A.

Xx
B. Xx
C. Situs of Taxation and Double Taxation

1. Meaning of Situs

Situs of taxation means the place of taxation, or the country that has jurisdiction to levy a particular tax
on persons, property, rights or business.

2. Situs of subjects of taxation

§42

Income from Sources Within the Philippines

§104

For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible
or intangible, or mixed, wherever situated:

Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or
donation, as the case may be, his real and personal property so transferred but which are situated outside the
Philippines shall not be included as part of his 'gross estate' or 'gross gift':

Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by
any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares,
obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the
Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in
the Philippines, shall be considered as situated in the Philippines:

Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property

Kinds of Tax Situs

1. Personal or Community Tax Residence or domicile of the taxpayer
2. Real Property Tax Location of the property
3. Personal Property Tax TANGIBLE: where it is physically located or permanently kept (Lex Rei
Sitae)

INTANGIBLE: Subject to Sec 104 of the NIRC * and the principle of Mobilia
Sequuntur Personam **
4. Business Tax Place of Business
5. Excise or Privilege Tax Where the act is performed or where occupation is pursued
6. Sales Tax Where the sale is consummated
7. Income Tax Consider: (1) citizenship, (2) residence,
(3) source of income (Sec 42, 23, NIRC of 1997)
8. Transfer Tax Residence or citizenship of the taxpayer
or location of the property
9. Donor’s Tax Location of the property
and the citizenship of the donor (Sec 98, NIRC 1997)
10. Estate Tax Location and citizenship of the decedent.(Sec 85, NIRC)
11. Franchise Tax state which granted the franchise

CIR v. British Overseas Airway Corp

For purposes of income taxation, the "source of income" relates not to the physical sourcing of a flow of money or
the physical situs of payment but rather to the "property, activity or service which produced the income."
The test of taxability the "source", or situs of the activities or property which produce the income . . . . Thus, if
income is to taxed, the recipient thereof must be (1) resident within the jurisdiction, or the property or (2)
activities out of which the income issue or is derived must be situated within the jurisdiction so that the source
of the income may be said to have a situs in this country. The underlying theory is that the consideration for
taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of
the State is that income which is created by activities and property protected by the Government or obtained
by persons enjoying that protection.

The source of an income is the property, activity or services that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces
the income. The tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.

CIR v. Japan Airlines

"The absence of flight operations to and from the Philippines is not determinative of the source of income or the
situs of income taxation. x x x The test of taxability is the `source'; and the source of an income is that activity x x
x which produced the income.

"The source of an income is the property, activity or service that produced the income. For the source of income to
be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines.

For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activities within this country regardless of the absence of flight operations within Philippine territory.

The revenue derived from the sales of airplane tickets through its agent Philippine Air Lines, Inc., here
in the Philippines, must be considered taxable income.

Wells Fargo Bank v. CIR

GR No L-46720

Nature: This is an appeal from the decision of CFI in an action for declaratory relief holding that the transmission
by will of the shares of stock is subject to Philippine inheritance tax.

Facts: Birdie Lillian Eye died at Los Angeles, California, the place of her alleged last residence and domicile. Among
the properties she left her one-half conjugal share in 70k (35k belonging to her) shares of stock in the Benguet
Consolidated Mining Company, an anonymous partnership organized and existing under the laws of the Philippines,
with is principal office in the City of Manila.

The Federal and State of California's inheritance taxes due on said shares have been duly paid. The CIR sought to
subject anew the aforesaid shares of stock to the Philippine inheritance tax.

Petitioner, the administrator of the estate, contends that intangibles, like the shares of stock in question, their situs
is in the domicile of the owner thereof, and, therefore, their transmission by death necessarily takes place under
his domiciliary laws.

Issue: Whether the said shares are subject to the Philippine inheritance tax.

Ruling: Yes.

Jurisdiction may exist in more than one government, that is, jurisdiction based on distinct grounds:
 1. the citizenship of the owner;
2. his domicile;
3. the source of income;
4. the situs of the property

In cases where the owner of intangibles confines his activity to the place of his domicile, these intangibles are
taxed at their situs and not elsewhere. BUT when the taxpayer extends his activities with respect to his
intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to
bring his person or property within the reach of the tax gatherer there, the reason for a single place of taxation no
longer obtains, and the rule even workable substitute for the reasons may exist in any particular case to support
the constitutional power of each state concerned to tax.

Through dominion over tangibles or over persons whose relationships are source of intangibles rights, or on the
benefit and protection conferred by the taxing sovereignty, or both, it is undeniable that the state of domicile is not
deprived, by the taxpayer's activities elsewhere, of its constitutional jurisdiction to tax, and consequently that there
are many circumstances in which more than one state may have jurisdiction to impose a tax and measure it by
some or all of the taxpayer's intangibles. Shares or corporate stock may be taxed at the domicile of the
shareholder and also at that of the corporation which the taxing state has created and controls; and income may
be taxed both by the state where it is earned and by the state of the recipient's domicile. protection, benefit, and
power over the subject matter are not confined to either state.

In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled
therein. The owner residing in California has extended here her activities with respect to her intangibles so as to
avail herself of the protection and benefit of the Philippine laws. Accordingly, the jurisdiction of the Philippine
Government to tax must be upheld.

Tan v. del Rosario

Facts: A special civil action for prohibition questioning the validity of the validity of Section 6, Revenue Regulation
No. 2-93.

RA 7496 aka Simplified Net Income Taxation Scheme, SNIT for brevity, is applicable only Self-Employed and
Professionals Engaged in the Practice of Their Profession.

Revenue Regulations No. 2-93 was issued by the respondent which declares that GPPs are covered by RA 7946.

Petitioners objected on the administrative interpretation of public respondents that would apply SNIT to partners in
GPPs. They claim that the same is in excess their rule-making authority.

Ruling: GPPs, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes
and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on
the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits.

“Income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons
who derive taxable income.

The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the
taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax
liability on their income from all sources) and of the generally accepted and internationally recognized
income taxable base (that can subject non-resident aliens and foreign corporations to income tax on
their income from Philippine sources).

In the process, the Code classifies taxpayers into four main groups, namely:
 (1) Individuals
(2) Corporations
(3) Estates under Judicial Settlement and
(4) Irrevocable Trusts (irrevocable both as to corpus and as to income)

Under the Code, either: (1) "taxable partnerships"; or (2) "exempt partnerships." Ordinarily, partnerships, no
matter how created or organized, are subject to income tax. However, "exempt partnerships" are not similarly
identified as corporations nor even considered as independent taxable entities for income tax purposes.

A general professional partnership is such an example. Here, the partners themselves, not the partnership
(although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the
payment of income tax in their individual capacity computed on their respective and distributive shares of profits.
In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In
fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a
mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners.

3. Multiplicity of Situs
CIR v. de Lara

Nature: These are two separate appeals, one by the CIR, and the other by de Lara as Ancilliary Administrator of
the estate of Hugo H. Miller, from the decision of the Court of Tax Appeals.

Facts: Hugo H. Miller, an American citizen, was born in Santa Cruz, California, U.S.A.

In 1905, he came to the Philippines. From 1906 to 1917, he was connected with the public school system, first as a
teacher and later as a division superintendent of schools

After his retirement, Miller accepted an executive position in the local branch of Ginn & Co., book publishers with
principal offices in New York and Boston, U.S.A., up to the outbreak of the Pacific War. From 1922 up to December
7, 1941, he was stationed in the Philippines as Oriental representative of Ginn & Co.

In or about the year 1922, Miller lived at the Manila Hotel. He never lived in any residential house in the
Philippines. After the death of his wife in 1931, he transferred from the Manila Hotel to the Army and Navy Club.

On January 17, 1941, Miller executed his last will and testament in Santa Cruz, California, in which he declared
that he was "of Santa Cruz, California". During the war, he was taken prisoner by the Japanese forces in Leyte, and
in January, 1944, he was transferred to Catbalogan, Samar, where he was reported to have been executed by said
forces on March 11, 1944, and since then, nothing has been heard from him.

Part of his estate are Shares of stock in Philippine Corporations.

CIR made taxable his intangible personal properties situated here as well as in the United States were subject to
said taxes contending that during Miller’s long stay in the Philippines had required a "residence" in this country,
and was a resident thereof at the time of his death.

Issue: Whether Miller’s intangible asset in other in the United States are taxable here in the Philippines.

Ruling: No.

The prevailing construction given by the courts to the "residence" was synonymous with domicile. and that the two
were used intercnangeabiy.

At the time of his death, Miller had his residence or domicile in Santa Cruz, California. During his stay, Miller never
acquired a house for residential purposes for he stayed at the Manila Hotel and later on at the Army and Navy
Club.
The only properties of his estate subject to estate and inheritance taxes are those shares of stock issued by
Philippines corporations.

The general rule is that personal property, like shares of stock in the Philippines, is taxable at the domicile of
the owner under the doctrine of mobilia secuuntur persona, nevertheless, when he during his life time, extended
his activities with respect to his intangibles, so as to avail himself of the protection and benefits of the laws of the
Philippines, in such a way as to bring his person or property within the reach of the Philippines, the reason for a
single place of taxation no longer obtains- protection, benefit, and power over the subject matter are no longer
confined to California (Wells Fargo Bank & Union Trust Co. vs. CIR), but also to the Philippines

Mobilia secuuntur persona – Movables follow the person; personal properties should be governed by the law
that governs the person

4. Double Taxation

a. Meaning

CIR v. S.C. Johnson and Son, Inc.

Nature: This is a petition for review on certiorari seeking to set aside the decision of the of CA in affirming the
decision of the CTA in toto which granted SC Johnonson Inc’s claim on refund overpaid tax on royalty payments.

Facts: SC Johnson and Son, Inc, a domestic corporation entered into a license agreement with SC Johnson and
Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A.

SC Johnson and Son, Inc was given the the right to use the trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the products covered by the Agreement and secure
assistance in management, marketing and production from SC Johnson and Son, U. S. A.

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties
based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments.

Respondent argues that preferential tax rate of 10% should apply to it pursuant to the most-favored nation clause
of the RP-US Tax Treaty in relation to RP-West Germany Tax Treaty.

Issue: Whether SC Johnson is entitled to avail the tax rate on royalties, which is 10%, provided in RP-West
Germany Tax Treaty pursuant to the “most favored nation clause” in RP-US Tax Treaty.

Ruling: No.

Article 13 (2) (b) (iii) of the RP-US Tax Treaty allows the imposition tax rate based on rate imposed to other state
provided the royalties are of royalties of the same kind paid under similar circumstances.

The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes
imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty expressly allows crediting against German income and corporation tax of 20% of
the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid.
Hence, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in
the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former
convention.

Taxes on Royalties:

1. RP-US Treaty

Article 13 (2) (b) (iii), aka “most favored nation clause”:

2. However, the tax imposed by that Contracting State shall not exceed

b) In the case of the Philippines, the least of:

i. 25% of the gross amount of royalties

ii. 15% of the gross amount of the royalties, where the royalties are paid by a corporation
registered with the Philippine Board of Investments and engaged in preferred areas of activities

iii. the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid
under similar circumstances to a resident of a third State.

2. RP-Germany Treaty

Article 12 (2) (b):

10 % of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark,
design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial, commercial or scientific experience.

However, Article 24 of said treaty allows a tax credit of 20% of the gross amount of such royalties.

Double Taxation
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or
owns capital in the other contracting state and both states impose tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts to several methods;

First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard
to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the right to tax, although
the amount of tax that may be imposed by the state of source is limited.

The second method for the elimination of double taxation applies whenever the state of source is given a full or
limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state
of residence to allow relief in order to avoid double taxation.

There are two methods of relief — the exemption method and the credit method.

In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it may be taken into account in determining the rate of tax
applicable to the taxpayer's remaining income or capital.

On the other hand, in the credit method, although the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The
basic difference between the two methods is that in the exemption method, the focus is on the income or capital
itself, whereas the credit method focuses upon the tax.

Purpose of such Treaties

The ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a
crucial economic goal for developing countries.

The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures
to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if
the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a
concomitant commitment on the part of the state of residence to grant some form of tax relief, whether
this be in the form of a tax credit or exemption.

Otherwise, the tax which could have been collected by the Philippine government will simply be collected by
another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain
unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would
redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a
lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than
lose much-needed revenues to another country.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than
that which has been or may be granted to the "most favored" among other countries. The most favored nation
clause is intended to establish the principle of equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored
nation. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for equality of treatment.

b. Double taxation in its broad sense

Villanueva v. City of Iloilo

The trial court condemned the ordinance as constituting double taxation but treble because buildings pay real
estate taxes and also income taxes as provided for in NIRC, besides the tenement tax under the said ordinance.

In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed
twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter,
for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same kind or character of tax. "It has been shown
that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing
authority, are not of the same kind or character.

The same tax may be imposed by the national government as well as by the local government. There is nothing
inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity
by both the State and a political subdivision thereof.

It is a well-settled rule that a license tax may be levied upon a business or occupation although the land or
property used in connection therewith is subject to property tax. The State may collect an ad valorem tax on
property used in a calling, and at the same time impose a license tax on that calling, the imposition of the latter
kind of tax being in no sense a double tax.

To sum, to constitute double taxation:

1. Taxing TWICE
2. The SAME property or subject matter;
3. For the SAME purpose;
 4. By the SAME Taxing Authority;
5. Within the SAME Jurisdiction

c. Constitutionality of double taxation

City of Baguio v. de Leon

An ordinance imposes real estate dealer who leases property worth P50,000 or above must pay an annual fee of
P100. If the property is worth P10,000 but not over P50,000, then he pays P50 and P24 if the value is less than
P10,000. The same constitutes double taxation for

Due process clause does not forbid double taxation than it does doubling the amount of a tax, short of confiscation
or proceedings unconstitutional on other grounds.

Argument against double taxation may not be invoked where one tax is imposed by the state and the other is
imposed by the city ..., it being widely recognized that there is nothing inherently obnoxious in the requirement
that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and
the political subdivisions thereof."

Pepsi Cola Bottling v. City of Butuan

Pepsi claims that an ordinance that imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles
of Pepsi-Cola constitutes double taxation when considered in relation to the sales tax prescribed by Acts of
Congress.

SC said that “double taxation”, in general, is not forbidden by our fundamental law.

Sanchez v. Collector
G.R. No. L-7521

Nature: This is an appeal from the decision of CFI Manila declaring Veronica as a real estate dealer and is
therefore liable to real estate dealer’s tax.

Facts: Veronica Sanchez is the owner of a two-story, four-door "accessoria" building. Veronica lives in one of the
apartments, she is renting the rest to other persons.

CIR made demands for payment of income tax and real estate dealer’s tax.

Ver insists that she is not a real estate dealer and she filed a case for the refund payment of real estate dealer’s
tax.

She also argues that she is already paying real estate taxes on her property, as well as income tax on the income
derive therefrom, so that to further subject its rentals to the "real estate dealers' tax" amounts to double taxation.

Issue: Whether the imposition of real estate dealer’s tax constitutes double taxation.

Ruling: No.

"it is a well settled rule that license tax may be levied upon a business or occupation although the land or property
used there in is subject to property tax", and that "the state may collect an ad valorem tax on property used in a
calling, and at the same time impose a license tax on the pursuit of that calling", the imposition of the latter kind of
tax being in no sense a double tax.

Veronica also is a real estate dealer, Section 194 (s) of the Tax Code applicable to the period of herein questioned
payment of real estate dealer’s tax provides:
 "Real estate dealers" includes all persons who for their own account are engaged in the sale of lands,
buildings or interests therein or in leasing real estate.”

City of Mla. v. Interisland Gas Service

G.R. No. L-8799

Nature: This is an appeal from the CFI Manila holding that City Government of Manila has the right to impose tax
on liquefied flammable gas under Ordinance No. 925, as amended by Ordinance No. 3364 thus ordering Inter-
Island Gas Service, Inc to pay deficiency tax.

Facts: Island Gas Service, Inc sold at retail in the City of Manila cooking appliances and liquified petroleum gas in
cylinders.

Ordinance No. 1925 of the City of Manila, as amended by Ordinance No. 3364 imposes quarterly license fees based
on gross sales or receipts realized during the preceding quarter. By virtue of said ordinance the City imposed said
tax against Inter-Island Gas Service, Inc.

Another Ordinance, Ordinance No. 3259, regulations for storage, installations, use and transportation of
compressed and liquefied, inflammable gases other than acetylene, and providing fees therefor.

Island Gas Service contends that imposition of Ordinance 1925 constitutes double taxation.

Issue: Whether Ordinance 1925 constitutes double taxation.

Ruling: No.

(1) the fees paid by the defendant under Ordinance No. 3259 — for the storage, installation, use and
transportation of compressed inflammable gases — was charged by way of license fees, in the exercise of
the police power of the State, not under its inherent power of taxation;
(2) double taxation is not prohibited in our Constitution

Cpa. General de Tabacos v. City of Mla

Tabacalera, as a duly licensed first class wholesale and retail liquor dealer paid the City the fixed license fees
prescribed by Ordinance No. 3358 for the years 1954 to 1957, inclusive, and, as a wholesale and retail dealer of
general merchandise, it also paid the sales taxes required by Ordinances Nos. 3634, 3301, and 3816

That Tabacalera is being subjected to double taxation is more apparent than real. As already stated what is
collected under Ordinance No. 3358 is a license fee for the privilege of engaging in the sale of liquor, a calling in
which — it is obvious — not anyone or anybody may freely engage, considering that the sale of liquor
indiscriminately may endanger public health and morals. On the other hand, what the three ordinances mentioned
heretofore impose is a tax for revenue purposes based on the sales made of the same article or merchandise. It is
already settled in this connection that both a license fee and a tax may be imposed on the same business or
occupation, or for selling the same article, this not being in violation of the rule against double taxation.

D. Means of Avoiding and Minimizing the Burden of Taxation

1. Shifting of tax burden

a. Ways of shifting the tax burden

Shifting - the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or
imposed to someone else. What is transferred is not the payment of the tax but the burden of the tax.
 - All indirect taxes may be shifted; direct taxes cannot be shifted.

(1) Forward Shifting

When the burden of the tax is transferred from a factor of production through the factors of distribution
until it finally settles on the ultimate purchaser or consumer.

Ex. Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer,
who also shifts it to the final purchaser or consumer

(2) Backward Shifting

When the burden of the tax is transferred from the consumer or purchaser through the factors of
distribution to the factors of production.

Ex. Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is
reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer.

(3) Onward Shifitng

When the tax is shifted two or more times either forward or backward

Ex. a transfer from the seller to the purchaser involves one shift; from the producer to the wholesaler,
then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we
have three shifts in all.

b. Taxes that can be shifted

Indirect taxes may be shifted.

Ex. VAT, professional tax, amusement tax, customs duties

Sec. 105

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale
or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the person
engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines
by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

c. Meaning of impact and incidence of taxation

Impact of taxation – the point on which a tax is originally imposed. In so far as the law is concerned, the
taxpayer, the subject of tax, is the person who must pay the tax to the government.
Incidence of taxation – the point on which the tax burden finally rests or settles down. It takes place when
shifting has been effected from the statutory taxpayer to another.

2. Tax Evasion

Elements of tax evasion

(1) The end to be achieved.
Ex. the payment of less than that known by the taxpayer to be legally due, or in paying no tax when such
is due.
(2) An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not
accidental.”
(3) A course of action (or failure of action) which is unlawful.

Republic v. Gonzales
G.R. No. L-17962

Nature: This is an appeal from the decision of the CFI – Manila ordering Gonzales to pay deficiency income taxes
for the years 1946 and 1947 plus 50% surcharge interest of 1% per month.

Facts: Blas Gonzales, has been a private concessionaire in the U.S. Military Base at Clark Field, Angeles City: He
was engaged in the manufacture of furniture and, per agreement with base authorities, supplied them with his
manufactured articles.

Gonzales’ income tax return for 1946 and 1947 showed P80,459.75 and P1,707,355.57 as his total sales for the
said two years.

Upon investigation, however, the Bureau of Internal Revenue discovered that for the years 1946 and 1947, the
appellant had been paid a total of P2,199,920.50 for furniture delivered by him to the base authorities. Compared
against the sales figure provided by the base authorities, therefore, the amount of P1,787,848.32 declared by the
appellant as his total sales for the two tax years in question was short or underdeclared by some P412,072.18

Further investigation into the appellant's 1946 profit and loss statement disclosed "local sales," that is, sales to
persons other than the United States Army, in the amount of P124,510.43. As a result, the appellee likewise
considered the said amount as unreported income for the said year. The full amount of P124,510.43 was
considered as taxable income because the appellant could not produce the books of account on the same upon
which any deduction could be based.

CFI declared Gonzales as guilty of fraud against him in this incident. Gonzales argues that the facts invoked by the
lower court do not sufficiently establish the same.

Issue: Whether the court is correct in saying that Gonzales is guilty of fraud.

Ruling: Yes

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances
of the case.

The failure of the appellant to declare for taxation purposes his true and actual income derived from his furniture
business at the Clark Field Air Base for two consecutive years is an indication of his fraudulent intent to cheat the
Government of its due taxes.

The substantial undeclaration of income in the income tax returns of the appellant for four consecutive years,
coupled with his intentional overstatement of deductions made the imposition of the fraud penalty proper.
Sec. 254

Attempt to Evade or Defeat Tax. - Any person who willfully attempts in any manner to evade or defeat any tax
imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine not less than Thirty thousand (P30,000) but not more than One hundred
thousand pesos (P100,000) and suffer imprisonment of not less than two (2) years but not more than four (4)
years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil
suit for the collection of taxes.

3. Tax avoidance

Tax Avoidance or Tax Minimization The exploitation 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 politely called “tax
minimization” and is not punishable by law.

Delpher Traders Corp. v. IAC

G.R. No. L-69259

Nature: This is a petition for certiorari to review the IAC’s decision which affirmed the CFI in declaring the valid
existence of Hydro Pipes Phil Inc’s preferential right to acquire the subject property and ordering the Pachecos and
all persons deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the same at
the rate of P14.00 per square meter.

Facts: Delfin Pacheco and his sister, Pelagia Pacheco owned a lot being leased to Construction Components
International Inc.

Construction Components International, Inc. then assigned its rights and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco.

A deed of exchange was later executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased property together with another parcel of land for
2,500 no par value shares of stock of Delpher Trades Corporation.

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed a complaint against Delfin and Pelagia.

Issue: Whether Hydro Pipes Philippines, Inc. may validly compel Delfin and Pelagia exercise his right of first
refusal.

Ruling: No.

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another. The ownership remained in the same
hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted."

Pacheco’s Estate Planning Scheme

Benefits derived from incorporating instead of handling the properties as individulas:

 1. Continuous control of the property - since a corporation does not die it can continue to hold on to the
property indefinitely for a period of at least 50 years.

2. Tax Exemptions
- providing for tax free exchange of property, they were able to execute the deed of exchange free from
income tax and acquire a corporation
- if the property is held by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies

3. Flexibility in the valuation - the value is determined by the board of directors in increasing capitalization.
The board can fix the value of the shares equivalent to the capital requirements of the corporation.

Yutivo v. CTA
G.R. No. L-13203

Nature: This is a petition for review of a decision of CTA ordering Yutivo to pay CIR sales tax deficiency for the
third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon.

Facts: Yutivo Sons Hardware Co. is a domestic corporation