TAXATION LAW DOCTRINES

TAXATION LAW I

Tests to Determine Realization of Income for Tax Purposes

Realization Test- no taxable income until there is a separation from capital

of something of exchangeable value, thereby supplying the realization or
transmutation which would result in the receipt of income

Claim of Right Doctrine-a taxable gain is conditioned upon the presence of

a claim of right to the alleged gain and the absence of a definite
unconditional obligation to return or repay that which would otherwise
constitute a gain

Principle of Constructive Receipt of Income- Income which is credited to

the account of or set apart for a taxpayer and which may be drawn upon him
at any time is subject to tax for the year during which so credited or set
apart, although not then actually reduced to possession. The income must be
credited to the taxpayer without any substantial limitation or restriction as to
the time or manner of payment or condition upon which payment is to be
made.

Economic Benefit Test- any economic benefit to the employee that

increases his net worth is taxable

Immediacy Test- the use of undistributed earnings and profits for the
reasonable needs of the business would not generally make the accumulated
or undistributed earnings subject to tax. Under this test, the reasonable
needs of the business are the immediate needs of the business and
reasonably anticipated needs.

Convenience of the Employer Rule- If meals, living quarters, and other

facilities and privileges are furnished to an employee for the convenience of
the employer, and incidental to the requirement of the employees work or
position, the value of that privilege need not be included as compensation.

Tax Benefit Rule-Bad debts claimed as a deduction in the preceding year(s)

but subsequently recovered shall be included as part of the taxpayers gross
income in the year of such recovery to the extent of the income tax benefit
of said deduction. There is an income tax benefit when the deduction of the
bad debt in the prior year resulted in lesser income and hence tax savings
for the company. (Sec.4,RR 5-99)
Per Country Limit-The amount of tax credit shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayers
taxable income from sources within such country bears to his entire taxable
income for the same taxable year.

Worldwide Limit-The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayers
taxable income from sources without the Philippines taxable bears to his
entire income for the same taxable year.

Net Operating Loss Carry-over-The net operating loss of the business for
any taxable year immediately preceding the current taxable year, which had
not been previously offset as deduction from gross income shall be carried
over as a deduction from gross income for the next three consecutive
taxable years immediately following the year of such loss.

Net Capital Loss Carry-over-If an individual taxpayer sustains a net

capital loss in a taxable year, such loss (in an amount not in excess of the
net income for such year) shall be treated in the succeeding taxable year as
a loss from the sale or exchange of a capital asset held for not more than 12
months(100% deduction).

Tax Evasion-A scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or
criminal liabilities.

Tax Avoidance-Tax saving device within the means sanctioned by law, used
by the taxpayer in good faith and at arms length.

TAXATION LAW II

Reciprocity Rule-There is reciprocity if the foreign country of which the

decedent was a citizen and resident at the time of his death:

did not impose a transfer tax of any character, in respect of intangible

personal property of citizens of the Philippines not residing in that
foreign country; or
allowed a similar exemption from transfer tax in respect of intangible
personal property owned by citizens of the Philippines not residing in
that country.
In sum, both states must exempt nonresidents (citizens of the other state)
from transfer taxes in respect of intangible personal property.

Tax Credit for Estate Taxes- It is a remedy against international double

taxation. To minimize the onerous effect of taxing the same property twice,
tax credit against Philippine estate tax is allowed for estate taxes paid to
foreign countries.

Zero-rated Transactions-A zero-rated sale by a VAT-registered person is a

taxable transaction for VAT purposes, but shall not result in any output tax.

Cross-Border Doctrine- No VAT shall be imposed to form part of the cost of

goods destined for consumption outside of the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to
a foreign country must be free from VAT. Conversely, those destined for use
or consumption within the Philippines shall be imposed the 12% VAT.

Customs Territory-The national territory of the Philippines outside of the

proclaimed boundaries of the ecozones.

VAT-EXEMPT TRANSACTIONS- Sale of goods or properties and/or services

and the use or lease of properties not subject to VAT(output tax) and the
seller is not allowed any tax credit of VAT (input tax) on purchases. The
person making the exempt sale of goods, properties or services shall not bill
any output tax to his customers because the said transaction is not subject
to VAT.

Presumptive Input Tax Credits-Persons or firms engaged in the

processing of sardines, mackerel, and in manufacturing refined sugar and
cooking oil and packed noodle based instant meals, shall be allowed a
presumptive input tax, creditable against the output tax, equivalent to 4% of
the gross value in money of their purchases of primary agricultural products
which are used as inputs to their production.

Ad Valorem Tax- Tax based on selling price or other specified value of the
good.

One-Transaction Rule-Where only one instrument is prepared, made,

signed, and executed to cover a loan agreement, promissory note,
pledge/mortgage, the documentary stamp tax shall be paid and computed
on the full amount of the loan or credit granted. In this regard, the
instrument shall be treated as covering only one taxable transaction, subject
to the higher documentary stamp tax.
Third Party Information Rule-Obtaining on a regular basis, from any
person other than the person whose tax liability is subject to audit or
investigation, or from any office or officer of the national and local
governments, government agencies or instrumentalities, including BSP and
GOCCs, any information such as, but not limited to, costs and volumes of
production, receipts or sales and gross incomes of taxpayers, and the
names, addresses, and financial statements of corporations, mutual fund
companies, etc.

Non-retroactivity of Rulings Doctrine-Any revocation, modification or

reversal of any of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers.

Exception:

a. Where the taxpayer deliberately misstates or omits material facts from

his return or any document required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or
c. Where the taxpayer acted in bad faith.

Jeopardy Assessment-A tax assessment made by an authorized Revenue

Officer without the benefit of complete or partial audit, in light of the ROs
belief that the assessment and collection of the deficiency tax will be
jeopardized by delay caused by the taxpayers failure to:

a. Comply with audit and investigation requirements to present his books

of accounts and/or pertinent records
b. Substantiate all or any of the deductions, exemptions or credits
claimed in return.

It is usually issued when statutory prescriptive periods for the assessment or

collection of taxes are about to lapse due principally to the taxpayers fault.

Assessment Deemed Made-An assessment is deemed made when the

demand letter or notice is released, mailed, or sent by the BIR to the
taxpayer. The law does not require that the taxpayer receive the notice
within the three-year or ten-year period.
General Purpose Rule- Machinery used in line or for the general purpose
of the business but only indirectly is not treated as real property. This means
that a typewriter being used in the main office of a firm that manufactures
cars is not real property as the typewriter is not used to actually make the
car which is the main purpose of the company.

Actual Use of Real Property Test-Real property shall be classified, valued,

and assessed on the basis of its actual use regardless of where it is located,
whoever owns it and whoever uses it.

Dutiable Importation-All articles, when imported from any foreign country

into the Philippines, shall be subject to duty upon each importation, even
though previously exported from the Philippines, except as otherwise
specifically provided for by law.