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Tax Ortega 1 Inno 2
Tax Ortega 1 Inno 2
1. Income tax
1) In terms of coverage, income tax has the most since there are so many persons liable, even
aliens and foreign corporations are included
2. Transfer taxation
2) The transfer covered by this title is (1) the transmission of property upon the death of the
person and another is (2) transmission of property within during the lifetime of the transferor.
Both these transfers are gratuitous in kind
So the common characteristic again is the gratuitous nature of the transfer property
It is also sales transaction basically, but the one made liable is the importer or purchaser
But the two other transactions, (1) sales of goods or properties in the course of trade or
business and (2) sale of services in the course of trade or business, are activities which are
performed by the seller, who statutorily is made liable for the tax
So it will be basically sales transactions that will be covered by value added tax
So income in Title II, transfer of properties in Title III, and certain activities in Title IV
2) Take note that the subject of income in Title II comes from various sources
Also services
3) Title III is transfer of property. This cannot be labeled as property tax, though properties are
dealt with. It is not a tax on property, because the excise is on the privilege to transfer or
transmit property
4) In Title IV, the excise is on the privilege to engage in those kinds of activities or transactions
5) So in Title II, whenever income tax is talked about, it may come from various sources
And this activity may very well be one that is subject to the tax in Title IV
That is on the activity itself there is already an excise on the privilege and that is the value added
tax, and provided that there is an income realized on the same activity, then another internal
revenue tax may take place, and that is the income tax
So basically if you one particular transaction, it can result to two or more possible taxes or tax
liabilities
Of course, if on the same sale activity there is no income realized then there is no corresponding
liability under Title 2
6) But though in the same activity there is no liability for income tax, property may be transferred
to another
Out of the same transaction where income is also realized, for which there is liability for income
tax
There is income tax because there is income realized and there will be transfer tax because
there is transfer of property from one to another
Because in internal revenue tax, whether or not income tax is in place, that transfer tax is
applicable only in connection with transmission of properties which are gratuitous in nature
Unless, the problem says that the sale is for insufficient consideration. That matter will be
discussed in taxation law 2
But the basic rule is that, whenever a transfer of property is with consideration, Title 3 on
transfer taxation will not be relevant or applicable
Again, we talk about estate tax or donors tax only in transfer taxation, with one caveat, and that
is if the sale is for insufficient consideration. There are certain sections in the tax code relating to
transfers for insufficient consideration
So that will be the coverage of transfer taxation. The object is the transfer of property itself
7) While the sale in insufficient consideration, there is a possibility of the seller still realizing
income. Again, even if we say that it is for insufficient consideration, the amount realized may
even be above the amount of the cost of investment
That is why if one invests in property say for instance the profit is 100,000 pesos, but presently
the market value of the property is 2M pesos, yet selling price is fixed at 1 million only.
Definitely, it is a sale for insufficient consideration, yet there is income realized resulting out of
the profit of the seller
If the fund existed at one time, it is 100,000 pesos. That in return is a greater amount.
8) In one particular transaction, there can be two or more tax liabilities
There may be a form of double taxation, but not really in its strict sense. This is because there
are two different objects of taxation, and therefore 2 different kinds of taxes
One is income tax because of the income realized from the transaction. And the other one could
very well be a transfer tax, because it is a gratuitous transmission of property
9) If the sale is in the course of trade or business, then still there is likewise another title on value
added tax that imposes this particular kind of tax on the activity itself so long as it is done in the
course of trade or business
10) So it will be erroneous to say therefore that the Value Added Tax cannot apply since there
already is income which is subject of another tax
That will be an erroneous proposition because there are two different objects of taxation. One
cannot compare with another
1) So long as there is an income realized or received, then this can be the subject of taxation in the
Philippines
2) It is the most important tax, without this it would cripple the government
Unless there is another source of revenue, income tax will be part of our lifetime in many
generations to come. It has been there since time immemorial
Removing income tax as possible sources of revenue may eliminate our ability to meet the
expenses of the government
Incomes earned by many persons are taxed every day. Aliens are even subjected to income tax
5. Sec 11 General Principles
Even if a person is not a citizen of the Philippines, that person may be subjected to this
compulsion on the basis of being a resident of the Philippines
The underlying reason for this taxation affecting the resident or inhabitant of the
Philippines is that protection is afforded to the person who resides in here in Philippines
That consideration is the contribution to be made by this person for operating under the
protection of the government
(4) Sources can be labor or capital, it can also be property, activity or service
(5) If they are situated in the Philippines, then it may be said that the income came from
sources in the Philippines
(6) If the property, activity or service that generates the income is located outside of the
Philippines, then the income comes from source outside the Philippines
(7) When is the alien made liable for the income tax here in the Philippines?
Aliens are taxable from income derived from sources within the Philippines (Sec 23)
In no instance should an alien be made liable for the Philippine income tax based on
their income derived from sources outside
There are two types of citizens of the Philippines for purposes of taxation
All resident citizens are taxable for his income derived from his sources within the
Philippines and outside the Philippines
Because congress chose to tax only those income coming from sources within the
Philippines
As to the source of their income, if a citizen is also a resident of the Philippines, then
liability will encompass all income from all sources
But if he is a non resident citizen, one needs to determine which classes of income were
coming from sources from within and that which may come from source from outside
the Philippines. Meaning, there is a need to investigate further what is the generating
source of his income
Is it his property? If that is the case, then generally we look where that property is
situated. If it is in the Philippines, then its source is within the Philippines
(9) If the source is an activity outside the Philippines, and the person is a non resident
citizen, liability will not exist
For our law provides that a non resident citizen is only taxable for his income coming
from sources within the Philippines
a) Citizenship
b) Residence
c) Source
(11) Income coming from sources outside, just rely on the facts that the person is both a
citizen and a resident of the Philippines
(12) Is it possible for the Congress to subject even income derived from source
outside, by a non resident citizen or a resident alien?
Could a law be passed subjecting to tax, an income derived from source outside but
earned by a citizen who is not a resident of the Philippines or a resident but not a
citizen of the Philippines?
And if yes, whether this law can be justified?
But there are other theories on underlying basis of taxation which can be used in
justifying that kind of legislation, in the exercise of the taxing power
All 3 (Citizenship, residence, sources) can be used to justify taxation. Congress can rely
on one in order to justify taxation
A person who is a resident enjoys protection on the basis of his being a resident of the
Philippines
Even if this protection cannot be afforded to the source of income, which is outside of
the Philippines, yet the person affected is a resident who enjoys again protection from
our government, and he may be made accountable or subjected for the compulsion
(13) For comparison sake, in transfer taxation, the subject of taxation is the transfer of
property
Specifically, if we talk about estate taxation, then there are four persons made liable for
the transfer tax
It is the (1) estate belonging to citizens and residents in one group, and on the other
group, (2) estate belonging to non resident aliens
In the first group, there are 3 classes there. (1) resident- citizens, (2) non-resident
citizens, and (3) resident aliens
It is not the gross amount of the estate left by the decedent but net estate
The gross estate of the first group or decedents who are classified as (1) resident- citizens, (2)
non-resident citizens, and (3) resident aliens is found in Sec 85
The composition of their gross estate for purposes of Philippine transfer tax is found in Sec 85
The law defines gross estate in Sec 85, to include properties which are real, personal, tangible or
intangible, wherever situated
The subject of the tax is not really the property itself, but the transfer of property
But even a property situated outside can be affected by this Philippine tax
2) The gross estate of the alien who is a resident of the Philippines, is his properties wherever
situated
Congress chose to tax even the transfer of properties outside the Philippines as affecting that
particular group of decedents
The reason for this is that they are residents of the Philippines
Protection theory can be utilized insofar as classifying this exercise of taxing power
7. Can protection theory be utilized in classifying taxation for incomes coming from sources outside?
Yes, if the person affected is a resident even if that person is an alien
Or if a person is a citizen even if that person is not anymore a resident of the Philippines
That is enough justification. But congress chose to tax non-resident citizens and aliens of whatever
kinds or class, only on the basis of their income from within
8. If the person falls within any of the 3 criteria, then that becomes the basis for justifying the
taxability of the income, even if the income is from source outside for as long as the person affected
is a citizen or a resident of the Philippines
9. Under our present law, only 2 persons are mainly liable for tax on the basis of income coming from
all sources. These are (1) resident citizens and (2) domestic corporations. All others will be limited
from their sources within the Philippines for them to become liable for the tax here in the
Philippines
10. There was a time, prior to the present tax code, when non-resident citizens are in fact made liable
on the basis of income coming from all sources
But under the present law, Congress decided to unload non-resident citizens from additional burden
But in terms of justification for taxation, it can be justified based on the citizenship of the persons
covered, even if the incomes may be coming from sources outside the Philippines
That they now limit the liability of the persons from income coming from sources within the
Philippines
That is in respect to the same income that is derived from source outside the Philippines, there may
also be in place in the foreign country, an income
Therefore, there is an income tax payable there, and there is also an income tax payable here
So that even if our laws provide that income derived from sources outside the Philippines may be
taxable, that cannot be double burdensome for income earners
12. But there can be taxing facilities that can be adopted to minimize or offset the effects of double
taxation
13. There are tax devices and tax facilities which can be used or adopted to minimize or offset the
effects of double taxation
1) Tax deduction
2) Tax credit
3) Income taxes assessed made in foreign countries
14. Inconvenience on the part of the person made liable for the tax
If the person is a non resident, how would he comply with his tax obligations?
If the person is no longer here in the Philippines, then who is going to the country where he is
located to collect the tax?
If we appoint an agent, then that is an additional inconvenience on the part of the persons who are
not anymore residents of the Philippines, though they remain citizens of the Philippines
15. But for resident citizens and domestic corporations, it may not be a valid excuse because they are
here. They can easily comply with the tax obligations and other requirement compared to those
who are not anymore residing here in the Philippines
So even if the income is coming from sources outside, Congress chose to tax the same, and still they
may comply with lesser inconvenience compared to non-resident citizens
16. At the same time, Congress also inserted in the same tax code certain facilities that may mitigate
the effect of double taxation.
As we mention, this is what we call (1) tax deduction, (2) tax credit, or (3) tax state in foreign
countries
1. A boxer from the Philippines, a resident citizen, who participated in the boxing competition in the
US, and he was paid 300M pesos in prize money
The activity, which is the generation source of the income is not here in the Phil, but in the US
Considering that the source of income is outside, will it be taxable in the Phil?
A resident citizen is taxable for all his income derived within and outside the Philippines
OR
Use the law on exclusion
Here, there is a sports competition where prize or award was received by an athlete. In our law, the
tax treatment there is exclusion
This is Sec 32B, par 7, on prizes and awards won in competition sanctioned by our national sports
association
So, if it is sanctioned by NSA, then the prizes or awards received may not be taxable. The treatment
assigned in our law is exclusion, meaning exemption
Or insist using exempting provision is not applicable because of one missing element:
Example:
In the absence of any showing that the activity is sanctioned by the NSA, the prize and award won in
the competition is taxable
2. Norma donated property worth 1M to Teresa. Is this property taxable income on the part of
Teresa?
It is not taxable because anything received as gifts, bequest, inheritance or devise is an exclusion in
gross income
Or insist that the exempting provision that is not applicable because one missing element: in the
absence of any showing that the activity is sanctioned by the NSA, the prize and award won in the
competition is taxable
In other words, for the exclusion to apply, the prizes and awards must be won in a competition
sanctioned by NSA
3. Income is taxable when it is realized or received, except when otherwise exempted by law
5. Whether held in the Philippines or abroad, the exempting provision on prizes or awards in
competition, even if the place of activity is abroad
(1) But there are gratuitous transmission of property that are not taxable
1) When the decedent is a NRA, the transmission of property happening is the transmission
of his properties here in the Philippines
There are gratuitous transfers of his properties which are outside the Philippines, but it is
taxable where it is located
It is gratuitous in kind, but it is not taxable because exclusion treatment is assigned by law
Whenever the person appointed as heir is a charitable institution, social welfare, cultural
institution, then it is expressly specified by law as exempted from taxation
7. VAT
Because if this one is taken out, the sale is an isolated transaction, and the person is not
engaged in any business, and the sale is not in the course of sellers trade or business, then
VAT will not attach to that particular transaction
VAT is not applicable because the sale was not in the course of trade or business
Generally, sales in the course of trade or business are vatable, but there are sales in the
course of trade or business that are not subject to VAT
Exempt transactions
These exempt transactions are also done in the course of trade or business, yet VAT is not
applicable by express exclusion
8. Incomes that are already realized and received, yet if they come from source outside, it is exempted.
That is because, congress chose to exempt them from taxation
9.
10.
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