio, 71
Phil 547). In the Local Government Code of 1991, special assessment is called as Special Levy
(Sec. 240, LGC). Tax distinguished from debt 1. Debt generally arises from contract, express or
implied; tax is created by law; 2. Debt is assignable; fax cannot generally be assigned; 3. Debt
may be paid in kind; tax is generally payable in money, and 4. A person cannot be imprisoned
for non-payment of debt; imprisonment is a sanction for non-payment of tax (except poll tax).
Tax distinguished from customs duties A tax includes various kinds of imposition on persons or
property, for supplying the treasury as tribute, subsidy, excise, imposts, or customs; customs
duties are taxes levied upon commodities, imported into or exported across national boundaries.
It follows that taxes include customs duties: and an act granting exemption from all taxes of any
kind and nature carries with it exemptions from customs duties (time, Reviewer in Taxation
[1977]. p.13)

Double Taxation In its strict sense (referred to as direct duplicate or direct double taxation), it
means taxing twice for the same purpose, by the same taxing authority, in the same jurisdiction,
in the same period. some of the property in the territory. In its broad sense (referred to as
indirect duplicate or indirect double taxation), which is taxation other than direct duplicate, it
extends to aN cases in which there is a burden of two or more pecuniary impositions. In a long
line of cases, the Supreme Court considered double taxation as not unconstitutional although
obnoxious. It is not in itself a valid defense against the validity of a tax measure. But such
taxation, while not forbidden is something not favored, that is why it should be avoided and
prevented whenever possible to avoid injustice or unfairness (Pepsi Cola Bottling Co. vs
Municipality of Tanauan L•31156 Feb 27 1976) However, double taxation may give rise to
certain defenses that would render the tax void, such as: 1 The two taxes which are of the same
kind. nature, and from the same taxing authority make taxation inequitable, excessive,
oppressive and unreasonable. 2. Uniformity in taxation is violated as when the first measure
applies to all the members of a certain class, while the second measure applies only to limited
members of the same class.

Case 1-26 The Municipality of Buhi enacted an ordinance which imposes occupation tax upon
owners of fishponds. The validity of the ordinance is being challenged on the ground that it
constitutes double taxation because the fishpond owners are subject also io income tax. Is the
ordinance valid?

Answer:

The ordinance is valid. Although there are actually two taxes behi charged by the government,
the first one is imposed by the local government unit of Milli while the other is imposed by the
national government. Since there are two different taxing authorities the imposition is not a
direct duplicate taxation. Al most, there is only indirect duplicate taxation.

Revenue Revenue refers to all funds or income derived by the government, whether from tax or
any other source. It may he derived from the following sources: Grants received from another
government; 2. Dimalions from non-governmental sources, 3 Loans from private entities or
another government entity: 4. Commercial revenues such as those received by government-
owned or controlled enterprises: 5 Administrative revenues such as fines. penalties and
forfeitures: and Taxes such as internal revenues and customs duties. •

Situs of s:ltis taxdt:ori !neilms of taxalmo •rile i5-: IN! Ihe state \14-901 has jurisdiction to tax the
person. property or transactions may rightfully levy and collect the tax
Situs of taxation shalt be as follows: Business. occupation Or transaction - Place where the
business is conducted: the place where the occupation is practiced: or the place where the
transaction look place

2 Real and tangible persona! property I. °cation of property

3 Intangible personal property. • - Domicile of the owner unless the property has acquired a
business situs in another jurisdiction 4 Income • Place where the same is earned or citizenship
or domicile of the owner

5 Gratuitous transfer of property - Residence or citizenship of the taxpayer. or location of the

properly

Interpretation of tax laws In case of doubt as to whether a taxpayer is covered by the tax or not,
the doubt shall be resolved in favor of the taxpayer and strictly against the government (Comm
vs. Firemans Ins. Co . G.R. L-30644. March 9. 1987).

However, doubts as to the validity of tax exemptions are resolved liberally in favor of the
government and strictly against the taxpayer, except: 1. When the statute granting exemption
provides for liberal constructions thereof; 2. Exemptions in favor of the government, political
subdivisions or instrumentalities (Maceda vs Macaraig, 197 SCRA 771). 3. Exemptions in favor
of exemptees traditionally exempt such as churches and educational institutions (Cooley). and
4. Special circumstances to special classes of persons such as the granting of exemptions to
victims of the eruption of Mount Mayon.

Forms of escape from taxation Escapes from taxation are means or methods by which the
taxpayer saves the tax or escapes the burden of tax payment. The means resorted by the
taxpayer may or may not result in loss of revenue to the government. They may also be legal or
illegal. With the exception of tax evasion, all are legal means of escape from taxation.

The basic forms of escape from taxation are: A. Those that do not reduce the revenue collection
of the government: 1 Shifting. This is a transfer of the tax burden by one on whom the tax is
assessed to another. This is exemplified by the, different taxes on business.

• 2 Capitalization. It is the reduction in the selling price of income producing property by an

amount equal to the capitalized value of future taxes that may be paid by the purchaser. 3.
Transformation. It is a method by which the manufacturer or producer upon whom the tax is
imposed pays the tax and strives to recover such expense through lower production cost
without sacrificing the quality of his product. This is resorted to because of his fear to loss his
market if he will add tax to the selling price. Shifting and capitalization are means of escape
through process of exchange, while transformations are means through process of production.

B. Those that result in loss of revenue to the government:

 1. Tax evasion. It refers to fraudulent or forbidden schemes or devices designed to lessen or
defeat taxes (Yutivo Sons Hardware Co. vs. CTA, L13203, January 28, 1965). This is also
known as tax dodging.

2. Tax avoidance. The exploitation by the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income in order to reduce tax liability (also known as
tax minimization).

3. Exemption from taxation. It is the grant of immunity to particular persons or corporations or to

persons or corporations of a particular class from a tax which persons and corporations
generally within the same taxing district are obliged to pay (51 Am. Jur. 503).

Case 1- 27 Mr. Angdaya who wishes to avoid the payment of taxes assessable on the
transaction was advised by his tax consultant to make it appear that his gross income in 2021
was only P1,000,000 instead of the correct amount 'of P1,500,000. Is this tax evasion or tax
avoidance?

Answer:

This is tax evasion. Intentionally decreasing the income without basis is illegal because it will
result to a clear reduction in the tax liability of the taxpayer.

Tax amnesty This is an immunity from all criminal and civil obligations arising from nonpayment
of taxes. It is a general pardon given to all taxpayers; it applies only to past periods, hence of
retroactive application. It is distinguished from tax exemption in the sense that while tax
amnesty is immunity from civil and criminal obligations, tax exemption is immunity from civil
liability only. Moreover, tax exemption is prospective in application, while tax amnesty is
retroactive.

Doctrine of equitable recoupment This doctrine states that where the refund of a tax illegally or
erroneously collected or overpaid by the taxpayer is barred by prescription, a

tax presently being assessed against a taxpayer may be recouped or set-off against the tax
whose refund is now barred by prescription. In the case of University of Santo Tomas vs.
Collector (104 Phil 1062), the Supreme Court rejected this doctrine, saying that it was not
convinced of the wisdom and propriety thereof, and that it may work to tempt both the collecting
agency and the taxpayer to delay and neglect their respective pursuits of legal action within the
period set by law. Rule on set-off or compensation A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off; neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction. In the case of Republic vs. Mambulao
Lumber Company (4 SCRA 622) the court held that "the general rule based on grounds of
public policy is well settled that no set-off is admissible against demands for taxes levied for
general or local government purposes. The reason is that taxes are not in the nature of
contracts between the party but grow out of duty to, and are the positive acts of the government
to the making and enforcing of which, the personal consent of individual taxpayer is not
required. However, in the case of Domingo vs. Garlitos (8 SCRA 443), the Supreme Court has
this to say: "the court having jurisdiction of the estate had found that the claim of the estate
against the government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law. Under the above circumstances, both the
claim of the government on inheritance taxes and the claim of the intestate estate for services
rendered have become overdue and demandable as well as fully liquidated. Compensation
therefore, takes place by operation of law, in accordance with the provision Article 1279 and
1290 of the Civil Code and both debts are extinguished to concurrent amount.

Case 1 - Francfa contends that his tax delinquency of P240,000 has been extinguished by legal
compensation. She claims that the government owes her P411,600 when a portion of his land
was expropriated on October 19. Hence, her obligation had been set-off by operation of law. Is
the reasoning of Francia justified?

Answer. .45F—

No. There can be no off-setting of taxes against the claims that the taxpayer may have against
the government. A person cannot refuse to pay tax on the ground that the government owes
him an amount equal to greater than the tax being collected. The collection of a tax cannot await
the result of a laWsuit against the government.

Taxpayer's suit 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. .

Case 1-29 In a taxpayer's suit; Gonzales is questioning the release of funds for the construction
of the Cultural Center of the Philippines. lie contends that as taxpayer, he has a monetary
interest to question the illegal expenditure of public funds. Is the contention of Gonzales
tenable?

Answer:

Public money or public funds should he understood to mean as those funds derived by the
government through taxation. Thus, the Supreme Court held that the taxpayer has no legal
personality to assail the validity Executive Order No. 3n creating the Cultural Center of the
Philippines. Assailed order does not involve .the use of public funds. There was finding to the
effect that the funds came from donations and contributions and not by taxation. Accordingly,
there was that absence of the requisite pecuniary or monetary interest (Gonzales vs. Marcos,
6,5 SCRA 624).

Sources of tax laws Taxation is derived from: 1. The Constitution. — The provisions of the
Constitution dealing on taxation merely regulate the exercise of the power of taxation. They are
not actually grants of the power, because taxation can be exercised by the government; as
stated earlier, the power of taxation is not a mere constitutional grant.

Sources of tax laws

Taxation is derived from: 1. The Constitution. — The provisions of the Constitution dealing on taxation
merely regulate the exercise of the power of taxation. They are not actually grants of the power, because
taxation can be exercised by the government; as stated earlier, the power of taxation is not a mere
constitutional grant.

2. Statutory enactments.-This refers to the tax laws passed by the Congress.

3. Administrative rulings and regulations. - Administrative rulings are the less general interpretation of
tax laws which are issued from time to time by the Commissioner of Internal Revenue. They are usually
rendered on request of taxpayers to clarify certain provisions of a tax law. They are commonly known as
"BIR Rulings." Regulations are intended to clarify or explain the law and carry into effect its general
provisions by providing the details of administration and procedure. However, in case of conflict between
a regulation and a statute, the latter"shall prevail. Regulations issued by the Secretary of Finance, upon
the recommendation of the Commissioner of Internal Revenue. are known as "Revenue Regulations."

4. Judicial decisions. - This refers to decisions of the Court of Tax Appeals and the Supreme Court
applying or interpreting tax laws. They constitute a major part of the jurisprudence on taxation and form
part of the legal system of the Philippines. Decisions of the Court of Tax Appeals. however, are still
appealable to the Supreme Court of the Philippines.

Steps in the legislative process Under the 1987 Philippine Constitution, all revenue and tariff bills shall
originate from the House of Representatives. A revenue bill is one that levies taxes and raises funds for
the government, while a tariff bill specifies the rates or duties to be imposed on imported articles (Cruz,
Philippine Political Law). Often, major tax proposals are initiated by the Executive Department thru the
President upon the recommendation of the Department of Finance based on the latter's study or proposal,
and then introduced into Congress by the allies of the President. The steps in the legislative process are as
follows:

1. A tax bill is introduced in the House of Representatives and is referred to the House Committee on
Ways and Means. This is known as the first reading. The first reading involves only a reading of the
number and title of the measure.

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate
may propose or concur with amendments.

2. The proposal is considered by the Committee on Ways and Means, committee hearings as well as
public hearings are held. If there are several bills of the same nature or purpose, they shall all be
consolidated in the conduct of the hearings. Moreover, the committee may introduce amendments or
propose substitute bills.

3. The tax bill is voted on by the Committee and, if approved, is reported uut to the House of
Representatives for a vote. Deliberations, interpellations and even amendments by the members of the
House are held.
4. If passed by the House, the bill is transmitted to the Senate for consideration by the Senate Committee
on Ways and Means, and public hearings are held. The bill undergoes the same legislative process in the
Senate.

5. Upon approval by the Senate, both the Senate and the House versions are sent to the Bicameral
Conference Committee consisting of representatives of the House and of the Senate.

6. The two versions are generally dissimilar. Thus, the conflict is reconciled in the Bicameral Conference
Committee. This process of ironing out the differences generally involves substantial. compromise.

7. A final bill, as approved by the Bicameral Conference Committee, is then resubmitted to the House and
Senate for approval.

8. If the version of the Bicameral Conference Committee is approved by the House and Senate, it is sent
to the President for approval or veto. This is known as the "enrolled bill."

9. If the President approves the bill, he shall sign it and the bill becomes a law. When the President vetoes
it, both Houses may override the veto by' two-thirds vote of all the members of each house.

If the required measure is met, the bill is converted into law over the President's objections. Moreover, the
bill may become a law when the President does not act upon the measure within thirty (30) days after it
has been presented to him.
INCOME TAX - tax on all yearly profits arising from property, offices, trades or on a tax on a
person's income, profits and the like *Yung decrease na iniimpose sa kita mo kahit ikaw ay
businessman or business o kahit tagabenta ng property (LAHAT MAY TAX) Classifications of
Tax

TAXES IMPOSED BY BIR

· Capital Gains Tax is a tax imposed on the gains presumed to have been realized
by the seller from the sale, exchange, or other disposition of capital assets located in
the Philippines, including pacto de retro sales and other forms of conditional sale.

· Documentary Stamp Tax is a tax on documents, instruments, loan agreements

and papers evidencing the acceptance, assignment, sale or transfer of an obligation,
rights, or property incident thereto.

· Donor's Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer
of property between two or more persons who are living at the time of the transfer.

· Estate Tax is a tax on the right of the deceased person to transmit his/her estate to
his/her lawful heirs and beneficiaries at the time of death and on certain transfers
which are made by law as equivalent to testamentary disposition.

· Income Tax is a tax on all yearly profits arising from property, profession, trades or
offices or as a tax on a person’s income, emoluments, profits and the like.

· Percentage Tax is a business tax imposed on persons or entities who sell or lease
goods, properties or services in the course of trade or business whose gross annual
sales or receipts do not exceed P550,000 and are not VAT-registered.

· Value-Added Tax is a business tax imposed and collected from the seller in the
course of trade or business on every sale of properties (real or personal) lease of
goods or properties (real or personal) or vendors of services. It is an indirect tax,
thus, it can be passed on to the buyer.

· Withholding Tax on Compensation is the tax withheld from individuals receiving

purely compensation income.

(TAKEN FROM BIR.GOV WEBSITE)

EXTRA INFO

· LOCAL TAX – Imposed by the municipality or local government units (Sedula

Tax/Community Tax Certificate, Entertainment Tax which varies from region to
region)

· BUSINESS PERMIT – used for regulation through state police, NOT PART OF
TAXATION

· VAT & EXCISE is EQUAL? VAT is added during the time of sale while EXCISE is
added during manufacturing

· IS VAT INDIRECT? - Indirect Type because tax is added through every point of
production) is a tax on product

TYPES OF TAX
NATIONAL TAX – imposed by the BIR, as opposed to Local taxes by LGU’s, as thye have the fiscal
code to independently decide on fiscal policies through ordinances and code. So they can impose other
taxes than the national government.

EXCISE TAX – Taxes imposed on goods and commodities, to tax is to destroy, TAKE SIN TAX
for example! Tax on any manufactured good, depending on customs, used on commodity
(Alcohol, Cigarettes, SIN TAX!)

- Donor’s Tax, the person giving the property is not being taxed, IT IS THE RIGHT!
There are two parties. It’s called donors kasi ang nagbabayad ng tax dahil siya ang
namigay ng RIGHTS either sa relative or sa trip nila.

- Estate Tax ay kapag namatay yung tao, tas may naiwan, so dapat bawat ari-arian
ay ililipat sa heirs diba? So sino magbabayad ng tax? Di na yung namatay, baliw.
Yung buong property ay tatawaging estate, the estate will be managed by the
admin/executor appointed by the heirs or yung namatay (last will and testament).
Kaya may tax ang paglipat ng property kasi yung RIGHT to transfer ang
tinatax, AGAIN.

DIRECT TAX – Pag ikaw yung kumikita, ikaw babayad ng tax.

Compensation Income – if you work in a corporation, yung kinikita mo ay C.I. or professional

income. May portion ng kita mong binabwasan ng tax.

INDIRECT TAX – Pwede mong i-transfer or burdern shift the tax to another person.

VAT – Consumers pay that tax, kahit galing sa seller. Kasi diba dapat seller, pero sa VAT,
Consumer talaga.
*Sir diba yung kumita is seller kasi income naman niya yung benta sa product niya? YES,
pero VAT kasi indirect which means that the seller can shift the burden of tax imposition to
another person. May VAT sa lahat ng binibili mo! (12% always).

INCOME TAX PAYERS

INDIVIDUAL – Refers to natural person whether Filipino or not, or resident or resident

(foreigners). TAYO ito, we are natural person kasi tayo ay juridical person (created by
law/artificial beings).

CORPORATION – Artificial Being, which includes partnerships no matter how they are created
and organized, joint stock companies, joint accounts- people who come together who form a
corporation with the prospect of earning profit.

ESTATE – All the property, rights and obligations of a person which are not extinguished by his
death, ito yung mga naiwan property ng isang namatay. Para subject to income tax, it must
undergo judicial settlements para mapag-usapan kung ano ang naiwan, mga utang at kung sino
ang heirs. Kung wala, di yan lalagyan ng income tax.

TRUST – Buhay, pero inassign niya sa tao/group kung saan at papano ididistrubute ang taxes
after death.

Kunyare si Pedro may property, pero ayaw niya itransfer kay Juan. So gagawa siya ng trust, ito
yung kabuuan ng property pero buhay pa siya. Ia-assign niya muna kay Johnathan.

Bawal niya bawiin unless irrevocable, because it will only be taxable if it is irrevocable.

“Par. Itransfer mo to sa anak ko, mga yaman ko pre pag namatay na q, tsa akung pwede lang
naman- iinvest mo tas yung kita, kasama ng property, bigay mo na rin sa anak ko par.” – Pedro,
1947-2022

GROSS INCOME
 - All income derived from whatever sources, but not limited to:

Service Compensation - compensation for services in whatever form paid, salaries, wages,
commissions and similar items.

Business – Income you derived from operations as a store is considered as a core part of your
gross income, as long as you exercise your profession. Interest is also a part of your gross
income.

Rents – pag nagpa-renta ka syempre wahaha

Royalties – Kung author ka or musician, if you are paid by your publisher per use of your asset

Dividends – Money paid to shareholders/stockholder out of profits. Kunyare mabinilhan ka na

corporation ng shares, at the end, they can finally declare dividends and a percentage of
earnings can now be given to stockholders) KITA SA STOCKS LMAO

Prizes and Winnings – Lotto winner wow! Income yun, report mo yun. Kunyare sumali ka sa
contest tas kailangan skills mo, yung mapapalanunan mo, winnings mo yun, kaya nga wins eh.

Pension – Mga retired at tumatanggap ng pension, subject sa tax

Partner’s Distributed Share from Net Income of General Professional Partnership

- Therefore, yung net income na papasok sa GPP, kunyare lawyer ka diba tas may
loafer kayo,, yung kikitain niyo papasok sa partnership. Pero non-taxable nga diba,
so ano ita-tax? Yung SHARE nila, may kita na hahatiin pa rin. It is the Partner’s
Distributed Share which is taxable. However, yung partnership mismo, yung
kabuuan, yung net income ay di subject to tax.

- Kunyare, si A,B,C, nagtayo ng ABC Partnership, lahat sila ay CPA. The services
they render from 1 client (let’s say the client needs an audited financial statement).
So babayaran niya si ABC diba (150,000/net income). Yung share ba nila, kunyare
naghiwalay sila na tig-50k, taxable un? Oo. Pero yung net income mismo?
Non-taxable.

Partnership - it’s an agreement between 2 or more persons. Nag-usap sila kung saan ang
kanilang property ay nilagay nila sa isang common fund para magtayo ng business, tas
hahati-hatiin ang kita ng business nila.

General Professional Partnership – same concept, however ay hindi itinayo for the purpose of
earning profit. PERO BAKIT JOKE TIME? Simply to exercise their profession, edi dapat hindi
siya taxable, NOT FOR PROFIT = NO TAX!
FRINGE BENEFIT TAX

Any good, service or benefit given by employers in the form of any asset, parang bonus nalang
sa salary mo sa isang empleyado na hindi file-rank.

BENEFITS RECEIVED BY AN EMPLOYEE FROM HIS/HER EMPLOYER in ADDITION to

SALARIES (Employer- Employee Relationship)

GROSSING UP - A gross-up is an additional amount of money added to a payment to cover the

income taxes the recipient will owe on the payment. Basically, yung extra money na dapat
covered ng tax, ibibigay nalang sayo.

RANK-FILE Employees - yung mga hindi managers or supervisors (accountant, cashiers)

Why is it important to distinguish? Rank and files receive such benefits but the benefits are not
subject to FBT. Kung naka-receive man ang rank and file ng benefits other than ssalary,
included/ form part of his/her gross income and subject to income tax.
Kung managerial, yung mga benefits ay subject sa FBT.

Ex but not limited to:

Housing

Expense Account

Vehicle

Household Personnel

Loan Interest (less than market rate)

Foreign Travel Expense

Membership Fees

Holiday & vacation Expense

Educational Assistance

Life or health insurance

IMPOSITION

Final witholding is imposed on grossed-up monetary value of fringe benefit furnished, granted or
paid by employer to employee. Di bale kung yung employer ay indiv, prof. partner or corpo (kahit
taxable o hindi).

a. F.B. na authorized and exempt sa income tax under special law/code.

Malinaw sa batas na ang benefits ay exempt sa both income at FBT tax in general. Pag
sinabi ng NIRC or any special law (mga batas na nag-umpisa sa bill na pinasa ng
legislative at inaproba ng pres).

Ex. Train Law

b. Contributions of employer for benefit of employee sa mga plans nila like retirment, health,
etc.
Ito yung mga contributions ng employer mo or the company itself. For your benefits,
baka every month may cinocontribute sa empleyado just incase magreretire ka na or
something. Exempt ito sa FBT.

c. Benefits para sa fank and file, under bargaining agreement or hindi

Kapag benefits received by R&F, it is not subject to FBT, they are subject to income tax.
Ang collective bargaining agreement ay kapag sa isang company, meron kayong
asosasyon ng mga employees, para maparating mo grievances mo. Agreement niyo yan
between employee and employer. Kunyare, yung mga benefits nan arereceive mo na
pwede mo na hingin kunyare na may benefits na kayo na ganun. Basta nakasaad sa CBA
niyo.

d. De minimis benefits - BENEFITS that are exempt sa FBT ay limited sa facilities/privileges

na sinupply ng employer na binigay lang in goodwill/efficiency. Mga small value things to
boost morale

Small things na wag na itax

e. if grant of fringe is required by nature na kailangan sa profession ng employer.

Convenience of The Employer – if kailangan sa business ng employer para sa

in=kabubuti sa operation ng pinapasukan mo. Exempted sa tax.

Exemption from finge benefit, di ibig sabhinin na exempt sa ibang income tax imposed by code.
So, kung exempted ang FB sa FBT, part pa rin siya ng gross compensation income na subject
to income tax. Isang halimbawa ay FB for rank and file, exempt sila sa FBT, pero taxable as
ordinary income.

*Itong mga items na inenumerate natin except letter A, di ibig sabihin na exempt din sila
sa income tax. Pwedeng exempted sa FBT, pero dapat ininclude sa income at subject to
income tax. Kung malinaw ang batas na ang benefits nay un ay di kasama sa gross
income tax or FBT, di sila taxable.
CONVENIENCE OF EMPLOYER RULE

Pag mga allowance such as free meals/living area are binigay ng employer as condition for
employment and convenience ng employer. ALLOWANCES FURNISHED AY DI TAXABLE!

*Kapag for the benefit of the employer, yung allowances ay di dapat taxable on the part of
the employee.

Si Engr, mayroon siyang, di on-site:

220 k - salary

33k - libre meal

22.5k - living expense

A. How much is taxable income? (LETTER A assumes that the benefits are not on-site)

Salary + libre + living = 275.5k

B. Okay, 24 hours yung factory, so required siya tumira sa mismong factory (free lahat), so
magkano income? ? (LETTER B, on-site na si Engineer!)

220k lang na salary kasi yung free na binigay di taxable at convenient for the employer

FOR RANK AND FILE

Ang FTB ay DI APPLICABLE sa rank and file and yung FB na received by this type of
employees ay malalagay lamang sa taxable compensation income.
Managers are the one who is vested with powers to lay down management
policies/hire/fire/assign/discipline employees.

Supervisors recommend managerial actions if the exercise of authirty ay hindi lang routine,
kundi kailangan ng inputted judgement nila.

· RANK AND FILES ARE ROUTINARY

· SUPERVISORS ARE GIVEN CERTAIN TASKS WHICH REQUIRE JUDGEMENT

LASTLY:

· Benefits of R&F are not subject to FBT, however such benefits will form part
of gross income, subject to income tax. Paulit-ulit.

· Benefits of sup/man, benefits that they receive are subject to FBT. Except if such benefits
are for the advantage of the employer.

ANO BA ANG MGA DE MINIMIS? (Di subject sa income tax /witholding tax) - Hindi mandatory.
Benefits that are in a relatively small amount of value for the promotion of the health, good will
and contentment/ efficiency of the employees. Di siya subject to FBT, kasi ang liit ng value.

1. Monetized unused vacation leave credits ng mga private emp. (not more than 10 days)

2. Monetized value of vacation and sick leave credit paid sa mga emp. at off.

3. Medical cash allowance sa dependents around max of 1.5k-250/month.

4. Rice subsidy ng mga 2k/month

5. Uniforms na 6k/year

6. Medical assistance na max of 10k/year

7. Laundry na 300/month
8. Employee Achievements, wag above 10k/year

9. Xmas Gifts, mga 5k/years

10. Gifts/Items given under special circumstances.

10. Daily meal allowance for overtime, not beyond 25% ng minimum wage

11. Collective Bargaining Benefits & Productivity Incentives, basta yung total annual monetary
value from CBA & incentives combined do NOT EXCEED 10k/employee/year

EMPLOYER GIVES BENEFITS BEYOND THE CEILING

Amount of DMB conforming to ceilings ay hindi icoconsider sa pagdetermine ng 90k sa mga

other benefits. Pero kung mas humigit ang bayad ng employer sa ceiling, yung nattiira ay
taxable sa empleyadong nagrereceive ng benefits if more than 90k.

Yung natitira ay magiging part na ng oridnary income, at magiging taxable na rin.

*There is a ceiling of 90k, nagkaroon ng ganyan ceiling noong nagkaroon ng RA10963 (TRAIN
LAW)

*Example, in 1 year, yung pabahay ni Migs kay Adrianne. Nagbabayad si Migs ng 120k, eh
under the TRAIN lLAW, may ceiling na 90k. So yung 90k would be covered by the ceiling
and the 30k would be part of the employee’s compensation income, subject to income
tax kasi lagpas na nga sa ceiling.

GROSSED UP MONETARY VALUE – dun imumultiply ang tax rate na 35%, FBT Rate para
makuha yung FBT. Pano magcompute ng grossed-up monetary value? Divide FB monetary
value by 65%.

Kayla Migs, 120k ang actual value so 120,000/.65 = 184,615.38 GROSSED UP x .35
FBTAXRATE = 64,615.38

· Gross up monetary value is 35% = TRUE OR FALSE?

· (65% is net amount of money)

IMPORTANT TIP:
Kapag ang employee naka-receive ng employee, ang tax ay withhold. Hahawakan muna,
irerecord ng employer and then will be paid on a quarterly basis. Unlike in compensation
income which is paid annually. Diba we file income tax return/annum? Kapag FBT, tit
would be withheld on quarterly basis/ 4x per year.

TAX RATE AND TAX BASE

Final witholding tax is 35% sa grossed up monetary value ng FB furnished/granted by

employer to emp.

Para malaman mo yung grossed-up monetary value, divide the FB monetary value of the FB by
65%

The grossed-up monetary value (100%) ng FB ay ang buong income including:

1. 65% (net amount ng received property ng empleyado

2. 35% FBT na paid by empoyer on behalf of the emp.

Yung imposed tax ay magiging final tax ng empleyado, to be witheld quarterly.

EXAMPLE
FINGE BENEFITS TO RANK AND FILE

Salary (15,000x12) - 180k

Others

Rice - 6k

Medical - 4.5k

13th Month - 15k

Loyalty - 20k

Clothing - 2k

TOTAL = 47.5k

Less: Exemption = 90k

Grocery Allowance = 12k

Rental = 140.4K

*Inadd lang yung 180k (Salary) + Grocery (12k) + Rental ng Apart. (140.4k)

A. Excess over the ceiling of rice, med and clothing are included as other benefits.

B. Rental of apartment is fring to employee, however not subject to FBT kasi siya ay RANK AND
FILE.

FRINGE TO SUPERVISOR

Monetary Value of Benefit (11.7k x 50%) = 5,850/65% Monetary Value Factor = 9k

9000 x 35% (Tax Rate Base) = 3,150 monthly FBT

Wala namang transfer ng ownership so 50% lang yung monetary value ng benefit.

NATURE OF IMPOSITION AND PAYMENTS TAX

FBT is subject to FINAL WITHOLDIGN TAX, imposed on emp. but the employer MUST pay the
tax on behalf of the employee. Kaya tax is computed based on grossed-up monetary value
(benefit amount + tax) at hindi ang binayaran lang ng employer kay emp.

Kung person to person na hindi si emp., walang tax witholding.

HOUSING

Housing given is subject to tax except:

1. Mga militar

2. Within the facilty, max. of 50m from the distance of the premises

3. Temporary housing na 3 months or less

GUIDLINES FOR SPECIFIC FRINGE BENEFITS

Case 1 - Leases (as lessee) residential property for the use of employee

AVB - Wala

VB - Monthl rent paid by employer

Case 2 - Owns resident assigned to officer to use as home

AVB - 5% ng FMV of land

Case 3 - Purchases resident property on installment, alowing emp. to use it

AVB - 5% of acquisition cost na walang interest

Case 4 - Purchases residential property and transfers ownership to emp.

VB - Acquisition cost or FMV, kung ano mas mataas

Case 5 - Purchases residential property and transfers ownerhip to employee for resident use
less than acquisition cost.

VB - FMV of CIR & FMV of Accessor, kung ano mas mataaas - the cost to emp.

Case 1-3 has no ownership transfer, so the monteary value if 50% lang.

sa 4-5 meron, so entire value of the benefit is the monetary value

In all cases, tax base in computing FBT is grossed-up monetary value of the benefit given.

EXAMPLE

May isang compnay na naglelease ng residential houses for managers. During the year, they
paid a monthly rental of 8,450 for one residential house in Iriga City.

1. How much is tax per month on the FBT furnished by the corpo to its manager in Iriga?

CASE 1 yan! So monthly rent lang.

Monetary Value (8,450 x 50%) = 4.225

Grossed-up monetary value (4,225/65%) = 6,500

Tax Rate = (constant) 35%

Monthly FBT = (35% of 6,500) 2,275

. Okay so yung condo pinagawang residence. The fair market value was determined as
3,744,000 while the Assessor vale is 2.5 million. How much is FBT?

Case 2 yan

Monthly VB (5%x3,744,000)/12 = 15,600 x taxable (50%)

Monetary Value (MV) = 7,800/65%

Grossed-up = 12,000 x 35% = 4,200

3. Purchased a condo via installment at a contract price of 3,380,000 and allow for residency.
How much is FBT?

Case 3

MV (5%x3,380,000)x50% = 84,500/65%

Gorssed up = 130k/Months in a year (12) = 10,833.33 x Tax Rate (35%) = 3,791.67

4. Bumili ng condo for 1.6M, when the market value was 1,820,000 and ownershipw as
transferred to manager.
Case 4

Monetary Value (MV is higher) = 1,820,000/65%

Grossed up = 2,800,000 x tax Rate (35%) = 980k FBT

5. Purchased condo for 2,872,500 and given to manager for 1,800,000. Property valye is
2,820,000 while Assessor is 2,150,000.

Case 5

FMV/Commisioner (Higher Value) = 2,872,500 - (Employee Cost) 1,800,000

VB = 1,072,500/65%

Grossed up = 1,650,000 x 35% = 577,500 FTB

VEHICLE

C1- Purchase in employee name (acquisition cost)

C2 - Give employee cash for purchase of motor in name of employee (amount of cash received)

C3 - Shoulders porition of amount in name of employee (amount shouldered by buyer)

C4 - Purchases car installment in name of emp. (Acquisition cose/no interest divided by 5 yrs)

C5 - Owns and maintains vehicles for employees (Acquisition cost of all motors na di ginamit/5
yrs)

C6 - Leases and maintains vehicles for employees (Amount of rental payment on vehicles not
used)

C7 - Yacht (Depreciaiton ng yacht with life of 20 yrs.)

1-4 is entire benefit value, kahit personal usage.

5-6, 50% ang VB sa MV

Kapag aircraft, pangbuisness yun at di subject sa FBT

Mayaman Co. bumili ng car para sa manager, 1,170,000 sa name ng manager. Pang-business,
minsan pang-personal.

1. FBT?

MV = 1,170,000/65% = Grossed Up (1,800,000)x35% = 630,000

2. Pano kung 70% lang binayaran?

MV (1,170,000x70%) = 819,000/65% = Grossed Up (1,260,000)x35% = 441,000 FBT

3. Pano kung installment sa ngalan ng manager?

MV (1,170,000/5) = 234,000/65% = Grossed Up 360,000 x 35% = 126,000 FBT

EXPENSE ACCOUNTS

Ito lang ang subject sa FBT

1. Expensed incurred by emp. to be paid by employer

2. Personal employee expense in the name of employer

Ito ang di kasama

1. Kung yung expenditure ay naresibo sa ngalan ng employer, pero hindi sa nature ng personal
expense ng emp.

2. Transpo na may fixed amounts as part ng monthly income; ito ginagawang compensation
income subject to regular tax.

HOUSEHOLD

Ito ay kasama sa TAXABLE FB

1. Salaries ng mga katulong ng empleyado

2. Personal homeowner expenses

INTEREST ON LOAN AT LESS THAN MARKET RATE

Kung nagpahiram ang employer sa employee ng walang interest at a rate lower than 12%, ang
interest na ito ay di na papansinin ng employer. OR the differenct of interest ay inassume n ang
empleyado ng 12% at ito ay TAXABLE FB.

Benchmark ay 12% as long as sabi ng law.

EXAMPLE

Maru Co. approved a 100,000 loan sa isang manager at 7.5% interest rate. Payable in 6
months. Ano ang FBT? Constant of benchmark rate is 12%
Interest at benchmark (100,000x12%x6/12) = 6,000,000 - Interest at special rate (100,00 x
7.5%x6/12) = 2,250,000/65% = Grossed Up 3,461.54 x 35% = 1,211.54

MEMBERSHIP FEES

Basta kahit anogn membershop sa club, at TAXABLE fringe benefits, lahat yan, 100%

EXPENSES FOR FOREIGN TRAVEL

NOT taxable fb ang mga:

1. Reasonable business exmpnese paid by employer for abroad meetings

2. Inland travel expenses na hindi kasam ang hotel around $300 or less per day.

3. Economy and Business Class plane ticket, pero 30% lng ng 1st class ay subject sa FBT

Travelling expenses paid by employer sa fam ng emp. ay TAXABLE FB ng employee.

Conditions for exemption fro abroad meetings are:

1. May proof na nagmeet kayo (documents)

2. Dapat may official comms/invitatons ng org abroad.

HOLIDAY AND VACATION

- Ito ay taxable FB
EDUCATIONAL ASSISTANCE

Ito ay taxable FB

1. Cost of educational assistance mula sa employer. Pero ang scholarship at hindi TFB KUNG

a. yung inaaral ay directly related sa business

v. may kontrata na after graduation, magtatrabaho muna dun

*So ito ay para sa cnvenience ng employer.

2. Cost of educ. ass. to the dependents of emp.

May Dean daw na isosponsoran ng school niya, basta mag-masters siya. Funded by the school,
req. by CHED. Is it subject to FBT?

No, in compliance siya sa CHED na lahat ng DEANS dapat may MASTERAL, so connected sa
school.
ANSWER KEY
COLLECTION
EXERCISE 5-1. DISCUSSION QUESTIONS

1. There is no income earned subject to tax as there is only mere return of capital.
Walang income na taxable, sabi sa problem may 60k worth of net assets sila. Pero di clearly
sinabi ang net income na nakuha. Assume that they did NOT have net income by year's end so
walang distributive share tax for both
2. The contention of judge nitafan is wrong. As government employee, compensation for services
rendered should be subject to income tax
The contention of the judge is WRONG. Because as a gov. employee, your salary SHOULD BE
SUBJECT TO INCOME TAX because if you're going to allow your income not to be deducted a
proportional tax, then that is contrary to the law!
Sabi ni judge - The witholding of tax from my salaries is contrary to the provision of the
constitution (Section 10, Article 8 of the 1987 Conts that provides slary of judges are fixed by law
and during their contunuance should not be decreased.)
- Is the president of the Philippine's salary subject to tax? Yes
- Senators? Yes

3. Income to be reported
2017-80,000
2018-10,000
2019-10,000

2017 - received a promisory note (taxable kasi may economic benefits and consideration in
exchange for the services rendered) binayaran ni bookstore ng 100,000 pero discounted ng 20%.
The net income for 2017 to be subject to tax is 80,000.

Anyare sa 20k? Recognized as part of the gross income of 2018-2019, 10k then 10k respectively.
Bakit 10k? Na-realize yung 50% ng 100,000 nung 2018 then 50% nung 2019.

4. The cancellation of Eduardo's debt would have the effect as payment of dividend cash dividend
to be specific hence subject to income tax. On the other hand, if the corporation happened to be
the debtor and Eduardo canceled its debt, it would have the effect as an additional investment
to the corporation and is not subject to tax since it is an increase in capital.
Ano effect ng cancellation? Would tantamount to payment of dividend. Dahil wala ng utang si
Eduardo, it would now be subject to income tax. Yun yung economic benefit, ergo kasama sa
gross income (So yung utang na cinancel, naging dividend payment nalang so kasama sa gross
income mo).

Pano kung si Eduardo nag-cancel ng debt at debtor ang Lux? The amount is considered as an
additional investment by Eduardo to the corporation. Subject ba to tax? Counted na siya as
capital. Kung capital, hindi subject to tax.
 5. Yes, it is justifiable because Reynaldo condoned the debt without any condition, hence it is a
taxable gift and not taxable income.
Hilario's contention of Reynaldo is tenable. Reynaldo should not report an income of 50k
because he condoned Hilario's debt. Reynaldo, therefore has no reason to report na may income
siya ng 50k n abinayaran ni Hilario. Considered as gift, di income.

6. Yes, as it was motivated by consideration that is in exchange to inday’s service and not due to
the liberality of donor, the amount would be taxable income

Nagservice si Inday kay Pedro at Maria for 30 years, yung 300k as GRATITUDE. Ito ay renumenary
donation at taxable. Kung out of liberty, di taxable.

7. Yes, since Pamco had tax benefit hence the recovered amount would be taxable but only 60,000
tax benefit rule-dahil may amount na hindi narecognize the preceding year, once that amount
was recovered, it must then be recognized as taxable in the following year

Kunyare, may corporation tas meorn may utang sayo dahil bumili ng products amounting to 1
million in 2022. So sinabi na wag na pabayaran, ipabawas nalang sa gross income as deduction
so ano mangyayari sa income? Maliit ang income.

8. Taxable in case of refund

VAT-not taxable
real property tax-taxable
income tax- not taxable
stock transaction – not taxable
occupation tax- taxable
estate tax- not taxable
income tax paid to foreign country-not taxable but taxable if it was claimed as deduction
community tax-taxable(example yung cedula)
excise tax on business-taxable
9. A. Yes since it is not only
B. No, since stock dividend lang and it’s not taxable
C. unissued stocks of the issuing corporation=hindi usually dinidistrubute na stock kasi may
pinaglalaanan; basically reserved. Not taxable since it’s only an increase in investment
D. cash dividend=taxable; stock dividend=not taxable

Dividends - bigay ng company dahil ikaw ay isang investor. Pwede maging cash or stock.

*kapag cash = investment, kasi dumagdag ang stock shares. Stock share is not subject to income tax.

10. A. Not taxable

B. Not taxable because law
C. Yes may 15% final tax
 *Domestic Corporation - corporation incorporated within the country under Securities and
Exchange Comission
*Resident Foreign Corporation - merong office ssa Philippines
*Non-Resident Foreign Corporation - walang office sa Philippines

11. A. 1,000,000
For smuggled goods, the reward is generally around 10% but not exceeding 1,000,000 pesos.

Compromise penalty - 50 million

X-rate - 10%
Beyond the maximum! - 5,000,000, so 1,000,000

B. 100,000

To Ms. Supsup (max 1,000,000)

X tax rate - 10%
Final withholding tax - 100k

12. A. 148,000
B, 127,027
C. 127,027
D.147,027

EXERCISE 5-2. TRUE OR FALSE QUESTIONS

1. Dividends received by a non-resident foreign corporation from a domestic corporation are subject to
the 15% final withholding tax, subject to the condition from a domestic corporation that the country
in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due
from the non-resident foreign corporation taxes, deemed to have been paid in the Philippines. TRUE

2. Tips received by waiters in restaurants are not subject to income tax because they are actually
donations which are subject to donor's tax on the customer. FALSE

3. Excess of cash advances on travel allowances of employees are taxable to them if not returned to
theiremployer. TRUE

4. The "tax benefit rule” is applicable on tax refund but not on recovery of bad debts previously claimed
as deduction from gross income. FALSE

5. The statutory taxpayer (not the person who shouldered the tax burden) is the proper person that has
the personality to claim tax refund of indirect taxes erroneously paid. TRUE

6. Representation and travel allowances (RATA) of government officials are subject to income tax. FALSE

7. Additional Compensation Allowance (ACA) given to officials and employees of the government are
considered part of taxable Compensation income. FALSE
8. Employees of BIR are disqualified to receive rewards as tax informers. TRUE

9. First cousins of BIR employees are not entitled to a reward as tax informers. TRUE

10. The maximum amount of tax that may be withheld by the BIR on a report made by a tax informer is
P100,000. TRUE

11. A revenue examiner of the Bureau of Internal Revenue shall receive a tax informers reward if he
discovers anomalous reporting of business transactions which led to the filing of a tax evasion case
and conviction of the tax evader. FALSE

12. Persons Cultivating a farm for pleasure, the result of which is a continual loss from year to year are
regarded also as farmers. FALSE

13. A provision for bad debt which may be claimed as deduction from gross income for purposes of
accounting are deductible also for tax purposes. FALSE

14. P200,000 earned by a Filipina in transporting prohibited drugs from the Philippines to other
countries as a drug mule is taxable in the Philippines. TRUE

15. A general professional partnership is taxable also as a corporation. FALSE

16. Return of capital is not subject to income tax, while income is subject to tax. TRUE

17. Under the realization test, stock dividends are not income subject to income tax on the part of the
stockholder, because he merely holds more shares representing the same equity interest in the
corporation that declared the stock dividends. TRUE

18. Under the economic benefit test, any economic benefit to the employee that increases his net worth
is taxable, whatever may have been the mode by which it is affected. TRUE

19. In a merchandising business, gross income means the total sales, less the cost of goods sold, plus
anyincome from investments and from incidental or outside operations or sources. TRUE

20. As a general rule, stock dividends are not part of the gross income of the stockholders because they
are subject to final withholding tax. FALSE

EXERCISE 5-3. MULTIPLE CHOICE THEORY

1. King is a stockholder of Ara Corporation. In 2018, he receives as dividens from latter 150
common shares of Ara corporation and another 150 common shares of Mina Company with a market
value of
P100 and P120 per share, respectively. The dividend income subject to tax of King is
Stock dividend Property dividend
a. P33,000

b. 33,000 -

c. - 18,000
d. 15,000 18,000
2. Ara, Mina, Rosa, Linda and Babes own 20% each out of 1.000 shares issued and outstanding of
ABS GMA Corporation. On December 21, 2018 the corporation declared 10% common stock dividends
giving the stockholders the Option to Choose property or stock dividend Rosa and Linda opted property
dividend while the rest chose stock dividend. How much is the dividend income of Rosa if the market
value of the stocks is P30

a. None

b. The dividends received are not taxable

c. P 300

d. 600

3. Malie bought 100 common shares of Gainsway Company on October 31 2017 at P50 per share. On
December 15, 2017 she received 25% stock dividend of common shares. On January 20, 2018, she sold
the stock dividends at P30 per share.

How much is the gain or loss on the sale of the stock dividends?

a. P(250)

b. 250

c. 750

d. 3,750

4. Raymundo purchased 200 common shares of Advance Corporation at 55 per share. At the end of the
year, he received a 10% stock dividend in common shares. The day after receipt of the dividend, he sold
40 share at P 60 per share, The gain on sale is

a. P2,200

b. 8,800

c. 200

d. 400

5. The total sale of Magsasaka from its farm products and farm equipment is P400.000 and P50,000,
respectively. The cost of production amount to P240,000 while the book value of farm equipment at
time of sale was 35,000. The other income of the farm amount to P12,500. It’s beginning inventory was
125,500, while the ending inventory was 177,000. If Magsasaka using cash method of accounting, how
much is his gross income during the year?
a. P187,500

b. 172,500

c. 138,000

d. 462,500

6 There is no taxable income until such income is recognized. Taxable income is recognized when the
(BEQ)

a. taxpayer fails to include the income in his income tax return.

b. income has been actually received in money or its equivalent.

c. income has been received, either actually or constructively.

d. transaction that is the source of the income is consummated

7. Schedular system of taxation means

a. all types of income are added together to arrive at gross income.

b. separate graduated rates are imposed on different types of income.

c. capital gains are excluded in determining gross income.

d. compensation income and business incomes are added together in arriving at gross income

8. This dividend is subject to normal income tax

a. Dividend received by a domestic corporation from another domestic corporation.

b. Dividend received by a resident foreign corporation from a domestic corporation.

C. Dividend received by a domestic corporation from a resident foreign corporation.

d. Dividend received by resident citizen from a domestic corporation.

9. One of the following is not subject to income tax –

a. Winning in jueteng.

b. Bribe given to a public official.

c. Winning in lotto amounting to P10,000.

d. Wagering gains.
10. One of the following is not the major business internal revenue tax in the tax code.

a. Value Added Tax

b. Excise Tax on Business

c. Income tax

d. Percentage tax

11. There is an effect of a payment of dividend when

a. fringe benefit is received by an employee fro the company.

b. promissory notes are paid to the employees for the services he had rendered to his employees.

c. a creditor condones the debt of a corporation.

d. a corporation condones the debt of its stockholders.

12. Lazaro saved the life of Cory and three other who met a car accident. Unintentionally, it was found
out that Cory is a kidnap victim of the three men. Because of the assistance extended by Lazaro, Cory
was saved and the kidnappers were arrested by the police authorities. Consequently, Cory gave him
50,000. The remuneration received by Lazaro is:

a. exempt from tax.

b. subject to income tax.

c. subject to donor’s tax.

d. subject to 20% final tax.

13. In 2016, King, an employee of advance corporation, is indebted to Philip corporation in the amount
of 50,000. He has also liability with Rex of 25,000. During the year, the board of directors of Philip
corporation decided to condone his liability, he being a stockholder of said corporation. To be relieved by
his liability, King has required by Rex to work in his restaurant for two (2) years as a waiter. As a
consequence, King has filed his vacation leave from advance corporation for the same period thereby
receiving the monetized value of his leave credits in amount of 6,000. While working as a waiter in the
restaurant, he received tips form the customer totaling to 5,000. Said amount was not accounted
anymore by Rex. How much is the taxable income of King in 2016?

a. 36,000

b. 25,000

c. 30,000
d. 86,000

14. Rogelio sold 200 common shares of stock of Gibsons Corporation at P115 per share. ts books of
accounts showed the following record of purchases of common shares
Date Purchases
January 24, 2016 200 shares at P100 per share

February 5, 2016 200 shares at P110 per share

April 20, 2016 Received 5% stock dividends
If the costing of the shares is based on the moving average method the gain on the sale of the
shares is

a. P3,000

b. 2,000

c. 1,000

d. None

15. If the costing of the shares above are based on the first-in first-out method the gain on the sale of the
shares is

a. P3,000

b. 2.000

c. 1,000

d. 3,954

16. The employees of PALA Incorporated staged a strike. Mon an employee joined the strike After four
(4) months of continued strike, Mon ran out of money and asked financial aid from other people since he
has no source of income and needed financial assistance in order to live. He was able to raise P3,000.
When Mon filed his return, he excluded these benefits from his gross income

a. The P3,000 is subject to final withholding tax.

b. The entire amount is not taxable because it is a donation and not income.

c. The income is not taxable because it is nether compensation, business, professional nor passive
income.

d. The entire income is taxable because it is considered as income from d whatever source derived.
17. Gains from graft, extortion, embezzlement, fraud or ransom fall under:

a. tax avoidance

b. tax exemption

c. tax evasion

d. income taxation

18. Ceidi was notified by its depository bank that P1 million had been credited to his savings account
because of a million-dollar remittance by her sister in the United States through a US bank. Ceidi lost no
time in spending most of the money for various purposes, such as the purchase of luxurious
condominium unit and a luxury car, money market placement, gifts to relatives, etc. It turns out that
Ceidi’s sister remitted only $1,000 dollars and not $1 million.

Statement 1: The erroneous remittance is taxable.

Ador issued a check drawn on a bank in which he has no funds. He negotiated the check and received
15,000 and immediately proceeded to the casino to try his luck but lost. Later, he was charged and
convicted for violation of Batas Pambansa blg. 22.

Statement 2: the BIR can tax him for the 15,000 he got from negotiating the check.

a. Statement 1 is true, while statement 2 is false.

b. Statement 1 is false, while statement 2 is true.

c. Both statement is true.

d. Both statement is false.

19. If an individual renders services to a creditor who in consideration thereof cancels the debt, the
cancellation of indebtedness may amount to a:

a. Gift

b. Capital contribution

c. Donation inter vivos

d. Payment of income

20. Which of the following is subject to tax?

a. P6,000 representing his unused vacation leave credits of nine working days

b. Traveling expense of 15,000 received by an employee who was sent on a business trip to Davao city.
c. Representation expenses of 5,000 a month which are not subject to liquidation

d. Tips received by waiters which are remitted to their employer

EXERCISE 5-4. MULTIPLE CHOICE

1. In 2016, the net income before write-off of Maganda Corporation is 1 P20,000 The bad debt written
off is P30,000. If the P30,000 is fully recovered in the following year

a. the entire amount of P30,000 is taxable to the corporation

b. the amount recovered is not taxable

c. the P20,000 is taxable while the P10,000 is not

d. the P10,000 is subject to tax

2. Any amount subsequently received on account of a bad debt previously charged off and allowed as a
deduction from gross income for prior years must be included in the gross income for taxable year in
which received This is known as

a. end result doctrine

b. destination of income test

c. equitable doctrine of tax benefit

d. severance theory

3. A tax refund of the following is taxable to the taxpayer

a. 6% capital gains tax on sale of real property.

b. value-added tax paid by a VAT registered person on the purchase of goods which were exported
abroad.

c. tax erroneously paid on inter vivos donations to the government.

d. basic and additional community tax paid by the corporation.

4. For services rendered Sharmaine received from Dawn a promissory note with a face value of P50,000.
At the time of receipt, the note may be sold at a discount of twenty percent (20%). The note will mature
the following year

a. The taxable income of Sharmaine upon receipt of the note is P50,000.

b. The income of Sharmaine is payable in the following year.

c. In the year of receipt, Sharmaine shall report P40,000 representing her income on the note.

d. The P50,000 is not taxable since it was not paid in cash.

5. In 2016, Vic constructed a commercial building with spaces for lease to the public. Vic required
Edward, a prospective lessee, to sign a pre-lease agreement which principally provided: (a) that the
lessee shall extend to the lessor a non-interest bearing loan of P100,000 payable within one year, and (b)
that in consideration of the loan, the lessee and his rentals shall not be increased while the loan remains
unpaid. Edward extended the loan of P100,000 to Vic and was given a space in its ground floor

a. The rent income is taxable, while the loan is not

b. The loan is taxable to Vic while the rent income is not

c. Neither the income from rent nor the loan is taxable.

d. Both the loan of P100,000 and the income from rent are taxable.

6. Evangelista owns a vacant parcel of land that he leases to Jasmine for ten (10) years at
an annual rental of P10,000. According to the contract, Jasmine will erect a building on the
land. At the termination of the lease, the building shall become the property of Evangelista
without any compensation or reimbursement whatsoever.

The construction was completed at the end of the second year at a cost of P2 million. The depreciable
life of the building is 50 years.

a. Upon the expiration of the lease contract, Evangelista should declare the P2 million in his income
tax return.
b. If Evangelista uses spread-out method, he must report a total income of P210,000 on the second
year of the contract.
c. If Evangelista uses spread—out method, he must report a total gross income of P220,000
starting on the third year.
d. Evangelista should report an income of P1,680,000 in the year the construction of the building
was finished

7. Which of the following is not included in the income to be reported by the lessor?a.

Rent paid by the lessee

b. Taxes paid by lessee

c. Income on the leasehold improvement

d. Depreciation on the leasehold improvement

EXERCISE 5-6. LEASEHOLD IMPROVEMENT

PROBLEM 5-6.1: Artemio leased a 216 square meter of idle land to Leizzie College of Business (LCB), a
proprietary educational institution, for a period of twenty (20) years effective January 1, 2016, at a
monthly rental of P5,000. The lease contract provides that Leizzie College of Business (LCB) will erect a
building thereon to be used as classroom, which it did on the lot of Artemio. The agreement provides
also that the building shall become the property of the lessor at the end of the lease. The building was
completed on June 30, 2018 at a cost of P1,800,000. The estimated life of the leasehold improvement is
thirty (30) years.

If was further agreed that effective 2016 Leizzie College of Business (LCB) will pay the real estate tax on
the land assessed at P3,000 annually On January 2, 2016, LCB paid Artemio P120,000 consisting of rental
covering the two (2) year period from 2016 to 2017.

1. The rent income to be reported by Artemio in 2016 –

a. P 60,000
b. 123, 000
c. 120,000
d. 63,000
2. The rent income to be reported by Artemio in 2018 using outright method is –
a. 60,000
b. 63,000
c. 1,860,000
d. 1,863,000
1. The income to be reported by Artemio in 2018 using spread-out method is
a. P84,429
b. 105,857
c. 81,429
d. 21,429
2. Which of the following statements is correct?
a. Effective third quarter of 2018, the land and the building shall be exempt from real
estate tax.
b. Effective June 30m 2018, the land shall be exempt from real estate tax.
c. Effective January 1, 2019, the land and the building shall be exempt from real estate tax.
d. No exemption from real estate tax shall take place on the land and building
3. The deductible expense of Lezzie business College in 2019-
a. 165,857
b. 102,857
c. 114,429
d. 84,429
 4. The income to be reported by Artemio in 2019 is –
a. P105,857

b. 102,857
c. 114,429
d. 84,429
5. Suppose the lease contract was terminated on April 1, 2022 due to the fault of the lessee, the
income to be reported by Artemio under spread-out method on 2022 is –
a. 1,443,000
b. 1,485,857
c. 1,440,000
d. 1,482,857

PROBLEM 5-6.2: Bryant leased a land to Joe for a period of 11 years starting January 1, 2016 at a monthly
rental of P2,000. Observing the provisions of the contract, Joe constructed a building which shall become
the property of Bryant at the expiration of the lease. The construction was completed on December 30,
2016 at a cost of P1,000,000 with an estimated life of 20 years.

1. How much income is to be reported by Bryant in 2016 under the outright method?
a. P1,024,000
b. 1,000,000
c. 61,500
d. 37,500
2. How much income is to be reported by Bryant in 2017 under the spread-out method?
a. P84,000
b. 1,000,000
c. 74,000
d. 99,000
3. Suppose on February 1, 2020 the building was destroyed by fire how much loss did Bryant
incur?
a. P1,000,000
b. 150,000
c. 61,111
d. 75,000

PROBLEM 5-6.3: Mr. Rivera leased his land to Mr. Gomez. The term of the contract of lease is for fifteen
(15) years and the rental fee is P36,000 a year. The contract provides that Mr. Gomez, the lessee, will
construct a building and at the end of the contract, the building will be owned by Mr. Gomez, the lessor,
The building was constructed at a cost of P600,000 and has a useful life of 30 years. Assuming that Mr.
Rivera will spread his income over the term of the lease contract, for income tax purpose, his yearly
income is:
 a. 40,000
b. 56,000
c. 76,000
d. 20,000

EXERCISE 5-7 SERVICES PAID BY A PROMISSORY NOTE

PROBLEM 5-7.1: Instead of receiving cash, Babonio General Services received a promissory note in 2016
from Fine Arts Company valued at P120,000 for janitorial services rendered from January 1 to June 30,
2016 Fifty-percent (50%0 of the note is payable in 2017 while the remaining balance of fifty-percent
(50%) is payable in 2018. The note can be sold, however, to a bank at a discount of 20%.

1. How much is the taxable income in 2016 of Barbonio General Services on the promissory
note?
a. P120,000
b. 24,000
c. 60,000
d. 96,000
2. How much is the taxable income of Barbonio General Services on the promissory note in 2017
and 2018?
a. P120,000; None
b. 24,000; None
c. None; P 24,000
d. 12,000; 12,000

PROBLEM 5-7.2: In 2016, Alonte received from his employer a promissory note with a face value of
P50,000 for services rendered. The note will mature in 2017

However, it can be sold to a financing institution at a discount of 25%. The employer paid the
promissory note in 2017

1. How much taxable income is to be declared by Alonte on the promissory note in 2016?
a. P50,000
b. 12,500
c. 37,000
d. NONE
2. How much is the taxable income of Alonte on the promissory note in 2017?
a. P50,000
b. 12,500
c. 37,500
d. NONE
EXERCISE 6-2. TRUE OR FALSE QUESTIONS

1. Fringe benefit expense plus fringe benefit tax expense is equal to grossed-up monetary value.

TRUE

2. All fringe benefits which are not subject to fringe benefits tax are subject to ordinary income

tax. TRUE

3. All fringe benefits which are of relatively small value are included in the term de minimis benefit

and are exempt from fringe benefit tax and ordinary income tax. FALSE

4. Under the convenience-of-the-employer rule, a fringe benefit received by an employee is

exempt from ordinary income tax but it is subject to fringe benefits tax. FALSE

5. Garbage dues on the household of a manager amounting to P400 per month is subject to fringe

benefit tax if shouldered by the employer. TRUE

6. The excess on the ceiling of P1.500 of rice allowance shall automatically be added to the taxable

compensation income of a rank-and-file employee. FALSE

7. A housing privilege of a police regional director within the compound of the regional police

the office is exempt from the payment of a fringe benefit tax. TRUE

8. Allowances which are fixed in amount and are regularly being received every month by a

Managerial employees are fringe benefits which are subject to fringe benefit tax. FALSE

9. Allowances which are fixed in amount and are regularly being received every month by a

supervisory employee are benefits which are included in the computation of the gross

compensation income. TRUE

10. Representation allowances and travel allowances (RATA) of government officials are privileges

which are taxable as compensation income. FALSE

11. The fringe benefit tax is a final withholding tax on the employee which are being withheld and

paid by the employer. TRUE

12. The fringe benefit tax is a final withholding tax with a rate of 35% based on the monetary value

of the fringe benefit. FALSE

13. A fringe benefit received by an employee is subject to fringe benefits tax even if the employer-

grantor is exempt from income tax. FALSE

14. If the grant of the fringe benefit to the employee is required by the nature of or necessary to the
business of the employer, it shall not be subject to fringe benefit tax even if the recipient is a

managerial/supervisory employee. TRUE

15. An exemption from fringe benefit tax does not follow exemption from a creditable

withholding tax. TRUE

16. In recording the transaction for a cash fringe benefit given to a supervisory employee, the entry

is: (Debit) Fringe Benefit Expense (Debit) Fringe Benefit Tax Expense (Credit) Cash (Credit) Fringe

Benefit Tax Payable.

17. In recording the transaction for a cash fringe benefit given to a rank-and-file employee, the entry

is: (Debit) Fringe Benefit Tax Expense (Credit) Cash.

18. Membership dues of a manager in Rotary Club which is shouldered by his employer is a taxable

fringe benefit. TRUE

19. The monetized value of vacation and sick leave credits paid to government officials and employees is
not subject to any ceiling. TRUE

20. Employer's share in the monthly contribution to the Social Security System (SSS) of a supervisory
employee is a fringe benefit which is not subject to fringe benefit tax. TRUE

PROBLEM SOLVING

1. Concept of income plus fringe benefits. Joy collected P1,000 interest on corporate bonds and a salary
of P12,000 from her employer. She also received P3,000 as her share of the tips in the restaurant she is
working with. Joy won P10,000 in lotto. She also won P8.000 in jueteng. Joy also stole P3,000 from her
mothers purse when she was not looking. Lastly, she received her monthly rice subsidy of P325 from her
employer. Which amounts are taxable?

● Interest on corporate bond - 1,000

● Salary - 12,000
● Tip - 3000
● Jueteng - 8,000
● Stolen from mother's purse - 3,000

(RICE IS DE MINIMIS so IT IS NOT TAXABLE)

Lotto Winning - 10,000 (Di kasama kasi under train law ang lotto winnings na 10,000 below)
2. Living quarters and meals. William and Kate, a wealthy couple, hired Yaya, a governess to take care of
their only child who is three (3) years old. Because they want that full attention should be given by Yaya
to their child, the couple required her to stay in their house with free meals and lodging. Is the value of
the free meals and lodging taxable to Yaya?

No, because in this case, the convenience of employer rule has been applied

3. Free living quarter. Kulas was hired by Habang Bata Pa Piggery Farm as a caretaker with a monthly
salary of P6,000. To enable him to perform his duties well and serve as guard at the same time, he was
provided with a small room which he could use as his residence inside the premises of the piggery farm.
Is the equivalent value of the living quarter subject to the 35% fringe benefit tax?

No. The equivalent value of the living quarter is not taxable to Kulas under the
convenience-of-the-employer rule. The purpose of the piggery farm in providing Kulas a room inside
the premises is for the convenience of Habang Bata Pa Piggery Farm.

4. De minimis benefits. In your taxation class at the University of San Carlos, Cebu City, you were asked
by your teacher. Atty Chris Malaya. of the following situational case: "Punzalan Company gave its officials
and rank-and-file employees a monthly benefit of one sack of rice (equivalent to P1,500) each as a
means of promoting goodwill. contentment, and efficiency of its employees. Assuming you are the
company accountant, will you subject said benefit to creditable withholding tax? How about fringe
benefit tax?" What will be your answer to the question of Atty. Malaya?

a. No, because de minimis benefits are not subject to income tax as well as withholding tax on
compensating income of rank and file employees. (Di siya lumampas sa 2k which is rice limit before
taxability.)

b. No, because the rice allowance is considered as de minimis benefit which is exempted from FBT

5. De minimis benefits. Kareen Leon, the Vice-President of UB Corpo-ration received benefits that are
unavailable to other employees. These benefits include free parking, two percent (2%) discount on
products sold by the corporation, rice subsidy of P1,500 per month, laundry allowance of P750 per
month, and housing privilege on a residential property leased to the company at a monthly rental of
P8,000. Which of the benefits must be included in the gross income of Kareen Leon?

The free parking and courtesy discounts are subject to fringe benefit tax considering that Kareen Leon
is not a rank and file employee of UB Corporation. The laundry is beyond 300 limit, since it is 750, the
excess is taxable. The rice subsidy of P1,500 a month falls under the “de minimis benefits” which are
exempt from income tax.
SIR HUSSEIN BREAKDOWN:

Keep in mind that KAREEN is Managerial, subject to FBT lahat ng benefit.

● Free parking - subject to FBT

● Rice subsidy - hindi taxable, de minimis
● Laundry na 750 (300 lang ang covered by de minimis) - only the 450 excess is FBTaxable
● 8k Rent - FBT kasi managerial, so ung housing binigay as benefit

6. Educational assistance to employees. Effective this coming school this year, all certified public
accountants who are teaching accounting/ auditing, finance, law, taxation and other technically related
subjects are now required to undergo accreditation by the Board of Accountancy. One requirement for
the accreditation is that the applicant must possess a masters degree in Business Administration (MBA)
or in Accountancy (MSA). To avoid shortage of accounting professors, De la Salle Araneta University
shouldered the cost of tuition fees of Prof. Ferdinand Romero who enrolled in MBA in their school. There
is a condition, however, that (1) he should be able to graduate within three years; and (2) he should
remain teaching in the school for ten (10) years after graduation.

(a) Does the cost of the tuition fees form part of the employee's taxable compensation income?

(b) How about if the educational benefit is granted through a qualifying exam?

(c) Is the cost of the tuition fees deductible from the gross income of the employer?

a. No, because there is a condition that he has to comply

b. No, because there is a condition that he has to comply
c. Yes, if it is part of compensation income to employee

IDENTIFY the following employees whether managerial, supervisory. or rank and file employee.

1. CPA review director - MANAGERIAL

2 President and Chairman of the Board of a corporation - MANAGERIAL

3. Capataz (foreman) of a construction company - SUPERVISORY

4. Janitor (addressed as floor manager) - MANAGERIAL

5. College dean - MANAGERIAL

6. Public school principal - MANAGERIAL

7. College instructor - SUPERVISORY

8. Account executive - SUPERVISORY

9. Accounting clerk - RANK & FILE

10. Guest Relations Officer (GRO) in a nightclub - RANK & FILE

11. Passenger bus inspector - SUPERVISORY

12. Construction engineer - MANAGERIAL

13. Secretary of National Defense - MANAGERIAL

14. City Vice-Mayor - MANAGERIAL

15. Bank teller - RANK & FILE

EXERCISE 6-5. THEORY AND COMPUTATION

Journal entry of Marietta Tabasondra Corporation:

Fringe benefit expense P 32,500

Fringe benefit tax expense 17,500

Cash P 50.000

1. The deductible expense of Tabasondra Corporation –

a. P34,000

c. 50.000

b. 16,000

d. None

2. The grossed-up monetary value is —

a. P34,000
c. 50,000

b. 16,000

d. None

3. Based on the journal entry above, the fringe benefit must have been given to –

a. the company's general manager

b. an accounting clerk

c. a janitor

d a security guard

4. The above journal entry –

a. might consist of one sack of rice given to the employees of the company.

b. can be recorded by a corporation whether exempt from income tax or not.

c. may refer to a free lodging given by an obstetrician to his driver who is required to stay in the
physician's house so that he will always be available even during nighttime when somebody will call the
services of the doctor.

d. may have been the employer's share in the GSIS premium contribution for the employees.

EXERCISE 6-6. MULTIPLE CHOICE THEORY Elizabeth Barbosa Company gave benefits to its employees
during the year, as follows:

a. To eight (8) rank and file employees:

Rice allowance during the year - 96,000

Medical cash allowance to dependents - 16,000

Uniform allowance - 12,000

b. To the company supervisor:

Fees in a civic club - 9,500

Premium on life insurance where the employee is the beneficiary - 10,000

Uniform allowance - 4,000

1. The deductible fringe benefit tax expense—a. P 30,000 b. 10,500 c. 19,500 d. 23.500

2. The deduction for the fringe benefits given to all the employees —a. P 147,500 b. 158,000 c. 10,500 d.
124,000

3. The amount of de minimis benefits not subject to fringe benefit tax a. 113,000 b. 124,000 c. 27,000 0,
120,000

SOLUTIONS INCASE!
4. The journal entry for the entire fringe benefits given (use one entry only) -
Fringe benefit expense - 147,500

Fringe benefit tax expense - 10,500

Cash - 147,500

Fringe benefit tax payable - 10,500

EXERCISE 6-7. MULTIPLE CHOICE THEORY

1. Under the 'convenience of the employer rule'

a. where living quarters are furnished in addition to cash salary, the rental value of such quarters should
be reported as income.

b. bonuses representing additional payments for satisfactory services rendered should be reported as
income.

c. allowances furnished to the employee for and as a necessary incident to the performance of his
duties are not taxable.

d where allowances have been furnished to the employee for the convenience of the employer, the
latter shall shoulder the tax on the income of his employee.

2. Tony and Bert are employed as drivers by Atty. Osang and Dr. Cnsty respectively, with a salary of
P10,000 each. In addition, Tony and Bert are provided free meals and living quarters with a monthly
value of P5,000. Tony eats and lives at Atty. Osang's residence because he is a bachelor and could save on
his daily expenses. On the other hand, Bert stays with Dr Cristy because the latter is an obstetrician
available 24 hours a day.

a Both Tony and Bert are taxable on the entire P10,000 monthly incomes.

b. The free meals and living quarters are not taxable to Tony and Bert because they are provided for the
convenience of the employer.

c The gross compensation income of Bert consists only of his salary of P10.000 because the living
quarters and meals are meant for the convenience of his employer.

d. The free meals and living quarters are taxable to Tony and Bed because they are obviously furnished
for their convenience.
3. Kanebo Company is a garment manufacturer. Most of its factory workers were recruited from the
province and since the company does not want its workers to find difficulty in looking for boarding
houses, it constructed houses within the factory compound to be used by the employees for free. This
was availed of by 60 workers who considered that since the offer was free, they would be saving P1,000
each a month. When the employer discovered that most of its workers are buying food from the nearby
carenderias which upon investigation were found to have unsanitary facilities, it likewise provided free
meals to its employees valued at P200 each daily.

a. Since the fringe benefits are furnished to the employees for free, it would likewise be exempt from
income tax.

b. The value of the free lodging and meals is not taxable because the workers did not receive it in cash.

c. The employees are not liable to pay income tax on the equivalent value of the free meals and lodging
because these are given for the convenience of their employer

d. The free meals and lodging are part of the taxable compensation of the workers because they are
furnished to rank-and-file employees.

4. Represents the gross amount of income realized by the employee which includes the net monetary
value of property received and the amount of fringe benefit tax thereon paid by the employer in behalf
of the employee

a. fringe benefits

b. income constructively realized

c. de minimis benefits

d. grossed-up monetary value

5. Which of the following is considered for business use and not subject to fringe benefit tax?

a. The use of a yacht owned by the employer.

b. The use by business of a fleet of motor vehicles being leased by employers.

c. The use by business of a fleet of motor vehicles owned by employers.

d. The use of aircraft owned and maintained by the employer.

6. Jaguar is employed as security guard of Robindaugh Superman. He lives in a room within a compound
but is not charged any rent. The rental value of the room is P1,000 a month.

Statement 1: The rental value of the room is subject to fringe benefit tax. COI. General is a member of
the Philippine Army Apart from his salary he is also supplied with free uniforms. free meals and given
free living quavers in whatever military camp he is assigned.

Statement 2: These benefits are taxable to Col. General.

a. Statement 1 is true, while Statement 2 is false.

b. Statement 1 is false, while Statement 2 is true.

'c. Both statements are true.

d. Both statements are false.

7. Fringe benefits which are limited to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value

a. Housing privilege

b. De minimis benefits

c. Expense account

d. Grossed-up monetary value

8. A fringe benefit which is not subject to fringe benefit tax

a. Benefits received by managerial employees.

b. Benefits given to rank and file employees.

c. Educational assistance to dependents of the company's model supervisor.

d Membership dues in a golf club by the company managers.

9. Which of the following housing benefits is not exempt from fringe benefit tax?

a. Housing privilege of military officials of the Armed Forces of the Philippines.

b. Housing unit located 20 meters away from the company's business premises.

c. Housing for an employee who temporarily stays within the company premises for the convenience of
the employer.

d. A residential property owned by the company and assigned to an officer for use as his residence.

10. Candida is an office secretary of the General Manager of a Regional Operating Headquarter. During
the year she received P100,000 fringe benefit. The fringe benefit is

a. subject to a fringe benefit tax of 15%.

b. subject to a fringe benefit tax of 35%.

c. not subject to a fringe benefit tax.

d. within the ceiling of de minimis benefit.

1. Her employer has the following list of expenses incurred on Manlou Espocia-Malquisto during the
year: - Fixed representation allowance of P4,000 a month - Entertainment allowance of P15,000. Marilou
has to liquidate expenses she incurred. - Reimbursement by the employer of purchases of groceries for
the personal consumption of the employee, P11,700. - Medical benefit to the employee, P17.500. The
amount of fringe benefit tax if Marilou Malquisto is a supervisory employee is —a. P 10,500 c. 4,941 b.
6,300 d. 8,470

Items 2 and 3 are based on the following information: Ver Dray is employed by Dr. Oren as driver with a
salary of P14,000 a month. In addition, he is given free meals with a monthly value of P10,500 and living
quarters with a value of P3,000 a month. 2. The monthly gross compensation income is –

a. P 24,500 b. 14,000

c. 13,500 d. 27,500

3. If the allowances are furnished to Ver Dray for and as a necessary incident to the proper performance
of his duties. the monthly gross compensation income is – a. P 24,500 b. 14,000

c. 13,500 • d. 27,500.
4. Mica is the chief chemist of V Medical Hospital Inc. As reward for good performance, she was sent by
her employer to the United States to attend a 3-day convention of International Association of Medical
Technologists She was booked on a first class ticket that cost the company US $2,300 ($1 = P50) for a
round trip ticket. Economy ticket costs only $1,200 She was likewise given an allowance to be used for
her meals and local transportation at a rate of US $100 daily which is subject to liquidation. The amount
of fringe benefit tax is —

a. P16,153.85 b. 53,846.15

c. 20,192.31 d. 15,176.47

Items 5 and 6 are based on the following information: 5. Cartndge Company owns a fleet of motor
vehicles. In 2018. one of the cars which was acquired at a cost of P800,000 was allowed to be used by
the general manager. During the year, its book value amount to P775,000. How much will be the fringe
benefit tax due thereon?

a. P 86.154 b 43,077

c. 10,433 d. 37,647

6. Suppose Cartridge Company is just leasing the car that is being used for personal purposes and is
paying a monthly rental of P10,000. The fringe benefit tax is —a. P 2,692 c. 5,385 b. 2.353 d. 2,576

7. France Company granted a loan of P100,000 in favor of a company's manager with an interest of 9%
per annum. The loan is payable in eight (8) months. The fringe benefit tax is —a. P 7,058.82 b. 6,461.54

c. 941.18 d. 1,076.92

8. In 2018, a non-stock, non-profit university provided a three (3) day vacation trip in Boracay Island to
the university's Executive Vice-President. The total expenses incurred by the school amounted to
P36,000. The fringe benefit tax is - a. P 16,941 c. 10,303.00 b. 19,385 d. None

9. Galante Company provides free driver and a housemaid to its general manager, Alfredo Lobo. The
driver is being paid a salary of P15,000 a month, while the housemaid is receiving P6,000 a month as
salary. The company has also shouldered the annual membership fees and dues of the manager in a golf
club which amount to P75,000. The monthly fringe benefit tax is —a. P 38,117 c. 14,673 b. 12,824 d
5,765

10. Sicilian Corporation purchased a condominium unit for P2,000.000. The zonal value is P2,500,000.
The title to the property was transferred in the name of Lito: the company's finance manager. How much
is the fringe benefit tax due? .a. P 1,076,923 c. 269,231 b. 1,346,154 d. None
11. During the month, the company paid for the monthly rental of a dormitory which is being occupied
by the supervisor in the amount of P10,000. It also provided fringe benefit to a clerk amounting to
P3,000. The deductible expense of the company is — • a. P 15,692 c. 13,000 b. 12,692 d. 7,200

12. The employer company gave the following cash benefit to the following. P 500,000 200,000
1,800,000

Supervisory employees Rank and file employees The fringe benefit tax is —a. P141,615 b. 91,765

P 195,000

68,000

c. 105.000 d. 80,000

Items 13 through 15: The compensation package of the Vice-President for Finance of corporation was:
Monthly salary Fixed representation allowance Car. given by the company, purchase price P 500,000
200,000 1,800,000

13. The monthly taxable compensation income

a P500,000 b. 700,000 c. 200,000 d. 2,500,000

14. The fringe benefit tax a. 847,058 b. 169,411 c. 70,588 d. 969,231

15 The fringe benefit tax if the Vice-President shouldered 60% of the cost of the car a. 387,692 c.
169,411 b. 338 824 d. 70.588
EXCERSIE 1.1 CHAPTER 1

TRUE OR FALSE

Write T if the statement is true and F if the statement is false

1. A taxpayer who deliberately admits to over-declares his taxable income is guilty of tax evasion.
FALSE
2. The power to tax can reach. over into any jurisdiction to seize upon persons or property.
FALSE?
3. Salaries of Supreme Court justices and judges of lower courts are exempt from income tax.
FALSE
4. A person cannot refuse to pay a tax on the ground that he was previously diagnosed to be
positive of Covid 19.
TRUE
5. Taxes must only be imposed prospectively unless the law provides for its retroactivity.
TRUE
6. Tax evasion in one year can be offset by paying excessive taxes in the following year.

7. Taxation can be exercised by local government units even without previous constitutional
authority.
FALSE?
8. Tax laws should always be aimed at revenue collection.
FALSE
9. A tax is a voluntary donation te-the government.
FALSE
10. The salary of the President of the Philippines is not sublect to income
FALSE
11. The salary of a priest as a chaplain in the Armed Forces of the Philippines is subject to income
tax.
TRUE
12. The income of a non-stock and non-profit educational institution is exempt from income tax. )
TRUE
13. Non-delegation of the legislative power to tax is Moth a constitutional and inherent limitation on
the power of taxation.

14. The power to :ax is limited to the territorial jurisdiction of the taxi government.
TRUE
15. The power to tax may include the power to destroy.
TRUE
16. The test for exemption from real properly tax of private educational institutions is its use ancl
not ownership

17. As a general rule, a tax exemption is an act of liborality which can be revoked by the government

18. Taxes are paid only by those who are directly benefiting from the government.
FALSE
19. All revenue bills must originate from the Senate.
FALSE
20. All taws granting tax exemption must be approved by a two-thirds (2/3) vote of all the members
of the Congress
21. A law passed by Congress which granted tax amnesty to those who have not paid income taxes
for a certain year without at the same time providing for the refund of taxes of those who have
already paid them is invalid because it is a violation of the equal protection clause.
FALSE
22. The doctrine of "incidental and reasonably necessary use" as a basis in the granting of
exemption from real property tax on educational institutions is still applicable under the 1987
Constitution.
23. The power to grant tax exemption is essentially a legislative prerogative.
TRUE
24. The non-impairment clause is violated if franchises are revoked even if the reason for its
revocation is public welfare.

25. The Congress may delegate to the President the power to fix tariff rates.

26. Double taxation is not an inherent limitation on the exercise of the power.
TRUE
27. Constitutional limitations are part and parcel of the power of taxation and originate from the
very nature of taxation.

28. A law passed imposing a tax of P2.00 on every citizen for the purpose of raising funds to be given
as loans to earthquake victims in Mindanao is not valid because it violates the equal protection
clause.
FALSE
29. A tax does not meet the public purpose limitation if it is for the benefit principally of limited
subjects or objects.

30. The Congress has the power to tax the Armed Forces of the Philippines.
TRUE
31. A person may be imprisoned for non-payment of a poll tax.
FALSE
 32. The police power can be used to implement the power of taxation.
TRUE

QUIZ 1 ANSWERS
1. A taxpayer who deliberately admits to over-declares his taxable income is guilty of tax
evasion. FALSE

2. A person cannot refuse to pay a tax on the ground that he was previously
diagnosed to be positive of Covid 19. TRUE

3. Tax should always be aimed at revenue collection. FALSE

4. The salary of the President of the Philippines is not subject to income tax. FALSE

6. Non-delegation of the legislative power to tax is both a constitutional and inherent

limitation on the power of taxation. TRUE

7. Taxes are paid only by those who are directly benefiting from the government.
FALSE

8. In case of doubts, statutes are construed strictly against the Government and
liberally in favor of the taxpayer. TRUE

9. The power to grant tax exemption is essentially a legislative prerogative. TRUE

10. Select constitutional limitations on the power to tax. Due process, Equal
protection, Non-impairment clause

11. Select inherent limitations on the power to tax. Non-delegation of

the legislative power to tax, Territorial jurisdiction, International comity

12. Which of the following is subject to tax? Privately owned cemetries

13. The following, except one, are basic principles of a sound tax
system. It should be exercised to promote public welfare

14. What are the inherent powers of the State? POLICE POWER, POWER
TO TAX, POWER OF EMINENT DOMAIN

15. Direct duplicate taxation is a constitutional limitation on the power to tax. FALSE

16. A taxpayer gives the following reasons in refusing to pay a tax. Which of
his reasons is not acceptable for legally refusing to pay the tax? That he will derive
no benefit from the tax.

17. This is a prerogative of escaping or diminishing a tax liability through

availment of ways allowable by law or not contrary to law to mitigate tax liability.
TAX AVOIDANCE

18. Equal protection is a rule in taxation which states that all taxable persons
and property of the same class are taxed at the same rate. FALSE

19. One of the characteristics of a tax is that – It is generally payable

in money.

20. Theoretical justice means that tax laws must be administratively

feasible and just. FALSE

21. Principles of a sound tax system include: Tax laws must be

administratively feasible, A person's ability to pay, Sources of revenue
must be sufficient.

22. The following, except one, are stages of taxation? Incidence of taxation

23. A fundamental rule in taxation that property of one country may not
be taxed by another country is known as international reciprocity. FALSE
24. Although the power of taxation is basically legislative in character, it is
NOT the function of Congress to: collect the tax levied under the law.

25. A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off, neither are they a proper subject of recoupment since they arise
out of the contract or transaction. FALSE

26. Double taxation in its general sense means taxing the same subject
twice during the same taxing period. In this sense, double taxation violates the
right to equal protection which is an inherent limitation on the power to tax.
FALSE

27. A law passed by Congress which granted tax amnesty to those who have
not paid income taxes for a certain year without at the same time providing for the
refund of taxes of those who have already paid them is invalid because it is a
violation of the equal protection clause. FALSE

28. A law is passed providing for compulsory vaccination and subjects a

person to imprisonment for refusing to submit to vaccination, except when it is
apparent or it can be shown that the person is not fit for vaccination because of his
physical condition. Is the law valid? Yes, it is valid because under the police
power of the state for the purpose of protecting and preserving public health.

29. The strongest of all inherent powers of the government is: POWER
OF TAXATION

30. The following statements correctly state the differences among the
inherent powers of the state, except? Eminent domain does not require
constitutional grant but taxation being formidable, does in order to limit its
exercise by the legislature.

31. The purpose of taxation is to encourage the growth of home industries

through the proper use of tax incentives. FALSE
32. A provision of taxation in the Philippine Constitution is a grant of power.
FALSE

33. Taxes collected are the main source of the revenue of the government.
FALSE

34. A tax must be imposed for a public purpose. An example of such

public purpose is the improvement of the sugar industry. TRUE

35. The levying, imposition of tax and the collection of tax are processes
which constitutes the taxation system: Aspects of Taxation

36. An example of an excise tax is donor's tax. TRUE

37. The official action of an officer authorized by law in ascertaining

the amount of tax due under the law from a taxpayer is delinquency. FALSE

38. All of the following are administrative functions of taxation, except:

Selection of object of tax.

39. Assessment of tax liability is a function of the Congress. FALSE

40. The Commission of Internal Revenue is granted certain powers under the
tax code. One of which is to issue summons and subpoena. FALSE

41. Under the principle of theoretical justice, the government should not
incur a deficit. FALSE

42. All revenue bills must originate from the Senate. FALSE

43. A law passed imposing a tax of P2.00 on every citizen for the purpose of
raising funds to be given as loans to earthquake victims in Mindanao is not valid
because it violates the equal protection clause. FALSE
44. A person may be imprisoned for non-payment of a poll tax. FALSE

45. Mr. Dimagiba donated cash of P500,000 to the Diocese of Caloocan.

Mr. Dimagiba is liable to pay donor's tax to the government if only 30% of
the gift is used for religious purposes.

46. Not one of the purposes or objectives of taxation is: EXPROPRIATION

47. Which of the following is not a tax under the National Internal
Revenue Code? COMMUNITY TAX

48. A tax cannot be imposed without clear and expressed words for that
purpose. TRUE

49. If the law is repealed, taxes assessed before repeal of the law may no
longer be collected. FALSE

50. Under article 218 of the National Internal Revenue Code, the courts
shall have the authority to grant an injunction to restrain the collection of any
national internal revenue tax. FALSE