Midterm Coverage

Question 1

What are the classifications of taxpayers? What are its value?

Answer 1

Taxpayers are classified as follows:
1. Micro Taxpayer - Less than 3M
2. Small Taxpayer - 3M to 20M
3. Medium Taxpayer - 20M to 1B
4. Large Taxpayer - 1B above

Question 2

What is an income? How does it differ from capital?

Answer 2

An income is anything that flows into the taxpayers other than a mere return of capital.

A capital, on the other hand, is a fund of property existing at an instant time or a return of capital.

Question 3

When is an income considered as taxable?

Answer 3

The requisites for the taxability of income are the following:
(1) There must be an income, gain, or profit
(2) The income, gain, or profit must be realized (it must arise from a closed and completed transaction)
(3) The income, gain, or profit must not be exempt from tax under any law or any tax treaty

Question 4

What are the two classification of income taxpayers? Enumerate each kind within each classification.

Answer 4

As to individual taxpayers:
1. Resident Citizens
2. Non-resident Citizens
3. Resident Alien
4. Non-resident Alien Engaged in Trade or Business
5. Non-resident Alien Not Engaged in Trade or Business

As to corporate taxpayers:
1. Domestic Corporation
2. Resident Foreign Corporation
3. Non-resident Foreign Corporation

Question 5

What is the rule regarding whether an income derived from sources within and outside of the Philippines is taxable or not?

Answer 5

In all classifications of income taxpayers, their income derived from source within the Philippines are all taxable. While in sources outside the Philippines, only resident citizens and domestic corporations are taxable.

Question 6

What are the rules with regards to determining whether the income is derived from sources within or outside the Philippines with regards to:
1. Interest
2. Dividends
3. Services
4. Rentals and royalties
5. Sale of real property
6. Sale of personal property
7. Shares of stock of domestic corporation

Answer 6

To determine whether the income is derived from sources within or outside the Philippines, the situs rule of the following are:

1. Interest - Look at the residence of the debtor
2. Dividends - Generally, where the corporation declaring the dividends is incorporated. Exception is dividends from foreign corporation with 50% or more income from Philippine sources
3. Services - The place where the service was rendered or performed
4. Rentals and Royalties - With regards to rentals, where the location of the property is situated. With regards to royalties, where the intangible property was used or exercised.
5. Sale of real property - Where the property is located.
6. Sale of personal property - Where the property was sold.
7. Shares of stock of domestic corporation

Question 7

Give an example of corporation / organizations that are exempted from tax under the Tax Code. What is the rule as to its exemption?

Answer 7

A nonstock corporation or association organized and operated exclusively for religious, charitable, scientific purposes is exempt from income tax as long as no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer, or any specific person.

However, notwithstanding this rule, the income of whatever kind and character of the organizations from any of their properties, real or personal, or from any of their activities, conducted for profit, regardless of the disposition of such income, shall be subject for income tax.

However, this rule does not apply to non-stock non-profit educational institutions as provided for by the Constitution.

Question 8

What is the difference between ordinary assets and capital assets?

Answer 8

Ordinary assets are properties held by the taxpayer, whether or not connected with his trade or business:

(1) Including stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close taxable year

(2) Or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business

(3) Property used in the trade or business

Capital assets are those assets which do not belong to the definition of ordinary assets.

Question 9

What are the three transactions under capital asset transactions?

Answer 9

(1) Sale of shares of stock of a domestic corporation held as capital asset not traded through stock exchange.

(2) Sale of real property held as capital asset located in the Philippines.

(3) Other capital asset transaction which basically means gross income tax.

Question 10

What are the requisites for sale of shares of stock of a domestic corporation held as capital asset not traded through stock exchange?

How much is the final tax rate imposed?

Answer 10

(1) There must be a sale, barter, exchange, or other disposition
(2) The properties involved are shares of stock of a domestic corporation
(3) The shares of stock must be held as a capital asset by the seller or the taxpayer
(4) The shares of stock are not sold or disposed of through the stock exchange

The final tax rate imposed by law is 15%. All individual and corporate taxpayers are subjected.

Question 11

What are the requisites for sale of real property held as capital asset located in the Philippines?

How much is the final tax rate imposed?

Answer 11

(1) The properties involved are real property
(2) The property was held as capital asset
(3) The property is located in the Philippines

The final tax rate imposed by law is 6%. All individual and corporate taxpayers are subjected, except Resident Foreign Corporation and Non-Resident Foreign Corporation.

Question 12

How much is the final tax rate regarding passive income that are subject to final tax with regards to interest income?

Answer 12

With regards to peso currency, all individual and corporate taxpayers are subject to 20% final withholding tax, except Non-Resident Aliens Not Engaged in Trade or Business and Non-Resident Foreign Corporations which are subject to 25% final withholding tax.

With regards to foreign currency depositary units, all individual and corporate taxpayers are subject to 15% final withholding tax, except Non-Resident Citizen, Non-Resident Alien Engaged in Trade or Business, Non-Resident Alien Not Engaged in Trade or Business, and Non-Resident Foreign Corporations which are exempted.

With regards to long-term deposits which refers to a certificate of time deposit or investment in the form of savings with a maturity period of not less than 5 years, shall be imposed with the following final withholding tax bason on remaining maturity:
(1) 4 years to less than 5 years - 5%
(2) 3 years to less than 4 years - 12%
(3) Less than 3 years - 20%

Question 13

How much is the final tax rate regarding passive income that are subject to final tax with regards to cash and/or property dividends?

Answer 13

The following are the corresponding final withholding tax when the cash dividends and property dividends is sold by a domestic corporation to the following persons:

Resident Citizen, Non-Resident Citizen, and Resident Alien - 10%
Non-Resident Alien Engaged in Trade or Business - 20%
Non-Resident Alien Not Engaged in Trade or Business - 25%
Domestic Corporation and Resident Foreign Corporation - Exempted
Non-Resident Foreign Corporation - 25%

Question 14

How much is the final tax rate regarding passive income that are subject to final tax with regards to royalty income?

Answer 14

A final tax rate of 20% will be imposed upon royalties, except on books, as well as other literary works and musical composition, shall be imposed a final tax of 10%.

Question 15

How much is the final tax rate regarding passive income that are subject to final tax with regards to prizes and awards?

Answer 15

For non-PCSO prizes and awards, if the total amount is less than Php 10,000, it will be deemed as part of the gross income. But if the total amount is more than Php 10,000, then a final tax rate of 20% will be imposed.

For PCSO prizes and awards, if the total amount is less than Php 10,000, it will be exempt. But if the total amount is more than 10,000, then a final tax rate of 20% will be imposed.

Question 16

What are gross income?

Answer 16

Gross income pertains to all income derived from whatever source, including but not limited to:
(1) Compensation income
(2) Business income
(3) Gains derived from dealings in property
(4) Interest
(5) Rentals
(6) Royalties
(7) Dividends
(8) Annuities

Question 17

What are some of the considered as not included in gross income and shall be exempt from taxation?

Answer 17

(1) Life Insurance
Generally, proceeds of life insurance are exempt from taxation, except when the amount are held by the insurer under an agreement to pay interest thereon, it will be included in gross income.

(2) Income Tax Treaty

(3) Retirement Benefits, Pensions, and Gratuities

(4) Miscellaneous Items such as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement only if:
(a) The recipient was selected without any action on his part to enter the contest or proceeding
(b) The recipient is not required to render substantial future services as a condition to receiving the prize or award

Question 18

What is the Lifeblood Theory as the basis for taxation?

Answer 18

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. Without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

Question 19

What is the Necessity Theory as the basis for taxation?

Answer 19

It is a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State’s territory and facilities and protection which a government is supposed to override.

Question 20

What is the Benefits-Protection Theory as the basis for Taxation?

Answer 20

The Benefits-Protection Theory bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society.

Question 21

What is the primary purpose test?

Answer 21

If the primary purpose is to raise revenues and regulation is merely incidental, the power exercised is the power to tax.

If the primary purpose is to regulate and raising revenues is merely incidental, the power exercised is police power.

Question 22

Distinguish tax from license fee.

PBAN

Answer 22

As to its purpose, tax is for revenue while license fee is for regulation.

As to its basis, tax is an exercise of power of taxation while license fee is an exercise of police power.

As to the amount imposed, tax is given unlimited amount, while license fee is only limited to the costs of regulation.

As to the effect of non-payment, in tax, business will still be legal but the taxpayer will be held civilly and criminally liable, while in license fee, the business becomes illegal.

Question 23

Distinguish tax from debt.

SPANCIA

Answer 23

As to source of obligation, tax is from a law, while debt is from a contract.

As to mode of payment, tax must be paid in money while debt may be paid in money, property, or services.

As to assignability, tax cannot be assigned, while debt can be assigned.

As to the effect of non-payment, in tax, generally, penalty is imprisonment except non-payment of community tax. Debt on the other hand, there is no imprisonment.

As to compensation or set-off, tax cannot be subject to set-off while debt can be subject to set-off.

As to interest, tax can draw interest even without a written agreement, while debt can not draw interest.

As to authority, tax can only be undertaken by public authority while debt is undertaken by private individuals.

Question 24

Differentiate toll fee from tax.

DAA

Answer 24

As to demand, tax is demand from sovereignty while toll fee is demand of proprietorship.

As to amount, tax is unlimited in amount while toll fee is limited to cost of improvement and to attain reasonable profit.

As to authority or purpose, tax is collected by the government for public purpose and to defray necessary expenses, while toll fee is collected by private entities to reimburse expenses.

Question 25

Differentiate tax from special assessment.

DSLBA

Answer 25

As to its definition, tax is enforced proportional contribution from persons or property while special assessment is enforced proportional contributions from owners of lands especially or peculiarly benefited by public improvements.

As to its subject, tax is levied on persons, property, income, or business while special assessment is levied on land only.

As to its liability, tax is a personal liability of a taxpayer while in special assessment, it cannot be made a personal liability of the person assessed.

As to its basis, tax is based on necessity and partially on benefits, while special assessment is based on benefits.

As to its application, tax is general in application while special assessment’s special application is only as to a particular time and space.

Question 26

What are the principles of a sound tax system? Explain each briefly.

Answer 26

(1) Fiscal Adequacy - sources of government revenues must be sufficient to meet the government expenditures and public needs.

(2) Administrative Feasibility - Tax laws must be capable of being effectively enforced with the least inconvenience on the taxpayer.

(3) Theoretical Justice - A sound tax system must be based on a person’s ability to pay. If this is violated, the tax law will be invalidated as the principle of theoretical justice is also found under the Constitution.

Question 27

What are the inherent limitations of the power of taxation? Explain each briefly.

Answer 27

(1) Public purpose - The power of taxation must be exercised for a public purpose, which has an elastic meaning that evolves through jurisprudence.

(2) International comity - Based on the principle of international law and the sovereign equality of States. Thus, the Philippines cannot tax the US Embassy.

(3) Territoriality - The government can
only impose taxes on objects within their jurisdiction.

(4) Exemption from taxation of government agencies and instrumentalities - As a general rule, government agencies are exempt from tax. But this exemption only extends to their public or governmental functions.

(5) Non-delegation of the power of taxation - Being a legislative power, it cannot be delegated to any person. Except to the President who has the power to set tariff, and local government units who have the power to create their own sources, as well as administrative agencies but only with respect to the collection of taxes.

Question 28

What is the principle of mobilia sequuntur personam?

Answer 28

The general rule, under the Principle of Mobilia Sequuntur Personam, is that movables follow the person. This applies to intangible personal property, where we must look at the domicile of the person.

Exceptions are:
(1) When the law says so
(2) When the situs is already acquired in another jurisdiction

Question 29

What are the direct constitutional limitations to the power of taxation?

Answer 29

(1) Revenue bill must originate exclusively in the House of Representatives but the Senate may propose amendments.

(2) Concurrence of a majority of all the members of Congress for the passage of a law granting tax exemption.

(3) Rule of uniformity and equity in taxation.

(4) Progressive system of taxation.

(5) Exemption of religious, charitable and education entities, non- profit cemeteries, and churches from property taxation.

(6) Exemption of non-stock, non-profit education institution from taxation.

(7) Power of the President to veto any particular items in a revenue or tariff bill

Question 30

With regards to the due process of law, what are the requirements for a tax imposition?

Answer 30

(1) For a public purpose
(2) Within the State’s jurisdiction
(3) Must not be arbitrary or oppressive
(4) Must not be discriminatory or confiscatory

Question 31

With regards to the equal protection of law, what are the requirements for a tax imposition?

Answer 31

(1) It must be based on substantial distinction
(2) Must apply to both past and future conditions
(3) Germane to the purpose of the law
(4) Apply equally to all members of the same class

Question 32

What is the rule regarding the exemption of charitable institution from real property taxes?

Answer 32

Charitable institutions are exempt from real property taxes on properties that are actually, directly, and exclusively used for religious, charitable, or educational purposes.

Question 33

When is there double taxation? How about indirect double taxation?

Answer 33

There is double taxation when t he following requisites are present:
(1) The same property or subject matter is taxed twice when it should be taxed only once

(2) Both taxes are imposed on the same
property or subject matter

(3) Both taxes are levied for the same purpose

(4) Both taxes imposed by the same taxing authority within the same jurisdiction

(5) During the same taxable period, and

(6) Covering the same kind or character of tax.

If any of the elements are absent, there is indirect double taxation, and this is what is prohibited by law.

Question 34

It is possible that two or more countries
impose the same kind of tax. How can these be minimized?

Answer 34

In the example earlier (payment of income tax to US and PH), whatever taxes he paid in US, may be claimed as tax credit here in the PH but subject to the proper supporting documents.

Another method of minimizing the effects of indirect double taxation is availment of tax treaty relief.

Question 35

What is the difference between tax exemption and tax amnesty?

Answer 35

Tax exemption is the grant of immunity to particular persons they does not have to pay tax

Tax amnesty on the other hand, is the general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law.

Tax exemption is generally prospective in application while tax amnesty is retroactive in application.

On tax exemption, the immunity only waives civil liability, while on tax amnesty, all liabilities are waived.

Question 36

What is the difference between tax avoidance and tax evasion?

Answer 36

Tax avoidance is the use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is also called “tax minimization”, and is not punishable by law.

Tax evasion on the other hand, is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as “tax dodging”, and is punishable by law.

Question 37

What is the rule with regards to the construction of tax laws in terms of tax exemption and tax imposition?

Answer 37

On tax exemption, tax laws must be construed strictly against the taxpayer and liberally in favor against the government.

On tax imposition, tax laws must be construed strictly against the government and liberally in favor of the taxpayer.

Question 38

What is the rule regarding taxpayer’s suit?

Answer 38

Generally, when a case is filed, the one filing the case must have legal standing.

Exceptions is a taxpayer’s suit.

In order for taxpayer’s suit to prosper:
A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law.