2012 Ateneo LawTaxation Law Summer Reviewer

TAXATION LAW BAR REVIEWER
FACULTY ADVISERS ACADEMICS HEAD SUBJECT HEADS ATTY. MICHAEL DANA MONTERO ATTY. FRANCISCO GONZALES PIERRE MARTIN REYES SHERYL CHRISTINE LAGROSAS ELLIE CHRIS NAVARRA
ATENEO CENTRAL BAR OPERATIONS 2012 ACADEMICS COMMITTEE Academics Head: Pierre Martin Reyes; Understudy: Clariesse Jami Mari Chan REVIEW COMMITTEE Head: Yla Gloria Marie Paras; Understudy: Ken Koga; Members: Catherine Dela Rosa, Eric Lavadia, Le Iris Lucido, Pearl Charisse Baustista; Mina Reyes TAXATION LAW COMMITTEE Heads: Sheryl Christine Lagrosas; Ellie Chris Navarra Understudies: Abigail Bernandino; Philip Marion Ortal; Hailin Quintos
TAXATION LAW
Table of Contents
I. GENERAL PRINCIPLES OF TAXATION......................... 5 A. Definition and concept of Taxation ...................5 B. Nature and Characteristics of Taxation ..............5 D. Purpose of Taxation ...........................................6 E. Principles of Sound Tax System (FAT) ................6 F. Theory and Basis of Taxation (JBL) .....................7 G. Doctrines in Taxation .........................................7 1. Prospectivity of tax laws ................................. 7 2. Imprescriptibility ............................................ 7 3. Double Taxation (DT)...................................... 7 4. Escape from Taxation ..................................... 8 5. Exemption from taxation ............................... 8 6. Compensation and Set-off.............................. 9 7. Compromise ................................................... 9 8. Tax Amnesty ................................................... 9 9. Construction and Interpretation of: ............. 10 H. Scope and Limitation of Taxation ....................11 1. Inherent Limitations ..................................... 11 2. Constitutional Limitations ............................. 12 I. Stages of Taxation (LAPR) .................................14 K. Requisites of a valid tax ....................................14 a. Must be for a public purpose........................14 b. It should be uniform and equitable ..............14 c. That either the person or property taxed is within the jurisdiction of the taxing authority ...14 d. That it complies with the requirements of due process ...............................................................14 e. That it does not infringe any constitutional limitations ..........................................................14 L. Tax as distinguished from other forms of exactions ...............................................................14 M. Kinds of Taxes .................................................15 II. NATIONAL INTERNAL REVENUE CODE ................... 17 A. Income Taxation ...............................................17 1. Income Tax Systems .................................... 17 2. Features of the Philippine Income Tax Law .. 17 3. Criteria in Imposing Philippine Tax Law .........18 4. Types of Philippine Income Tax .................... 18 5. Taxable Period ............................................. 18 6. Kinds of Taxpayers........................................ 18 7. Income Taxation .......................................... 21 8. Income.......................................................... 21 9. Gross Income ................................................. 23 10. Taxation of Resident Citizens, Non-resident Citizens and Resident Aliens ...............................51 11. Taxation of Non-resident Aliens Engaged in Trade or Business ...............................................54 12. Exclude Non-resident Aliens Not Engaged in Trade or Business ...............................................54 13. Individual Taxpayers Exempt from Income Tax54 14. Taxation of Domestic Corporations .............54 15. Taxation of Resident Foreign Corporations57 16. Taxation of Non-resident Foreign Corporations.......................................................59 17. Improperly Accumulated Earnings Tax ....60 18. Exemption from Tax on Corporations ......61 19. Taxation of Partnerships ..........................61 20. Taxation of General Professional Partnership (GPP) ...............................................61 21. Taxation of Estates and Trusts.................62 22. Withholding Tax ......................................63 B. Estate Tax..........................................................68 C. Donors Tax .......................................................74 D. Value-Added Tax ..............................................78 1. NATURE AND CHARACTERISTIC ..................... 78 2. IMPACT OF TAX ............................................. 78 3. INCIDENCE OF TAX ........................................ 78 4. DESTINATION PRINCIPLE ............................... 78 5. PERSONS LIABLE (Sec. 105) ........................... 79 6. VAT ON SALE OF GOOD OR PROPERTIES (Sec. 106) ................................................................... 79 7. ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERO RATED SALES OF GOODS OR PROPERTIES..................... 80 8. TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO 12% VAT) ....................................... 81 9. CHANGES IN OR CESSATION OF STATUS OF A VAT .................................................................... 82 10. VAT ON IMPORTATION OF GOODS (Sec. 107) ........................................................................... 82 11. VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES.................................................. 83 12. ZERO-RATED SALES OF SERVICE .................. 83 13. VAT EXEMPT TRANSACTIONS (Sec. 109) ..... 84 14. INPUT VAT AND OUTPUT VAT DEFINED ...... 87 15. SOURCES OF INPUT TAX .............................. 87 16. PERSONS WHO CAN AVAIL OF THE INPUT TAX ........................................................................... 87 17. DETERMINATION OF THE INPUT/OUTPUT TAX; VAT ............................................................ 88 Credits for Input Tax .......................................... 88 18. SUBSTANTIATION REQUIREMENTS OF INPUT TAX CREDITS ...................................................... 89
TAXATION LAW REVIEWER
Page 3 of 165
19. CLAIMS FOR REFUND/TAX CREDIT CERTIFICATE OF INPUT TAX ............................... 90 20. INVOICING REQUIREMENTS ........................ 90 21. FILING OF RETURN AND PAYMENT ............. 91 22. WITHHOLDING OF VAT ................................ 91 E. Percentage Tax..................................................95 F. Compliance Requirements ................................98 G. Tax remedies under the NIRC .........................108 III. LOCAL GOVERNMENT CODE OF 1991, as amended ............................................................................... 121 1. Fundamental Principles ............................... 121 2. Nature and Source of Taxing Power (CITE LAW) 121 3. Local Taxing Authority ................................. 122 4. Residual Taxing Powers of the LGU (Sec. 186 LGC) ................................................................. 122 5. Specific Taxing Power of Local Government Unit (LGU) ........................................................ 123 6. Common Limitations on the Taxing Powers of LGUs and common revenue ............................ 128 7. Collection of Business Taxes ........................ 128 8. Taxpayers Remedies ................................... 129 a) Periods of assessment and collection of local taxes, fees or charges ........................ 129 b) Protest of assessment (Sec. 195, LGC) ... 129 c) Claim for refund of tax credit for erroneously or illegally collected tax, free or charge ......................................................... 129 9. Civil Remedies by the LGU for the Collection of Revenues ......................................................... 129 1. Fundamental Principles in Assessment of Real Property Taxes (Sec. 198) [CUANE] .... 131 2. Nature of Real Property Tax ................... 131 3. Imposition of Real Property Tax ............. 132 4. Appraisal and Assessment of Real Property Tax ...............................................................133 Actual Use of Property as Basis for Assessment (LGC Sec. 217) .................... 133 Types of Real Property Tax .................... 133 5. Collection of Real Property Tax ...............133 Steps in the Assessment and Collection of RPT .................................................................... 133 Remedies of LGUs for the Collection of Real Property Tax ............................................... 134 6. Claim for Tax Refund or Credit (LGC Sec 253) .............................................................135 7. Taxpayers Remedies ...............................135 IV. TARIFF AND CUSTOMS CODE OF 1978, as amended ............................................................................... 137 A. Definitions ......................................................137 B. General Rule ...................................................137 C. Purpose for Imposition ...................................137 LIABILITY FOR CUSTOMS DUTIES ........................137
D. Flexible Tariff ..................................................138 E. Requirements for Importation ........................138 F. Importation in Violation of TCC.......................139 G. Goods Conditionally-free from Tariff and Customs Duties ...................................................139 H. Classification of Duties ...................................143 1. Ordinary/ Regular Duties ............................. 143 2. Special Duties .............................................. 144 I. Drawback .........................................................145 J. Tax Remedies under the TCC ...........................145 1. Government ................................................ 145 2. Taxpayer ...................................................... 145 V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax Appeals (CTA), as amended, and the Revised Rules of the Court of Tax Appeals.. 150 A. Jurisdiction of the Court of Tax Appeals .........150 B. Judicial Procedures .........................................150 1. Judicial action for collection of taxes .........150 C. Taxpayers Suit Impugning the Validity of Tax Measures ............................................................152 1. TAX PAYERS SUIT ................................... 152 2. DISTINGUISHED FROM CITIZENS SUIT ... 153 ..........................................................................................
Page 4 of 165
TAXATION LAW
I. GENERAL PRINCIPLES OF TAXATION
====================================== ======================================
TOPICS UNDER THE SYLLABUS: I. GENERAL PRINCIPLES A. Definition and concept of Taxation B. Nature and Characteristics of Taxation C. Power of Taxation Compared with Other Powers D. Purpose of Taxation E. Principles of Sound Tax System (FAT) F. Theory and Basis of Taxation (JBL) G. Doctrines in Taxation H. Scope and Limitation of Taxation I. Stages of Taxation (LAPR) J. Definition, Nature, and Characteristics of Taxes K. Requisites of a valid tax L. Tax as distinguished from other forms of exactions M. Kinds of Taxes
====================================== ======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES B. Nature and Characteristics of Taxation
======================================
The power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of independent government. The right to tax exists apart from Constitutions and without being expressly conferred by the people. It is legislative in character. It is generally not delegated to executive or judicial department. Exceptions: i. To LGUs in respect to matters of local concern to be exercised by the LG bodies thereof [Sec. 5, Art. X, 1987 Constitution]; ii. When allowed by the Constitution [Sec. 28[2], Art. VI, 1987 Constitution]; iii. When the delegation relates merely to admin implementation that may call for some degree of discretionary powers under a set of sufficient standards expressed by law Cervantes v. Auditor General, [91 Phil. 359], or implied from the policy and purpose of the Act Maceda v. Macaraig, [197 SCRA 771]. It is subject to constitutional and inherent limitations. It must be used for public purposes It has been held that tax has been utilized for public purpose if the welfare of the nation or the greater portion of its population has benefited for use Gomez v. Palomar, [25 SCRA 827]; Phil Guaranty Co., Inc. v. Commissioner, [13 SCRA 775]. It is the strongest of all the inherent powers of the government Sison v. Ancheta, [130 SCRA 654]. It is territorial in operation The power to tax can only be exercised within the territorial jurisdiction of a taxing authority [51 Am Jur 88], except when there exists privity of relationship between the taxing State and the object of tax. It is an enforced charge and contribution. Generally pecuniary in nature (payable in money).
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES A. Definition and concept of Taxation
======================================
Power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions. Power by which an Independent State, through its lawmaking body, raises and accumulates revenue from its inhabitants to pay the necessary expenses of the government. [51 AM JUR 341] Process or act of imposing a charge by governmental authority on property, individuals or transactions to raise money for public purposes. *Blacks Law Dictionary] Taxation is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. [71 AM JUR 2ND 342] Taxation is described as a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. Paseo Realty & Development Corporation v.CA, [2004]
Page 5 of 165
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES C. Power of Taxation Compared with Other Powers
======================================
POLICE POWER (in the form of a FEE) Concept Power to make and implement laws for the general welfare Scope Broader in application General power to make and implement laws Exercising Authority Government or political subdivisions EMINENT DOMAIN
TAX granting exemption; or (b) involves franchise
POLICE POWER (in the form of a FEE)
EMINENT DOMAIN
TAX
Power to enforce contribution to raise government funds
Power to take private property for public use with just compensation Merely a power to take private property for public use
Plenary, comprehensive and supreme
Benefits Received No direct or Market Value of immediate the property benefit but only such as may arise from the maintenance of a healthy economic standard of society Relationship to Constitution Subject to certain Relatively free Subject to certain constitutional from constitutional limitations constitutional limitations limitations Protection and general benefits from the government
Government or political subdivisions
Maybe granted to public service companies or public utilities
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES D. Purpose of Taxation

======================================== 1.
Purpose Raise revenue Exercise to The taking of promote public property for welfare through public use regulation Amount of Imposition No limit Limited to the No limit imposed, cost of but the amount regulation, should be based issuance of on the market license, or value of the surveillance property Effect Becomes part of Restraint on the Transfer of right public funds injurious use of to the property property Persons Affected Applies to all Applies to all Only particular persons, property persons, property property is and excises that and excises that comprehended may be subject may be subject thereto thereto Superiority of Contracts Contracts may be Contracts may be impaired unless (a) impaired government is party to contract
Revenue-raising Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of government. It is to provide funds or property with which to promote the general welfare and protection of the whole citizenry. It is raised to serve as a means to provide public improvements designed for the enjoyment of the citizenry within the States territory. Non-revenue/special or regulatory Taxation is also used for regulatory purposes; it is used to attain non-revenue objectives and pursue policy decisions.
2.
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES E. Principles of Sound Tax System (FAT)
======================================
1.
Fiscal Adequacy - the sources of tax revenue should coincide with and approximate the needs of the government expenditures
Page 6 of 165
2.
3.
Administrative Feasibility - the tax system should be capable of being properly and efficiently administered by the government and enforced with the least inconvenience to the taxpayer Theoretical Justice - the tax system should be fair to the average taxpayer and based upon the ability to pay
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES F. Theory and Basis of Taxation (JBL)
====================================== 1. 2. Jurisdiction over subject & objects Benefits-Protection Theory (Symbiotic relationship) The basis of taxation is found in the reciprocal duties of protection and support between the state and its inhabitants. In return for this contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. Lifeblood/Necessity Theory - The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and property within its limits to contribute.
Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such prescriptive period will only be applicable to those taxes that were returnable. The prescriptive period shall start from the time the taxpayer files the tax return and declares his liability Collector v. Bisaya Land Transportation Co., [1958] As to IAET, the court held that there is no time limit on the right of the BIR Commissioner to assess this type of tax [Sec. 25, NIRC]. The law on prescription being a remedial measure should be interpreted liberally in order to protect the taxpayer. Republic vs. Ablaza, [108 Phil 1105]
3.
Double Taxation (DT)

a. Direct Duplicate Taxation (Strict sense) To constitute double taxation in the objectionable or prohibited sense: i. ii. iii. iv. v. vi. The same property must be taxed twice when it should be taxed 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 period; and they must be the same kind or character of tax Villanueva v. City of Iloilo, [26 SCRA 578]
3.
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES G. Doctrines in Taxation

====================================== 1.

Prospectivity of tax laws

This principle provides that a tax bill must only be applicable and operative after becoming a law. As a general rule, taxing authorities must be applied prospectively, except by express provision of the law. Ex post facto is not applicable for tax purposes. However when it comes to civil penalties like fines and forfeiture (except interest), tax laws may be applied retroactively unless it produces harsh and oppressive consequences w/c violate the taxpayers constitutional rights regarding equity and due process Fernandez v. Fernandez, [99 Phil. 934]; Commissioner v. Filipinas Cia de Seguros, [107 Phil. 1055].
b. Indirect Duplicate Taxation (Broad sense) It means indirect duplicate taxation. It extends to all cases in w/c there are two or more pecuniary impositions. The Constitution does not prohibit the imposition of double taxation in the broad sense c. Constitutionality of DT The SC held that there is no constitutional prohibition against double taxation in the Phils. Villanueva v. City of Iloilo, [26 SCRA 578], therefore it is not a valid defense against the validity of a tax measure Pepsi Cola v. Tanauan, [69 SCRA 460]. i. i. There is no double taxation in the following cases: By taxing corporate income and stockholders dividends from the same corporation ii. Tax imposed by the State and the local government upon the same occupation, calling or activity iii. Real estate tax and income tax collected on the same real estate property leased for earning purposes. Villanueva vs. City of Iloilo, [26 SCRA 578] iv. Taxes are imposed on taxpayers final product and the storage of raw materials used in the
2.
Imprescriptibility
Unless otherwise provided by the tax law itself, taxes in general are not cancelable Commissioner v. Ayala Securities Corporation, [101 SCRA 231].
Page 7 of 165
production of the final product. Procter and Gamble Philippines vs. Municipality of Jana, [94 SCRA 894] d. Modes of eliminating DT (1) Provide for exemptions or allowance of deduction or tax credit for foreign taxes (2) Enter into treaties with other states [like the former Phil-Am Military Bases Agreements as to income tax] (3) Application of the Principle of Reciprocity
It connotes the integration of three factors: End to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; Accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and Course of action or failure of action which is unlawful. Benigno vs. Toda, [G.R. Nos. 78583-4 March 26, 1990] TAX EVASION Tax Dodging Use illegal means Punishable by law To entirely escape payment of taxes TAX AVOIDANCE Tax Minimization Use legal means Not punishable by law To merely minimize payment of taxes
4.
Escape from Taxation

a. Shifting of tax burden The imposition of tax is transferred from the statutory taxpayer to another without violating the law. (1) Ways of shifting the tax burden (FBO) i. Forward shifting the transfer of burden from the producer to distributor until it finally reaches the ultimate purchasers or consumers ii. Backward shifting the reverse of forward shifting, e.g. the manufacturer has agreed to buy the suppliers product only if the price is reduced by the amount of tax. iii. Onward shifting the tax burden is shifted twice or more either forward or backward (2) i. ii. iii. iv. Taxes that can be shifted VAT Percentage tax Excise tax on excisable articles Ad valorem taxes that oil companies pay to BIR upon removal of petroleum products from its refinery Other Name Means Penalty Object
5.
a.
Exemption from taxation

Meaning 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 state or taxing district are obliged to pay. i. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected. Greenfield v. Meer, [77 Phil 394] Nature Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly liable. In any case, it cannot be transferred or assigned by the person to whom it is given without the consent of the State. Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law Manila Electric Company v. Vera, [67 SCRA 351]. Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation, the exception. There can be no simultaneous exemptions under 2 laws, one partial and the other total. Kinds (ICE) (1) Express (or affirmative) when certain persons, property or transactions are, by express provision, exempted from all or certain taxes, either entirely or in part.
b.
(3) Meaning of impact and incidence of taxation i. Impact of Taxation point on which the tax is originally imposed or the one on whom the tax is formally assessed. ii. Incidence of Taxation point on which the tax burden finally rests or settles down. Example: VAT is originally assessed against the seller who is required to pay the said tax, but the burden is actually shifted or passed on to the buyer. b. Tax avoidance also called Tax Minimization; tax saving device that is legally permissible c. Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes; must be willful and intentional c.
Page 8 of 165
Examples of Statutory Tax Exemptions: i. Inter-corporate dividends by a domestic corporation from another domestic corporation [Sec. 27 D [4], NIRC] ii. Section 105 of the Tariff and Customs Code iii. Section 234 of the Local Government Code iv. Other special laws such as Omnibus Investment Code of 1987, Philippine Overseas Shipping Act (2) Implied (or by omission) when a tax is levied on certain classes of person, properties or transactions without mentioning the other classes. Every tax statute makes exemptions since all those not mentioned are deemed exempted. The omission may either be accidental or intentional. (3) Contractual those lawfully entered into by the government in contracts under existing laws. These exemptions must not be confused with the tax exemptions granted under franchises, which are not contracts within the context of nonimpairment clause of the Constitution. Cagayan Electronic Co. v. Commissioner, [138 SCRA 629] d. Rationale/grounds for exemption A presumption that the public interest will be subserved by the exemption allowed. Grant of exemption rests upon that such will benefit the body of the people and not upon any idea of lessening the burden of the individual owners of property. Purpose is some public benefit or interest, which the law-making body considers sufficient to offset the monetary loss entailed in the grant of exemptions. Created in a treaty on grounds of reciprocity or to lessen the rigors of the international double or multiple taxation. Equity is not a ground for tax exemption Revocation Tax exemption is generally revocable. The congressional power to grant an exemption necessarily carries with it the consequent power to revoke the same. In order to be irrevocable, the tax exemption must be founded on a contract or granted by the Constitution. Revocations are constitutional even though the corporate do not have to perform a reciprocal duty for them to avail of tax exemptions.
each other Republic v. Mambulao Lumber Co., [6 SCRA 622]; Caltex Phils. V. COA, [208 SCRA 726]. Not subject to set-off or compensation for the following reasons: i. Taxes are of distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations; ii. The applicable laws and principles governing each are peculiar, not necessarily common, to each; and iii. Public policy is better subserved if the integrity and independence of taxes are maintained Republic v. Mambulao Lumber Co., [6 SCRA 622]. A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. Philex Mining Corp. v. Commissioner, [1998]; Francia v. Intermediate Court, [162 SCRA 753] An exception to the rule is where both the claims of the government and the taxpayer against each other have already become due, demandable and fully liquidated. In this case, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. Domingo v. Garlitos, [8 SCRA 443]
7.
Compromise
Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. The law allows the ff: persons to do compromise in behalf of the government: i. BIR Commissioner as expressly authorized by the NIRC subject to certain conditions [Sec. 204, NIRC]; ii. Collector of Customs with respect to customs duties limited to cases where the legitimate authority is specifically granted such as in the remission of duties [Sec. 709, TCC]; and iii. Customs Commissioner subject to the approval of the Secretary of Finance, in cases involving the imposition of fines, surcharges, and forfeitures [Sec. 2316, TCC].
e.
8.
a.
Tax Amnesty
Meaning It 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. It partakes of an absolute forgiveness or waiver of the Government of its right to collect.
6.
Compensation and Set-off

This doctrine states that taxes are not subject to set-off or legal compensation because the government and the taxpayer are not mutual creditor and debtor of
Page 9 of 165
It is a way to give tax evaders, who wish to relent & are willing to reform a chance to do so.
b.
Distinguished from tax exemption: AMNESTY Immunity from all criminal, civil and administrative liabilities from nonpayment of taxes General pardon given to all taxpayers EXEMPTION Immunity from civil liability only
not a sufficient justification for exemption from the payment of surcharges imposed by the law for failing to pay tax within the period required. A tax statute should be construed to avoid the possibilities of tax evasion. b. Tax Exemption and Exclusion (1) General rule: Exemptions are not favored and are construed strictissimi juris [by the most strict right or law] against the taxpayer. An exemption from the common burden cannot be permitted to exist upon vague implication or inference The fundamental theory is that all taxable property should bear its share of the cost and expense of government. Applying the rule of strict construction to statutory provisions granting tax exemptions [or deductions] would minimize differential treatment and foster fairness and equality of treatment among taxpayers. Taxation is the rule and exemption, the exception. Therefore, whoever claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms too plain to be mistaken and too categorical to be misinterpreted. If not expressly mentioned by law, it must at least be within its purview by clear legislative intent. Claims for refund partake of the nature of tax exemptions and will not be allowed unless granted in the most explicit and categorical language. (2) Exception: When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption When the exemption is in favor of the government itself or its agencies because the gen. rule is that they are exempt from tax. When the exemption refers to religious, charitable and educational institutions. If there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction does not apply. c. Tax Rules and Regulations (1) General rule only The construction placed by the office charged with implementing and enforcing the provisions of a Code should be given controlling weight unless such interpretation is clearly erroneous.
Scope of immunity
To whom granted
Application
Presence of Actual Revenue Loss
Applies only to past tax periods hence retroactive application Yes, there is revenue loss since there was actually taxes due but collection was waived by the government
A freedom from a charge or burden to which others are subjected Generally, prospective in application None, because there was no actual taxes due as the person or transaction is protected by tax exemption
9.
a.
Construction and Interpretation of:

Tax Laws (1) General rule: No person or property is subject to taxation unless within the terms or plain import of a taxing statute. In case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer. Taxes being burdens, they are not to be presumed beyond what the statute expressly and clearly declares. Tax statutes offering rewards are liberally construed in favor of informers. (2) Exception: The rule of strict construction as against the government is not applicable where the language of the tax statute is plain and there is no doubt as to the legislative intent. In such case, the words employed are to be given their ordinary meaning. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent. They should not be construed as to permit the taxpayer to easily evade the payment of tax. Thus, good faith of the taxpayer is
Page 10 of 165
d.
Penal provisions of tax laws Strict construction so as not to extend the plain terms thereof that might create offenses by mere implication not so intended by the legislative body RP v. Martin, [G.R. No. L-38019, May 16, 1980]. Non-retroactive application to taxpayers The (tax) law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. Carmelino F. Pansacola v. CIR, [G.R. No. 159991, November 16, 2006] A tax law should not be given retroactive application when it would be harsh and oppressive, for in such case, the constitutional limitation of due process would be violated. Sec. 246 of the NIRC provides that any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with Secs. 244 and 255 or 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. (1) Exceptions: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. For instance: the universal practice of increasing taxes on income already earned. The rules and regulations promulgated by the CIR shall be retroactive in the following cases: i. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; ii. Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or iii. Where the taxpayer acted in bad faith.
e.
time of its enactment. Pascual v. Secretary of Public Works, [G.R. No. L-10405, December 29, 1960] Legislature is not required to adopt a policy of all or none for the Congress has the power to select the object of taxation. Lutz v. Araneta, [G.R. No. L7859, December 22, 1955] A special benefit to specific individual does not diminish the nature of tax being for public purpose as long as it is incidental.
b.
Inherently Legislative (1) General rule power of taxation cannot be delegated. Contemplates the power to determine kind, object, extent, amount, coverage, and situs of tax; Distinguish from power to assess and collect (2) Exceptions: (a) Delegation to local governments It is in line with the principle that the power to create municipal corporations for purposes of local selfgovernment carries with it the power to confer the power to tax on such local governments. (b) Delegation to the President Certain aspects of the taxing process that are not legislative in character may be vested to him. (c) Delegation to administrative agencies They are authorized to fix within specified limits, Tariff rates, import or export quotas, tonnage and wharfage dues and other duties or imposts.
c. Territorial (1) Situs of Taxation (a) Meaning place of taxation; power to tax is limited to the territorial jurisdiction of the taxing state. EXCEPT where privity of relationship exists, the State can exercise its taxing powers over its citizen outside its territory. (b) Situs of Income Tax (1) From sources within the Philippines Interests derived from sources within the Philippines Dividends from domestic and foreign corporations Compensation for services performed within the Philippines Rentals and royalties from properties located in the Philippines or any interest in such property including rentals or royalties for the use of or for the privilege of using within the Philippines, patents, copyrights and other like
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES H. Scope and Limitation of Taxation
====================================== 1. Inherent Limitations a. Public Purpose Test: whether the proceeds will be used for something which is the duty of the State to provide. The public purpose of the tax law must exist at the
Page 11 of 165
properties. Sale of Real property located in the Philippines Sale of Personal property Gains, profit, and income derived from the purchase within and its sale without the Phil, or from the purchase without and its sale within shall be treated as derived entirely from sources within the country in which the personal property is sold. Except: the gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Phils. regardless where the said shares are sold.
SUMMARY: OBJECT Person SITUS RULE Residence, Domicile, Citizenship Location of the property Physical location although the owner resides in another jurisdiction Domicile of the owner (mobilia sequntur personam) Citizenship Residence Source of Income Citizenship Residence Location of Property Where the act/business/occupation is performed/exercised
Real Property Tangible Personal Property Intangible Personal Property Income
(2) From sources without the Philippines Interest other than those derived from sources within the Philippines Dividends other than those derived from sources within the Philippines Compensation for services performed without the Philippines Rentals and royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights and other like properties. (3) Income partly within and partly without the Philippines Items other than those specified above in i. and ii. shall be allocated or apportioned to sources within or without the Philippines (c) Situs of Property Taxes (1) Taxes on Real Property Location of the property (2) Taxes on Personal Property i. Tangible Location of the property ii. Intangible Domicile of the owner
Transfer of property Business or Occupation d.
International Comity Property of a foreign State of government may not be taxed by another. Exemption of Government Entities, Agencies, and Instrumentalities Taking money from one pocket to the other. Applies only to entities exercising sovereign functions (acta jure imperii). However, it can tax itself if there is a statutory authority to do so and no express provision against such act.
e.
2. Constitutional Limitations
a. Provisions Directly Affecting Taxation (1) Prohibition against imprisonment of non-payment of poll tax [Sec. 20, Art. III] Can still be made to pay fines and penalties for non-payment. Taxpayer may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides. (2) Uniformity and equality of taxation [Sec. 28 (1), Art VI] Uniform: all articles or properties of the same class taxed at the same rate Equity: apportionment must be more or less just in the light of taxpayers ability to shoulder tax burden The equal protection clause refers more to like
(d) Situs of Excise Tax (1) Estate Tax Domicile of the decedent at the time of his death (2) Donors Tax Domicile of the donor at the time of the transfer (e) Situs of Business Tax Place where the taxpayer is registered or required to register (1) Sale of Real Property (2) Sale of Personal Property (3) VAT
Page 12 of 165
treatment in like circumstances The uniformity and equity clause refers to the proper relative treatment for tax purposes of persons in unlike circumstances (3) Grant by Congress of authority to the President to impose tariff rates/Flexible tariff clause [Sec. 28 (2), Art. VI] Includes import and export quotas, tonnage and wharfage dues aside from tariff rates Delegated by Congress Through a law; the Tariff and Customs Code has provided for what has been termed as the flexible tariff clause authorizing the President to modify import duties [Sec. 401, TCC] Subject to Congressional limits and restrictions Within the framework of national development program (4) Prohibition against taxation of religious, charitable and educational entities/Exemption from real property taxes [Sec. 28 (3), Art. VI of the Constitution] Covers charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY USED for charitable, religious and educational purposes Pertains only to real estate tax Test of exemption: actual use of the property, not ownership (5) Prohibition against taxation of non-stock, nonprofit [educational] institutions [Sec. 4(3&4), Art. XIV] Exempts from taxes all revenues and assets of nonstock, non-profit educational institutions used ACTUALLY, DIRECTLY AND EXCLUSIVELY for educational purposes Exemption covers income, real estate, donors tax, and customs duties (distinguish from the previous which pertains only to real estate tax) Income exempt provided it is used for maintenance or improvement of institution (indispensable or essential). The exemption is strictly personal. (nontransferable) Distinguish from tax treatment of i. Proprietary educational institutions (Preferential Tax of 10%); ii. Government educational institutions (exempt, ex. UP)
(6) Majority vote of Congress for grant of tax exemption [Sec. 28 (4), Art. VI] Includes amnesties, condonations and refunds Involves majority of all members voting separately Relative majority (majority of quorum) is sufficient to withdraw exemption. (7) Prohibition on use of tax levied for special purpose [Sec. 29 (3), Art. VI] Revenues derived for a special fund shall be administered for the purpose intended only. Once the purpose is achieved, the balance, if any, is to be transferred to the general funds of the government. (8) Presidents veto power on appropriation, revenue, and tariff bills [Sec. 27 (2), Art. VI] (9) Non impairment of jurisdiction of the SC [Sec. 5(2)(b), Art. VIII] (10) Grant of power to the local government units to create its own sources of revenue [Sec. 5, Art. X] (11) No appropriation or use of public money for religious purposes [Sec. 29 (2), Art. VI] b. Provisions Indirectly Affecting Taxation (1) Due process [Sec. 1, Art. III] PROCEDURAL No arbitrariness in assessment and collection Right to notice and hearing
SUBSTANTIVE Should not be harsh, oppressive, or confiscatory (reasonableness) By authority of valid law Must be for a public purpose Imposed within territorial jurisdiction
It can also be invoked by the government. Province of Abra v. Hernando, [G.R. No. L-49336 August 31, 1981] (2) Equal protection [Sec. 1, Art. III] All persons subject to legislation shall be treated alike, under like circumstances and conditions both in privileges conferred and liabilities imposed. Sison, Jr. v. Ancheta, [G.R. No. L-59431, 25 July 1984]
Page 13 of 165
No violation of equal protection when there is proper classification made; classification to be valid must: i. Rest on substantial distinctions ii. Be germane to the purpose of the law iii. Not be limited to existing conditions only; and iv. Apply equally to all members of the same class (3) Religious freedom [Sec. 5, Art III] The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. American Bible Society v. City of Manila, [G.R. No. L-9637, April 30, 1957]. Activities simply and purely for propagation of faith are exempt. Tax is unconstitutional if it operates as a prior restraint on exercise of religion or favors a certain religion (non-establishment of religion) Income of religious organizations from any activity conducted for profit or from any of their property, real or personal, regardless of disposition of such income, is taxable (4) Non-impairment of obligations [Sec. 10, Art. III] Applies only when government is party to the contract granting exemption EXCEPT if Franchise tax-exemption The Constitution provides that franchise is subject to amendment, alteration, or repeal by Congress.
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES J. Definition, Nature, and Characteristics of Taxes
====================================== A burden, charge, exaction, imposition or contribution assessed in accordance with some reasonable rule of apportionment by authority of the sovereign state upon the persons or property within its jurisdiction, to provide public revenue for the support of the government, the administration of the law, or the payment of public expenses. [71 AM JUR 2ND 343-346] Any payment exacted by the State or its municipal subdivisions as a contribution toward the cost of maintaining governmental functions, where the special benefits derived from the performance is merged in the general benefit. Taxes operate in INVITUM and are in no way dependent upon the will or contractual assent, express or implied, of the person taxed. (1) Enforced (2) proportional and (3) pecuniary contributions (4) from persons and property (5) levied by law-making body of (6) the state having jurisdiction over the subject of the burden (7) for the support of the government and all public needs. ======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES K. Requisites of a valid tax

======================================
a. Must be for a public purpose b. It should be uniform and equitable c. That either the person or property taxed is within the jurisdiction of the taxing authority d. That it complies with the requirements of due process e. That it does not infringe any constitutional limitations
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES I. Stages of Taxation (LAPR)

====================================== 1. Levy Refers to the enactment of a law by Congress, imposing a tax. 2. Assessment The act of administration and implementation of the tax law by the executive department through the administrative agencies 3. Payment Act of compliance by the taxpayer, including such options, schemes or remedies as may be legally available to him. 4. Refund Recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, or in any manner wrongfully, collected.
======================================
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES L. Tax as distinguished from other forms of exactions
====================================== 1. Customs Duty/Tariff TAX Coverage More comprehensive than customs duty Object Persons, prop, etc
CUSTOMS DUTY Kind of tax Goods imported or exported
Page 14 of 165
2.
Toll
TAX Demand of sovereignty support of government No limit depends on need of the government TOLL Demand of ownership Collection for the use of property Fair return of the cost of the property or improvement Effect
off Imprisonment is sanction for nonpayment No imprisonment for non-payment
Kind of demand Purpose Amount
======================================
3.
License Fee
TAX Exercise of Taxing power Raise revenue Persons, property and privilege no limit LICENSE FEE Emanate from the police power of the State Regulation Right to exercise a privilege
TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES

M. Kinds of Taxes
====================================== 1. As to subject matter or object a. Personal, poll, capitation tax Fixed amount Individuals residing within specified territory Without regard to their property, occupation or business Ex. Community Tax (Cedula)
b. Property tax Imposed on property, real or personal In proportion to its value or other reasonable method of apportionment Ex. Real estate tax Excise/Privilege tax - (different from the excise tax of Title VI of the NIRC) Imposed upon performance of an act, the enjoyment of a privilege or the engaging in an occupation, profession or business Ex. Income tax, VAT, estate tax, donors tax
Source Purpose Object
Amount
only necessary to carry out regulation
Distinction lies in the primary purpose: License fee primary purpose is to regulate and the excess of the amount collected from the cost to carry out the regulation is minimal and incidental. Taxs primary purpose, or at least one of the real and substantial purposes is to raise revenue. If amount is too high for regulation, it would be a tax; unless imposed on non-useful occupations or businesses. Purpose of distinction: limitations and exemptions apply only to one and not to the other (ex. Exemption from taxation does not include exemption from fee)
c.
4.
Special Assessment TAX Imposed Persons, properties, on etc. Why Regardless of public imposed improvement Purpose Support of government When Regular exaction imposed Basis Necessity 5. Debt
TAX Law; legal obligation Personal Generally not subject to compensation/ set-
2.
SPECIAL ASSESSMENT Only on land Public improvement that benefits the land Contribution to cost of public improvement Exceptional as to time and locality Benefits obtained
As to who bears the burden or incidence a. Direct the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax
b. Indirect imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs duties
3.
Source Nature Right to set-off
DEBT Based on contract Assignable May be the subject of compensation/ set-off
As to tax rates or determination of amount a. Specific tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex. Tax on distilled spirits, fermented liquors, cigars
b. Ad Valorem - tax of a fixed proportion of the value of property with respect to which the tax is assessed; requires intervention of assessor.
Page 15 of 165
Ex. Real estate tax, excise tax on cars, nonessential goods c. Mixed
4.
As to purposes a. General, fiscal or revenue - imposed for the general purpose of supporting the government Ex. Income tax, percentage tax
b. Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives Ex. Protective tariffs or customs duties
5.
As to scope or authority to impose a. National - imposed by the national government Ex. National internal revenue taxes, custom duties
b. Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax
6.
As to graduation of rate (Three systems of taxation) a. Proportionate - based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex. Real estate tax, VAT, percentage tax
b. Progressive or graduated - tax rate increases as the tax base or bracket increases Ex. Income tax, estate tax, donors tax Regressive - tax rate decreases as the tax base increases
c.
Page 16 of 165
II.NATIONAL INTERNAL REVENUE CODE

======================================
of graduated tax rates for an individual or normal corporate income tax rate for corporations. With respect to the income, the computation of income is global while the scheduler tax system applied to the capital gains and passive income subject to final tax at preferential tax rates. NOTE: Philippine income taxation is a combination of both system but is more schedular for individual while more global for corporation. GLOBAL SYSTEM A system which imposes a personal tax upon the total income of the taxpayer Emphasizes the burden allocation aspects Most equitable in distributing tax burden, as burden of an individual is closely related to his resources and his ability to pay It serves as a means for redistributing income and wealth SCHEDULAR SYSTEM A system which imposes various types of tax on income producing activities Emphasizes on revenue and administrative aspects Because of its multiple rates, the tax burden of a person does not respond to his income but rather fall fortuitously on the type of his income This function is alien to schedular system where in times of plenty or in times of need, people pay the same fixed tax on their income Schedular system cannot perform these functions
TOPICS UNDER THE SYLLABUS: A. Income Taxation B. Estate Tax C. Donors Tax D. Value-Added Tax (VAT) E. Compliance Requirements (Internal Revenue Taxes) F. Tax Remedies under the NIRC G. Organization and Function of the Bureau of Internal Revenue
========================================
======================================
TOPIC UNDER THE SYLLABUS: A. Income Taxation

======================================== 1. Income Tax Systems a. Global (unitary) Tax System the total allowable deductions, as well as personal and additional exemptions, in the case of qualified individuals, or the total allowable deductions only, in the case of corporations, are deducted from the gross income (i.e. sum of all items of taxable income, profit and gain) to arrive at the net taxable income subject to the graduated income tax rates, in the case of individuals, or to the corporate income tax rate, in the case of corporations. All items of gross income, deductions, personal and additional exemptions are reported in one income tax return and a single tax is imposed on all income received or earned by a person irrespective of the activities which produced the income (i.e. compensation income, net income from business, trade or profession). b. Schedular Tax System different types of incomes are subjected to different sets of graduated or flat income tax rates. The applicable tax rates will depend on the classification of the taxable income and the basis could be gross income or net income (i.e. capital gains tax) Semi-Schedular or Semi-Global Tax System the compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to one set
It serves as a supplementary devise to accomplish nonfiscal goals of the government Administration is not quite as easy as schedular because one has to consider all income from whatever sources 2. a.
Administration is simple being confined to each transaction or activity
Features of the Philippine Income Tax Law Direct tax tax burden us borne by the income tax recipient upon whom the tax is imposed. Progressive tax tax rate increases as the tax base increases; direct taxes are to be preferred and as much as possible, indirect taxes should be minimized. Tolentino v. Secretary of Finance, [G.R. No. 115455, October 30, 1995] Comprehensive system adopts the citizenship principle, residence principle and the source principle Semi-schedular or semi-global tax system certain passive incomes and capital gains are subject to final taxes at preferential rates while all other income are
b.
c.
c.
d.
Page 17 of 165
added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates for an individual or normal corporate income tax rate for corporations. 3. a. Criteria in Imposing Philippine Tax Law Citizenship principle a citizen taxpayer is subject to income tax: (a) on his worldwide income if he resides in the Philippines; or (b) only on his income from sources within the Philippines, if he qualifies as non-resident citizen. Residence principle a resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines. Source principle a non-resident alien is subject to Philippine income tax because he derives income from sources within the Philippines such as dividend, interest, rent or royalty. Types of Philippine Income Tax Net Income Tax/Taxable Income (GI Deductions Exemptions) Gross Income Tax Final Income Tax (On passive income and capital gains) Fringe Benefits Tax (amount of benefits to Managerial and Supervisory Employee paid by Employer; employee is taxed but burden is on employer) Capital Gains Tax (Real property and stocks not traded in stock market) Optional Corporate Income Tax Minimum Corporate Income Tax (2% of gross income) Improperly Accumulated Earnings Tax Preferential Rates (for special corporations) Branch Profit Remittance Tax
c.
Short Period a taxpayer may have a taxable period of less than twelve (12) months when: Taxpayer dies Corporation is newly organized Corporation changes its accounting period Corporation is dissolved.
6.
b.
c.
4. a. b. c. d.
Kinds of Taxpayers TAXPAYER TAX BASE Resident Citizen Taxable Income Nonresident Taxable Citizen Income Taxable Resident Alien Income Nonresident Alien engaged in trade Taxable or business (more Income than 180 days) Nonresident Alien not engaged in Gross trade or business Income (180 days or less) General Professional Partnership Taxable Income
TAXABLE ON INCOME Within and without the Philippines Within the Philippines Within the Philippines
Within the Philippines
Within the Philippines GPP itself not taxable, however, individual partners will be taxed depending on classification Same basis as an individual (depending on classification of decedent, if estate, trustor, if trust) Within and Without the Philippines Within the Philippines Within the Philippines
e. f. g. h. i. j.
Estate and Trust
Taxable Income Taxable Income Taxable Income Gross Income
5. Taxable Period GENERAL RULE: The accounting period of a taxpayer is a period of twelve (12) months. a. Calendar Year accounting period from January 1 to December 31 which is allowed if the: Taxpayer is an individual Taxpayer is a partnership Accounting period is other than a fiscal year Taxpayer has no accounting period Taxpayer does not keep books. Fiscal Year accounting period of twelve (12) months ending on the last day of any month other than December which is allowed ONLY to corporations.
Domestic Corporation Resident Foreign Corporation Non-resident Foreign corporation
a.
Individual Taxpayers (1) Citizens (a) Resident Citizen citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. (b) Nonresident Citizen citizen of the Philippines who are taxable only on his income from sources within the Philippines if he: i. Establishes the fact of his physical presence abroad with a definite intention to reside therein.
b.
Page 18 of 165
ii.
iii.
iv.
v.
Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis. Works & derives income from abroad & whose employment requires him to be physically present abroad most of the time (i.e. not less than 183 days) during the taxable year. Was previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines. Examples of non-resident citizens: a. Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured b. Permanent employee one who leaves the Philippines on a more or less permanent basis c. Contract Worker one who leaves the Philippines on account of a contract of employment which is renewed from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days)
NOTE: The taxpayer shall submit proof to the CIR to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be. Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines shall no longer be required to file information returns from sources outside the Philippines beginning 2001 [RR No. 5-2001] For Overseas Contract Worker, the time spent abroad is not material for tax exemption purposes. All that is required is for the workers employment contract to pass through and be registered with the POEA [BIR Ruling 33-2000] (2) Aliens (a) Resident Alien an individual whose residence is within the Philippines and who is not a citizen thereof is taxable only on income derived from sources within the Philippines. One who comes to the Philippines for a definite purposes which in its nature would require an extended stay, and makes his home temporarily in the country becomes a resident alien
Length of stay is indicative of intention An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. [RR No. 2] Loss of Residence by alien An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the Philippines A mere intention to change his residence does not change hid status. An alien who has acquired a residence is taxable as a resident for the remainder of his stay in the Philippines. [Sec. 6, RR. No. 2]
(b) Nonresident Alien an individual whose residence is not within the Philippines and who is not a citizen thereof but dong business therein is taxable only on income from sources within. (1) Engaged in trade or business an alien who comes and stays in the Philippines for an aggregate period of more than 180 days during any calendar year. (2) Not engaged in trade or business an alien whose stay in the Philippines is 180 days or less. (3) Special Class of Individual Employees (a) Aliens employed by regional or area headquarters and regional operating headquarters of multinational companies in the Philippines. (b) Aliens employed by offshore banking units. (c) Aliens employed by petroleum contractors and subcontractors.
Page 19 of 165
(d) Minimum Wage Earner A worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned; His earnings (i.e. SMW, holiday, overtime, night shift differential and hazard pay) are exempt from income tax pursuant to the provisions of this Code and other laws, general or special.
may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. (b) Nonresident foreign corporation foreign corporation not engaged in trade or business within the Philippines
b.
Corporations A corporation shall include partnerships, no matter how created or organized. Joint stock companies, joint accounts, associations, and insurance companies But does not include, for the purpose of imposing ordinary 30% (starting 2009; 35% 2006 - 2008) corporate income tax: i. General professional partnerships ii. Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with the government
c. Partnerships. Taxed as a corporation. d. General Professional Partnerships Established solely for purpose of exercising common profession and no part of income derived from engaging in trade or business. As an entity, it is not subject to income tax. i. Partners are liable for income tax on their distributive share (computed by dividing net income of GPP). ii. Each partner shall report his distributive share as part of his gross income. iii. Individual partners are subject to regular income tax rate on their taxable income.
Taxable/Business/Ordinary/General Partnership i. All other partnerships no matter how created or organized. ii. Includes unregistered joint ventures and business partnerships. iii. Taxable as an entity ordinary corporate income tax. iv. Joint ventures are not taxable as corporations when its purpose is: a) undertaking construction projects; b) engaged in petroleum, coal and other energy operation under a service contract with the government. v. Partners are considered stockholders; therefore, their distributive share is taxed as dividends, thus subject to final income tax on their gross distributive share.
(1) Domestic Corporation created or organized in the Philippines or under its laws and is liable for income derived from sources within and without. (2) Foreign Corporation organized and existing under the laws of a foreign country, which includes: (a) Resident foreign corporation foreign corporation engaged in trade or business within the Philippines and is liable from sources within. In the case of CIR v. British Overseas Airways Corp, [G.R. No. L-65773-74, April 30, 1987], the Court held that there is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. In order that a foreign corporation
e.
Estate and Trusts Estate: property, rights and obligations of a person which are not extinguished by his death and those that accrues thereto; taxed in the same way as an individual provided it is irrevocable and earns income; what is taxed is not the property that constitutes the trust (this was already subject to donors tax) but the income of such property. Trust: arrangement created by agreement under which title to property is passed to another for conservation or investment with the income and the corpus/principal distributed in accordance with the directions of the creator; to be taxable as a
Page 20 of 165
separate entity, grantor must have absolutely and irrevocably given up control and benefit over the trust.
c.
f.
Co-ownerships Exists whenever the ownership of an undivided thing or right belongs to different persons. For income tax purposes, the individual co-owners are liable for the taxes due on their respective shares and the co-ownership itself is not considered as a separate taxable entity. There is co-ownership in the following instances: i. Two or more heirs inherit an undivided property from a decedent; ii. A donor makes a gift of an undivided property in favor of two or more donees. It is not taxable when the activities are limited merely to preservation of the co-owned property but the co-owners are liable for income tax in their separate and individual capacities. It is taxable when the income of the co-ownership is invested by the co-owners in business creating a partnership.
General Principles TAXPAYER TAX BASE Resident Citizen Taxable Income Nonresident Citizen Taxable Income Taxable Resident Alien Income Nonresident Alien engaged in trade or Taxable business (more than Income 180 days) Nonresident Alien not engaged in trade Gross or business (180 days Income or less) General Professional Partnership Taxable Income
TAXABLE ON INCOME Within and without the Philippines Within the Philippines Within the Philippines
Within the Philippines
Within the Philippines GPP itself not taxable, however, individual partners will be taxed depending on classification Same basis as an individual (depending on classification of decedent, if estate, trustor, if trust) Within and Without the Philippines Within the Philippines Within the Philippines
Estate and Trust
Taxable Income Taxable Income Taxable Income Gross Income
7. a.
Income Taxation Definition A tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on a persons income, emoluments, profits and the life. Income tax is a direct tax Nature (same as Features of Philippine Income Tax Law) (1) Direct Tax tax burden us borne by the income tax recipient upon whom the tax is imposed. (2) Progressive Tax tax rate increases as the tax base increases; direct taxes are to be preferred and as much as possible, indirect taxes should be minimized. Tolentino v. Secretary of Finance, [G.R. No. 115455, October 30, 1995] (3) Comprehensive System adopts the citizenship principle, residence principle and the source principle (4) Semi-Schedular or Semi-Global Tax System certain passive incomes and capital gains are subject to final taxes at preferential rates while all other income are added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates for an individual or normal corporate income tax rate for corporations.
Domestic Corporation Resident Foreign Corporation Non-resident Foreign corporation 8. a.
b.
Income Definition and Nature Income, in the broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Income cannot be determined merely by reckoning cash receipts, for the statute recognizes as income determining factor other items, among which are inventories, accounts receivable, property exhaustion, and accounts payable for expenses incurred. [Sec. 36, RR No. 0240 dated 10 February 1940] When income is taxable (1) Existence of income For a taxable income to exist, gain or profit is necessary where there is an exchange of value received in the form of cash or its equivalent as a result of rendition of service or
b.
Page 21 of 165
earnings in excess of capital invested. BIR Ruling [DA-(C-335) 815-09] dated December 22, 2009 (2) Realization of income (a) Tests of Realization Under the REALIZATION PRINCIPLE, revenue is generally recognized when both of the following conditions are met: The earning is complete or virtually complete; and An exchange has taken place. This principle requires that revenues must be earned before they are received. Amounts received in advance are not treated as revenue of the period in which they are received, but as revenue of the future period or period or periods in which they are earned. These amounts are carried as unearned revenue, that is, liabilities to transfer goods or render services in the future until the earning process is complete. Manila Mandarin Hotels v. Commissioner, [CTA Case No. 5046, March. 24, 1997]
for the sale, and you recognize the expense when you actually pay cash for the expense). ACCRUAL METHOD method under which income, gains and profits are included in gross income when earned whether received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income.
(b) Installment payment v. Deferred payment v. Percentage of completion INSTALLMENT METHOD the taxpayer may report income over the several taxable years in which collections are made based on the terms of payment. Generally, the income derived on installment sale is the proportion of installment collection actually received during the year in relation to the gross profit and contract price. DEFERRED PAYMENT METHOD where the initial payments on installment sale exceed 25% of the selling price but they may only be realized in the subsequent year, the taxpayer is allowed to defer reporting income for accounting purposes but such sale is to be considered as the equivalent of "cash" which will be considered as taxable in the month of sale. [Sec. 177, RR No. 2 as cited in BIR Ruling No. 263-92 dated September 16, 1992] PERCENTAGE OF COMPLETION METHOD a method of recognizing the earnings derived from long-term construction contracts. This method requires recognition of income based on the progress of work.
(b) Actual v. Constructive Receipt ACTUAL RECEIPT occurs when there is a physical transfer of the money consideration or its equivalent to a person. CONSTRUCTIVE RECEIPT occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. For example: i. Deposit in banks which are made available to the seller of service without restrictions; ii. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and iii. Transfer of amounts retained by the payor to the account of the contractor. [Section 4.108-411 of RR No. 16-2005]
c.
(3) Recognition of income (4) Methods of accounting (a) Cash method v. Accrual method CASH METHOD recognition of income and expense dependent on inflow or outflow of cash (meaning, you recognize the income when you actually receive the cash payment
Tests in determining whether income is earned for tax purposes (1) Under the REALIZATION PRINCIPLE, revenue is generally recognized when both of the following conditions are met: (a) the earning is complete or virtually complete; and (b) an exchange has taken place. This principle requires that revenues must be earned before they are received. Amounts received in advance are not treated as revenue of the period in which they are received, but as revenue of the future period or period or periods
Page 22 of 165
in which they are earned. These amounts are carried as unearned revenue, that is, liabilities to transfer goods or render services in the future until the earning process is complete. Manila Mandarin Hotels v. Commissioner, [CTA Case No. 5046, March 24, 1997] (2) The "CLAIM-OF-RIGHT" DOCTRINE provides that if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income even though one may claim he is not entitled to the money. Should it later appear that the taxpayer was not entitled to keep the money, the taxpayer would be entitled to a deduction in the year of repayment. North American Oil Consolidated v. Burnet as cited in [BIR Ruling DA-(C-168) 519-08 dated December 12, 2008] (3) The ECONOMIC BENEFIT THEORY provides that anything which benefits a person materially or economically in whatever way is taxable under the law. [BIR Ruling No. 123-97 dated November 10, 1997] General Rule: in this jurisdiction, mere increase in the value of property without actual realization, either through sale or other disposition, is not taxable, the only exception being that even without sale or other disposition, if by reason of appraisal, the cost basis of property is increased and the resultant basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable under the economic-benefit principle. [BIR Ruling No. 029-98] (4) Under the SEVERANCE TEST THEORY, income is recognized when there is a separation of something which is of exchangeable value. Eisner v. Macomber, [252 US 189] The annual increase in value of an asset is not taxable income because such increase has not yet been realized. The increase in value i.e., the gain, could only be taxed when a disposition of the property occurred which was of such a nature as to constitute a realization of such gain, that is, a severance of the gain from the original capital invested in the property. The same conclusion obtains as to losses. The annual decline in the value of property is not normally allowable as a deduction. Hence, to be allowable the loss must be realized. Surre Warren, Federal Income Taxation, 1950, pp. 422-4, as cited in [BIR Ruling No. 206-90 dated October 30, 1990]
To compute the reportable income: Installment collection received Gross profit Contract Price
Reportable Income
When Installment Method Allowed (a) Installment sale of personal property Personal property is regularly sold on an installment basis by a dealer; Sec. 49(A) Casual sale if personal property on installment basis where the selling price exceeds P1,000 and the initial payments do not exceed 25% of the selling price; Sec. 49(B) NOTE: if the initial payment exceeds 25% of selling price, the transaction is considered cash sales; considered as initial payments are the down payments and all other payments received by the seller during the year of sale, including excess mortgage assumed by the buyer over the basis or cost of the property sold. (b) Installment sale of real property Sale of realty (inventory) where the initial payments do not exceed 25% of the selling price. Sec. 49(B) Sale by individuals of real property considered as capital asset, if initial payments do not exceed 25% of the selling price. Sec. 49(C)
9. Gross Income a. Definition All income derived from whatever source, including (but not limited to the following items) (GRIP CARD GPP) Gross income derived from the conduct of trade or business or the exercise of a profession Rent Income Interest Income Prizes & winnings Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions & similar items Annuities Royalties Dividend Income Gains derived from dealings in property Pensions Partners distributive share from the net income of the GPP (distributive share from ordinary partnerships is taxable as dividends; in this case, the ordinary partnership has already been subject to ordinary corporate income tax) Sec. 32.
Page 23 of 165
Recovery of damages (compensation for injury; from tortuous acts) Recovery of damages pertaining to recovery or return of loss income or profit Recovery of items previously deducted from gross income (tax benefit rule) Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Forgiveness of indebtedness in exchange of a service performed Income derived from illegal business (gain) Recovery of lost earnings
Not taxable Taxable Taxable Not Taxable Taxable Taxable Taxable Taxable
EXAMPLES OF INCOME FROM LEGAL SOURCES Employees salary, bonus; and commissions/rebates
EXAMPLES OF INCOME FROM ILLEGAL SOURCES Gambling, kidnapping, extortion, smuggling, embezzlement
c.
Gross income v. net income v. taxable income GROSS INCOME is described as income from whatever source, including compensation for services; the conduct of trade or business or the exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner's distributive share in the net income of a general professional partnership. [Sec. 32 of the Tax Code as cited in Commissioner of Internal Revenue v. PAL, Inc., G.R. No. 180066, July 7, 2009] NET INCOME means gross income less statutory deductions and exemptions. It is referred to as Taxable Income under the NIRC. TAXABLE INCOME means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. [Sec. 31 of the Tax Code as cited in Commissioner of Internal Revenue v. PAL, Inc., G.R. No. 180066, July 7, 2009]
BIR Ruling No. 017-2003 The transfer of land made by a person to another in payment of services rendered in the form of attorneys fees shall be considered as part of the gross income of the latter valued at either the fair market value or the zonal valuation, whichever is higher, in the taxable year received Doctrine of Involuntary Conversion of Property This is a doctrine provided for in US Jurisprudence (i.e., Herver vs. Helvering) and was adopted by the BIR in several of its rulings. This doctrine states that if property (as a result of its destruction, in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar to the property so converted, or into money, which is forthwith in good faith expended in the acquisition of other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain shall be recognized, but in an amount not in excess of the money so expended. For example, if a taxpayer uses the proceeds received from a property expropriated by the government to purchase another similar asset as replacement, then the excess of the proceeds over the cost of the expropriated property will not be considered taxable income. Any excess of the proceeds over the replacement asset will be considered taxable gain. b. Concept of income from whatever source derived Income from whatever sources derived means inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources.
d.
Classification of Income as to Source (1) Gross income and taxable income from sources within the Philippines (a) GROSS Income from Sources within the Philippines
INCOME Interests Dividends
TEST OF SOURCE OF INCOME Residence of Debtor a) From domestic corporation income within b) From foreign corporation: Income within if more than 50% of the gross income of such foreign corp. for the 3-yr. period ending with the close of the taxable year prior to the declaration of dividends (or for such part of such period as the corporation has been in existence) was derived from sources w/in the
Page 24 of 165
INCOME
TEST OF SOURCE OF INCOME Philippines Extent: Phil GI x Dividend = Income within Total GI Income without, if less than 50% of the gross income of such foreign corp. for the 3-yr. period ending with the close of the taxable year prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore, nothing of such dividends forms part of income within Place of performance of service
Services (Compensation for labor/personal services) Rentals Royalties
(d) Supply of any assistance that is ancillary & subsidiary to, & is furnished as a means of enabling the application or enjoyment of, any such property/right in (a) above, such equipment in (b) above or knowledge/info in (c) above (e) Supply of services by a nonresident person/his employees in connection with the use of prop./rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person (f) Technical advice, assistance or services rendered in connection with technical mgt./admin. of any scientific, industrial or commercial undertaking, venture or project (g) The use of or the right to use: i. motion picture films ii. films or video tapes for use in connection with TV iii. tapes for use in connection with radio broadcasting Most favored nation clause Royalty income paid by a domestic corporation to a non-resident foreign corporation which is a resident of a Contracting State with which the Philippines has an effective tax treaty is generally subject to 15% final withholding tax, but the rate may be reduced to 10% for certain royalty payments or under the most-favored-nation-clause of the tax treaty, such as the Philippines-US Tax Treaty. i. The purpose of the clause in a tax treaty is to grant to the other Contracting State a tax treatment that is no less favorable than that which is granted to the most favored among other countries. ii. It means each party to the treaty pledges that any tax concession given to any other treaty country will also be extended to the other party to the treaty; that is, it will not grant more favorable terms to other treaty countries without granting the same concession to the treaty partner involved. (b) TAXABLE Income from Sources within the Philippines General Rule: Gross Income (within the Philippines) ( - ) Deductions (attributable to GI within) Taxable Income By attributable is meant that the expense can be identified as the expense that generated the income. For instance, if ABC Corp. manufactures clothes and sells it in the Phils., and sells shoes in the US. The cost of manufacturing the clothes are
Gain on sale of Real property Gain on sale of personal property other than shares of stock in a domestic corporation purchased in one country and sold in another Gain on sale of shares of stock in a domestic corporation
Location of the property/interest in such property Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royalties Location of property Place of Sale
Philippines regardless of where sold
NOTE: ROYALTIES (from property or use of property located in Philippines), includes: (a) Use of/the right/privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right (b) Use of/the right to use in the Philippines any industrial, commercial or scientific equipment (c) Supply of scientific, technical, industrial or commercial knowledge or information
Page 25 of 165
attributable to the income generated from selling the clothes. Since the income from the sale of clothes is income within, then the expense for manufacturing them must be deducted from gross income within. However, the cost of selling the shoes may not be deducted from income within since it is not attributable to income within. Rather, it is specifically attributable to income without. Deductions: Expenses, losses & other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income Such deductions shall be allowed only if fully substantiated by all info necessary for its calculation Exceptions: No deduction for interest paid/incurred abroad shall be allowed unless: Indebtedness was actually incurred Indebtedness must be that of the taxpayer Interest must be legally due and stipulated in writing Interest must be paid or incurred during the taxable year Indebtedness must be in connection w/ the conduct or operation of trade/business in the Philippines
v. Gains, profits & income from the sale of real property located without the Philippines Tip: The foregoing enumeration is merely the reverse of the enumeration of gross income from sources within the Philippines. Hence, so long as you know which income are considered as income within, all else are income without. (b) TAXABLE Income from Sources Without the Philippines General Rule Gross Income (without the Philippines) ( - ) Deductions (attributable to GI without Taxable Income Deductions: Expenses, losses & other deductions properly apportioned/ allocated thereto and a ratable part of expenses, interests, losses and other deductions which cannot definitely be allocated to some items or class of gross income
a. b. c. d. e.
(3) Income partly within or partly without the Philippines These are: i. Income from services rendered partly within and partly without; ii. Income from sale of personal property produced (in whole or in part) within and sold without the Philippines; iii. Income from sale of personal property produced (in whole or in part) without and sold within the Philippines. PERSONAL PROPERTY Manufacturing Business Produced here and sold without Produced here and sold here Produced abroad and sold here Trading Business Purchased without and sold within Purchased within and sold without Purchased within and sold within Taxpayer sells it abroad through a sales office INCOME Income partly within, partly without Income within Income partly within, partly without Income within Income without Income within Income partly within, partly without
(2) Gross income and taxable income from sources without the Philippines (a) GROSS Income Philippines from sources without the
i. Interests (other than those derived from sources within the Philippines) ii. Dividends (other than those derived from sources within the Philippines) iii.Compensation for labor or personal services performed without the Philippines iv.Rentals or royalties from property located without the Philippines or from any interest in such property including rentals/royalties for the use of or for the privilege of using w/o the Philippines, patents, copyrights, secret processes & formulas, goodwill, trademarks, trade brands, franchises & other like properties
Page 26 of 165
As for unallocated expenses, meaning those which are not entirely attributable to either income within or without, such expenses shall be allocated using the following formula: Income without Worldwide Income Unallocated Expense Deductions from Income Without
Special Rules on Fringe Benefit Tax 12. Nature of FBT Final tax of 32% imposed on the grossed-up monetary value of fringe benefit furnished/granted to the Employee by the Employer, whether an individual or corp. Fringe benefit is an income of the employee subject to FBT but is payable by the Employer. Employer can deduct FBT from its taxable income. Fringe benefits are only for corporate officers / management. For rank and file, it is called an allowance. Allowances (benefits to rank and file) are not subject to FBT but rather compensation subject to income tax. 13. Fringe Benefits not subject to FBT (a) Fringe benefit authorized & exempted from tax under special laws (b) Contributions of employer for the benefit of the employee to retirement, insurance & hospitalizations benefit plan (c) Benefits given to the rank & file employees, whether granted under a CBA or not (d) De minimis benefits (e) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or (f) If the grant of the fringe benefit is for the convenience or advantage of the employer. 14. De Minimis Benefits (Last amended by RR No. 5-2011) (a) Monetized unused vacation leave credits of private employees not exceeding 10 days during the year (b) Monetized value of vacation and sick leave credits paid to government officials and employees (c) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month (d) Rice subsidy of P1,500 or 1 sack of 50 kg rice amounting to not more than P1,500 (e) Uniform and clothing allowance not exceeding P4,000 per year (f) Actual yearly medical benefits not exceeding P10,000 (g) Laundry allowance of P300 per month (h) Employee achievement awards, for length of service or safety achievement in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees (i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum
Income within Worldwide Income
Unallocated Expense
Deductions from Income Within
e.
Sources of income subject to tax (1) Compensation Income In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employeremployee relationship, unless specifically excluded by the Code. Included only when the taxpayer is subject to Net Income Tax.
(2) Fringe Benefits
Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) such as, but not limited to the following: (1) Housing (2) Expense account (3) Vehicle of any kind (4) Household personnel (such as maid, driver & others) (5) Interest on loan at less than market rate to the extent of the difference between the market rate & actual rate (6) Membership fees, dues & other expenses borne by the employer for the employee in social & athletic clubs or other similar organizations (7) Expenses for foreign travel (8) Holiday & vacation expenses (9) Educational assistance to the employee or his dependents (10) Life or health insurance & other non-life insurance premiums or similar amounts in excess of what the law allows
Page 27 of 165
(j)
Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis
15. Convenience of the Employee Rule When a fringe benefit is given solely for the convenience of the employer, the fringe benefit is exempt from FBT because the employee does not recognize income from the benefit. Ex. Expenditure on housing of engineer within factory premises is not subject to FBT General Rule: If housing is located outside, it is subject to FBT. Exception: If the nature of the employers business is hazardous to health of employee, housing can be located outside the factory without being subject to FBT. Ex. If employee is given housing allowance in cash, this will constitute compensation of the employee (income from whatever source). However, if it qualifies as a Fringe Benefit, then it will be subject to FBT and the burden is shifted to employer.
(3)
i. Ordinary assets assets that are used primarily in the ordinary course of trade or business, such as Stock in trade of taxpayer Property which would properly be included in an inventory of the taxpayer, if on hand Merchandise inventory Depreciable assets used in the trade/business Real property used in trade/business ii. Capital Assets properties of a taxpayer other than ordinary assets, such as Stock and securities held by taxpayers other than dealers in securities Interest in partnership and joint venture Goodwill Real property not used in trade or business like residential house and lot Investment property (b) Types of Gains from Dealings in Property i. Ordinary gain (loss) v. Capital gain (loss) Ordinary gain is derived from the sale or exchange of ordinary assets including gains from performance of services and business; included in the gross income.
Ordinary loss is the excess of business
Professional Income Income earned from the practice of profession provided there is no employer-employee relationship between him and his clients. Profession is primarily any endeavor or work requiring specialized training in the field of learning, art, or science engaged in as a means of livelihood or profit of an individual or group of individuals. In the case of manufacturing, merchandising, or mining business, gross income means the total sales, less cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining gross income, deductions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. In the case of sellers of services, their gross income is computed by deducting all direct costs and expenses as prescribed in RMC Nos. 04-03 and 3008.
expenses and losses over the business income of the taxpayer derived from the sale or exchange of ordinary assets; deductible from gross income.
Capital gain is the excess of value received
(4) Income from Business
over the determined cost from the sale or exchange of capital asset. The following are the rules on the taxability of capital gains: o Sale of Stocks of a domestic corporation subject to CGT o Gain derived from sale of real property in the Philippines subject to CGT o Other Capital Assets excess of the gains from sales or exchanges of other capital assets over the losses from such sales or exchanges; included in the gross income
Capital Loss is the excess of the losses from
(5)
Income from Dealings in Property
sales or exchanges of other capital assets over the gains from such sales or exchanges; deductible only from capital gains.
(a) Types of Properties
Page 28 of 165
ii. Actual gain v. Presumed gain Actual gain is the amount realized from the sale of the asset in excess of the cost to the taxpayer.
Presumed gain is the presumption of the
[1] Cost or basis of property sold: MODE OF ACQUISITION Purchase Inheritance Gift BASIS FOR DETERMINING GAIN/LOSS FROM SALE/DISPOSITION OF PROPERTY Cost of property acquired on/after 3/1/1913 Fair market value as of the date of acquisition (at the time of death) the cost to the donor or to the previous owner who did not acquire it by gift; BUT, if such basis > FMV at the time of the gift, the basis shall be such FMV for the purpose of determining the loss Amount paid by the transferee
law of the existence of a gain from sale of real property which subjects the said sale to CGT of 6% based on the selling price or FMV whichever is HIGHER. iii. Long term capital gain v. Short term capital gain In case of individuals, the percentages of gain or loss to be taken into account shall be: 100% if the capital asset has been held for 12 months or less; and 50% if the capital asset has been held for more than 12 months In case of a corporation, the holding period is not applicable; the capital gain and loss are to be reported in full amount regardless of the number of years the capital asset is held. iv. Net capital gain, net capital loss Net capital gain is added to ordinary gain.
Net capital loss is not deductible from
Acquired for less than adequate consideration Property acquired where gain or loss is not recognized (tax-free exchanges)
Basis of stock or securities received by transferor: Same as the basis of property, stock/ securities exchanged (1) increased by: dividends amount of any gain recognized by the exchange (2) decreased by: money received fair market value of the other property received liability assumed by the transferee Basis of the property transferred in the hands of the transferee: Same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.
ordinary gain. v. Computation of the amount of gain or loss GAIN = excess of the amount realized over the basis/adjusted basis (selling price > cost)
LOSS = excess of the basis/adjusted basis
over amount realized (cost > selling price)

AMOUNT REALIZED = money received + fair
market value of the property (other than money, if any) received
[2] Cost or basis of the property exchanged in corporate readjustment Non-recognition of gain or loss if exchange of property is solely in kind: [a] A corporation exchanges property solely for stocks in a corp. (both parties to merger/consolidation), or [b] A shareholder exchanges stock in a corp. for the stock of another corp. (both corps. are parties to the merger/consolidation), or [c] A security holder of a corp. exchanges
Page 29 of 165
his securities in such corp. solely for stock or securities in another corp. (both corps. are parties to the merger/consolidation) [d] If property is transferred to a corporation by a person in exchange for stock/unit of participation in such corporation of which as a result of such exchange such person, alone/together with others, not exceeding 4 persons, gains control of said corporation [3] Recognition of gain or loss in exchange of property [a] General Rule: the entire amount of the gain or loss shall be recognized upon the sale or exchange of property [b] Exception: no gain or loss is recognized (tax-free exchanges) If in pursuance to a plan of merger or consolidation, a corporation exchanges property solely for stocks in a corp. (both parties to merger/consolidation), or A shareholder exchanges stock in a corp. for the stock of another corp. (both corps. are parties to the merger/consolidation), or A security holder of a corp. exchanges his securities in such corp. solely for stock or securities in another corp. (both corps. are parties to the merger/consolidation) If property is transferred to a corporation by a person in exchange for stock/unit of participation in such corporation of which as a result of such exchange such person, alone/together with others, not exceeding 4 persons, gains control of said corporation Control is ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. vi. Income tax treatment of capital loss [1] Limitation on Capital Loss [a] General rule: Allowed only to the extent of the gains from such sales or exchanges, hence, the net capital loss is not deductible from ordinary
income; applicable to corporations and individuals.
both
[b] Exception: Losses from such sale incurred by a domestic bank/trust company substantial part of business is receipt of deposits, sell any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation, with interest coupons or in registered form (including one issued by the government or political subdivision) [2] Net Capital Loss Carry-over Corporations cannot carry over a net capital loss If net capital loss is sustained in any taxable year, such loss is treated in the succeeding taxable year as a loss from the sale/exchange of a capital asset held for not more than 12 mos. (100% deduction) Such net capital loss that should be carried over should not exceed the net income for the year Incurred (prior years net income) Example: Net income in 2011 = P6,000 Net capital loss in 2011 = 10,000 o Amount deductible in 2012 is P6,000 only since it should not exceed the net income of the taxable year where the loss was incurred. Note that the allowable capital loss to be deducted in 2012 (i.e. P6,000) is only to the extent of the capital gain for 2012. o Net income should be understood as TAXABLE income according E.O. 37 vii. Dealings in Real Property situated in the Philippines Involves the sale or other disposition of real property classified as capital asset located in the Philippines by a non-dealer in real estate.
If the sale is made by a dealer in securities or if the real property is an ordinary asset, the resulting gain or loss will be considered as ordinary income.
Page 30 of 165
Tax Base: the higher between o Gross selling price o Prescribed zonal value of real properties determined by the Commissioner o Fair Market Value as determined by the Provincial and City Assessors
NOTE: Gain or loss is immaterial since there is a conclusive presumption of gain. An individual taxpayer has the option to treat the capital gain as subject to 6% CGT or 5-32% graduated tax IF the buyer of the real property is the Government or any of its political subdivision, or GOCC Tax Rate: 6% viii. Dealings in shares of stock of Philippine Corporations [1] Listed and traded in the stock exchange (Stock Transaction Tax) Tax Rate one-half of one percent (1/2 of 1%) Tax Base Gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor's broker. [2] Not listed and not traded in the stock exchange (Capital Gains Tax) Amount of Capital Gain: Not over Php100,000 On any amount in excess of Php100,000 Tax Rate 5% 10%
NOTE: The capital losses realized from the sale or disposition of stocks not listed and traded during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the shares is an individual, the rule on holding period and capital loss carry-over will not apply. Non-deductibility of losses on wash sales and short sales Gains from sale of shares of stock in a foreign corporation are not subject to capital gains tax but to graduated rates either as capital gain or ordinary income depending on the nature of the trade or business of the taxpayer. ix. Sale of principal residence The term "Principal Residence" shall refer to the dwelling house, including the land on which it is situated, where the husband and wife or an unmarried individual, whether or not qualified as head of family, and members of his family reside. Actual occupancy of such principal residence shall not be considered interrupted or abandoned by reason of the individual's temporary absence therefrom due to travel or studies or work abroad or such other similar circumstances. Such principal residence must be characterized by permanency in that it must be the dwelling house in which, whenever absent, the said individual intends to return.
General Rule: The address shown in the ITR is conclusively presumed as the principal residence. Exception: If the taxpayer is not required to file a return, certification from Barangay Chairman or Building Administrator shall suffice. Requisites: i. Sale or disposition of the old actual principal residence ii. By a citizen or resident alien iii. Proceeds of which is utilized in acquiring or constructing a new principal residence within 18 calendar months from date of sale or disposition
Tax Base net capital gains realized during the taxable year from the sale, barter, exchange or disposition of shares of stock not listed and not traded in the stock exchange.
[3] Dealer in securities (Ordinary Income) The gain on this type of transaction shall be considered as ordinary income subject to 5%-32% for individuals and 30% for corporations.
Page 31 of 165
iv. Notify the Commissioner within 30 days from the date of sale or disposition through a prescribed return of his intention to avail tax exemption v. Can be availed of only once every 10 years vi. The historical cost or adjusted basis of his old principal residence shall be carried over to the cost basis of his new principal residence vii. If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to capital gains tax, and viii.The 6% capital gains tax due shall be deposited with an authorized agent bank subject to release upon certification by the RDO that the proceeds of the sale have been utilized
(6) Passive Investment Income
8. Interest on long-term deposit or investment in banks (with maturity of 5 years or more)
Exempt
TAX RATE ON INTEREST INCOME FROM FOREIGN CURRENCY DEPOSIT [RR No. 10-98] 1. Interest income actually received by a 7.5% final resident citizen or resident alien from FCD withholding tax 2. If deposited by an OCW or seaman or Exempt nonresident citizen 3. If in a bank account in the joint names 50% exempt/ of an OCW and spouse (resident) 50% final withholding tax of 7.5% 4. Interest income actually received by a 7.5% final domestic corporation or resident foreign withholding corporation from FCD tax (a) Interest Income Interest income earned on currency bank deposits & yield or any other monetary benefit from deposit substitutes & from trust funds & similar arrangement Final Tax Rate RC, NRC, RA, NRA-ETB NRA-NETB
i.
As a rule, passive income subjected to final tax is no longer included in the computation of the annual taxable income. TAX RATE ON CERTAIN PASSIVE INCOME ON CITIZENS AND RESIDENT ALIENS 1. Interest under the expanded foreign currency deposit system
[Nonresident citizens: Exempt]
FINAL TAX 7.5%

[Exempt for nonresident aliens engaged in trade or business]
20% 25%
2. Royalty from books, literary works, & musical compositions 3. Royalty other than above 4. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 6. Other winnings, except Phil Charity Sweepstakes & Lotto 7. Dividend from a domestic corporation, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax of a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation
Note: Dividends from foreign corporation Citizens - computed under Sec. 24 (a) tax table Resident aliens not taxable (income derived from abroad)
10% 20% 20%
Interest Income received by an individual (except a nonresident individual) from a depositary bank under the expanded foreign currency deposit system Final Tax Rate 7.5% (RC, RA)
20% 20%
ii.
10%
[20% for nonresident aliens engaged in trade or business]
Interest income from long term deposit or investment in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts & other investments evidenced by certification in such form prescribed by the BSP Final Tax Rate: For RC, NRC, RA, NRA-ETB Held for 5 years or more 4 years to less than 5 years 3 years to less than 4 years less than 3 years For NRA-NETB 25%
Exempt 5% 12% 20%
Page 32 of 165
(b) Dividend Income Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.
Corporation
tax credit for tax actually paid and tax deemed paid. Otherwise, subject to regular income tax rate of 30% (35% for 2006-2008)
Types of Dividends: Cash Dividend valued and taxable to the extent of amount of money received by the stockholder. ii. Stock Dividend generally, pure stock dividends are tax-exempt except if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. iii. Property Dividend property of an issuing corporation distributed as a dividend; valued and taxable to the extent of fair market value of the property received at the time of declaration. iv. Liquidating Dividend return of stockholders investment in the form of asset distribution upon corporate dissolution; generally, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. v. Script Dividend in the form of promissory notes; taxable to the extent of its fair market value and in the year when the warrant was issued.
i.
NOTE: Tax Sparing Credit Tax reduced by the Philippines should be fully applied or credited to the tax on dividend income received by the non-resident foreign corporation imposed by the country of its domicile. This serves as an incentive by reducing their tax liability in the Philippines and in their residence countries. Ex. Domestic corporation paid cash dividend to non-resident foreign corporation (NRFC) organized in Brazil. This shall form part of NRFCs income therefore taxable also in Brazil. The dividend received shall only be taxed at 15% in the Phils (instead of 35%) IF Brazil will reduce/credit at least 20% of the tax imposed in the Phils. from its tax imposed in Brazil. [See Sec. 28(B)(5)(b)] (c) Royalty income A payment or a portion of proceeds paid to the owner of a right for the use of such right. i. From books, literary works and musical sources RC, NRC, RA, NRA-ETB NRA-NETB
ii.
10% 25%
Other royalties 20% 25%
RC, NRC, RA, NRA-ETB NRA-NETB
Tax Rules: i. Tax Exempt: Received from a Domestic Corporation
ii.
by: Another domestic corporation Resident Foreign Corporation Pure Stock Dividend Pure Liquidating Dividend
Subject to Final Tax (if received from a Domestic Corporation) RC, NRC, RA 10% NRA-ETB 20% NRA-NETB 25% Non-resident Foreign 15% subject to the rule on
(d) Rental income Amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated time for the use of property. Tax Treatment: [1] Income from Leasehold Improvements when the lessee erected or built permanent improvements on the leased property, which will become the property of the lessor upon the expiration of the lease, the value of the improvements should be reported as income of the lessor either through: o Outright method the income shall be recognized when the
Page 33 of 165
improvement is completed at its fair market value.

o
ii.
Spread-out method the estimated book value of the leasehold improvement at the end of the lease is spread out over the term of the lease and is reported as income for each year of the lease, an aliquot part thereof.
iii.
Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured; If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be included in the gross income
[2] VAT added to rental/paid by the lessee All forms of property for lease, whether real or personal, are liable to VAT.
NOTE: The insured must die to avail of total exemption. If he survives, there/s only partial exemption to the extent that the proceeds constitute return of capital (total amount of premiums previously paid).
If advance payments are received for the faithful performance of certain obligations of the lessee, it is not subject to VAT. A security deposit that is applied to rental shall be subject to VAT at the time of its application
(8) Prizes and Awards

Amount in cash or in kind received by chance or
through luck are generally taxable unless otherwise provided.

If the prizes are derived from sources within:
Taxpayer RC, NRC, RA, NRA-ETB NRA-NETB Corporation
P10,000 or less 5-32% 25% 30%
More than P10,000 20% 25% 30%
[3] Advance Payment/Long term lease If the advance payment is a prepaid rental without restriction as to use, the entire amount is taxable in the year it is received.
PCSO and Lotto Winnings Exempt Exempt Exempt
If the advance payment is a security deposit which restricts the lessor as to its use, such amount shall be taxable only at the time it is applied. If the advance payment is a loan deposit, or option money for the property or a security deposit to insure the faithful performance of certain obligations of the lessee, such amount shall not be taxable to the lessor unless the lessee violates the terms of the contract.
If the prizes are derived from sources without the
said amount is included in the gross income for taxpayers who are taxable within and without the Philippines.
Prizes and awards made primarily in recognition of
(7) Annuities, Proceeds from Life Insurance or Other
Types of Insurance
Annuity installment payments for life, or for a
guaranteed fixed period of time, whichever is longer.

Amounts Excluded from Gross Income: i. Amount received by insured as return of
religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if: i. Recipient was selected without any action on his part ii. Recipient not required to render substantial future services as a condition of receiving the prize/award iii. Example: Nobel prize award iv. Construed strictly, take note of 7 categories. It does not include athletic achievement. v. Contemplates a rational selection process; cannot just be randomly selected.
Prizes, awards in sports competition sanctioned by
premium received either during the term or at the maturity of the terms or upon surrender of the contract
national sports associations whether held in Philippines or abroad vi. Contemplates a particular competition, not a cumulative achievement (Ex. Sportsman of the year award does not qualify for exemption)
Page 34 of 165
(9) Pensions, retirement benefit or separation pay

Pension lump sum payment or on a staggered
ii.
basis in consideration of services rendered given after an individual reaches the age of retirement.
Amounts Excluded from Gross Income (for further
iii. iv.
discussion, please see Exclusions from Gross Income) i. Retirement benefits received under RA 7641 (Labor Code of the Philippines) ii. Retirement benefits received under a Reasonable Private Benefit Plan iii. Amount received as a consequence of separation for any cause beyond control (death, sickness or other physical disability) iv. Benefits received from a foreign government by resident of nonresident citizens or aliens who reside permanently in the Philippines v. Veterans benefits vi. Benefits under SSS vii. Benefits received from GSIS
(10) Income from any source whatever
v. vi.
Income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign countries) Estate & donors taxes Taxes assessed against local benefits of a kind tending to increase the value of the property assessed Final taxes, being in the nature of income tax Special assessments
(a) Forgiveness of Indebtedness A GIFT if effect of entire transaction is a reduction of purchase price of property acquired in prior year) A CAPITAL TRANSACTION if the forgiveness of a stockholder is equivalent to dividend distribution A TAXABLE INCOME in exchange of a service performed Not Taxable Taxable f.
(d) Income from any source whatever Income from whatever sources derived means inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources, such as: (a) Gains from expropriation of property (b) Income derived from illegal sources (c) Compensation for damages if it represents payment for loss of expected profits Source rules in determining income from within and without INCOME Interests Dividends TEST OF SOURCE OF INCOME Residence of Debtor c) From domestic corporation income within d) From foreign corporation: Income within if more than 50% of the gross income of such foreign corp. for the 3yr. period ending with the close of the taxable year prior to the declaration of dividends (or for such part of such period as the corporation has been in existence) was derived from sources w/in the Philippines Extent: Phil GI x Dividend = Income within Total GI Income without, if less than 50% of the gross income of such foreign corp. for the 3yr. period ending with the
Taxable
(b) Recovery of amounts previously written off Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of gross income in the year of recovery to the extent of the income tax benefit of such deduction. (Tax Benefit Rule) (c) Receipt of Tax Refund or Tax Credit Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of income tax benefit of said deduction. (Tax Benefit Rule)
The following are non-taxable tax refunds: (non-deductible taxes) i. Philippine income tax (but FBT can be deducted from gross income as provided for in RR 8-98))
Page 35 of 165
INCOME
Services (Compensation for labor/personal services) Rentals Royalties
TEST OF SOURCE OF INCOME close of the taxable year prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore, nothing of such dividends forms part of income within Place of performance of service
shall be treated as derived entirely from sources within the Phils regardless where the said shares are sold. (2) From sources without the Philippines Interest other than those derived from sources within the Philippines Dividends other than those derived from sources within the Philippines Compensation for services performed without the Philippines Rentals and royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights and other like properties. (3) Income partly within and partly without the Philippines Items other than those specified above in 1) and 2) shall be allocated or apportioned to sources within or without the Philippines h. Exclusions from Gross Income (1) Rationale: it refers to items that are not included in the determination of gross income either because: (a) They represent return of capital or are not income, gain or profit. (b) They are subject to another kind of internal revenue tax. (c) They are income, gain or profit that is expressly exempt from income tax. (2) Exclusions v. Deductions v. Tax Credit (a) Deduction: included in the gross income but later deducted (b) Exclusion: not included in the computation of gross income. Refers to income received or earned but is not taxable as income because of exemption by virtue of a law or treaty. (c) Tax Credit: paid beforehand and is deducted from the tax liability of the taxpayer. (3) Under the Constitution
Gain on sale of Real property Gain on sale of personal property other than shares of stock in a domestic corporation purchased in one country and sold in another Gain on sale of shares of stock in a domestic corporation g.
Location of the property/interest in such property Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royalties Location of property Place of Sale
Philippines regardless of where sold
Situs of Income Taxation (See page 9 under Inherent Limitations, Territorial) (1) From sources within the Philippines Interests derived from sources within the Philippines Dividends from domestic and foreign corporations Compensation for services performed within the Philippines Rentals and royalties from properties located in the Philippines or any interest in such property including rentals or royalties for the use of or for the privilege of using within the Philippines, patents, copyrights and other like properties. Sale of Real property located in the Philippines Sale of Personal property Gains, profit, income derived from the purchase within and its sale without the Phil, or from the purchase without and its sale within shall be treated as derived entirely from sources within the country in which the personal property is sold. Except: the gain from the sale of shares of stock in a domestic corporation
Sec. 4(3) Art. XIV of the 1987 Constitution provides that all assets and revenues of a nonstock, non-profit educational institution used directly, actually and exclusively for private educational purposes shall be exempt from taxation.
Page 36 of 165
(4) Under the Tax Code (GIRL CRM) (a) Gifts, Bequests & devises But, income from such property shall be included in gross income Must be characterized by disinterested generosity and pure liberality Difficult to establish gift situations if there is an Employer-Employee relationship (A bonus/assistance in recognition of service rendered is not exempt) If given under a) constraining force of any moral or legal duty or b) from the incentive of c) an anticipated benefit of an economic nature or where it is a return for services rendered, proceeds cannot qualify as a gift. Most critical is the givers intention or motive. Can be a gift if given on account of filial relationship. (b) Income Exempt under Treaty To the extent required by any treaty obligation binding upon the Phil govt. (c) Amount Received by Insured as Return of Premium Under life insurance, endowment, or annuity contracts, received either during the term or at the maturity of the terms or upon surrender of the contract (d) Life Insurance Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be included in the gross income Insured must die to avail of total exemption. If he survives, there/s only partial exemption to the extent that the proceeds constitute return of capital (total amount of premiums previously paid). (e) Compensation for Injuries or Sickness Received through Accident/Health Insurance or Workmens Compensation Act, as compensation for personal injuries/sickness + amount of damages received on account of such injuries/sickness Damages will be exempt only if they arise together with personal injury; however, if damages only amount to return of capital, it is exempt (Ex. Damages from car accident exempt
only if claim includes compensation for personal injury. If no personal injury, damages for car wreckage will only be exempt to the extent of the amount of the actual damage return of capital) Must be physical injury, not injury to rights. (f) Retirement Benefits, Pensions, Gratuities Retirement benefits receive under R.A. 7641 (Labor Code of the Philippines) and those received in accordance with a Reasonable Private Benefit Plan (1) R.A. 7641 Conditions: (i) at least 60 years old; (ii) 5 years of service at time of retirement Availed if there is no reasonable private benefit plan (benefits under this option is less) Limited exemption: month salary for every year of service. In RPBP, all is excludable. (2) Reasonable Private Benefit Plan (RPBP) Conditions: (i) at least 50 yrs old; (ii) in the service of same employer for at least 10 years at time of retirement Must be approved by BIR A pension, gratuity, stock bonus or profitsharing plan maintained by an employer for the benefit of some or all of his officials/employees, wherein contributions are made by such employer for the officials/employees, or both, for the purpose of distributing to such officials & employees the earnings & principal of the fund thus accumulated; & provided in the plan that no part of the income shall be used for/be diverted to any purpose other than for the exclusive benefit of the said officials & employees Service must be continuous You can avail of the benefits only once (once youve availed of RPBP, you cannot avail of another RPBP); but you can avail of exemption under another ground such as SSS or GSIS benefits.
BIR Ruling No. 125-98 The phrase shall not have availed of the privilege under a retirement benefit plan of the same or another ER found in Sec. 32(B)(6)(a) of the Tax Code means that the retiring official must not have previously received retirement benefits from the same or another employer who has a qualified retirement benefit plan.
Page 37 of 165
(3) Amount received as a consequence of separation for any cause beyond control (death, sickness or other physical disability) Sickness must be job threatening must render taxpayer incapable of working (Ex. Does not include STD) Benefits from separation due to retrenchment come under exemption (no choice/option; but if the Employee avails of an optional early retirement plan, he cannot reason that he was separated for reasons beyond his control, therefore, he cannot claim exemption of the benefits on this ground but he can claim under other grounds such as RPBP or RA 7641. BIR Ruling No. 143-98 The terminal leave pay of government employees whose employment is coterminous is exempt since it falls within the meaning of the phrase for any cause beyond the control of the said official or EE found in Sec. 32(B) of the CTRP. (4) Benefits received from a foreign government by resident of nonresident citizens or aliens who reside permanently in the Philippines (5) Veterans benefits (6) Benefits under SSS (7) Benefits received from GSIS (g) Miscellaneous Items (1) income derived by foreign government (from investments in Philippines in loans, stocks, bonds or other domestic securities) Refers only to passive income. If the foreign government engages in trade, income is taxable. (2) income derived by govt/its political subdivisions (from public utility or exercise essential governmental function) Key: Income should accrue to government; if the income is retained by the public utility, it is not exempt look at charter of political subdivision/GOCC to determine whether its income accrues to the government or not. (3) prizes, awards in sports competition sanctioned by national sports associations whether held in Philippines or abroad
Contemplates a particular competition, not a cumulative achievement (Ex. Sportsman of the year award does not qualify for exemption) (4) Prizes & Awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if: recipient was selected without any action on his part recipient not required to render substantial future services as a condition of receiving the prize/award Example: Nobel prize award Construed strictly, take note of 7 categories. It does not include athletic achievement. Contemplates a rational selection process; cannot just be randomly selected. (5) 13th month pay & other benefits (i.e. productivity incentives & Christmas bonus) the total of which does not exceed P30,000 If the benefit exceeds P30,000, only the excess will be taxable. (6) GSIS, SSS, Medicare, Pag-ibig contributions & union dues of individuals (7) Gains from the sale of bonds, debentures or other certificates of indebtedness with a maturity of more than 5 years (8) Gains from redemption of shares in mutual fund (6) Under a Tax Treaty Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines, is exempt from income tax. Business profits of a foreign corporation organized under the laws of a treaty country from sources within the Philippines are not subject to Philippine income tax, unless such profits are attributable to a permanent establishment of the foreign corporation created or deemed created in the Philippines.
Page 38 of 165
(7) Under Special Laws (a) R.A. 6938 Cooperative Code of the Philippines Agricultural multi-purpose cooperative registered with the Cooperative Development Authority is exempt from ordinary income tax on its transactions with members and non-members for a period of ten (10) years from the date of registration. Thereafter, the income tax exemption shall be limited to business transactions with members only. (b) R.A. 7279 Urban Development Housing Act of 1992 The National Housing Authority is exempt from all fees and charges of any kind, whether local or national, while the private sector participating in socialized housing shall be exempt from taxes on project-related income directly realized from the development and capital gains tax on sale of raw lands for use in socialized housing. (c) R.A. 7653 New Central Bank Act (as amended by R.A. 8791) The BSP is exempt from all national, provincial, municipal and city taxes for a period of five years. It is exempt from DST under RA 9243. (d) R.A. 7916 PEZA Law (as amended) PEZA-registered enterprises are given income tax holidays of 6 or 4 years from the date of commercial operations if their activities are considered pioneer and non-pioneer, respectively. (e) R.A. 9178 Barangay Micro Business Enterprises (BMBE) Act of 2002 BMBE shall be exempt from income tax from income arising from the operation of the enterprise. i. Deductions from Gross Income (1) General Rules To be deductible as a business expense: (a) The expense must be ordinary and necessary, (b) It must be paid or incurred within the taxable year, and (c) It must be paid or incurred in carrying on a trade or business. (d) The expense must be substantially proved by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. Esso Standard Eastern, Inc. v. Commissioner of Internal Revenue, [G.R. Nos. L-28508-9, July 7, 1989] NOTE: Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid. (2) Return of capital (cost of sales or services) (a) Sale of inventory of goods by manufacturers and dealers of properties the portion of the receipt representing the cost of goods manufacture and sold (manufacturers) and cost of sales (dealers) are deducted from the gross sales. (b) Sale of stock in trade by a real estate dealer and dealer in securities generally, the return of capital are not allowed to be deducted from the gross sales. Rather, they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged. (c) Sale of services not allowed to deduct any return of capital; thus the entire gross receipts are treated as part of income. (3) Itemized Deductions (BELT DID CRP) i. ii. iii. iv. v. vi. vii. viii. ix. x. Bad Debts Expenses Losses Taxes Depreciation Interest Depletion of oil & gas wells & mines Charitable & other contributions Research & Development Pension trusts
(a) Expenses i. Requisites for deductibility [1] Must be ordinary AND necessary (both must be complied with) trade, business or professional expenses only [2] Must be paid or incurred during the taxable year [3] Must be paid or incurred in carrying on or which are directly attributable to, the development, management, operation and or conduct of the trade, business or exercise of a profession. There is yet to be a clear-cut criteria or a fixed test for determining the reasonableness of an advertising expense. There being no hard and
Page 39 of 165
fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation. We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under the Tax Code. [CIR v. General Foods Phils.] ii. Substantiation Requirements: sufficient evidence (i.e. official receipts, financial statements or other adequate records) to substantiate: o Amount of expense deducted o Direct connection/relation of the expense to the development, management operation &/or conduct of the trade, business or profession of the taxpayer Classification of Expenses: [1] Ordinary expense normal or usual in relation to the taxpayers business and the surrounding circumstance. [2] Necessary expense appropriate and helpful in the development of taxpayers business and are intended to minimize losses or to increase profits. These are the day to day expenses. While illegal income will form part of the income of the taxpayer, expenses which constitute bribe, kickback, and other similar payment, being against law and public policy are not deductible from gross income. [3] Business expense expenditure related to the business that is deductible in the year incurred, in the same taxable year. [4] Capital expense expenditure that improves or adds to the value of your property or equipment. Not immediately deductible. It is deductible over time, such as in the form of depreciation.
NOTE: Expenses allowable to private educational institutions: In addition to the expenses allowable as deductions, a private educational institution has the option to elect either: (a) to deduct as expense those otherwise considered as capital outlays of depreciable assets for the expansion of school facilities (b) to capitalize asset & deduct allowance for depreciation EXPENSES TO BE DEDUCTIBLE: 1. Amount must be reasonable. 2. Amount must be substantiated. 3. It is not contrary to law, public policy or morals. 4. Tax required to be withheld must have been paid to the BIR iv. Salaries, wages & other forms of compensation for personal services actually rendered (including grossed-up monetary value of FB); but the final tax should have been paid Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. v. Travel expenses in pursuit of trade, business/ profession Traveling expenses include transportation expenses and meals and lodging incurred solely on business.
iii.
vi. Cost of materials In general, the cost of materials or supplies is deductible as expense when consumed or used in business operation during the taxable period. Unused supplies and supplies not used for business operation are not allowable deductions.
If the materials or supplies are used directly or indirectly in the production of the product, the related cost shall for part of the cost of the product and will be deductible as such when the products are sold.
Page 40 of 165
vii. Rentals &/or other payments as lessee, user or possessor On the accrual basis, rent is deductible as expense when liability is incurred during the period of use. While on cash basis, rent is deductible when incurred and paid.
An advance payment is not deductible expense of the lessee until the period is used, although the lessor may be required to report the amount when received.
0.50% of net sales (gross sales less sales returns/allowances & sales discounts) for taxpayers engaged in sale of goods or properties; 1% of net revenue (gross revenue less discounts) for those engaged in sale of services, including exercise of profession and use or lease of properties. [RR No. 10-02]
xii. Political campaign expenses xiii. Training expenses (b) Interest i. Requisites for deductibility, as implemented by Rev. Reg. 13-2000: [1] There must be an indebtedness [2] There should be an interest expense paid or incurred upon such indebtedness [3] Indebtedness must be that of the taxpayer [4] Indebtedness must be connected with the taxpayers trade, business or exercise of profession [5] Interest expense must have been paid or incurred during the taxable year [6] Interest must have been stipulated in writing [7] Interest must be legally due [8] Interest payment arrangement must not be between related taxpayers [9] Interest must not be incurred to finance petroleum operations [10] In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure [11] The interest is not expressly disallowed by law to be deducted from gross income of the taxpayer. NOTE: General Rule On Deduction The amount of interest expense paid or incurred within a taxable year of indebtedness in connection with the taxpayers trade, business, or exercise of profession shall be allowed as a deduction from the taxpayers gross income.
viii. Repairs and maintenance Incidental (minor) repairs deductible from gross income; does not materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition.
Major repairs (replacement) not deductible since it prolongs the life of the asset; should be capitalized.
ix. Expenses under lease agreements x.
Expenses for professionals The cost of supplies in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc.; used in such offices, and the hire of office assistants. Amounts currently expended for books, furniture, and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are not allowable as deductions.
xi. Entertainment, amusement & recreation expenses directly connected to the devt., mgt. & operation & conduct of trade, business/ profession Directly connected to the development, management and operation of the trade, business of profession of the taxpayer.
Subject to a limit of
Page 41 of 165
LIMITATION ON DEDUCTION Interest expense shall be reduced by an amount equal to the following % of interest income subjected to final tax: 1/1/00 1/1/06 1/1/09 38% 42% 33%
If indebtedness is payable in periodic amortizations, int. is deducted in proportion of the amt. of the principal paid. [2] Payments made: Between members of a family (include only brothers & sisters, spouse, ancestors, & lineal descendants) Between an individual & a corp. more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation) Between 2 corps. More than 50% in value of outstanding stock owned by same individual, if either one is a personal holding co. or a foreign holding co. during the taxable yr. preceding the date of sale/exchange Between grantor & fiduciary of any trust Between fiduciary of a trust & the fiduciary of another if same person is a grantor to each trust Between fiduciary & a beneficiary of a trust Indebtedness is incurred by a service contractor to finance petroleum corp. Interest on preferred stock which in reality is dividend Interest on unpaid salaries and bonuses Interest calculated for cost keeping on account of capital or surplus invested in business which does not represent charges arising under interest-bearing obligation Interest paid when there is no stipulation for the payment thereof iv. Interest subject to special rules [1] Interest paid in advance [2] Interest periodically amortized [3] Interest incurred to acquire property used in trade or business At the option of taxpayer, the interest may be allowed as: as expense (outright deduction) as capital expenditure (subject to depreciation) (c) Taxes The term taxes refers to national and local taxes, and means TAXES PROPER, hence, no deductions are allowed for:
Example: Year 2012 Interest expense = P2,000 Interest income subject to final tax = P1,500 Deductible interest expense = P1,505 [P2,000 (P1,500 x 33%)] The objective of the limitation is to discourage tax arbitrage on back-to-back loans, the proceeds of which are invested in income earning interest that is subject to 20% final tax. TAX ARBITRAGE - is a method of borrowing without entering into a debtor/creditor relationship, often to resolve financing and exchange control problems. In tax cases, back-toback loan is used to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest expense deduction. ii. Deductible Interest Expense: [1] Interest on taxes, such as those paid for deficiency or delinquency, since taxes are considered indebtedness (provided that the tax is a deductible tax, except in the case of income tax). However, fines, penalties, and surcharges on account of taxes are not deductible. The interest on unpaid business tax shall not be subjected to the limitation on deduction of 42%/33%. [2] Interest paid by a corporation on scrip dividends. [3] Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on such interest was withheld. [4] Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said corporation is the legal or equitable owner, even though it is not directly liable for the indebtedness. Non-deductible Interest Expense: [1] Interest paid in advance through discount or otherwise (in case of cash basis taxpayer) Allowed as deduction in the year the debt is paid
iii.
Page 42 of 165
[1] Interests* [2] Surcharges [3] Penalties or fines incident to delinquency (Sec. 80, Rev. Reg. 2) * Interest incurred or paid by a taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction of 42%/33% of interest income. (sec. 4(c) Rev. Reg. 13-00) i. Deductible Taxes All taxes, national, or local, paid or incurred during the taxable year in connection with the taxpayers profession, trade or business, are deductible from gross income. Requisites for Deductibility [1] It must be paid or incurred within the taxable year [2] It must be paid or incurred in connection with the taxpayers trade, profession or business [3] It must be imposed directly on the taxpayer [4] It must not be specifically excluded by law from being deducted from the taxpayers gross income Non-Deductible Taxes: [a] Philippine income tax (but FBT can be deducted from gross income as provided for in RR 8-98) [b] Income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign countries) [c] Estate & donors taxes [d] Taxes assessed against local benefits of a kind tending to increase the value of the property assessed [e] Final taxes, being in the nature of income tax [f] Special assessments
Exceptions to the rule that only such persons on whom the tax is imposed by law can claim deduction thereof: (a) Taxes of shareholder upon his interest as such and paid by the corporation without reimbursement from him, can be claimed by the corporation as deduction. (b) A corporation paying the tax for the holder its bonds or other obligation containing a tax-free covenant clause cannot claim deduction for such taxes paid by it pursuant to such covenant.
iv.
ii.
Limitations on Deductions In case of a nonresident alien individual engaged in trade/business in the Philippines, taxes to be deducted shall be allowed only if & to the extent that they are connected with income from sources w/in the Philippines Tax Credit a right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid to his foreign country subject to limitation.
v.
iii.
[1] Who can Claim? [a] Citizen [b] Domestic Corporation [c] Member of GPP [d] Beneficiary of an estate or trust [2] Who cannot claim? [a] Alien individual (except resident aliens deriving income from within & without the Phils., if there is reciprocity) [b] Foreign Corporation [3] Substantiation Requirements The tax credit shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: [a] The total amount of the income derived from sources without the Philippines; [b] The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and [c] All other information necessary for the verification and computation of such credits.
Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of income tax benefit of said deduction. (Tax Benefit Rule) For NRAETB and RFC, taxes paid or incurred are allowed as deductions only if and to the extent that they are connected from income within the Philippines.
Page 43 of 165
[4] What amount may be taken as tax credit: The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but NOT TO EXCEED THE FOLLOWING LIMITS: [a] Per Country Limitation Amount of credit to tax paid/incurred to any country shall not exceed same proportion of the tax against which such credit is taken Country Limit = TI per country (outside) TI from all sources x Philippine Income Tax
EXAMPLE: Particulars Net Income P50,000 40,000 110,000 P200,000 Actual Foreign Tax Paid in Philippine Peso P18,000 P11,000 Phil Income Tax due at 30%
Country A Country B Phil-source income Tot NI all
P29,000
P60,000
[b] Global Limitation Total amount of credit shall not exceed same proportion of tax which such credit is taken Global Limit = Total TI from outside TI from all sources x Philippine Income Tax
A. PER COUNTRY LIMITATION Country A : [(50,000/200,000 x 60,000)] = 15,000 Country B : [(40,000/200,000 x 60,000)] = 12,000 ** maximum tax credit limit B. GLOBAL LIMITATION [(90,000/200,000 x 60,000)] = P27,700 Computation of Allowable tax credit Tax Due on P200,000 P60,000 Less: Allowable Foreign Tax Credit Country A P15,000 Country B 11,000 26,000 Tax Still Due P34,000 ** Cannot exceed maximum tax credit limit NOTE: For limitation A, Country A, 15K is lower than the actual; Country B, 11K (actual) is the lower amount; get the total of all per country amounts. For limitation B, 27.7K is lower than the total of the actual amount. Comparing the total of limitation A vs. B, the former is the lower amount so that is the allowable tax credit. (d) Losses i. Requisites for deductibility of ordinary loss [1] Loss must be of the taxpayer [2] Actually sustained during the taxable year [3] Not compensated for by insurance or other forms of indemnity [4] Incurred in trade, business or profession OR property connected w/ trade, business or profession lost through fires, storm, shipwreck, or other casualties OR from robbery, theft or embezzlement [5] Evidenced by a completed transaction [6] Not claimed as a deduction for estate tax purposes [7] Notice of loss must be filed with the BIR within 30 days but not more than 45 days from the date of discovery of the casualty or robbery, theft or embezzlement
NOTE: Allowable Tax Credit shall be the LOWER of the actual tax paid to the foreign country, per country limitation and global limitation. [5] When Credit for Taxes may be Taken: The credit for taxes provided by Section 34(C)(3) to (7) may ordinarily be taken either in the return for the year in which the taxes accrued or on which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his returns filed upon the accrual basis or upon cash receipts and disbursements. vi.
Tax Credit v. Deduction Deduction: included in the gross income but later deducted. Tax Credit: paid beforehand and is deducted from the tax liability of the taxpayer.
Page 44 of 165
The taxpayers failure to record in his books the alleged loss proves that the loss had not been suffered, hence, not deductible. [City Lumber vs. Domingo] ii. Category and Types of Losses [1] Ordinary Losses

There is no substantial change in the ownership of the business when: not < 75% in nominal value of outstanding issued shares is held by same persons not < 75% of paid up capital of corp. is held by same persons NOTE: No actual change in ownership is involved in when: (1) in case the transfer involves change from direct ownership to indirect ownership (2) merger of the subsidiary into the parent company. [3] Special Types of Losses [a] Capital Losses deductions allowed only to the extent of the gains from such sales or exchanges of capital assets (does not apply to banks and trust companies) losses from sale or exchange of capital assets losses resulting from securities becoming worthless and which are capital assets losses from short sales of property losses due to failure to exercise privilege or option to buy or sell property [b] Losses from wash sales of stock or securities 30 days before and after the date of the sale, the taxpayer has acquired or has entered into a contract or option so as to acquire, substantially identical stock/securities General rule: NOT deductible unless claim is made by a dealer in stock/securities & made in ordinary course of business [c] Wagering Losses - allowed only to the extent of the gains from such losses [d] Abandonment Losses In case of abandoned petroleum operations, accumulated expenditures incurred prior to 1/1/79 allowed as deduction only from income derived from same contract area; notice of abandonment shall be filed with Commissioner In case of abandoned producing well, unamortized cost & undepreciated costs of equipment directly used, allowed as deduction in the yr. of abandonment
incurred in trade or business, or practice of profession of property connected with the trade, business, or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement NOTE: Rev. Reg. No. 12-77 requires that a declaration of loss should be filed with the BIR within 45 days after the occurrence of the casualty, robbery, etc. Failure to submit the declaration within 45 days will result in the disallowance of the loss.
[2] Net Operating Loss Carry-over Refers to the excess of allowable deductions over gross income of the business for any taxable year, which has not been previously offset as deduction from gross income.
The net operating loss of a business shall be carried over as deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss. The 3 year period shall continue to run notwithstanding that the corporation paid its taxes under MCIT, or that the individual availed of the Optional Standard Deduction. For mines other than oil & gas wells, if loss incurred in any of the 1st 10 yrs. of operation, carry-over for the next 5 yrs. Requirements: [a] the taxpayer was not exempt from income tax in the year of such net operating loss; [b] the loss was not incurred in a taxable year during which the taxpayer was exempt from income tax, and [c] there has been no substantial change in the ownership of the business or enterprise.
Page 45 of 165
[e] Losses from Illegal Transactions - NOT deductible [f] Losses due to voluntary removal of building incident to renewal or replacements deductible expense from gross income [g] Loss of useful value of capital assets due to charges in business conditions deductible expense only to the extent of actual loss sustained (after adjustment for improvement, depreciation, and salvage value) [h] Losses from sales or exchanges of property between related taxpayers NOT deductible as provided under Section 36 of the NIRC but the gains are taxable (e) Bad Debts Debts due to the taxpayer actually ascertained to be worthless and charged off during the year may be claimed as deduction.
ii. Ascertainment of Worthlessness (proof of two facts): Taxpayer did in fact ascertain the debt to be worthless in the year for which the deduction was sought; [Collector v. Goodrich] That in so doing, he acted in good faith [Collector v. Goodrich] Depends upon the facts and the circumstances of the case Good faith does not require that the taxpayer be an incorrigible optimist but on the other hand, he may not be unduly pessimistic (f) Depreciation Gradual diminution in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. Also applies to amortization of intangible assets, the use of which in trade or business is of limited duration. i. Requisites for Deductibility: [1] The allowance for depreciation must be reasonable. [2] It must be for property used for employment in trade or business or out of its not being used temporarily during the year. [3] The allowance must be charged off. [4] Schedule on the allowance must be attached to the return. ii. Methods of Depreciation [1] Straight-line method: cost - salvage value estimated life Example: years = Depreciation Expense
Actually ascertained to be worthless Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness must depend upon the particular facts and circumstances of the case. It must be uncollectible even in the future. Collector v. Goodrich International Rubber Co., [21 SCRA 1336]
i. Requisites for Deductibility: [1] Existing indebtedness due to the taxpayer which must be valid and legally demandable, [2] Connected with the taxpayers trade, business or practice of profession, [3] Must not be sustained in a transaction entered into between related parties, [4] Actually ascertained to be worthless and uncollectible as of the end of the taxable year, and [5] Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year. NOTE: Tax Benefit Rule - Recovery of bad debts previously allowed as deduction in the preceding yrs. shall be included as part of gross income in the yr. of recovery to the extent of the income tax benefit of such deduction
cost=15,000; SV=5,000; est. life=5
15,000 - 5,000 5 years
2,000
[2] Declining balance method: cost - accum. dep. estimated life x Rate = Depreciation Expense
Example: cost = 15,000; SV = 5,000; est. life = 5 years; depreciation rate 200%
Page 46 of 165
Year 1: 15,000 - 0 5 Year 2: 15,000 - 6,000 5
200%
6,000
200%
3,600
The BIR and the taxpayer may agree in writing on the useful life of the property to be depreciated. The agreed rate may be modified if justified by facts or circumstances. The change shall not be effective before the taxable year on which notice in writing by certified mail or registered mail is served by the party initiating. (g) Depletion of oil and gas wells and mines The reduction of cost or value of natural resources such as oil & gas wells, & mines as the resources are converted into inventories. No further allowance is granted if the allowance for depletion = the capital invested i. Intangible exploration & development drilling cost: deduct in the yr. incurred if incurred for non-producing wells & mines deduct in full OR capitalize & amortize if incurred for producing wells & mines in same contract area ii. Election to deduct exploration & development expenditures for mining operations: [1] deduct as cost [2] deduct as adjusted basis provided, total amt. deductible shall not exceed 25% of net income actual exploration & development expenditures net of 25% of NI shall be carried forward to succeeding yrs. until fully deducted
exploration expenditures = incurred for the
[3] Sum of years digits method: nth period x cost - sv* sum of year *sv = salvage value = Depreciation Expense
Example: cost = 15,000; SV = 5,000; est. life = 5 years Sum of years = 5 + 4 + 3 + 2 + 1 = 15
Year 1: 5 15 x Year 2: 4 15 x 15,000 5,000 = 2,666.67 15,000 - 5,000 = 3,333.33
iii. Special Types of Depreciation [1] Petroleum operations Depreciation of all properties directly related to production of petroleum shall be allowed under straight-line or declining-balance (DB) method May shift from DB method to SL method Useful life: 10 yrs. or shorter life as may be permitted by Commissioner Useful life of prop. not used directly: 5 yrs. under straight-line method [2] Mining operations depreciation on all properties in mining operations other than petroleum operations at the normal rate if expected life is 10 yrs or less. if expected life is > 10 yrs., depreciate over any no. of yrs. bet. 5 yrs. & the expected life NOTE: Depreciation is deductible by non-resident aliens engaged in trade/business or non-resident corporation only when such property is located in the Philippines
purpose of ascertaining the existence, location, extent, or quality of any deposit of ore/other mineral & pd/incurred before the beginning of the development stage of the mine/deposit
development expenditures = incurred during
development stage of the mine or other natural deposits NOTE: Depletion of Oil and Gas wells and mines deductible by a non-resident alien or foreign corporation only in respect of oil and gas wells or mines located in the Phils.
Page 47 of 165
(h) Charitable & other contributions i. Requisites for Deductibility: [1] The contribution or gift must be actually paid [2] It must be given to the organizations specified in the code [3] The net income of the institution must not inure to the benefit of any private stockholder or individual ii. Valuation The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. iii. Contributions subject to limitations: [1] Contributions or gifts actually paid or made w/in the taxable year [2] To or for the use of the government or its agencies or any political subdivision, exclusively for public purpose, or [3] To accredited domestic corps./associations organized and operated exclusively for: [a] Religious [b] Charitable [c] Scientific [d] Youth & sports development [e] Cultural or educational purposes [f] For the rehabilitation of veterans [g] To social welfare institutions [4] To NGOs No part of NI inures to the benefit of any private stockholder or individual iv. Limitation [1] For individual: not more than 10% of taxable income before deducting the charitable contributions [2] For corporation: not more than 5 % of taxable income before deducting the charitable contributions v. Contributions deductible in full [1] Donations to the govt. to finance, to provide for, or to be used in undertaking priority activities in education, health, youth & sports development, human settlements, science & culture & in economic development according to National Priority Plan determined by NEDA If not in accordance w/ annual priority plan, donation is subject to limitations in (a) above
[2] Donations to certain foreign institutions or international organizations - in compliance with agreements, treaties, or commitments entered into by Phil. government and foreign institutions/international organizations [3] Donations to accredited NGOs Organized & operated exclusively for scientific, educational, character-building & youth & sports development, health, social welfare, cultural or charitable purposes or combination thereof (no part of net income inures to the benefit of any private individual) Must be utilized within 15th of the 3rd month after the close of the taxable year, directly for the active conduct of activities constituting the purpose of the organization, unless period is extended Administrative expense should not be greater than 30% of total expenses Upon dissolution, assets would be distributed to another nonprofit domestic corp. organized for similar purpose or to the state for public purpose or to another org. to be used in same purpose as the dissolved corp. (i) Research and Development Paid or incurred by a taxpayer during the taxable yr. in connection with his trade, business or profession as ordinary & necessary expenses which are not chargeable to capital account; allowed as deduction during the taxable year when paid/incurred. i. Requisites for Deductibility (as an Expense) [1] Paid or incurred during the taxable year [2] Ordinary and necessary expenses in connection with trade business or profession [3] Not chargeable to capital account ii. Requisites for amortization of certain R&D expenditures (treated as deferred expenses): [1] paid/incurred by the taxpayer in connection w/ his trade/business [2] not treated as expense [3] chargeable to capital acct. but not chargeable to property of a character w/c is subject to depreciation/depletion
Page 48 of 165
[4] amortized over a period of not < 60 months as may be elected by the taxpayer iii. This subsection on research and development cost is not applicable to: [1] Any expenditure for the acquisition or improvement of land, or for the important of prop. to be used in connection with R&D of a character subject to depreciation and depletion [2] Any expenditure paid/incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas (exploration exp.)
subject to the control and disposition of the employer; [5] The payment has not yet been allowed as a deduction; and [6] The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer of payment is made. ii. Summary rules on Retirement Benefits Plan/Pension Trust: EXEMPT FROM INCOME TAX employees trust under Sec. 60(B) EXCLUSION FROM GROSS INCOME amount received by the employee from the fund upon compliance of certain conditions under Sec. 32(B)(6) DEDUCTION FROM GROSS INCOME NOTE: Amounts contributed by the employer during the taxable year into the pension plan to cover the pension liability accruing during the year considered as ordinary and necessary expenses under Sec. 34(A)(1). 1/10 of the reasonable amount paid by the employer to cover pension liability applicable to the years prior to the taxable year, or so paid to place the trust in a sound financial basis deductible under Sec. 34 (J). (k) Premium payments on health and/or hospitalization insurance An amount of premium on health and or hospitalization paid by an individual taxpayer (head of family or married), for himself and members of his family during the taxable year. i. Requisites for Deductibility: [1] Insurance must have actually been taken; [2] The amount of premium deductible from gross income does not exceed P2,400 per family or P200 per month during the taxable year; [3] That said family had a gross income of not more than P250,000 for the taxable year; [4] In case of married individuals, only the spouse claiming additional exemption shall be entitled to this deduction. ii. Who may avail of this deduction? [1] Individual taxpayers earning purely compensation income during the year. [2] Individual taxpayers earning business income or in practice of his profession whether availing of itemized or optional
(j)
Pension trusts (Past Service Cost) Pension Trust Contributions a deduction applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee. This deduction is purely business in character. Established or maintained by employer to provide for the payment of reasonable pensions to his employees. Normal Cost the contributions during the taxable year to cover the pension liability accruing during the taxable year. Allowed as a deduction under Sec. 34(A)(1) as expenses in general. Past Service Cost amount in excess of the above contribution (covering pension liability pertaining to old employees which accrued during the years previous to the establishment of the pension trust); allowed as deduction only if: o such amount not been allowed as a deduction o apportioned in equal parts over 10 consecutive years beginning with the year in which the payment is made. i. Requisites for Deductibility of Past Service Cost [1] The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to his employees; [2] The pension plan is reasonable and actuarially sound; [3] It must be funded by the employer; [4] The amount contributed must be no longer
Page 49 of 165
standard deductions during the year. (4) Optional standard deduction (OSD) [As amended by R.A. 9504 which took effect July 6, 2008] (a) An individual, other than a nonresident alien, may elect a standard deduction of 40% of his gross sales or gross receipts. (prior to RA 9504, rate is 10% of gross income) (b) In the case of a corporation, it may elect s standard deduction of 40% of its gross income as defined in Section 32 of the Tax Code. (prior to RA 9504, no OSD benefit for corporation) Such election should be signified in his return & shall be irrevocable for the taxable year for which the return was made (5) Personal and Additional Exemption (a) Basic Personal Exemption Pursuant to amendments under RA No. 9504, there shall be allowed personal exemptions amounting to P50,000 for each individual taxpayer regardless of whether he is single, head of the family or married. Note: Prior to R.A. 9504, personal exemptions are P20,000 for Single, P25,000 for Head of the Family and P32,000 for each Married individual. (b) Additional Exemptions for Taxpayers with Dependents There shall also be allowed an additional exemption of P25,000 for each dependent not exceeding four. Note: Prior to R.A. 9504, additional exemption amounted to only P8,000 each dependent. A dependent means: o A legitimate, illegitimate or legally adopted child o Chiefly dependent upon and living with the taxpayer o Not married, not gainfully employed, not more than 21 years of age o Except: If such dependent, regardless of age, is incapable of self-support because of mental or physical defect. In case of married individuals, the additional exemption shall be claimed by only one of the spouses. The proper claimant of the exemption would
generally be the husband, except if the husband is (1) unemployed (2) working abroad like an OFW or seaman (3) husband waived his right to the exemption. For legally separated spouses, the additional exemption may be claimed only by the spouse who has custody of the child. However, the total amount of additional exemption that may be claimed by both shall not exceed 4. NOTE: Parents, brothers, and sisters may not entitle the taxpayer to the additional exemption of P25,000. Non-resident aliens engaged in trade or business (NRAETB) may be entitled to personal exemptions (but not additional exemption) subject to reciprocity such that: i. The country from which he is a citizen has an income tax law; and ii. The income tax law of his country allows personal exemption to citizens of the Philippines not residing therein but deriving income therefrom and not to exceed the amount allowed in NIRC. o The personal exemption shall be equal to that allowed by the income tax law of the country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, whichever is LOWER. NOTE: Non-resident aliens not engaged in trade or business cannot claim any personal or additional exemption. (c) Individuals not entitled to personal and additional exemptions: i. Non-resident alien NOT engaged in trade or business ii. Alien individual employed by Regional or Area Headquarters of Multinational Companies iii.Alien Individual employed by Offshore Banking Units iv.Alien Individual employed by Petroleum Service Contractor and Subcontractor (d) Status-at-the-end-of-the-year-rule i. The death of the taxpayer during the taxable year shall not affect the amount of personal and additional exemptions his estate can claim, as if he died at the end of such year ii. If the taxpayer got married or should have
Page 50 of 165
additional dependent (child born within the year) during the taxable year, he may claim the corresponding personal exemptions in full for such year iii.If the spouse should die or any of the dependents become twenty one years of age, or become gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if he/she died, or became twenty one years old or became gainfully employed at the close of such year. (6) Items not deductible (a) General Rules: An expense will only be allowed as deduction only if the tax required to be deducted and withheld therefrom has been remitted to the BIR. (b) Specific Items enumerated under Section 36: i. Personal, living or family expenses ii. Amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate (not applicable to intangible drilling and development costs incurred in petroleum operation) iii. Amounts expended in restoring property or in making good the exhaustion thereof for w/c an allowance is or has been made iv. Premiums on life insurance policy when the taxpayer is directly/indirectly a beneficiary under such policy v. No deduction shall be allowed in Losses from Sales or Exchanges of Property directly/indirectly: [1] Between members of a family (include only brothers and sisters, spouse, ancestors, & lineal descendants) [2] Between an individual and a corporation more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation) [3] Between 2 corporations more than 50% in value of outstanding stock owned by same individual, if either one is a personal holding company or a foreign holding company during the taxable year preceding the date of sale/exchange [4] Between grantor & fiduciary of any trust [5] Between fiduciary of a trust & the fiduciary of another if same person is a grantor to each trust
j.
Exempt Corporations Income received by the following corporations shall be exempted from tax: (1) Government educational institutions (2) Non-stock non-profit educational institutions (3) Non-profit labor, agricultural or horticultural organizations (4) Association of farmers, fruit growers, and the like whose primary function is to market the product of their members (5) Organizations with a purely local operation whose income is derived only from assessments, dues and fees collected from their members to meet operational expenses (6) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans; provided that no individual person owns its assets or no individual person receives benefit on its earnings (7) Non-stock/non-profit mutual savings bank or nonstock/non-profit cooperative bank (8) Non-profit civic league or organization operating exclusively for the benefit of its members (9) Cemetery company owned and operated exclusively for the benefit of its members (10) Non-profit business league, chamber of commerce, or board of trade (11) Associations, orders, beneficiary societies operating for the exclusive benefits of their members 10. Taxation of Resident Citizens, Non-resident Citizens and Resident Aliens a. General Rule (1) Resident Citizen citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. (2) Nonresident Citizen citizen of the Philippines who are taxable only on his income from sources within the Philippines if he qualifies as a nonresident citizen. (3) Resident Alien an individual whose residence is within the Philippines and who is not a citizen thereof is taxable only on income derived from sources within the Philippines. b. Taxation on Compensation Income (1) Inclusions (a) Monetary benefits
Page 51 of 165
i. Salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); ii. Fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; iii. Taxable pensions and retirement pay; iv. Other income of a similar nature (b) Non-monetary i. Taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; (2) Exclusions (a) Fringe Benefit Subject to FBT Any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to a managerial or a supervisory employee Subject to a final tax of 32% based on the grossed-up monetary value of the benefit given withheld by the employer (b) De minimis benefits Benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. All other benefits given by the employers, which are not included in the enumeration under RR No. 05-11, shall not be considered de minimis benefits. (c) 13th month pay and other benefits 13th month pay & other benefits (i.e. productivity incentives & Christmas bonus) the total of which does not exceed P30,000 If the benefit exceeds P30,000, only the excess will be taxable. (3) Deductions (a) Personal exemptions i. Basic Exemption P50,000 ii. Additional Exemption P25,000 for every qualified dependent children not to exceed 4 NOTE: A dependent means a [1] Legitimate, illegitimate or legally adopted child, [2] Chiefly dependent upon,
[3] Living with the taxpayer, and [4] Not married, not gainfully employed, not more than 21 years old Except: If such dependent, regardless of age, is incapable of self-support because of mental or physical defect. iii. In the case of married individuals, the additional exemption can be claimed only by one of the spouses. As a rule, the husband claims the exemption, except if the husband [1] Expressly waives in favor of the wife [2] Has no income [3] Works abroad If legally separated, the spouse who has custody of the dependent can claim the additional exemption. Resident aliens are qualified to deduct additional exemptions ONLY if the qualified dependent children are living with him in the Philippines.
iv.
v.
vi.
(b) Health and Hospitalization Insurance The actual premium payments for health and hospital insurance taken by an individual for himself or for his family are allowed as deduction. i. Requisites: [1] Amount deductible should not exceed P2,400 per family or P200 per month whichever is LOWER during the year. [2] The gross family income does not exceed P250,000 for the calendar year. NOTE: The spouse claiming the additional exemptions for dependents shall be the one to claim the deduction for premium payments. (c) Taxation of Compensation Income of a Minimum Wage Earner (MWE) Compensation income of MWEs shall be exempt from income tax and consequently from the withholding tax on compensation if they work: In the private sector and being paid the SMW In the public sector being paid compensation of not more than the SMW in the nonagricultural sector
ii.
Page 52 of 165
STATUTORY MINIMUM WAGE (SMW) Refers to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax for this purpose. Note: Holiday pay, overtime pay, night shift differential pay and hazard pay earned by MWE shall likewise be covered by the above exemption. MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, EXCEPT income subject to final tax, in addition to compensation income are NOT exempted from income tax on their entire income earned during the taxable year BUR the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be EXEMPT FROM WITHHOLDING TAX. MWEs who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay SHALL NOT ENJOY THE PRIVILEGE OF BEING A MWE AND, THEREFORE, HIS/HER ENTIRE EARNINGS ARE NOT EXEMPT FORM INCOME TAX, AND CONSEQUENTLY, FROM WITHHOLDING TAX. c. Taxation of Business Income/Income from Practice of Profession Please refer to the discussion under Gross Income.
TAX BASE Interest income earned from deposit NOT FCDU Interest income earned from deposit FCDU Cash and/or Property Dividends e. Taxation of Capital Gains TAX BASE Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess of P100,000 Sale of shares of stocks traded in the Local Stock Exchange (Stock Transaction Tax) Selling price Capital gains on sale of Real Property situated in the Philippines Selling Price or FMV whichever is HIGHER Income from the sale, exchange or other disposition of capital assets
TAX RATE 20% 7.5%
10%
TAX RATE
Final tax of 5% 10%
of 1%
Final tax of 6%
Graduated Income Tax Rate
d.
Taxation of Passive Income TAX BASE Royalties, except on books, other literary works and musical composition Prizes and other Winnings more than P10,000 Interest Income from Long-Term Deposit or investment (held for 5 years or more) In case of pre-termination: if held for 4 years to less than 5 years 3 years to less than 4 years Less than 3 years Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties
TAX RATE 20% 20%
NOTE: Capital gains from sale/disposition of principal residence by natural persons may be EXEMPT provided that: i. Proceeds were fully utilized in acquiring/constructing a new principal residence within 18 mos. from date of sale. ii. Historical cost/adjusted basis of sold prop be carried to the new principal residence built/acquired iii.Commissioner duly notified within 30 days from sale iv.Tax exemption can only be availed once every 10 years v. If no full utilization of proceeds of sale, such portion shall be subject to CGT Capital gains from other capital assets are subject to the holding period. The reportable capital gain would be: i. 100% if the asset was held for one year or less. ii. 50% if the asset was held for more than one year. There is a net capital loss carryover on the net capital loss provided that the amount of loss does not exceed the income before exemptions at the year the loss was sustained to be recognized immediately succeeding the year it was sustained.
Exempt
5% 12% 20%
Page 53 of 165
11. Taxation of Non-resident Aliens Engaged in Trade or Business a. General rules (1) A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year. (2) Shall be taxed on income earned within the Philippines, in the same manner as an individual citizen or a resident alien. (3) Except Cinematographic Film owner Taxable at 25% of Gross Income. INCOME EARNED Cash and/or Property Dividends Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess of P100,000 TAX RATE 20%
the regular income tax rate on its taxable compensation income. To qualify for the preferential 15% rate, the Filipinos must satisfy 3 tests: (RR 11-2010) i. Position and Function Test must occupy a managerial position or technical position AND must actually exercise such function. ii. Compensation Threshold Test must have received or is due to receive a gross annual taxable compensation of at least P975,000. iii. Exclusivity Test must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. 13. Individual Taxpayers Exempt from Income Tax a. Senior citizens (SCs) (1) A Senior Citizen is (a) Any resident of the Philippines (b) At least 60 years old Generally, qualified Senior Citizens deriving income during the taxable year are required to file and pay their income tax returns, except If the income earned is from compensation income qualified as a MWE, the income is exempt If the aggregate amount of gross income during the taxable year does not exceed the amount of basic and additional exemptions The said exemption does not extend to income subject to Final Tax (i.e. Interest income from deposit, dividends, share from partnership) and Capital Gains Tax. (2) Compliance Requirements: (a) SCs must be qualified as such by the CIR of the RDO by submitting a certified true copy of his OSCA ID. (b) Must file a Sworn Statement on or before January 31 of every year that his annual taxable income does not exceed the poverty level.
5% 10%
12. Exclude Non-resident Aliens Not Engaged in Trade or Business a. General rule: Taxable at a rate of 25% on his GROSS INCOME WITHIN Except: TAXPAYER Alien Individual Employed by Offshore Banking Units Alien Individual Employed by Petroleum Service Contractor and Subcontractor Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies b.
TAX RATE 15% of gross income earned as such employee 15% of gross income earned as such employee
15% of gross income earned as such employee
NOTE: The same tax treatment shall also apply to Filipinos employed and occupying the same positions as those of the alien employees mentioned above. Only the income earned as an employee of the said entities is subject to the preferential 15% rate; income earned from other sources (i.e. rent) shall be taxable in the same manner as a Resident Alien or NRA-ETB. Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option to be taxed at either 15% of their gross income OR
b.
Exemptions granted under international agreements
14. Taxation of Domestic Corporations a. Tax payable (1) Regular Corporate Income Tax (RCIT) The use of regular domestic tax rates: YEAR APPLICABLE 2009 onwards 2006-2008 Before 2006 TAX RATE 30% 35% 32%
Page 54 of 165
(2) Minimum Corporate Income Tax (MCIT) MCIT Rate = 2% of gross income (GI) When to begin/apply MCIT? Beginning on the 4th taxable year immediately following the year in which such corporation commenced its business operation NOTE: Commencement of Business Operation: Upon Issuance of BIR Certificate of Registration When will a corporation be liable for MCIT? If 2% of the corporations gross income is greater than 35% of its taxable income. Rationale: This is designed to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income (Ex. Over statement of depreciation expense) (a) Carry Forward of Excess Minimum Tax Excess of MCIT over the normal income tax shall be carried forward & credited against normal income tax for the 3 succeeding years NOTE: You can deduct MCIT Carry Forward only if Regular Income Tax is greater than MCIT. (b) Relief from MCIT MCIT may be suspended by the Sec of Finance when corporations losses are due to: i. prolonged labor dispute ii. force majeure iii. legitimate business reverses (c) Gross Income (for purposes of applying MCIT) Gross income shall mean gross sales () sales returns, discounts and allowances () cost of goods sold. Cost of goods sold shall mean all business expenses directly incurred to product the merchandise to bring them to their present location and use. For taxpayers engaged in the sale of services, gross income shall mean gross receipts () sales returns, discounts and allowances () cost of services Cost of services shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients. NOTE: Pursuant to RR No. 12-07, MCIT shall apply at the time of the filing of the quarterly corporate income tax.
Example: The following dates are available for X Corp: SEC Registration BIR Registration Start of operations December 17, 2004 January 4, 2005 January 1, 2006
The MCIT will be imposed on X Corp starting taxable year 2009. Computation of RCIT 2008 Gross Sales P 3,000,000 Cost of Goods 1,500,000 Sold Gross Income P 1,500,000 Operating 1,450,000 Expenses Net Taxable P 50,000 Income RCIT Rate 35% RCIT P 17,500 [2] Computation of MCIT [1]
2009 P 4,000,000 2,000,000 P 2,000,000 1,900,000 P 100,000 30% P 30,000
2010 P 5,000,000 2,500,000 P 2,500,000 2,100,000 P 400,000 30% P 120,000
2009 2010 Gross Income P 2,000,000 P 2,500,000 MCIT Rate 2% 2% MCIT P 40,000 P 50,000 NOTE: The MCIT is not applicable in 2008 since it has not yet reached the fourth taxable year requirement. Determination of Tax Due and Payable 2008 2009 2010 RCIT or MCIT (whichever is P 17,500 P 40,000 P 120,000 HIGHER) Less: Excess of 10,000 MCIT over RCIT Tax Due and P 17,500 P 30,000 P 110,000 Payable [4] Determination of Excess of MCIT over RCIT 2009 MCIT P 40,000 Less: 2009 RCIT 30,000 Excess of MCIT over RCIT P 10,000 Allowable deductions (1) Itemized Deductions Items under Sec. 34 of the NIRC as discussed under Deductions from Gross Income. [3]
b.
Page 55 of 165
(2) Optional Standard Deduction An amount not exceeding forty percent (40%) of gross income. Gross Income shall mean the gross sales less sales returns, discounts and allowances and cost of goods sold. A taxpayer who elected to avail of the OSD shall signify in his/its return such intention, otherwise he/it shall be considered as having availed himself of the itemized deductions. Once the election to avail the OSD is signified in the return, it shall be irrevocable for the taxable year for which the return is made. c. Taxation of capital gains TAX BASE Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess of P100,000 Sale of shares of stocks traded in the local stock exchange (Stock Transaction Tax) Selling price Capital gains on sale or exchange of lands and or buildings located in the Philippines Selling Price or FMV whichever is HIGHER Net Capital gains on sales or exchange or disposition of other capital assets d. Taxation of Other Passive Income TAX BASE Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties Interest income earned from deposit NOT FCDU Interest income earned from deposit FCDU Income Derived under the Expanded Foreign Currency Deposit System Income derived by a depository bank under the FCDU system from foreign currency transactions with local commercial banks (i.e. branches of foreign banks authorized by the BSP to transact business with FCDU).
Interest income from foreign currency loans granted by depository banks under the FCDU system to residents. Intercorporate Dividends
Exempt
e.
TAX RATE
Tax on proprietary-educational institutions and hospitals which are non-profit TAX RATE BASIS 10% On related trade, business or activity; 30% (2009 onwards) IF total gross income from 35% (2006-2008) unrelated trade, business, or activity exceed 50% of total income Proprietary educational institution any private school maintained & administered by private individuals or groups with an issued permit to operate from DECS, or CHED or TESDA Taxable at 10% on TAXABLE INCOME, except on certain passive income (which are subject to final tax)
Final Tax 5% 10%
of 1% Predominance Test: if gross income from unrelated trade/business/other activity > 50% of the total gross income from all sources, ENTIRE taxable income shall be subject to the REGULAR corporate tax rate of 30% (35% - 2006-2008) Distinguish from non-profit non-stock educational institutions which are exempt from tax on revenues and assets Actually, Directly and Exclusively used for educational purposes (Sec 30 (H), NIRC; RMC 762003). f. Tax on GOCCs, agencies and instrumentalities TAX RATE BASIS 30% (2009 Same tax rate upon their onwards) taxable income in a similar 35% (2006-2008) business, industry, or activity (1) General Rule: all corporations, agencies, or instrumentalities owned or controlled by the govt. are taxable. 10% (2) Exceptions: (a) GSIS (b) SSS (c) PHIC (d) PCSO
Final Tax 6%
Regular Corp. Tax (30%)
TAX RATE
20% 7.5%
Page 56 of 165
15. Taxation of Resident Foreign Corporations a. General rules The rest is the same rules as Domestic Corporation On taxable income from all sources within the Philippines. b. 30% (2009 onwards) 35% (2006-2008)
originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document Provided, tickets revalidated, exchanged and/or indorsed to another international airline form part of the GPB if the passenger boards a plane in a port or point in the Philippines o If the ticket is indorsed to another airline, the GPB will be charged to the indorsee. Provided, for a flight which originates in the Philippines but transshipment (transfer) of passenger takes place at any port outside the Philippine on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the GPB. o NOTE: Transfer of airline company, not transfer of aircraft GPB rule in the NIRC is a departure from the old rule which emphasized where tickets were bought. Now we adopt the originating rule meaning to form part of GPB, passenger/cargo must originate from the Philippines Does not apply to domestic corporations (Ex. PAL) Carrier must be an alien resident corporation; if its not, then it will be subject to 30% (35% 2006-2008) tax on gross income as nonresident alien corporation. Does not apply to offline carriers o Online carriers: those with landing rights in the Philippines o Offline carriers: those without landing rights but may nevertheless be selling tickets in the Phil sale of tickets subject to tax treatment of ordinary resident foreign corporation Whats controlling is the amount stated in the ticket and not the actual purchase value. In order that a foreign corporation may be regarded as doing business, there must be
Minimum corporate income tax Same rules as Domestic Corporation
c.
Tax on certain income TAX BASE Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties (from sources within) Interest income earned from deposit NOT FCDU Interest income earned from deposit FCDU Income Derived under the Expanded Foreign Currency Deposit System Income derived by a depository bank under the FCDU system from foreign currency transactions with local commercial banks (i.e. branches of foreign banks authorized by the BSP to transact business with FCDU). Interest income from foreign currency loans granted by depository banks under the FCDU system to residents. Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess of P100,000 Intercorporate Dividends
TAX RATE
20% 7.5%
10%
5% 10% Exempt
NOTE: Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. d. Exclude: (1) International Carrier Doing business in the Philippines shall pay a tax of 2 1/2% on its Gross Philippine Billings defined as: (a) International Air Carrier Refers to gross revenue derived from carriage of persons, excess baggage, cargo, and mail
Page 57 of 165
continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. In other words, a foreign airline company selling tickets in the Philippines through their local agents, whether liaison offices, agencies or branches, as in the case at bar, shall be considered as resident foreign corporation engaged in trade or business in that country for such activities show continuity of commercial dealings or arrangements and performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of commercial gain or for the purpose and object of the business organization. Air Canada v. CIR [CTA Case No. 6572, December 22, 2004] (b) International Shipping Gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. (2) Offshore Banking Units TAX RATE BASIS Any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units.
its gross income from within taxable at 30% (35% 2006-2008) Branch will first be subjected to ordinary corporate tax as a resident foreign corporation (35%). Afterwards, the profits for remittance shall then be subject to 15% BPRT. (Because branch assumes personality of an RFC and is therefore taxable as such) o Any remittance, so long as you can trace it from a branch to the foreign parent corporation subject to BPRT Ex. X foreign corp. has both regional headquarters and branch in Philippines. Instead of remitting straight to X, branch pays amount to regional headquarters supposedly for administrative support services The amount paid for the services will still be subject to BPRT because the tax is imposed on any form of remittance, direct or indirect. o Exception: Interest, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.
10%
Difference between Home Office (HO) Branch relationship and Parent Subsidiary relationship HO-BRANCH Branch is classified as a Resident Foreign Corporation HO is classified as a resident Foreign Corporation HO and Branch are taxed on taxable income within the Philippines PARENT-SUBSIDIARY Subsidiary is classified as a Domestic Corporation Parent Company is classified as a Non-Resident Foreign Corporation Subsidiary is taxed on taxable income within and without the Philippines while Parent Company is taxed on gross income within the Philippines Income repatriation by a Subsidiary to Parent Company is referred to as dividends
Exempt
(3) Branch Profit Remittance (BPRT) BPRT shall be imposed on any profit remitted by a branch to its head office. Distinguish between a branch and a subsidiary o If branch, subject to BPRT o If subsidiary amounts received by nonresident foreign corporation would be treated as dividends it becomes part of
Income repatriation by Branch to HO is referred to as Branch profit remittances
Page 58 of 165
Branch profit remittances are subject to 15% tax on remittance of branch profits effectively connected to the conduct of Branchs trade or business in the Philippines HO and Branch are considered as one and the same corporate entity Tax and other liability of the Branch in the Philippines can be collected from the HO in foreign country as they are one and the same
Dividends paid by Domestic Corporation to a NonResident Foreign Corporation is subject to the preferential rate of 15% subject to the tax sparing condition Parent Company and Subsidiary are two separate legal entities Tax and other liability of the Subsidiary cannot be collected from the Parent Company in a foreign country as they are considered separate legal entities
companies engaged in any of the following services: i. General administration and planning; ii. Business planning and coordination; iii. Sourcing and procurement of raw materials and components; iv. Corporate finance advisory services; v. Marketing control and sales promotion; vi. Training and personnel management; vii. Logistic services; viii. Research and development services and product development; ix. Technical support and maintenance; x. Data processing and communication; xi. Business development. 16. Taxation of Non-resident Foreign Corporations a. General rule A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% (2009 onwards; 35% - 2006-2008; 32% - 2000 to 2005) of the gross income received from all sources within the Philippines. b. Tax on certain income (1) Interest on Foreign Loans A final tax at the rate of 20% is imposed on the amount of interest on foreign loans contracted on or after August 1, 1986. (2) Intercorporate Dividends A final tax at the rate of 15% is imposed on the amount of cash and/or property dividends received from a domestic corporation subject to reciprocity. Reciprocity rule: The country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the regular income tax on corporations and the 15% tax on dividends. (3) Capital gains from shares of stock not traded through the Local Stock Exchange A final tax on the NET CAPITAL GAINS realized during the taxable year from the sale of shares of stock in a domestic corporation NOT through the stock exchange: Rates of tax on the net capital gains: Not over P100,000 On any amount in excess of P100,000
Marubeni v. CIR [G.R. No. 76573] The general rule is that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. (4) Regional or Area Headquarters and Regional
TAXPAYER TAX RATE BASIS Regional/Area Exempt Headquarters Regional Operating 10% On taxable income Headquarters of Multinational companies Operating Headquarters of multinational companies (RHQ and ROHQ) Regional or area headquarters A branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines Act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. Regional operating headquarters A branch established in the Philippines by multinational
5% 10%
Page 59 of 165
c.
Exclude special nonresident foreign corporations APPLICABLE TAX INCOME CLASSIFICATION WITHIN Cinematographic Film 25% Gross Income Owner, Lessor, Distributor Lessor of Machinery, Equipment, Aircraft and 7 % Gross Income Others Lessor of Vessels chartered 4 % Gross Income by Philippine Nationals 17. Improperly Accumulated Earnings Tax (Implemented by RR 2-2001 which prescribes rules governing the imposition of IAET) a. Rule There is imposed for each taxable year, in addition to other taxes, a tax equal to 10% of the improperly accumulated taxable income of domestic and closelyheld corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders (Ex. Holding company). b. Rationale If the earnings and profits were distributed, the shareholders would then be liable for income tax; if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. It is a tax in the nature of a penalty to the corporation for the improper accumulation of its earnings, and a deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. Exception 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 the tax. What is meant by reasonable needs of the business is determined by the Immediacy Test. Immediacy Test It states that the reasonable needs of the business are the Immediate needs of the business; and Reasonably anticipated needs (Ex. Expansion) How to prove the reasonable needs of the business : The corporation should prove that there is An immediate need for the accumulation of the earnings and profits; or A direct correlation of anticipated needs to such accumulation of profits.
d.
Composition The following constitute accumulation of earnings for the reasonable needs of the business: (ILL ABE) Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution; In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence. Covered corporations Only domestic AND closely-held corporations are liable for IAET. Closely-held corporations are those: o At least 50% in value of the outstanding capital stock; or o At least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.
e.
c.
f.
Exempt corporations The IAET shall not apply to the following corporations: (BIG-PEN-T) (1) Banks and other non-bank financial intermediaries; (2) Insurance companies; (3) Publicly-held corporations; (4) Taxable partnerships; (5) General professional partnerships; (6) Non- taxable joint ventures; and (7) Enterprises that are registered: o With the Philippine Economic Zone Authority (PEZA) under R.A. 7916;
Page 60 of 165
Pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227; and Under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.
1 rule. A Debt-to-Equity ratio (Current Assets over Current Liabilites) of 2:1 is indicative of the liquidity of a corporation, and further accumulation would expose it to the IAET. Cyanamid Phils. v. CA, [G.R. No. 108067, January 20, 2000] 18. Exemption from Tax on Corporations Please see page 48 on the discussion of Exempt Corporations. 19. Taxation of Partnerships A general co-partnership is a partnership wherein part or all of its income is derived from the conduct of trade or business. Guidelines of the tax liability of a general partnership: (1) For taxation purposes, the general partnership is considered as a corporation liable to pay the corporate income tax. (2) A general partnership is also subject to MCIT like a corporation. (3) The profit distribution to the partners is treated as distribution subject to a final tax of 10% since the partners are considered as stockholders. 20. Taxation of General Professional Partnership (GPP) A GPP is one formed by two or several persons for the sole purpose of exercising their common profession of which no part of income is derived from engaging in any trade or business. The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-through" entity where its income is ultimately taxed to the partners comprising it. RR 02-10 Guidelines of the tax liability of GPP a. Who is Liable? o A GPP, as an entity, shall not be subject to the income tax. o The partners in a GPP shall be liable for income tax only in their separate and individual capacities. Each partner shall report his distributive share, actually or constructively received in the net income of the partnership as gross income. The share of the partner shall be subject to creditable withholding tax at 10%/15%.
g.
Period for payment of dividend/iaet The dividends must be declared and paid or issued not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter. Determination of purpose to avoid income tax The fact that a corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members A holding or investment company is a corporation having practically no activities except holding property, and collecting the income therefrom or investing the same; and Where the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business.
h.
i.
Prima facie instances of accumulation of profits beyond the reasonable needs of a business and indicative of purpose to avoid income tax upon shareholders (1) Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; (2) Investment in securities; and bonds and other long-term
(3) Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business. The controlling intention of the taxpayer is that which is manifested at the time of accumulation. A speculative and indefinite purpose will not suffice. The mere recognition of a future problem or the discussion of possible and alternative solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its consummation is essential. Ideally, the working capital should equal the current liabilities and there must be 2 units of current assets for every unit of current liability, hence the so-called 2 to
Page 61 of 165
b. How computed? o For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. o All expenses, which are ordinary and necessary, incurred or paid for the practice of profession, are allowed as deductions. o Since the taxable income is in the hands of the partner, apart from the expenses claimed by the GPP in determining its net income, the individual partner can still claim deductions incurred or paid by him that contributed to the earning of the income taxable to him. o If the GPP availed of the itemized deduction = the partners may still claim itemized deductions from said share, however, they cannot claim the same expenses already claimed by the GPP. o If the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from their share in the net income. o If the GPP avails of OSD in computing its net income, the partners comprising it can NO longer claim further deduction from their share in the said net income. i. The partners' distributive share in the GPP is treated as his gross income not his gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be deducted not from his gross income but from his gross sales/receipts; ii. The OSD being in lieu of the itemized deductions allowed in computing taxable income, it will answer for both the items of deduction allowed to the GPP and its partners. Compliance requirements Every GPP shall file in duplicate, a return of its income (except items excluded from gross income and shall set forth the following: o The items of gross income and of deductions allowed o The names, TIN, addresses and shares of each of the partners. 21. Taxation of Estates and Trusts a. Application Applies to income of estates or of any kind of property held in trust (separate taxable entities), including: (1) Income accumulated in trust: (a) For the benefit of unborn/ unascertained person(s) w/ contingent interests (b) Held for future distribution under the terms of
the will or trust (2) Income: (a) To be distributed currently by the fiduciary to the beneficiaries (b) Collected by a guardian of an infant to be held or distributed as the court may direct (3) Income received by estates of deceased persons during the period of administration or settlement of the estate (4) Income which, in the discretion of the fiduciary, may be either distributed to beneficiaries or accumulated b. Exception Employees trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of all or some of his employees: (1) If contributions are made to the trust by the employer/employees, or both for the purpose of distributing to such employees the earnings plus principal of the fund accumulated by the trust in accordance with such plan (2) If under the trust instrument, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of income to be used for/diverted to, purposes other than for the exclusive benefit of his employees (any amount distributed to employees shall be taxable in the yr. so distributed) Determination of tax (1) Consolidation of income of two or more trusts (a) Requisites: Two or more trusts where: The creator of each of the trust is the same person. The beneficiary of each of the trust is the same. (b) Effects: The taxable income of all the trusts shall be consolidated. The tax provided shall be computed on such consolidated income. The proportion of said tax shall be assessed and collected from each trustee based on the taxable income of the trust administered by him.
c.
Page 62 of 165
(2) Taxable income Computed in same manner & on the same basis as in the case of an individual, EXCEPT: (a) Deduction allowed: i. Amount of income of the estate/trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries & the amt. of the income collected by a guardian of an infant which is to be held/distributed as the court may direct ii. Amount allowed as deduction is included in computing the taxable income of the beneficiaries, whether distributed or not iii. Amount allowed as deduction under this subsection will not be allowed as deduction under (2) hereof (b) Additional deduction: i. Amount of the income of the estate/trust for its taxable year, properly paid/credited during such year to any legatee, heir or beneficiary may be claimed as deduction. This applies in cases of: Income received by estates of deceased person during the period of administration or settlement of the estate Income w/c, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated ii. Amount paid/credited will be included in the taxable income of the legatee, heir or beneficiary NOTE: For trust administered in a foreign country, the deductions in (1) and (2) above is not allowed provided that the amount of income included in the return of said trust shall not be included in computing the income of the beneficiaries (c) Exemption Allowed to Estates and Trusts: P20,000 (3) Revocable Trusts Requisites: the power to re-vest in the grantor title to any part of the corpus of the trust is vested(a) In the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus/income (b) In any person not having a substantial adverse interest in the disposition of such part of the corpus/income Effect: the income of such trust shall be included in computing the taxable income of the grantor
In short, it is a trust where the title can revert back to the grantor anytime. It is not taxable as a separate entity because the income forms part of the income of the grantor. NOTE: An estate is taxable as a separate entity when it is already subject to a judicial proceeding A trust is taxable as a separate entity if the trust is irrevocable. This is because the grantor has absolutely given up the corpus and any incidents thereto. In this case, the grantor has no control over the corpus of the trust. The grantor has transferred the income earning property to a beneficiary. If there is a condition that provides that a portion shall be reserved for the grantors medical expenses (for example), this condition does not convert the irrevocable trust to a revocable trust. But that portion is taxable income of the grantor. If the transfer is revocable, the entire income shall be taxable in the hands of the grantor. (4) Income for the benefit of the grantor Requisites: where any part of the income of a trust is, or in the discretion of the grantor/any person not having a substantial adverse interest in the disposition of such part of the income (a) May be held/accumulated for future distribution to the grantor (b) May be distributed to the grantor (c) May be applied to the payment of premiums upon policies of insurance on the life of the grantor Effect: such part of the income be included in computing the taxable income of the grantor (5) Meaning of in the discretion of the grantor In the discretion of the grantor, with regard to the Income for the benefit of the grantor: Exercised either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question. 22. Withholding Tax a. Concepts Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income.
Page 63 of 165
In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Bank of America v. Commissioner, [234 SCRA 320] Timing of Withholding Withholding tax shall be deducted and withheld by the withholding agent when the income payment is paid or payable or accrued or the income payment is accrued or recorded as an expense or asset, whichever is EARLIER. Withholding Agent (WA) A separate entity acting no more than an agent of the government for the collection of tax in order to ensure its payments. He is merely a tax collector, NOT a taxpayer. If a withholding agent was assessed for deficiency withholding tax under the Code, as such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer. CIR v. CA, [G.R. No. 104151 March 10, 1995] The following persons are constituted as withholding agents: i. Juridical persons, whether or not engage in trade or business ii. Individual, with respect to payments made n connection with his trade or business iii. Individual buyers with regard to taxable sale, exchange, or transfer of real property, although not engaged in trade or business b.
of Large and Non-Large Taxpayers who files through the Electronic Filing and Payment System (EFPS). Consequences for Failure to Withhold Liable for surcharge or penalties Liable upon conviction to a penalty equal to the total amount of the tax not withheld or not accounted for and remitted [Sec. 251 of the NIRC] iii. Any income payment which is otherwise deductible from the payors gross income will not be allowed it is shown that the income tax required to be withheld is not paid to the BIR. [Sec. 2.58.5 of RR 2-98] i. ii. Kinds FINAL WITHHOLDING CREDITABLE TAX WITHHOLDING TAX Amount of Tax Collected Intended to equal or at Full and final payment least approximate the of the income due tax due from the said from the payee on the payee on the said said income income Who is Primarily Liable Liability rests primarily Liability rests primarily on the withholding on the taxpayer agent Need to File a Return Income recipient is still required to file an Payee is not required income tax return to file an income tax and/or pay the return for the difference between particular income the tax withheld and the tax due on the income. Coverage All income subject Those income payments covered by to final taxes (i.e. EWT [RR 2-98] passive income, Examples: gross income of NRA-NETB) Professional fees, talent fees Fringe benefit Informers reward Income payments to partners of GPP to persons instrumental to the discovery of violations of the NIRC and the discovery and seizure of smuggled goods
Returns and Payments of Taxes Withheld at Source [Sec. 58(A) of the NIRC] Taxes deducted and withheld by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, Revenue District Officer, Collection Agent, or duly authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. Note that the payment of taxes is simultaneous with the filing of the returns (pay-as-you-file) except in cases
Page 64 of 165
(1) Final withholding tax The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. The finality of the withholding tax is limited only to the payees income tax liability on the particular income. It does not extend to the payee's other tax liability on said income, such as when the said income is further subject to a percentage tax. Formula: Gross Income P xxx Multiply by: Final Tax Rate xx Final Tax P xxx NOTE: Deductions and/or personal exemptions are NOT allowed. (2) Fringe benefit tax A final withholding tax is imposed on the grossedup monetary value of fringe benefit furnished, granted or paid by the employer to the non-rank and file employees except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The tax imposed under Sec. 33 of the NIRC shall be treated as a final income tax on the employee, which shall be withheld and paid by the employer on a calendar quarterly basis (3) Creditable Withholding Tax Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income.
The following are creditable withholding taxes: o Expanded Withholding Tax (EWT) on certain income payments o Withholding Tax on Wages (WTW) o Withholding Tax on money payments to the Government c. Withholding on wages A method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent. (1) Requirement for Withholding Every employer must withhold from compensation paid to its employees. No withholding of tax shall be required on payments to employees who are classified as Minimum Wage Earners [earning only the Statutory Minimum Wage (SMW)]. An employee who receives additional compensation and benefits in excess of the allowable statutory amount of P30,000.00 other than the SMW the entire amount, including the SMW shall be subject to withholding tax (2) Tax paid by recipient Every person who is required to withhold the tax from the compensation of an employee is liable for the payment of such tax to the BIR. Such liability stays even if the employee subsequently pays the tax. The payment of the tax by the employee does not relieve the employer from the liability for penalties and/or additions to the tax for failure to deduct and withhold within the time prescribed by law or regulations. The employer will not be relieved of his liability for payment of the tax required to be withheld unless he can show that the tax has been paid by the employee. (3) Refunds or credits When the total amount withheld exceeds the annual tax due for the employee, the excess shall be credited or refunded to the employee not later than January 25 of the following year.
Page 65 of 165
In case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. The employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid. (4) Year-end Adjustment [Sec. 2.79.6 of RR 2-98] On or before the end of the calendar year, and prior to the payment of the compensation for the last payroll period, the employer shall determine the sum of the taxable regular and supplementary compensation paid to each employee for the entire year, including the last compensation to be paid and compute for the amount of income tax on the annualized gross compensation income. The taxable fringe benefits received by non-rank and file employees shall be subject to a final fringe benefits tax. (5) Liability for Tax Employer The employer shall be responsible for the withholding and remittance of the correct amount of tax required to be deducted and withheld from the compensation income of his employees. If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together plus penalties. Failure to refund excess withholding tax not later than January 25 of the succeeding year, shall make the employer liable to a penalty equal to the total amount of refund which was not refunded to the employee plus penalties. Employee Where an employee fails or refuses to file the Application of Registration or Certificate of Update of Exemption and of Employer's and Employee's Information (BIR Form No. 2305) together with the attachments or willfully supplies false or inaccurate information thereunder after due written notice by the employer, the tax otherwise to be withheld by the employer shall be collected from him including
penalties or additions to the tax from the due date of remittance until the date of payment. For failure or refusal to file the said BIR Form 2305, the excess taxes withheld by the employer, if any, shall not be refunded to the employee but shall be forfeited in favor of the government. d. Withholding value-added tax (1) ON PAYMENTS TO NONRESIDENTS (creditable withholding VAT) Payments to non-residents, with respect to lease or use of property or property rights in the Philippines owned by such non-residents, are subject to withholding VAT. The VAT shall be based on the contract price. Other services rendered in the Philippines by non-residents General guidelines for Creditable WVAT: The party required to withhold is the payor, regardless of whether or not he is VATregistered. The VAT is passed on to the resident withholding agent. The payor shall claim this as input tax upon filing of his own VAT return, subject to the rule of allocation of input tax. The duly filed BIR Form 1600 is the proof or documentary substantiation for the claimed input tax. (2) ON PAYMENTS BY GOVERNMENT (Final Withholding VAT) The Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods and/or services taxed at 12% shall deduct and withhold a final VAT of 5% of the gross payment. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales.
Page 66 of 165
e.
Deadline of filing of return and payment of taxes withheld FILING AND PAYMENT TYPE OF WITHHOLDING TAX DEADLINE Final Withholding Tax (FWT) On or before the tenth (10th) day of the month following the month in which withholding was made. Fringe Benefit Tax (FBT) On or before the 10th day of the month following the calendar quarter in which the fringe benefits were granted. Withholding Tax on Wages On or before the tenth (WTW) (10th) day of the month following the month in which withholding was made. Except for taxes withheld for December which shall be filed/paid on or before January 15 of the succeeding year. On or before the tenth (10th) day of the month following the month in which withholding was made. Except for taxes withheld for December which shall be filed/paid on or before January 15 of the succeeding year. On or before the tenth (10th) day of the month following the month in which withholding was made.
Expanded Withholding Tax
Withholding Value-Added Tax (WVAT)
Page 67 of 165
======================================
6. Classification of decedent/Composition of gross estate RESIDENTS AND CITIZENS The gross estate of a decedent shall be comprised of the all properties, real or personal, tangible or intangible, wherever situated and interest therein at the time of his death, including revocable transfers and transfers for insufficient consideration. NON-RESIDENT ALIENS The gross estate of a decedent shall be comprised only of properties situated in the Philippines provided, that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity. 7. Gross estate vis--vis net estate ESTATE TAX FORMULA Gross Estate (Sec. 85) Less: (1) Deduction (Sec. 86) (2) Net share of the surviving spouse ---------------------------------------------------------Net Taxable Estate X Tax rate (Sec. 84) ---------------------------------------------------------Estate Tax due Less: Tax Credit (if any) Sec. 86 [E] or 110 [B] ---------------------------------------------------------Estate Tax Due, if any GROSS ESTATE OF THE DECEDENT (Sec. 85) Includes the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. In the case of nonresident citizen, only that part of the gross estate which is situated in the Philippines shall be included in his taxable estate. 8. Determination of gross estate and net estate VALUATION Real Property FMV as determined by the Commissioner OR the FMV shown in schedule of values fixed by the assessors, whichever is HIGHER a. No zonal value: use the FMV in the latest tax declaration. Shares of Stock Listed shares: average of the highest and lowest quotation at date of death (or the date nearest to the date of death, if no quotation is available at the time of death)
TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE B. Estate Tax
====================================== 1. Basic principles ACCRUAL OF ESTATE TAX The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. GOVERNING LAW Estate taxation is governed by the statute in force at the time of death of the decedent. RESIDENCE For estate tax purposes, residence refers to the permanent home, the place to which whenever absent, for business or pleasure, one intends to return, and depends on facts and circumstances, in the sense that they disclose intent. Corre v. Tan Corre, [100 Phil 321] 2. Nature A tax imposed upon the privilege to transmit property at the time of death; the tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon. 3. Definition An EXCISE TAX on the rights of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death. 4. Purpose or Object 5. Time and transfer of properties The properties and rights are transferred to the successors at the time of death. [Art. 777 of the Civil Code] However, the Register of Deeds shall not transfer the title to the properties without the Certificate of Authority to Register (CAR) issued by the RDO evidencing the filing and payment of the estate tax. [RR 24-02 dated November 15, 2002]
Page 68 of 165
Unlisted Shares Common stocks: use BOOK VALUE Preferred stocks: use PAR VALUE
c. d. e. f. g.
Personal Property Valued at FMV
Revocable Transfer Property Passing Under General Power Appointment Proceeds of Life Insurance Prior Interests Transfers for Insufficient Consideration
of
SPECIAL RULES ON INTANGIBLE PROPERTIES Intangible personal properties with situs in the Philippines (Section 104) 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 issued by any foreign corporation 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, rights in any partnership business or industry established in the Phil.
NOTE: The capital of the surviving spouse of the decedent shall not be deemed part of his gross estate. a. Decedents Interest
i. To the extent of the interest therein of the decedent at the time of his death. b. Transfer in Contemplation of Death Transfers impelled by the thought of an impending death (i.e., the motivating factor or controlling motive is the thought of death), without regard of the state of health of the transferor. Transfers made before the decedents death wherein decedent retained: a. the possession or enjoyment of, or the right to the income of the property; b. the right either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or its income EXCEPT bona fide sales for an adequate and full consideration in money or moneys worth Revocable Transfer Transfers made by the decedent by trust or otherwise, where the enjoyment was subject at the date of his death to any change through the exercise of a power by the decedent alone or in conjunction with any other person, to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedents death. The power to alter, amend or revoke shall be considered to exist at the date of the decedents death even if: The exercise is subject to the requirement of giving prior notice The alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power. Does not include bona fide sales for an adequate and full consideration in money or moneys worth.
RECIPROCITY CLAUSE Intangible personal property of a decedent who is nonresident alien, with a situs in the Philippines (Section 104) The intangibles shall not form part of the gross estate if: 1. The decedent at that time of his death was a citizen and resident of a foreign country which at the time of his death a. Did not impose a transfer tax or death tax of any character b. In respect of the intangible personal property of citizens of the Philippines not residing in that foreign country; or 2. a. b. The law of the foreign country of which the decedent was a citizen and resident at the time of his death: Allow a similar exemptions from transfer taxes or death taxes of every character In respect of the intangible personal property owned by citizens of the Philippines not residing in that foreign country. c.
9. Composition of the gross estate 10. Items to be included in the gross estate ITEMS OF GROSS ESTATE: a. Decedent's Interest b. Transfer in Contemplation of Death
Page 69 of 165
d.
Property Passing Appointment (GPA)
Under
General
Power
of
GPA is the power to designate, without restrictions, the persons who shall receive, succeed to, possess or enjoy the property or its income received from the estate of a prior decedent.
(b) Judicial expenses of the testamentary or intestate proceedings (c) Claims against the estate (d) Claims against insolvent persons included in the gross estate (e) Unpaid mortgages or indebtedness upon property (f) Unpaid taxes (g) Losses incurred during the settlement of the estate Transfers for Public Use-to the government of the Republic of the Philippines or any political subdivision thereof, exclusively for public purposes Vanishing deductions Family Home - Fair value but not to exceed P1,000,000 Standard Deduction -- P1,000,000 Medical Expenses Not to exceed P500,000 Amount Received by Heirs under RA 4917 Net Share of the surviving spouse in the Conjugal Property Ordinary Deductions Funeral expenses
The GPA is exercised by: a. Will b. Deed executed in contemplation of death c. Deed under which he has retained for his life or for any period which does not in fact end before his death The possession or enjoyment of, or the right to the income from, the property or The right, either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom EXCEPT bona fide sales for an adequate and full consideration in money or moneys worth Proceeds of Life Insurance Proceeds from life insurance form part of the gross estate only when: The beneficiary is the estate, executor or administrator, whether the designation is revocable or irrevocable. The beneficiary is other than the estate, executor or administrator and the designation is revocable. Prior Interests Except as otherwise provided, the provisions on (1) transfer in contemplation of death, (2) revocable transfers and (3) proceeds of life insurance shall apply to the transfers, trusts, etc., whether made before or after the effectivity of the Tax Code. Transfers for Insufficient Consideration The amount includible in the gross estate is the excess of the FMV at the time of death over the value of the consideration received.
a. i.
e.
Actual funeral expenses or in amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed P200,000. FUNERAL EXPENSES are costs which are actually incurred in connection with the interment or burial of the deceased. Examples of DEDUCTIBLE funeral expenses: The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial; Expenses for the deceaseds wake, including food and drinks; Publication charges for death notices; Telecommunication expenses incurred in informing relatives of the deceased; Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible; Interment and/or cremation fees and charges; and All other expenses incurred for the performance of the rites and ceremonies incident to interment. Examples of NON-DEDUCTIBLE funeral expenses: Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible.
f.
g.
11. Deductions from estate DEDUCTIONS FOR ESTATE OF A CITIZEN OR A RESIDENT [Revenue Regulations 2-2003 and Sec. 86]: Expenses, Losses, Indebtedness, and Taxes (ELIT): (a) Actual funeral expenses or five percent (5%) of the gross estate whichever is lower (not exceeding P200,000)
Page 70 of 165
Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible.
Must not have been condoned by the creditors or the action must not have prescribed. Duly substantiated
Substantiation REQUIREMENTS: The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred [RR 2-2003] ii. Judicial Expenses Judicial Expenses are expenses incurred during the settlement of the estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return. Judicial Expenses should be supported by a sworn statement of account issued and signed by the creditor. Examples of judicial expenses (1) Fees of executor or administrator (2) Attorneys fees (3) Court fees; (4) Accountants fee; (5) Appraisers fee; (6) Clerk hire; (7) Cost of preserving and distributing the estate; (8) Brokerage fees for selling property of the estate. Expenses incurred in the extrajudicial settlement of the estate must be necessary costs toward the settlement of the case. Attorneys fees to be deductible should essential to the collection of assets, payment of debts or the distribution of the estate. CIR v. CA [328 SCRA 666] iii. Claims against the Estate Claims against the Estate are debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Requisites for DEDUCTIBILITY: A personal obligation of the deceased existing a the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses which are classified under a different category of deductions, Contracted in good faith and for adequate and full consideration in money or money's worth, Must be a debt or claim which is valid in law and enforceable in court,
Substantiation REQUIREMENTS: notarized at the time incurred, except loans from financial institutions where notarization not part of business practice or policy A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent iv. Claims against Insolvent Persons Condition for DEDUCTIBILITY: The claim against the insolvent person should be included as part of the gross estate of the decedent. v. Unpaid Mortgage
Conditions for DEDUCTIBILITY: The value of the decedents interest over the property encumbered is included as part of the gross estate undiminished by the amount of mortgage The deduction shall be limited to the extent that the mortgage was contracted bona fide and for an adequate consideration Other Rules Determine who is the recipient or beneficiary of the loan which must be verified; If merely an accommodation made by decedent in favor of another person, then balance of loan considered as receivable from that person and part of gross estate If there is a legal impediment to recognize the same as receivable of the estate, the unpaid obligation shall not be allowed as a deduction from the gross estate. vi. Taxes What taxes are deductible? Income taxes, real estate or property taxes due at the time of death which were unpaid as of the time of death Taxes NOT DEDUCTIBLE: Estate taxes Income tax on income received after death Property taxes not accrued before death
Page 71 of 165
vii. Losses Requisites for DEDUCTIBILITY: Losses should arise from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement; Losses should not be compensated by insurance or otherwise; Losses should not be claimed as deduction in the income tax return of the taxable estate; The losses should occur during the settlement of the estate; AND that The losses should occur before the last day for the payment of the estate tax (last day to pay 6 months after the decedents death) b. Transfer for Public Use
d.
Family Home
FMV of the family home but not to exceed P1,000,000. Family Home is the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside as certified by Barangay Captain of the locality. The family home is deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually resides therein. Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, etc. The family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return. Conditions for the allowance of FAMILY HOME as DEDUCTION from the gross estate The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated; The total value of the family home must be included as part of the gross estate of the decedent; and Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedents interest (whether conjugal/community or exclusive property), whichever is lower, but not exceeding P1,000,000. NOTE: The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse, depending upon the classification of the property (family home), and the property relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property. For purposes of availing of a family home deduction to the extent allowable, a person may constitute only one family home.
Requisites for DEDUCTIBILITY: the disposition is in the last will and testament to take effect after death in favor of the government of the Philippines or any political subdivision thereof exclusive for public purpose the value of property given is included in the gross estate The transfer also contemplates bequests, devices, or transfers to social welfare, cultural and charitable institutions c. Vanishing Deductions (Property Previously Taxed)
Nature and Purpose VANISHING DEDUCTIONS are deductions allowed for properties which were already subjected to transfer taxes (e.g., estate and donors tax). The purpose is to minimize the effect of double taxation within a short period of time since the same property will be again subjected to tax in the form of estate tax. Requisites for DEDUCTIBILITY: Present decedent acquired the property by inheritance or donation within 5 yrs prior to his death The property must have formed part of the gross estate of previous decedent or the taxable gift of the donor Estate tax on the prior estate or the donors tax must have been paid It must be the same property received from previous decedent or donor Estate of previous decedent or donor have not previously availed of vanishing deduction
Page 72 of 165
e.
Standard Deduction
A deduction in the amount of P1,000,000 shall be allowed as additional deductions without need of substantiation Full amount shall be allowed as deduction for the benefit of the decedent f. Medical Expenses
Requisites for DEDUCTIBILITY Medical cost incurred within the one year Up to a maximum amount of P500,000, whichever is lower Any excess over P500,000 cannot be reclassified and deducted as claims against the estate It must be duly substantiated with official receipts for services rendered g. Amount Received by Heirs under R.A. 4917
favor of another beneficiary in accordance with the desire of the testator All bequests, devises, legacies, or transfers to social welfare, cultural or charitable institutions Provided, not more than 30% of the value given is used for administrative purposes Proceeds from life insurance where the beneficiary is other than estate, executor or administrator AND the designation is irrevocable SSS death benefits Properties held in trust by the decedent Benefits received by beneficiaries residing in the Philippines under laws administered by the US Veterans Administration Separate or exclusive properties of the surviving spouse
13. Tax credit for estate taxes paid in a foreign country ESTATE TAX CREDIT is a remedy against international double taxation to minimize the onerous effect of taxing the same property twice WHO MAY AVAIL OF TAX CREDITS? Only the estate of a citizen or resident alien at the time of the death can claim tax credit for any estate taxes paid to a foreign country WHAT AMOUNT OF TAX CREDIT MAY BE CLAIMED? The estate tax imposed by the Philippines shall be credited with the amounts of any estate tax imposed by the authority of a foreign country, subject to the following limitations: PER COUNTRY LIMITATION net estate within a foreign country Net estate, foreign x Phil. Estate Tax = max amt. of credit Net estate, world GLOBAL LIMITATION Total net estate outside X Phil. Estate tax = max amt. of credit Net estate, world The final allowable amount shall be the lower of the country and global limitation amounts. 14. Exemption of certain acquisitions and transmissions [Sec. 84 and 87 of the NIRC] a. b. First P200,000.00 value of the net estate Merger of usufruct in the owner of the naked title
Amount received by the heirs from the decedents employer as a consequence of death of the decedent employee in accordance with R.A. 4917 h. Net Share of the surviving spouse in the Conjugal Property
DEDUCTIONS FOR NONRESIDENT ALIENS (for property situated in the Philippines) Expenses, Losses, Indebtedness and Taxes (ELIT) Only the proportion of the total expenses, losses indebtedness and taxes which the value of such part bears to the value of his entire GE wherever situated. Property Previously Taxed Transfers for Public Use Net Share of the surviving spouse in the Conjugal Property
NOTE: To be allowed deductions for a non-resident alien, executor/administrator/any heir must include in the return to be filed, the value of the gross estate not situated in the Philippines 12. Exclusions from GROSS estate Acquisitions and transfers expressly declared as exempt: Merger of the usufruct in the owner of the naked title Transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee to the fiduciary Transmission from the first heirs, legatees or donees in
Page 73 of 165
Example: A died leaving a fishpond; naked title to B, his son, and usufruct to C, another son, for life. C died a year later. The fishpond will be included in the gross estate of A, being the owner. Upon the death of C, the usufruct will be merged into the owner of the naked title B who shall become the absolute owner thereof. The transfer from C to B is exempt from estate tax. c. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary The substitution must not go beyond one degree from the heir originally instituted The fiduciary or first heir must be both living at the time of the testators death
knows of the acceptance of the donee (exception: donations of immovable1 properties); subject to donors tax Donation mortis causa: a donation which takes effect upon the death of the donor; subject to estate tax
APPLICABILITY OF LAWS GOVERNING THE IMPOSITION OF DONORS TAX The donors tax applies to a completed gift. The transfer is perfected from the moment the donors knows of the acceptance by the donee; it is completed by the delivery, either actual or constructively, of the donated property to the donee. The law in force at the time of the perfection/completion of the donation shall govern the imposition of donors tax based on the FMV of the property. A gift that is incomplete because of reserved powers, becomes complete when either: The donor renounces the power; or His right to exercise ceased because of the happening of some event or contingency or the fulfillment of some condition, other than the death of the donor. SPECIAL RULES ON HUSBAND AND WIFE Husband and wife are considered as separate and distinct taxpayers for purposes of the donors tax. However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donors tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the Philippines. NET GIFT The net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of mortgage assumed. 2. Definition Donors Tax is a tax on the privilege of transmitting ones property or property rights to another or others without adequate and full valuable consideration.
Example A dies and leaves in his will a lot to his brother B who is entrusted with the obligation to transfer the lot to C, a son of A when A reaches legal age. B is the fiduciary heir and C is the fideicommissary. The transfer from A to B is subject to estate tax. But the transmission or delivery to C upon reaching legal age shall be exempt from estate tax. d. Transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided not more than 30% of the transfers shall be used by such institutions for administration purposes
e.
15. Filing of notice of death (see F. Compliance requirements) 16. Estate tax return (see F. Compliance requirements)
======================================
TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE C. Donors Tax
====================================== 1. Basic principles KINDS OF DONATIONS: Donation inter vivos: a donation made between living persons; perfection is at the moment when the donor
Page 74 of 165
3.Nature The subject of donors tax is the gift or donation. Article 725 of the Civil Code defines a gift or donation as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. 4. Purpose or object The purpose of donors tax is to complement estate tax by preventing tax-free depletion of the transferors estate during his lifetime It is also to prevent avoidance of income tax through the device of splitting income among numerous donees, who are usually members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of income tax. 5. Requisites of valid gift or donation (CIDA) Capacity of the donor Intent to donate Delivery of the subject gift, whether actual or constructive Acceptance by the donee
See Estate of Fidel Reyes, CTA Case No. 6747, January 16, 2006 where the repudiation by the heirs of an inheritance was held not to be a donation. 7. Transfers for less than adequate and full consideration Where property, other than a real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or moneys worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. NOTE: In the case of real properties considered as capital assets, the difference between the FMV and the actual value received in transfers for less than the adequate or full consideration shall not be subject to donors tax. The rationale is that under Section 24 (d), the FMV itself, if higher than the gross selling price, is the base for the computation of capital gains tax. In essence, what the seller avoids in the payment of donors tax, it pays for the capital gains tax. 8. Classification of donor
6. Transfers which may be constituted as donation a. Debt condoned or remitted [Sec. 50 of RR 02-40] If a creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. b. c. Transfers made in trust for another person Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person; However, a general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donors tax, unless specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. [Sec. 11, Rev. Reg. 22003]
Resident citizen Non-resident citizen Resident alien Non-resident alien
9. Determination of gross Gift Gross gift refers to all property, real or personal, tangible or intangible, that is given by the donor to the donee by way of gift, without the benefit of any deductions. 10. Composition of Gross Gift RESIDENT CITIZEN/NON-RESIDENT CITIZEN/RESIDENT ALIEN Real property within and without the Philippines Tangible personal property within and without the Philippines Intangible personal property within and without the Philippines NON-RESIDENT ALIEN Real property within the Philippines Tangible personal property within the Philippines Intangible personal property within the Philippines
Page 75 of 165
SPECIAL RULES ON INTANGIBLE PROPERTIES Intangible personal properties with situs in the Philippines (Section 104) 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 issued by any foreign corporation 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, rights in any partnership business or industry established in the Phil.
FORMULA Limitation A (per country): Net gifts, foreign country X Phil. donors tax Net gifts, world Limitation B (by total): Net gifts, foreign country X Phil. donors tax Net gifts, world
13. Exemption of gifts from donors tax (Sec. 101) The exemptions are not to be treated as exclusions from the gross gifts of the donor. They partake the nature of deductions and are therefore, deductible from the gross gift in order to arrive at the net taxable gift. MADE BY A RESIDENT (a) Dowries or gifts made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first P10,000 NOTE: Both parents may make dowries and gifts made on account of marriage. Each parent shall be entitled to the exemption above. This has the effect of splitting the value of the gift into half for both spouses so each spouse can claim the exemption. However, both spouses must file separate returns because the husband and wife are considered as distinct entities for purposes of donors tax. (b) Gifts made to the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government (c) Gifts in favor of a non-profit educational and/or charitable, religious, cultural or social welfare corporation, institution accredited non-government organization, trust or philanthropic organization or research institution or organization; provided, not more than 30% shall be used by such donee for administration purposes. NON-PROFIT EDUCATIONAL AND/OR CHARITABLE CORPORATION is one which is incorporated as a non-stock entity paying no dividends, governed by trustees who received no compensation, and devoting all its income to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation
RECIPROCITY CLAUSE Intangible personal property of a decedent who is nonresident alien, with a situs in the Philippines (Section 104) The intangibles shall not form part of the gross gift if: 1. The donor at that time of his death was a citizen and resident of a foreign country which at the time of his death a. Did not impose a transfer tax or death tax of any character b. In respect of the intangible personal property of citizens of the Philippines not residing in that foreign country; or 2. The law of the foreign country of which the donor was a citizen and resident at the time of his death: a. Allow a similar exemptions from transfer taxes or death taxes of every character c. In respect of the intangible personal property owned by citizens of the Philippines not residing in that foreign country.
11. Valuation of gifts made in property Personal property: FMV at the time of donation Real Property: FMV as determined by the Commissioner or the FMV in the latest schedule of values of the provincial or city assessor, whichever is HIGHER
12. Tax credit for donors taxes paid in foreign country WHO ARE ENTITLED TO CLAIM CREDITS: Only resident or citizen donors
Page 76 of 165
(d) Encumbrances on the property donated if assumed by the donee in the deed of donation (e) Donations made to entities as exempted under special laws. (f) Donations not exceeding P100,000 per year (Sec. 99[A])
administration purposes 14. Person liable Any person, resident or nonresident, transferring the property by gift. 15. Tax Basis
NOTE: To be exempt from donors tax and to claim full deduction of the donation given to qualified donee institutions duly accredited by the Philippine Council for NGO Certification, Inc.(PCNC), the donor engaged in business shall give a notice of donation on every donation worth at least Fifty Thousand Pesos (P50,000) to the Revenue District Office(RDO) which has jurisdiction over his place of business within thirty (30) days after receipt of the qualified donee institutions duly issued Certificate of Donation, which shall be attached to the said Notice of Donation, stating that not more than thirty percent (30%) of the said donation/gifts for the taxable year shall be used by such qualified-donee institution for administration purposes pursuant to the provisions of Section 101(A)(3)and (B)(2) of the Code [RR 2-2003]. Donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration. Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. The Court was not convinced that since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners contribution of money without any material consideration evinces animus donandi. The fact that their purpose for donating was to aid in the election of the donee does not negate the presence of donative intent. Abello v. CIR, [GR No. 120721, Feb. 23, 2005]
COMPUTATION OF TAX AND PERSON LIABLE (Applicable only on donations made to a person who is not a stranger.) On the 1st donation of the year xx xx xx xx xx ========== On subsequent donation during the year Gross Gift Less: deductions Net gift Add: prior net gift Aggregate net gifts Multiply by: tax rate Donors tax on aggregate gift Less: prior donors tax paid Donors tax on this date xx xx xx xx xx xx xx xx xx ========== TAX RATES 1. Donee is a Stranger to the Donor Rate: 30% A Stranger is a person who is not a: 1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant 2) Relative by consanguinity in the collateral line within the 4th degree of relationship A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, donation to him shall not be considered as donation made to stranger. Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger. Mother/Father-in-laws are considered strangers. Gross Gift Less: deductions Net gift Multiply by: tax rate Donors tax
MADE BY A NONRESIDENT ALIEN (a) Gifts made to the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government (b) Gifts in favor of an non-profit educational and/or charitable, religious, cultural or social welfare corporation, institution accredited non-government organization, trust or philanthropic organization or research institution or organization; provided, not more than 30% shall be used by such donee for
Page 77 of 165
2.
Donee is NOT a Stranger to the Donor Rate: Graduated Rates
======================================
TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE D. Value-Added Tax
======================================
Considering that there are no sale, barter or exchange of goods or properties in the instant case, the imposition of output VAT on subsidized advertising expense has no leg to stand on. (NOTE: Basically, in order that VAT may be imposed, there must be the existence of a transaction that is subject to VAT.) 2. IMPACT OF TAX Originally, the tax is imposed against the seller of goods properties or services. 3. INCIDENCE OF TAX The tax is shifted to the buyer of the goods, properties or services. VAT is an indirect tax levied on goods and services; not on persons, and ultimately paid by consumers in the form of higher prices 4. DESTINATION PRINCIPLE DESTINATION PRINCIPLE: VAT is imposed in the country in which the products or services are actually consumed or used. Exports exempt, imports taxable. Actual shipment of the goods from the Philippines to a foreign country is a precondition of an export sale following the destination principle being adhered to by our VAT system. ORIGIN PRINCIPLE: only national taxpayers would be exposed to the tax, without distinguishing between transactions consumed locally or abroad. Exports taxable, imports exempt. Situs: country of production CROSS-BORDER DOCTRINE: No VAT shall be imposed to form part of the cost of goods sold destined for consumption outside of the territorial border of the taxing authority. [CIR v. American Express, G.R. No. 152609, June 29, 2005] As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. However, our VAT law itself provides for a clear exception, under which the supply of service shall be zero-rated when the following requirements are met: (1) the service is performed in the Philippines; (2) the service falls under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance with BSP rules.
1. NATURE AND CHARACTERISTIC VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines Seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. In the case of importation, the importer is the one liable for the VAT
[CIR v. COMASERCO, G.R. No. 125355, March 30, 2000] VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and in the performance of services, even in the absence of profit attributable thereto. The term in the course of trade or business requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payment for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. Sony Philippines v. CIR, [CTA EB Case No. 90 CTA Case No. 6185, May 17, 2007] The fact that the advertising expense is subsidized or reimbursed by Sony International does not render the same automatically subject to output VAT. There was no sale, barter or exchange of goods or properties from the questioned transaction. Neither was there an exchange of service. The CIRs reliance on the case of CIR v. COMASERCO is misplaced. In the above ruling, COMASERCO rendered services to its affiliates. What was being taxed were these services rendered to its affiliates. Thus, the SC held that COMASERCO is liable for output VAT.
Page 78 of 165
5. PERSONS LIABLE [Sec. 105] Any person who, in the course of trade or business Sells, barters, or exchanges goods or properties (seller or transferor) Leases goods or properties (lessor) Renders services (service provider) Imports goods (importer), whether or not made in the course of trade or business Definition of in the course of trade or business (Rule of Regularity) 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 or government entity Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if the performance of services is not regular CIR v. Magsaysay Lines, [G.R. No. 146984, July 28, 2006] The term course of business or doing business connotes regularity of activity. Any sale, barter, exchange of goods or services not in the course of trade or business in not subject to VAT. CS Garments v. CIR, [CTA case no. 6520, 4 January 2007] A transaction will be characterized as having been entered into by a person in the course of trade or business if it is (1) regularly conducted; and (2) undertaken in pursuit of a commercial or economic activity are considered as entered into in the course of trade or business. Incidental means something else as primary; something necessary, appertaining to, or depending upon another, which is termed the principal. Hence, an isolated transaction is not necessarily disqualified from being made incidentally in the course of trade or business. Therefore, the sale of motor vehicle used by its officers is an incidental transaction because the said vehicle was purchased in the furtherance of petitioners business. Exceptions to the rule of regularity Any business where the gross sales or receipt do not exceed P100,000 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of trade or business Services rendered in the Philippines by non-resident foreign persons shall be considered as being rendered in the course of trade or business.
6. VAT ON SALE OF GOOD OR PROPERTIES [Sec. 106] Every sale, barter or exchange of goods or properties shall be subject to 12% VAT based on the gross selling price or gross value in money of the goods or properties sold. Goods: all tangible and intangible objects which are capable of pecuniary estimation. Includes: Real properties held primarily for sale to customers or held for lease in the ordinary course of business the right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right the right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment the right or the privilege to use motion picture films, film tapes and disc radio, television, satellite transmission and cable television time Gross Selling Price: the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of sale, barter or exchange of the goods or properties, excluding the VAT. The excise tax, if any, of such goods or properties shall form part of the gross selling price. The consideration stated in the sales document, or The fair market value (FMV) as determined by the Commissioner (zonal value) or FMV as shown in the schedule of values of the Provincial and City Assessors, whichever is higher NOTE: If the VAT is not billed separately, the selling price stated in the sales document shall be deemed to be inclusive of VAT If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT. Thus, the zonal/market value, net of the output VAT, should still be higher than the consideration in the document of sale, exclusive of the VAT. Sale of Real Properties sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT sale of real properties may either be on an installment basis or deferred-payment basis.
Page 79 of 165
a.
sale of real property on installment plan: sale of real property by a real-estate dealer, the initial payments of which in the year of sale do not exceed 25% of the gross selling price. In this case, the VAT shall be collected on the installment payments. Initial payments: Covers any down payment made and includes all payments actually or constructively received during the year of sale. It excludes amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the property to the seller, in which case the excess shall be considered part if the initial payments. It also excludes notes or other evidence of indebtedness issued by the purchaser to the seller at the time of the sale.
7. ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERO RATED SALES OF GOODS OR PROPERTIES (a) The following sales by VAT-REGISTERED persons shall be subject to 0% rate: Export Sales a. The sale and actual shipment of goods from the Philippines to a foreign country i. Irrespective of any shipping arrangement ii. Paid for in acceptable foreign currency or its equivalent in goods or services iii. Accounted for in accordance with the rules and regulations of the BSP b. Sale of raw materials or packaging materials by a VATregistered entity to a nonresident buyer i. for delivery to a resident local export-oriented enterprise ii. Used in the manufacturing, processing, packing, repacking in the Philippines of the said buyers goods iii. Paid for in acceptable foreign currency iv. Accounted for in accordance with the rules and regulations of the BSP c. Sale of raw materials or packaging materials to exportoriented enterprise whose export sales exceed 70% of total annual production d. Sale of gold to the BSP e. Those considered export sales under the Omnibus Investment Code of 1987 and other special laws Under Omnibus Investment Code: i. the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or ii. the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same; iii. Provided, that sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents; Constructive Exports: i. sales to bonded manufacturing warehouses of export-oriented manufacturers; ii. sales to export processing zones iii. sale to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority pursuant to RA 7227;
b.
sale on the deferred-payment basis: the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale (sale of real property where the initial payment exceeds 25% of the gross selling price.
The real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller. Correspondingly, the buyer can claim the input tax in the same period that the seller recognized the output tax. Real estate dealer includes any person engaged in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or part-time dealer in real estate. Sale of residential lot with gross selling price exceeding P1.5 million, residential house and lot or other dwellings with gross selling price exceeding P2.5 million, where the instrument (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale, or otherwise) is executed on or after November 1, 2005 shall be subject to 12% VAT (10% VAT prior to February 1, 2006). Where the instrument of sale was executed prior to November 1, 2005, the price needs only to exceed P1 million of the installment sale of residential house and lot or other residential dwellings to be subject to 10% VAT Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary. However, is the property transferred is one for sale, lease or use in the ordinary course of trade or business and the transfer constitutes a complete gift, the transfer is subject to VAT as a deemed sale transaction.
Page 80 of 165
iv. sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); v. sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not. NOTE: For purposes of zero-rating export sales of registered export traders shall include commission income. Exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee. Provided, finally, that sales of goods, properties or services made by a VAT-registered supplier to a BOIregistered manufacturer/ producer whose products are 100% exported are considered export sales. A certification to this effect must be issued by the Board of Investment (BOI) which shall be good for one year unless subsequently re-issued by the BOI. The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations NOTE: Limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without docking or stopping at any other ports in the Philippines Foreign Currency Denominated Sale (internal exports) Sale to a non-resident of goods, except those mentioned in Section 149 (automobiles) and 150 (nonessential goods) Assembled or manufactured in the Philippines For delivery to a resident in the Philippines Paid for in acceptable foreign currency and accounted for in accordance with BSP regulations. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate. Refer to exemptions granted under special laws or treaties which are extended not only to the grantee but also to its supplier
(b) Automatic vs. Effectively Zero-Rated Sale Although both are taxed similarly, automatic zero-rated transactions differ from effectively zero-rated transactions as to their source. An automatically zero-rated sale refers to a sale of goods, properties and services by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997. [RMC 50-2007] An effectively zero-rated sale, on the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zerorated. [RMC 50-2007] Automatic zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of tax credit certificate for the VAT previously charged by supplier. Effectively zero-rated transactions, however, refer to sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to zero-rate. Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges output tax on such transactions can also claim a refund or tax credit certificate for VAT previously charged by suppliers. CIR v. Seagate, [G.R. No. 153866, February 11, 2005]
8. TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO 12% VAT) For transactions deemed sales, the output tax shall be based on the market value of goods deemed sold as of the time of the occurrence of the transaction. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base. NOTE: The gross selling price is unreasonably lower than the fair market value if it is lower by more than 30% of the
Page 81 of 165
actual market value. [Revenue Regulations 16-2005; Revenue Regulations 4-2007] a. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business. Transfer of goods or properties not in the course of business can take place when VAT-registered person withdraws goods from his business for personal use Distribution or transfer to: Shareholders or investors share in the profits of VAT-registered person Property dividends which constitute stocks in trade or property primarily held for sale or lease declared out of Retained Earnings on or after Jan.1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or fair market value at the time of distribution, whichever is applicable. Creditors in payment of debt or obligation Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned Consigned goods returned by the consignee within the 60-day period are not deemed sold Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. Change of ownership of the business (when a single proprietorship incorporates or the proprietor of a single proprietorship sells his entire business Dissolution of a partnership and creation of a new partnership which takes over the business NOTE: For retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is LOWER. 9. CHANGES IN OR CESSATION OF STATUS OF A VAT REGISTERED PERSON a. subject to 12% output VAT (1) change of business activity from VAT taxable status to VAT-exempt status (2) approval of a request for cancellation of registration due to reversion to exempt status (3) approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of 3 consecutive years from the time of registration by a person who
voluntarily registered despite being exempt under Sec 109 (2) of the Tax Code (4) approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipt exceeding P1,500,000 but who failed to exceed this amount during the first 12 months of operations b. not subject to 12% output VAT (1) change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders i. The goods or properties used in business or those comprising the stock-in-trade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest of the corporation. [Revenue Regulations 10-2011] ii. Exchange of property by corporation acquiring control for the shares of stocks of the target corporation is subject to VAT. (2) change in the trade or corporate name of the business (3) merger or consolidation of corporations i. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation.
b.
c.
d.
10. VAT ON IMPORTATION OF GOODS [Sec. 107] VAT is imposed on goods brought into the Philippines, whether for use in business or not. The VAT shall be paid by the importer prior to the release of such goods from customs custody. Importer: refers to any person who brings goods into the Philippines, whether or not made in the course of his trade or business. Includes non-exempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies Tax base = total value used by BOC in determining tariff and customs duties, plus custom duties, excise tax, and if any, other charges (postage, commission, and similar charges, prior to the release of the goods from customs custody If the valuation used is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost = invoice amount, customs duties, freight, insurance and other charges (excise tax shall form part of the tax base)
Page 82 of 165
a.
Sale, transfer, or exchange of imported goods by taxexempt persons: In the case of goods imported by VATexempt persons, entities or agencies which are subsequently sold, transferred or exchange in the Philippines to non-exempt persons or entities, the latter shall be considered the importers thereof and shall be liable for VAT due on such importation. The tax due on such importation shall constitute a lien on the goods, superior to all charges/liens, irrespective of the possessor of said goods.
Gross Receipts: total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT. Gross Receipts exclude amounts earmarked for payment to unrelated third (3rd) party, and amounts received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor. Constructive receipt: occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. Deposit in banks which are made available to the seller of service without restrictions Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered Transfer of amounts retained by the payor to the account of the contractor Advance payments made by lessee for lease of property: Advance payments may be in the form of: i. A loan to the lessor from the lessee, or ii. An option money for the property, or iii. A security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, or iv. Pre-paid rental If the advance payment is for the faithful performance of certain obligations of the lessee, it is not subject to VAT A security deposit that is applied to rental shall be subject to VAT at the time of its application If the advance payment constitutes a pre-paid rental, then such payment is taxable to the lessor in the month when received, irrespective of the accounting method employed by the lessor 12. ZERO-RATED SALES OF SERVICE The following services performed in the Philippines by a VAT-REGISTERED person shall be subject to 0% VAT rate: a. processing, manufacturing, or repacking goods for other persons doing business outside the Philippines, i. which goods are subsequently exported ii. where the services are paid for in acceptable foreign currency
11. VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES Sale or exchange of service, as well as the use or lease of properties shall be subject to 12% VAT a. Sale or Exchange of Service: the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in cash or in kind. Sale or exchange of service shall also include: i. Lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand, or other like property or right ii. The lease or the use of, or the right to use any industrial, commercial or scientific equipment iii. The supply of scientific, technical, industrial or commercial knowledge or information iv. The supply of any assistance that is ancillary and subsidiary to and furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (b) hereof or any such knowledge or information as is mentioned in subparagraph (c) hereof v. The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery, or other apparatus purchased from such nonresident person vi. The supply of technical advise, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme vii. The lease of motion picture films, film tapes, and discs viii. The lease or use of, or the right to use, radio, television, satellite transmission and cable television time b. Lessors of property all forms of property for lease, whether real or personal, are liable to VAT
Page 83 of 165
b.
iii. accounted for in accordance with the rules and regulations of the BSP services other than processing, manufacturing, or repacking i. rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed CIR v. Busmeirter, et al, [G.R. No. 153205, January 22, 2007 require performance of services to nonresident to qualify as zero-rated.] ii. The consideration of which is paid for in acceptable foreign currency iii. accounted for in accordance with the rules and regulations of the BSP services rendered to persons or entities whose exemptions under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent rate services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof NOTE: shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines (subject to 12% VAT)
13. VAT EXEMPT TRANSACTIONS [Sec. 109] (Refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT and the seller is not allowed any tax credit of VAT on purchases) The following are VAT-exempt transactions: a. sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials thereof Livestock: cows, bulls and calves, pigs, sheep, goats and rabbits Poultry: fowls, ducks, geese and turkey Does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets Marine food products: fish and crustaceans, such as but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams Meat, fruit, vegetables and other agricultural and marine food products are considered in their original state even if hey undergone the simple process of preparation or preservation for the market : freezing, drying, salting, broiling, roasting, smoking or stripping, shrink wrappings in plastic, vacuum packing, tetra-pack, and other similar packaging methods Polished and/or husked rice, corn grits and raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural product in their original state Sugar whose content of sucrose by weight, in the dry state: parameter reading of 99.5 and above are presumed to be refined sugar Bagasse is not included in the exemption provided for under this section sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fishes, zoo animals and other animals generally considered as pets) importation of personal and household effects belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel,
c.
d.
e.
f.
services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. NOTE: Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to percentage tax.
b.
g.
sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels. NOTE: Zero rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power
c.
d.
Page 84 of 165
e. f.
aircraft, machinery and other goods for use in the manufacture and merchandise of any kind in commercial quantity) Belonging to persons coming to settle in the Philippines For their own use and not for sale, barter or exchange, Accompanying such persons or arriving within 90 days before or after their arrival Upon the production of evidence satisfactory to the CIR that such persons are actually coming to settle in the Philippines The change of residence is bonafide services subject to percentage tax services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar into raw sugar BIR has clarified that toll processing or toll dressing, which are covered by the VAT exemption of services by agricultural contract growers under Section 109(F) of the Tax Code of 1997, pertain to toll processing services for clients from which growing of animals were contracted. Thus, the activity of preparing and packaging hogs/chicken ready for delivery after producing or growing is considered within the purview of agricultural contract growing, which is exempt from VAT under Section 109(F) of the Tax Code of 1997, as amended. However, if the toll processing/toll dressing/toll manufacturing service is performed independently from growing poultry, livestock, or other agricultural and marine food products, the activity is not covered by the agricultural contract growing and therefore subject to VAT under Section 108 of the Tax Code of 1997, as amended. [Revenue Memorandum Circular No. 97-2010, December 21, 2010] medical, dental, hospital and veterinary services, except those rendered by professionals Laboratory services are exempted If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and merchandise is subject to VAT. However, sales of drugs to inpatients of hospitals are considered part of hospital services, which are exempt from VAT. Educational services rendered by private educational institutions duly accredited by the DepED, CHED and TESDA and those rendered by government educational institutions Does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or TESDA
i.
g.
h.
Services rendered by individuals pursuant to an employer-employee relationship j. Services rendered by regional or area HQ established in the RP by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the Philippines k. Transactions which are exempt under international agreements to which the Philippines is a signatory, except those under PD 529 [Petroleum Exploration Concessionaires under the Petroleum Act of 1949] l. sales by agricultural cooperatives duly registered and in good standing with the CDA to their members, as well as sale for their produce, whether in its original state or processed form, to non-members their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT; However, the sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer m. Gross receipts from lending activities by credit or multipurpose cooperatives duly registered and in good standing with the CDA n. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good standing with the CDA Share capital contribution of each member does not exceed 15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members Importation of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT o. Export sales by persons who are not VAT-registered p. The following sales of real properties are exempt from VAT: Not primarily held for sale to customers or held for lease in the ordinary course of trade or business Sale of real properties utilized for low-cost housing A subdivision or a condominium registered and licensed by the HLURB Undertaken by the govt or private developers Utilized for socialized housing Residential lot valued at 1.5M and below, or house and lot and other residential dwellings valued at 2.5M and below
Page 85 of 165
q.
r.
s.
t.
u.
Instrument must be executed on or after July 1, 2005. Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed 1.5M Lease of residential units Monthly RENTAL: not exceeding P10,000 Gross receipts from rentals exceeding P10,000 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P10,000) exceeds 1.5M. Otherwise, subject to 3% percentage tax Sale, importation, printing or publication of books and any newspaper, magazine, review, or bulletin which appears at regular intervals with fixed prices for subscription and sale which is not devoted principally to the publication of paid advertisements Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations Limited to 150 tons and above, including engine and spare parts of said vessels Comply with the age limit requirement, at the time of acquisition counted from the date of he vessels original commissioning Passenger/cargo vessel: 15 years old Tankers: 10 years old High-speed passenger crafts: 5 years old Exemption shall be subject to the provisions of The Domestic Shipping Development Act Importation of life-saving equipment, safety and rescue equipment and communication and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates, used for shipping transport operations; Provided, that the exemption shall be subject to the provisions of Section 4 of Republic Act No. 9295, otherwise known as 'The Domestic Shipping Development Act of 2004'; Importation of capital equipment, machinery, spare parts, life-saving and navigational equipment, steel
plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic Act No. 9295, otherwise known as The Domestic Shipping Development Act of 2004'; v. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations Shall be used exclusively or shall pertain to the transport of goods and/or passengers from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines w. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other nonbank financial intermediaries subject to percentage tax such as money changers and pawnshops x. Sale or lease of goods or properties or the performance of services other than the transaction mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed 1.5M. For purposes of the threshold of 1.5M, the husband and wife shall be considered separate taxpayer. The aggregation rule for each taxpayer shall apply For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold. A VAT-registered person may, elect that that the exemption shall not apply to his sales of goods or services or properties which is irrevocable for a period of 3 years. Zero-Rated vs. VAT-Exempt Transaction CIR v. Cebu Toyo Corporation, [G.R. No. 149073, February 16, 2005] A zero-rated transaction differs transaction on the following points: a. from VAT-exempt
b.
a zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to output tax. The input tax on purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.
Page 86 of 165
c.
Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while registration is optional for VAT-exempt persons.
v)
b.
Exempt Transaction vs. Exempt Party The object of exemption from the VAT may either be the transaction itself or the parties to the transaction. An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed and expressly exempted from the VAT under the Tax Code, without regard to the tax status (VAT exempt or not) of the party to the transaction. Such transaction is not subject to VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. Such party is also not subject to VAT, but may be entitled to a tax refund or credit for input taxes paid, depending on its registration as a VAT or nonVAT taxpayer. CIR v. Seagate Technology, [G.R. No. 153866, February 11, 2005] 14. INPUT VAT AND OUTPUT VAT DEFINED Input tax means the VAT paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of the Tax Code. [Sec. 104 now 105, as amended by R.A. 7716; Fort Bonifacio Devt. Corp. v. CIR, G.R. Nos. 158885 and 170680, April 2, 2009; BIR Website] Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or services by any person registered or required to register under section 236 of the Tax Code. [BIR Website] g. c.
For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code Purchase of real properties for which a VAT has actually been paid Purchases of services in which a VAT has actually been paid Transactions deemed sale Transitional input tax A person who becomes liable to VAT or any person who elects to be a VAT-registered person shall be allowed to claim input tax on his beginning inventory of goods, materials and supplies equivalent to 2% of the value of such inventory or the actual VAT paid on such goods, materials and supplies, whichever is higher. Presumptive input tax Covered: Persons or firms engaged in the processing of sardines, mackerel, and milk and in the manufacturing refined sugar, cooking oil and packed noodle-based instant meals The term processing shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. Rate: 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production Transitional input tax credits allowed under the transitory and other provisions of these Regulations Creditable Withholding VAT on payments to nonresidents
d. e.
f.
h.
16. PERSONS WHO CAN AVAIL OF THE INPUT TAX 15. SOURCES OF INPUT TAX a. Purchase or impartation of goods i) For sale; or ii) For conversion into or intended to form part of a finished product for sale, including packaging materials; or iii) For use as supplies I the course of business; or iv) For use as raw materials supplied in the sale of services; or TAXPAYER To the importer TIME TO CLAIM INPUT TAX Upon payment of VAT prior to the release of goods from customs custody Upon consummation of the sale Upon payment of the compensation, rental,
To the purchaser of the domestic goods or properties To the purchaser of services or the lessee or licensee
Page 87 of 165
royalty or fee. To the purchaser of real property under: Cash/Deferred Payment Basis Installment Basis
Upon consummation of sale Upon every installment payment
NOTE: Even if the said events have already transpired but the required documents are not on hand, the input taxes may not be claimed. 17. DETERMINATION OF THE INPUT/OUTPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDIT a. Computation of output tax i. Goods or properties: Gross selling price x VAT rate Allowable deductions from gross selling price (1) discounts determined and granted at the time of sale (expressly indicated in the invoice, amount thereof should form part of gross sales duly recorded in the books, and the granting of the discount does not depend on the happening of the future event) (2) sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales ii. b. Sellers of service: Gross receipts x VAT rate
Input tax arising from qualified transactions in the current month or quarter Input tax carried-over from the preceding month or quarter Reduction in Creditable Input Tax Amount of claim for VAT refund or Tax Credit Certificate (whether filed with the BIR, the Department of Finance, the Board of Investments or the BOC) Other adjustments, such as purchase returns or allowances, input tax attributable to exempt sales and input tax attributable to sales subject to final VAT withholding. Credits for Input Tax The VAT due on or paid by a VAT-registered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of trade or business Include the transitional and the presumptive input tax Includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input taxes which cannot be directly attributed to either the taxable or exempt activity Evidenced by a VAT invoice or official receipt issued by a VAT-registered person Claim for Input Tax on Depreciable Goods i. Requisites: A VAT-registered person purchases or imports capital goods (which are depreciable goods for income tax purposes) If aggregate acquisition cost of all capital goods (exclusive of VAT) in a calendar month exceeds P1 million, the input tax cannot be claimed outright but should be subject to amortization over a period of 5 years or useful life of the capital goods, whichever is lower. If the aggregate acquisition cost of all capital goods in a calendar month does not exceed P1 million, the input tax may be claimed outright as credit against output tax. Aggregate acquisition cost refers to the total price agreed upon for one or more assets acquired and not the payments actually made during the calendar month. ii. Manner of claiming input tax of more than P1 million (1) estimated useful life of a capital good is 5 years or more: input tax spread evenly over a period of 60 months
Determination of input tax credit Determination of Input Tax Credit during a taxable month or quarter All creditable input taxes during the month or quarter + any amount of input taxes carried-over from preceding month/quarter (claim for VAT refund or tax credit certificate) (other adjustments purchase returns) (input tax attributable to exempt sales) (input tax on capital goods purchased during the month/quarter subject to amortization) +/(difference between standard input and actual input on government sales) + (creditable VAT withheld on payments to nonresidents) = Input Tax Credit
NOTE: Adjustments to Input Tax Addition to Creditable Input Tax
Page 88 of 165
commenced in the calendar month when the capital good is acquired
(2) estimated useful life is less than 5 years: input tax spread evenly on monthly basis by the actual number of months comprising the estimated useful life of the capital good commenced in the calendar month when the capital good is acquired If the depreciable capital good is sold/transferred within the period of 5 years or prior to the exhaustion of the amortizable input tax thereon: entire unamortized input tax on the capital goods sold, can be claimed as input tax credit during the month or quarter when the sale or transfer was made but subject to limitation c. Allocation of input tax on mixed transactions
VAT payable computation: Output Tax - Input Tax VAT payable VAT Payable (Excess Output) or Excess Input Tax If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or credited against other internal revenue taxes subject to provisions of Section 112. 18. SUBSTANTIATION REQUIREMENTS OF INPUT TAX CREDITS Required Supporting Documents for claiming Input VAT TRANSACTIONS REQUIRED SUPPORT On domestic purchases of VAT Invoice goods or properties made in the course of trade or business On purchases of real property Public Instrument (i.e., deed Cash/Deferred Payment of absolute sale, deed of Basis conditional sale, contract/agreement to sell, etc.) together with the VAT Invoice for the entire selling price and Non-VAT ORs for the initial and succeeding payments Installment Basis On domestic purchase of services On importation of goods Public Instrument and VAT OR for every payment VAT OR Import entry or other equivalent document showing actual payment of VAT on the imported goods and BOC OR. Inventory of goods as shown in a detailed list to be submitted to the BIR. Required invoices Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of
A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: i. all the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit input taxes which are directly attributable to VAT taxable sales of goods and services from the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall not be credited against output taxes arising from sales to nongovernment entities if any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit
ii.
NOTE: input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost of goods sold for persons engaged in both zero-rated sales and nonzero rated sales, the aggregate input taxes shall be allocated ratably between the zero-rated sale and nonzero-rated sale d. Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits
On transitional input tax
On deemed sale transactions On payments made to nonresidents
Page 89 of 165
Advance VAT on Sugar
the non-resident evidencing remittance of VAT due which was withheld by the payor. Payment order showing payment of the advance VAT
A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Sec. 113 and 237 of the Tax Code (invoicing requirements) 19. CLAIMS FOR REFUND/TAX CREDIT CERTIFICATE OF INPUT TAX a. Zero-rated and effectively zero-rated sales of goods, properties or services Any VAT-registered person whose sales are zerorated or effectively zero-rated may within 2 years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of the creditable input tax due or paid attributable to such sale. The creditable input tax allowed to be refunded does not include transitional input tax. In case the taxpayer is engaged in zero-rated and also in taxable or exempt sale, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. Cancellation of VAT registration A person whose VAT registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status, may within 2 years from the date of cancellation, apply for the issuance of tax credit certificate for any unused input tax. Period within which refund or TCC of input taxes shall be made The Commissioner shall grant a TCC/refund for creditable input taxes within 120 days from the date of submission of complete documents in support of the application Taxpayer may appeal to the CTA within 30 days from receipt of said denial If no action on the claim for refund has been taken by the CIR after the 120 day period from the date of submission of the application with complete documents, the taxpayer ,may appeal to the CTA within 30 days from the laps of the 120-day period The CIR has 120 days, from the date of the submission of the complete documents within which to grant or deny the claim for refund/credit d.
of input VAT. In case of full or partial denial by the CIR, the taxpayers recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. Otherwise, if after the 120-day period, the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days. Hence, if filed with CTA before the 120-day period expires, CTA will dismiss for prematurity. If filed with CTA after the 150-day (120 + 30 days), CTA will dismiss for being late. This only applies to credit input tax refunds. CIR v. Aichi Forging Company, [G.R. No. 184823, October 6, 2011] Manner of giving refund Refund shall be made upon warrants drawn by the CIR or by his duly authorized representative without the necessity of being countersigned by the Chairman of COA Refunds under this paragraph shall be subject to post audit by the COA
20. INVOICING REQUIREMENTS a. Invoicing requirements in general i. A VAT-registered person shall issue: A VAT Invoice for sale of goods or properties A VAT Official Receipt for sale of services or lease of goods or properties ii. The following information shall appear in the VAT Invoice or VAT Official Receipt: A statement that the seller is a VAT-registered person followed by the TIN The amount of tax shown as a separate item The word VAT-Exempt Sale written or printed prominently if sale is VAT-exempt The word Zero-Rated Sale written or printed prominently if sale is VAT-exempt. Date of transaction, quantity, unit cost and description of the goods or properties or the nature of service For sale of VAT-registered persons amounting to P1,000 or more, indicate the name, business style, address and TIN of the purchaser. Consequences of issuing erroneous VAT invoice or VAT official receipt If a person who is not a VAT-registered person issues an invoice or receipt showing his Tax Identification Number (TIN), followed by the word VAT, the issuer shall, in addition to any liability for other percentage taxes, be liable to:
b.
c.
b.
Page 90 of 165
i.
VAT without the benefit of any input tax credit, and ii. A 50% surcharge on the VAT payable iii. If the invoice/receipts contain the required information, purchaser shall be allowed to recognize an input tax credit. If a VAT-registered person issues a VAT invoice or official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words VAT-EXEMPT SALE, the transactions shall become taxable and the issuer shall be liable to pay the VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase. VAT invoices and official receipts cannot be used interchangeably for purposes of substantiating input VAT. In supporting claims for input VAT on purchase of goods or properties, the law requires that a VAT invoice be presented while a VAT official receipt is necessary to substantiate claims for input VAT involving the purchase of services. Citing the case of CIR v. Manila Mining Corporation, where an invoice is distinguished from a receipt, the SC clarified that the VAT invoice is the sellers best proof of sale of goods or services to the buyer while the VAT receipt is the buyers best evidence of the payment of goods or services received from the seller. As explained by the SC, even though VAT invoices and receipts are normally issued by the supplier/seller alone, the VAT invoices and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods sold and their selling price (proof of transaction), and the best means to prove the payments of input VAT (proof of payments). Hence, the SC held that a VAT invoice and VAT receipt should not be confused as referring to one and the same thing; the two should not be used interchangeably. Kepco Philippines Corporation v. Commissioner of Internal Revenue, [G.R. 181858, November 24, 2010]
NOTE: For the electronic payment of tax for returns required to be filed earlier under the staggered filing system, the taxpayer, upon e-filing, shall, still using the facilities of EFPS, likewise give instructions to the Authorized Agent Bank (AAB) to debit its account for the amount of tax on or before the due date for payment thereof as prescribed under the prevailing/applicable laws/regulations. b. Withholding VAT Return (BIR Form 1600) Filing and Payment Deadline: 10 days from the end of the month Quarterly VAT Return (BIR Form 2550Q) Filing and Payment Deadline: 25 days following the close of each taxable quarter The quarterly returns shall reflect the cumulative totals of the sales, purchases, output tax and input tax for the 3 months of the applicable quarter The VAT payable (Output Tax less Input Tax) for each quarter shall be reduced by the total amount of the tax previously paud for the preceding months. EFPS: same deadline
c.
22. WITHHOLDING OF VAT a. On Payments to Nonresidents (creditable withholding VAT) (Rule applies to payments by government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, as well as private corporations, individuals, estates and trusts, whether large or non-large taxpayers) i. Payments to non-residents, with respect to lease or use of property or property rights in the Philippines owned by such non-residents, are subject to withholding VAT. The VAT shall be based on the contract price. Other services rendered in the Philippines by nonresidents Services rendered in the Philippines, such as providing assistance in establishing tender price of a project and designing materials, by a nonresident, shall be subject to the 12% withholding VAT. NOTE: The party required to withhold is the payor, regardless of whether or not he is VAT-registered. The VAT is passed on to the resident withholding agent. The payor shall claim this as input tax upon filing of his own VAT return, subject to the rule of allocation of input tax.
ii.
21. FILING OF RETURN AND PAYMENT a. Monthly VAT Declarations (BIR Form No. 2550M) Refers to first 2 months of taxpayers quarters Filing and Payment Deadline: 20 days from the end of the month, except for Electronic Filing and Payment System (EFPS) taxpayers Filing Deadline for EFPS: Deadline depends on the industry classification of the taxpayer but applicable only for filing the monthly VAT return Payment Deadline for EFPS: 25 days from the end of the month
Page 91 of 165
VAT withheld and paid for the non-resident recipient, which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. If the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, shall form part of the cost of purchased services, which may be treated either as an asset or expense, whichever is applicable, of the resident withholding agent. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. On Payments by Government (final withholding VAT)
(2) Individuals earning purely compensation income whether locally or abroad; (3) Overseas Workers; (4) GAIs, in the discharge of their governmental functions; (5) Marginal Income Earners; (6) LGUs, in the discharge of their governmental functions; (7) Tax exempt persons such as those enumerated under Section 30 of the Code, as amended, in pursuance of tax-exempt activities; (8) Non-stock/non-profit organizations not engaged in business; (9) Persons subject to tax under one-time transactions; and (10) Facility/ies where no sales transactions occur. Registration of Each Type of Internal Revenue Tax Every person who is required to register with the BIR shall register each type of internal revenue tax for which he/it is obligated to OR is expected to periodically file a return, pay taxes due thereon, and update such record of any changes in the registration information. Note that the registration of one tax type does not automatically register the other type of taxes (e.g. registered for income tax is not registered for VAT) Generally, registration of tax types/fees by a business entity would consist of the following internal revenue taxes/fees: (a) Income tax; (b) VAT and/or percentage tax; (c) Withholding tax on compensation; (d) Creditable withholding tax at source on certain income payments; (e) Final withholding tax on certain income payments; (f) Documentary stamp tax; (g) Excise tax; and (h) Annual registration fee. Transfer of Registration It shall be duty of the taxpayer to inform the RDO where he is registered by filing the prescribed BIR Form specifying the RDO where he is intending to transfer. In case of transfer of registration of individuals earning purely compensation income due to change of employer, it shall be the responsibility of the RDO having jurisdiction of the new employer to effect the transfer of employee's registration. It shall be the duty of the old RDO to transfer the accountabilities of the taxpayer to the new RDO where he is transferring. The old RDO can still institute collection on concluded audit cases at the time of transfer of registration. The old RDO shall terminate audit cases that are prescribing
b.
The Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods and/or services taxed at 12% shall deduct and withhold a final VAT of 5% of the gross payment. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceed seven percent (7%) of gross payments, the excess may form part of the sellers expense or cost. If actual input VAT attributable to sale to government is less than 7% of gross payment, the difference must be closed to expense or cost Registration Requirements 1. ADMINISTRATIVE REQUIREMENTS a. Registration Requirements (see RR 11-08)
Annual Registration Fee (RF) Fee of (P500.00) for every separate or distinct establishment or place of business shall be paid upon registration and every year thereafter on or before January 31 by every person subject to any internal revenue tax. The following are exempt from the Annual RF: (1) Cooperatives duly registered with the CDA;
Page 92 of 165
within six (6) months from the date of transfer. The filing of tax returns and payment of taxes to the new RDO shall commence at the time the transfer is effected by the old RDO. Both the new and the old RDO shall be responsible in notifying the taxpayer concerned that the transfer of registration has already been effected. Transfer of head office of taxpayers engaged in business during the interim period shall only be officially effected in the records of the BIR by the end of the year. The taxpayer may be allowed to physically transfer its business to the intended RDO, however, the filing of its returns and payment of taxes in the new RDO shall still bear the RDO Code of the old RDO until the end of the year and without imposition of any surcharge for "wrong-venue filing of return" Request for transfer of registration of branch/facility, which has no registered tax types in the RDO where it is registered, shall immediately be effected by the concerned old RDO. Registration of employees of the transferring employers shall simultaneously be transferred to the new RDO once the transfer of registration of the employer is effected.
a) Death of an individual; b) Dissolution, merger or consolidation of juridical person; c) Discovery of a taxpayer having multiple TINs; d) Payment of estate tax by the heirs, administrator or executor or upon full settlement of the tax liabilities of the estate. The cancellation of business registration may be granted on the following instances: a) Closure/Cessation of business operation; b) Dissolution of corporation/partnership; c) Merger/Consolidation; d) Death of an individual.
Other Updates Any person registered shall, whenever applicable, update his registration information with the RDO where he is registered under any of the following instances: a) A person's business has become exempt b) A change in the nature of the business itself, i.e. from sale of taxable goods and services to exempt c) A person whose transactions are exempt from VAT but voluntarily registered under VAT system applies for cancellation of his VAT registration after the lapse of 3 years after his registration NOTE: optional registration as a VAT taxpayer of a franchise grantee of radio and/or television broadcasting whose gross receipts for the preceding year did not exceed P10,000,000.00 shall be irrevocable; d) A VAT-registered person whose gross sales or receipts for three consecutive years did not exceed P1,500,000.00. Upon updating his registration, the taxpayer shall become liable to the percentage tax. e) Any other changes/updates in registration information previously supplied, including cancellation or change in any tax types. Cancellation of Registration Either cancellation of business registration and/or TIN. The cancellation of business registration shall not automatically cancel the TIN of the person. TIN is cancelled upon:
Power of Commissioner to suspend the business operations of any person who fails to register Suspension of business operations: In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the CIR or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than 5 days for any of the following violations: a) Failure to issue receipts and invoices b) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code c) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter d) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code b. Persons Required to Register for VAT
Mandatory VAT registration Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or engages in the sale or exchange of services shall be liable to register if: i. His gross sales or receipts for the past 12 months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, have exceeded P1.5 million; or ii. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Sec. 109(1)(A) to (U) of the Tax Code, will exceed P1.5 million. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding taxable year exceeded P10 million, shall register within thirty (30) days from the end of the taxable year.
Page 93 of 165
NOTE: If he fails to register, he is liable to output VAT but cannot claim input VAT, for the period in which not properly registered. Optional VAT Registration Taxpayers may apply for VAT registration not later than 10 days before the beginning of the taxable quarter and shall pay the P500 registration fee, unless they have already paid at the beginning of the calendar year. The Commissioner of Internal Revenue may, for administrative reason deny any application for registration. Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. Cancellation of VAT Registration If he makes a written application and can demonstrate to the commissioners satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will not exceed one million five hundred thousand pesos (P1,500,000); or If he has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months. NOTE: The cancellation for registration will be effective from the first day of the following month the cancellation was approved. c. Supplying TIN Any person required to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicated in such return statement or document filed with the BIR for his proper identification for tax purposes. In case a registered taxpayer dies, the administrator or executor shall register the estate of the decedent a new TIN. In case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the RDO where he is registered BUT if the executor or administrator is not registered, registration shall be made with the RDO having jurisdiction over his legal residence. Only one TIN shall be assigned to a taxpayer. Issuance of Receipts or sales or commercial invoices
from the BIR an authority to print receipts or sales or commercial invoices before a printer can print the same. No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show: a) the name b) business style c) Taxpayer Identification Number (TIN) d) business address of the person or entity to use the same, e) other information that may be required
Invoicing requirements for VAT A VAT-registered person shall issue: a) A VAT invoice for every sale, barter or exchange of goods or properties; and b) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or official receipts. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. Information contained in the VAT invoice A statement that the seller is a VAT-registered person, followed by his TIN; The total amount to be paid with the indication that such amount includes the VAT; Provided, That: (a) The amount of tax shall be a separate item (b) If the sale is exempt from VAT, the term "VATexempt sale" shall be written or printed prominently on the invoice or receipt; (c) If the sale is subject to zero percent (0%) VAT, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; (d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zerorated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt. NOTE: The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. In the case of sales of P1,000.00 or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client, shall be indicated in addition to the information required.
d.
Printing of receipts or sales or commercial invoices All persons who are engaged in business shall secure
Page 94 of 165
Consequences of issuing erroneous VAT invoice or ORs (Please refer to 22. Invoicing Requirements under the VAT Section for further discussion) e. Exhibition of certificate of payment at place of business The original copy of Certificate of Registration and the duly validated Annual Registration Fee Return are required to be displayed in any conspicuous place in the head office, branch office, storage place or place of production. [RMC No. 39-95 dated December 1, 1995] Continuation of business of deceased person If during the year, the owner of a business dies, the business is continued, and the annual registration fee has been duly paid, NO ADDITIONAL PAYMENT shall be required for the remainder of the year. However, the persons interested in the estate of the deceased owner shall submit to the BIR, within 30 days from the death, a list of the inventories of goods or stocks of the business at the time of death. This shall also apply in the case of transfer of ownership or change of name of the business establishment. Removal of Business to another location Any business for which the annual registration fee has been paid may be removed and continued in any other place without the payment of additional tax during the term for which the payment was made subject to the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
Gross receipts of common carriers derived from incoming and outgoing freight is not subject to local taxes under the Local Government Code (LGC). Covers cars for rent or hire driven by the lessee, transportation contractors, including persons who transport passengers for hire, and other domestic carriers by land, air or water, for the transport of passengers, and keepers of garages Does not cover owners of bancas and owners of animal-drawn two-wheeled vehicles MINIMUM QUARTERLY GROSS RECEIPTS: Jeepneys Manila and other P 2,400 cities Provincial 1,200 Public Utility Bus Not exceeding 30 P 3,600 Passengers More than 30 but not 6,000 more than 50 passengers More than 50 7,200 Passengers Taxis Manila and other P 3,600 cities Provincial 2,400 Cars for hire With chauffer P 3,000 Without chauffer 1,800
f.
g.
======================================
TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE E. Percentage Tax
====================================== I. TAX LIABILITY A. TAX ON PERSONS EXEMPT FROM VAT 3% of gross quarterly sales or receipts Any person who is exempt from VAT and who is not a VAT-registered person. Those who gross annual sales and receipts does not exceed P1.5 million are exempted from VAT. Cooperatives shall be exempt from the 3% gross receipts tax (GRT) Those earning less than P100,000 which is neither covered by percentage tax nor VAT B. TAX ON DOMESTIC CARRIERS AND KEEPERS OF GARAGES 3% of quarterly gross receipts
A.
TAX ON INTERNATIONAL CARRIERS 3% of their quarterly gross receipts Covers International air carriers and shipping carriers doing business in the Philippines TRANSPORTING Persons KIND OF CARRIER Domestic TAX LIABILITY 3% Percentage Tax 12% VAT Domestic Trip 12% VAT International Trip Zerorated 3% Percentage Tax Domestic
COMMON CARRIER By Land
By Sea
Goods/cargo Whether transporting person or goods/cargo
Domestic Domestic
International
By Air
Domestic
Page 95 of 165
International
flight 12% VAT International flight Zerorated 3% Percentage Tax
Tax on gross receipts derived from sources within the Philippines by all banks and non-banks financial intermediaries
B.
TAX ON FRANCHISES 1. Franchises on radio and broadcasting companies whose annual gross receipts of the preceding year does not exceed P10 million 3% tax on the gross receipts derived from the business covered by law granting the franchise Radio and television broadcasting has an irrevocable option to be registered as a VAT taxpayer and pay the corresponding VAT 2 Gas and water utilities 2% tax on the gross receipts derived from the business covered by the law granting the franchise
RECEIPTS Interest, commission, discounts from lending activities and financial leasing bases on remaining maturities of instruments Maturity period is 5 years or less Maturity period is more than 5 years Dividends and equity shares in net income of subsidiaries Royalties, rentals of property (real/personal), profits from exchange and all other items treated as gross income under Section 32 Net trading gains on foreign currency, debt securities, derivatives, and other similar financial instruments
RATE
5% 1% 0% 7%
7%
NOTE: Electric companies are now subject to VAT and not percentage tax C. OVERSEAS COMMUNICATIONS TAX Covers every overseas dispatch, message or conversation transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and either communication equipment services 10% on the amount paid for services rendered Paid by the person paying for the services rendered to the person rendering the services Exemptions: a. Government and any of its political subdivisions and instrumentalities b. Diplomatic services c. International organizations (based in the Philippines and enjoying privileges, exemptions and immunities pursuant to an international agreement) d. News services (which messages deal exclusively with the collection of news for dissemination) D. TAX ON BANKS AND NON-BANK FINANCIAL INTERMEDIARIES PERFORMING QUASI-BANKING FUNCTIONS E.
NOTE: 1. The term banks refer to entities engaged in the lending of funds obtained in the form of deposits. [RA 337, as amended General Banking Law of 2000] 2. Quasi-bank refers to a non-bank financial institution authorized by BSP to engage in quasi-banking functions and to borrow funds from more than 19 lenders through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes. 3. The 20% final withholding tax on a banks passive income forms part of the taxable gross receipts for the purpose of computing the gross receipts tax (GRT). TAX ON OTHER NON-BANK FINANCE INTERMEDIARIES Tax on gross receipts derived by other non-bank finance intermediaries, doing business in the Philippines, from interest, commissions, discounts from lending activities, income from financial leasing, and all other items treated as gross income Based on the remaining maturities of the instruments from which the receipts are derived MATURITY 5 years or less More than 5 years RATE 5% 1%
Page 96 of 165
F.
TAX ON LIFE INSURANCE PREMIUMS 5% of total premiums collected (whether paid in money, notes, credits or any substitute for money) by every person, company or corporation doing life insurance business of any sort in the Philippines, except purely cooperative companies or associations Premiums not included in the taxable receipts: 1. Premiums refunded within 6 months after payment on account of rejection of risks 2. Premiums paid upon reinsurance by a company that has already paid the tax 3. Premiums collected or received by any branch of a domestic corporation, firm or association doing business outside the Philippines on account of any life insurance of the insured who is a non-resident, if any tax on such premiums is imposed by the foreign country where the branch is established 4. Premiums collected or received on account of any reinsurance, if the insured of a personal insurance, resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has been issued or perfected 5. Portions of premiums collected or received by insurance companies on variable contracts in excess of the amount necessary to insure the lives of variable contract owners
operator of the amusement place, income from television, radio and motion picture rights
SOURCE Cockpits Cabarets, night or day clubs Boxing exhibitions Professional basketball games (in lieu of all other percentage taxes) Jai-alai and racetracks (whether or not they charge for admissions)
RATE 18% 18% 10% 15% 30%
Boxing exhibitions, wherein World or Oriental Championships in any division is at stake having at least one (1) Filipino contender and that
I.
TAX ON WINNINGS SOURCE Winnings or dividends based on the actual amount paid to winner for every winning ticket after deducting the cost of the ticket Winnings from double, forecast/quinella and trifecta bets Prizes of owners of winning horses RATE 10% PERSON LIABLE Every person who wins in horse races
4%
NOTE: Cooperative companies or associations are such as are conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit G. TAX ON AGENTS OF FOREIGN INSURANCE COMPANIES 10% of total premiums collected by every fire, marine or miscellaneous insurance agent authorized to procure policies of insurance as he may have previously been legally authorized to transact on risks located in the Philippines for companies not authorized to transact business in the Philippines Does not cover premiums paid on reinsurance In cases where owners or property obtain insurance directly with foreign companies, the owners shall pay a tax of 5% on the premiums paid J.
10%
Owner of winning race horses
NOTE: The tax shall be withheld by the operator, manager or person in charge of the horse races before paying the dividends or prizes TAX ON SALE, BERTER, OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING (IPO) A. Through Local Stock Exchange of 1% of the Gross Selling Price or Gross Value in Money of the shares of stocks sold, bartered, exchanged or otherwise disposed of through the local stock exchange other than the sale by a dealer in securities The tax shall be paid by the seller or transferor
H.
AMUSEMENT TAXES For purposes of amusement tax, gross receipts include all receipts of the proprietor, lessee or
Page 97 of 165
B. Through Initial Public Offering (IPO) Imposed on the sale, barter, exchange of shares of stock of closely held corporations in proportion to the total outstanding shares after the listing in the local stock exchange Tax based on the Gross Selling Price or Gross Value in Money shall be paid by the issuing corporation in the primary offering of it by the seller in the secondary offering NUMBER OF SHARES Up to 25% of all shares Over 25% but not over 33 % Over 33 % RATES 4% 2% 1%
======================================
TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE F. Compliance Requirements
====================================== 1. Administrative Requirements h. Registration Requirements (see RR 11-08)
C. Return on Capital Gains Realized from Shares of Stocks Includes both return on capital gains realized from sale of shares of stock listed and traded in the local stock exchange and return on public offerings of shares of stocks II. PAYMENT OF PERCENTAGE TAX Persons subject to percentage tax shall file a quarterly return of the amount of his gross sales, receipts or earnings and pay the tax due within 25 days after the end of each taxable quarter In case of a person whose VAT registration is cancelled and who becomes liable to percentage tax, the tax shall accrue from the date of cancellation Persons retiring from business subject to percentage tax shall file his return and pay the tax due within 20 days after closing the business Every person liable may, at his option, file a separate return for each branch or place of business or a consolidated return for all branches or places of business with the authorized agent bank, revenue district officer, collection agent or duly authorized treasurer of the city or municipality where the said business or principal place of business is located The Commissioner may, by rules and regulations, prescribe the time for filing the return and manner of payment, and a minimum amount of gross receipts, sales and taxable base when it is found that a person has failed to issue receipts or invoices, or when no return is filed, or when there is a reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return
Annual Registration Fee (RF) Fee of (P500.00) for every separate or distinct establishment or place of business shall be paid upon registration and every year thereafter on or before January 31 by every person subject to any internal revenue tax. The following are exempt from the Annual RF: (11) Cooperatives duly registered with the CDA; (12) Individuals earning purely compensation income whether locally or abroad; (13) Overseas Workers; (14) GAIs, in the discharge of their governmental functions; (15) Marginal Income Earners; (16) LGUs, in the discharge of their governmental functions; (17) Tax exempt persons such as those enumerated under Section 30 of the Code, as amended, in pursuance of tax-exempt activities; (18) Non-stock/non-profit organizations not engaged in business; (19) Persons subject to tax under one-time transactions; and (20) Facility/ies where no sales transactions occur. Registration of Each Type of Internal Revenue Tax Every person who is required to register with the BIR shall register each type of internal revenue tax for which he/it is obligated to OR is expected to periodically file a return, pay taxes due thereon, and update such record of any changes in the registration information. Note that the registration of one tax type does not automatically register the other type of taxes (e.g. registered for income tax is not registered for VAT) Generally, registration of tax types/fees by a business entity would consist of the following internal revenue taxes/fees: (i) Income tax; (j) VAT and/or percentage tax; (k) Withholding tax on compensation; (l) Creditable withholding tax at source on certain income payments; (m) Final withholding tax on certain income payments; (n) Documentary stamp tax;
Page 98 of 165
(o) Excise tax; and (p) Annual registration fee. Transfer of Registration It shall be duty of the taxpayer to inform the RDO where he is registered by filing the prescribed BIR Form specifying the RDO where he is intending to transfer. In case of transfer of registration of individuals earning purely compensation income due to change of employer, it shall be the responsibility of the RDO having jurisdiction of the new employer to effect the transfer of employee's registration. It shall be the duty of the old RDO to transfer the accountabilities of the taxpayer to the new RDO where he is transferring. The old RDO can still institute collection on concluded audit cases at the time of transfer of registration. The old RDO shall terminate audit cases that are prescribing within six (6) months from the date of transfer. The filing of tax returns and payment of taxes to the new RDO shall commence at the time the transfer is effected by the old RDO. Both the new and the old RDO shall be responsible in notifying the taxpayer concerned that the transfer of registration has already been effected. Transfer of head office of taxpayers engaged in business during the interim period shall only be officially effected in the records of the BIR by the end of the year. The taxpayer may be allowed to physically transfer its business to the intended RDO, however, the filing of its returns and payment of taxes in the new RDO shall still bear the RDO Code of the old RDO until the end of the year and without imposition of any surcharge for "wrong-venue filing of return" Request for transfer of registration of branch/facility, which has no registered tax types in the RDO where it is registered, shall immediately be effected by the concerned old RDO. Registration of employees of the transferring employers shall simultaneously be transferred to the new RDO once the transfer of registration of the employer is effected. Other Updates Any person registered shall, whenever applicable, update his registration information with the RDO where he is registered under any of the following instances: f) A person's business has become exempt g) A change in the nature of the business itself, i.e. from sale of taxable goods and services to exempt h) A person whose transactions are exempt from VAT but voluntarily registered under VAT system applies for cancellation of his VAT registration after
i)
j)
the lapse of 3 years after his registration NOTE: optional registration as a VAT taxpayer of a franchise grantee of radio and/or television broadcasting whose gross receipts for the preceding year did not exceed P10,000,000.00 shall be irrevocable; A VAT-registered person whose gross sales or receipts for three consecutive years did not exceed P1,500,000.00. Upon updating his registration, the taxpayer shall become liable to the percentage tax. Any other changes/updates in registration information previously supplied, including cancellation or change in any tax types.
Cancellation of Registration Either cancellation of business registration and/or TIN. The cancellation of business registration shall not automatically cancel the TIN of the person. TIN is cancelled upon: e) Death of an individual; f) Dissolution, merger or consolidation of juridical person; g) Discovery of a taxpayer having multiple TINs; h) Payment of estate tax by the heirs, administrator or executor or upon full settlement of the tax liabilities of the estate. The cancellation of business registration may be granted on the following instances: e) Closure/Cessation of business operation; f) Dissolution of corporation/partnership; g) Merger/Consolidation; h) Death of an individual. Power of Commissioner to suspend the business operations of any person who fails to register Suspension of business operations: In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the CIR or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than 5 days for any of the following violations: e) Failure to issue receipts and invoices f) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code g) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter h) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code i. Persons Required to Register for VAT
Mandatory VAT registration Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or
Page 99 of 165
engages in the sale or exchange of services shall be liable to register if: iii. His gross sales or receipts for the past 12 months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, have exceeded P1.5 million; or iv. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Sec. 109(1)(A) to (U) of the Tax Code, will exceed P1.5 million. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding taxable year exceeded P10 million, shall register within thirty (30) days from the end of the taxable year.
k.
document filed with the BIR for his proper identification for tax purposes. In case a registered taxpayer dies, the administrator or executor shall register the estate of the decedent a new TIN. In case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the RDO where he is registered BUT if the executor or administrator is not registered, registration shall be made with the RDO having jurisdiction over his legal residence. Only one TIN shall be assigned to a taxpayer. Issuance of Receipts or sales or commercial invoices
NOTE: If he fails to register, he is liable to output VAT but cannot claim input VAT, for the period in which not properly registered. Optional VAT Registration Taxpayers may apply for VAT registration not later than 10 days before the beginning of the taxable quarter and shall pay the P500 registration fee, unless they have already paid at the beginning of the calendar year. The Commissioner of Internal Revenue may, for administrative reason deny any application for registration. Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. Cancellation of VAT Registration If he makes a written application and can demonstrate to the commissioners satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will not exceed one million five hundred thousand pesos (P1,500,000); or If he has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months. NOTE: The cancellation for registration will be effective from the first day of the following month the cancellation was approved. j. Supplying TIN Any person required to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicated in such return statement or
Printing of receipts or sales or commercial invoices All persons who are engaged in business shall secure from the BIR an authority to print receipts or sales or commercial invoices before a printer can print the same. No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show: f) the name g) business style h) Taxpayer Identification Number (TIN) i) business address of the person or entity to use the same, j) other information that may be required Invoicing requirements for VAT A VAT-registered person shall issue: c) A VAT invoice for every sale, barter or exchange of goods or properties; and d) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or official receipts. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. Information contained in the VAT invoice A statement that the seller is a VAT-registered person, followed by his TIN; The total amount to be paid with the indication that such amount includes the VAT; Provided, That: (e) The amount of tax shall be a separate item (f) If the sale is exempt from VAT, the term "VATexempt sale" shall be written or printed prominently on the invoice or receipt;
Page 100 of 165
(g) If the sale is subject to zero percent (0%) VAT, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; (h) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zerorated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt. NOTE: The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. In the case of sales of P1,000.00 or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client, shall be indicated in addition to the information required.
2. Tax Returns a. Income tax returns
Consequences of issuing erroneous VAT invoice or ORs (Please refer to 22. Invoicing Requirements under the VAT Section for further discussion) l. Exhibition of certificate of payment at place of business The original copy of Certificate of Registration and the duly validated Annual Registration Fee Return are required to be displayed in any conspicuous place in the head office, branch office, storage place or place of production. [RMC No. 39-95 dated December 1, 1995]
(1) Individual Tax Returns (a) Filing of individual tax returns i. Who are required to file Husband and Wife Married individuals shall file a return for the taxable year to include the income of both spouses, computing separately their individual income tax based on their respective total taxable income. Where it is impracticable for the spouses to file one return, each spouse may file a separate return of income. If any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. Return of Parent to include income of Children The income of unmarried minors derived from property received from a living parent shall be included in the return of the parent EXCEPT: (i) when the donors tax has been paid on such property, (ii) when the transfer of such property is exempt from donors tax. Return of persons with disability If the taxpayer is unable to make his own return, the return may be made: (i) by his duly authorized agent or representative or (ii) by the guardian or other person charged with the care (iii) of his person or property, Where the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. ii. Who are not required to file An individual whose gross income does not exceed his total personal and additional exemptions for dependents However, a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of gross income;
m. Continuation of business of deceased person If during the year, the owner of a business dies, the business is continued, and the annual registration fee has been duly paid, NO ADDITIONAL PAYMENT shall be required for the remainder of the year. However, the persons interested in the estate of the deceased owner shall submit to the BIR, within 30 days from the death, a list of the inventories of goods or stocks of the business at the time of death. This shall also apply in the case of transfer of ownership or change of name of the business establishment. n. Removal of Business to another location Any business for which the annual registration fee has been paid may be removed and continued in any other place without the payment of additional tax during the term for which the payment was made subject to the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
Page 101 of 165
An individual with respect to pure compensation income derived from sources within the Philippines and the income tax has been correctly withheld However, if an individual derives compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. A minimum wage earner
Office where the taxpayer is required to register/which has jurisdiction over the location of the principal office of the CORPORATION filing the return. In places where there are no AABs with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer within the Revenue District Office where the taxpayer is required to register/which has jurisdiction over the location of the principal office of the CORPORATION filing the return.
Time of filing Within sixty (60) days following the close of each of the first three (3) quarters of the taxable year whether calendar or fiscal year. ii. Final adjustment return Place of filing Any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the Revenue District Office where the taxpayer is required to register/which has jurisdiction over the location of the principal office of the CORPORATION filing the return. In places where there are no AABs with the Revenue Collection Officer or Duly Authorized City or Municipal Treasurer of the municipality or city under the jurisdiction of the Revenue District Office where the taxpayer is required to register/which has jurisdiction over the location of the principal office of the CORPORATION filing the return. Time of filing On or before the 15th day of the fourth month following the close of the taxpayer's taxable year. iii. Taxable year of corporations A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return. The corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. iv. Extension of time to file return The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income, subject to the provisions of Section 56 of this Code.
NOTE: Any individual not required to file an income tax return may be required to file an information return (b) Where to file With any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the Revenue District Office where the taxpayer is required to register/where the taxpayer has his legal residence or place of business in the Philippines. In places where there are no AABs, the returns shall be filed with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer of the Revenue District Office where the taxpayer is required to register/where the taxpayer has his legal residence or place of business in the Philippines. In case taxpayer has no legal residence or place of business in the Philippines, the return shall be filed with the Office of the Commissioner or Revenue District Office No. 39, South Quezon City. (c) When to file For the quarterly income tax return: First Quarter On or before April 15 of the current taxable year Second Quarter On or before August 15 of the current taxable year Third Quarter On or before November 15 of the current taxable year For the annual income tax return: On or before April 15 of the next succeeding year.
(2) Corporate Returns (a) Requirement for filing returns i. Declaration of quarterly corporate income tax Place of filing Any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the Revenue District
Page 102 of 165
(b) Return of corporation contemplating dissolution or reorganization Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. (c) Return on capital gains realized from sale of shares of stock not traded in the local stock exchange Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange shall: i. file a return within thirty (30) days after each transaction ii. file a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. (3) Returns of Receivers, Trustees in Bankruptcy or Assignees In cases wherein receivers, trustees in bankruptcy or assignees are operating the property or business of a corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net income as and for such corporation, in the same manner and form as required from the organization Any tax due on the income as returned by receivers, trustees or assignees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody or control.
(4) Returns of general partnerships Every general professional partnership shall file a return of its income, except exempt income setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners. (5) Fiduciary returns b. Estate tax returns
Persons liable to pay estate tax The person primarily liable is the estate itself, through the executor and administrator. When there are 2 or more executors or administrators, all of them are severally liable for the payment of tax. The heir or beneficiary has a subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the net estate. The extent of his liability shall not, however, exceed the value of his share in the inheritance. (1) Notice of death to be filed WHO files: the executor, administrator or any of the legal heirs, WHEN to file: within 2 months after the decedent's death, or within a like period after qualifying as such executor or administrator TO WHOM filed: Commissioner. (2) Estate tax returns WHEN to file: within six (6) months from the decedent's death; except, the Commissioner, in meritorious cases, grants a reasonable extension not exceeding 30 days for filing the return MANDATORY filing of estate tax returns in all cases of: i. transfers subject to the tax imposed herein ii. transfers though exempt from tax, where the gross value of the estate exceeds P200,000 iii. regardless of the gross value, the estate consists of registered or registrable property for which a clearance from the Bureau of Internal Revenue is required for the transfer of ownership in the name of the transferee WHERE to file: i. Authorized agent bank ii. Revenue district officer
Page 103 of 165
iii. Duly authorized city or municipal treasurer of the place of decedents domicile iv. If there is no legal residence in the country, with the Commissioner (3) Discharge of liabilities If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability, the Commissioner as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax shall notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. Distribution of Estate Upon payment, the administrator shall deliver the distributive share in the inheritance to any heir or beneficiary. The estate tax clearance issued by the Commissioner or the Revenue District Officer having jurisdiction over the estate will serve as the authority to distribute the remaining/distributable properties/share in the inheritance to the heir or beneficiary. In case of installment payments, the clearance shall be released only with respect to the property the corresponding tax has been paid. (a) Definition of deficiency The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax.
c.
Donors Tax Return
Who are liable to file donors tax return? Every person, whether natural or juridical, resident or nonresident, who transfers or causes to transfer property by gift (1) Requirements Any individual who makes any transfer by gift (except those which are exempt shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall set forth: i. Each gift made during the calendar year which is to be included in computing net gifts; ii. The deductions claimed and allowable; iii. Any previous net gifts made during the same calendar year; iv. The name of the donee; and v. Such further information as may be required by rules and regulations made pursuant to law. (2) Time and place filing The donors tax return shall be filed within 30 days after the date the gift is made Filed with any Authorized Agent Bank (AAB) of the RDO having jurisdiction over the place of the domicile of the donor at the time of the transfer. In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer, or if there is no legal residence in the Philippines, with Revenue District No. 39 South Quezon City. In the case of gifts made by a non-resident alien, the return may be filed with Revenue District No. 39 - South Quezon City, or with the Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer. d. VAT Return
(1) In General a. Monthly VAT Declaration (BIR Form No. 2550M) and Payment of VAT Refers to first 2 months of taxpayers quarters Filing and Payment Deadline: 20 days from the end of the month, except for Electronic Filing and Payment System (EFPS) taxpayers Filing deadline for EFPS: Deadline depends on the industry classification of the taxpayer but applicable only for filing of the monthly VAT return. NOTE: For the electronic payment of tax for the returns required to be filed earlier under the staggered filing system, the taxpayer upon e-filing shall, still using the facilities of EFPS, likewise give instruction to the
Page 104 of 165
Authorized Agent Bank (AAB) to debit its account for the amount of tax on or before the due date for payment thereof as prescribed under the prevailing/applicable laws/regulations. Payment deadline for EFPS: 25 days from the end of the month Withholding VAT Return (BIR Form 1600) Deadline of filing and payment: 10th day of the following month Quarterly VAT Return (BIR Form No. 2550Q) Deadline for filing and payment: Should be filed within 25 days following the close of each taxable quarter. The quarterly return shall reflect the cumulative totals of the sales, purchases, output tax and input tax for the three (3) months of the applicable quarter. The VAT payable (output tax less input tax) for each quarter shall be reduced by the total amount of the tax previously paid for the preceding 2 months EFPS: same deadline. (Sec. 114 [A])
iii.
b.
twenty five (25) days after the end of each month. The return for final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements shall be filed and the payment made within twenty five (25) days from the close of each calendar quarter.
c.
(2) Where to file the return The returns/declarations must be filed with any Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office where the taxpayer is required to register. In places where there are no Authorized Agent Bank (AAB), the returns/declarations shall be filed with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the revenue district where the taxpayer is required to register. Taxpayers with branches shall file only one consolidated return/declaration for his principal place of business or head office and all branches. e. Withholding Tax Returns (1) Quarterly returns and payment of taxes withheld Taxes deducted and withheld by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, Revenue District Officer, Collection Agent, or duly authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The return for final withholding tax shall be filed and the payment made: i. Within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year. ii. For large taxpayers, the filing of the return and the payment of tax shall be made within
(2) Annual Information Return The payor is required to file with the Commissioner, Revenue Regional Director, Revenue District Officer, Collection Agent in the city or municipality where the payor has his legal residence or principal place of business, where the government office is located in the case of a government agency, an Annual Information Return of Income Tax Withheld at Source (Form No. 1604), showing among others the following information: i. Name, address and taxpayer's, identification number (TIN); and ii. Nature of income payments, gross amount and amount of tax withheld from each payee and such other information as may be required by the Commissioner. On or before January 31 of the following year in which payments were made. If the payor is the Government of the Philippines or any political subdivision or agency thereof, or any government-owned or controlled corporation, the return shall be made by the officer or employee having control of the payments or by any designated officer or employee. 3. Tax Payments a. (i) Income Taxes Payment, in general; time of payment Pay as you file In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (ii) Installment payment When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer OTHER THAN A
Page 105 of 165
CORPORATION may elect to pay the tax in two (2) equal installments: in which case, i. The first installment shall be paid at the time the return is filed ii. The second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.
not to exceed 5 years, in case the estate is settled through the courts; or 2 years in case the estate is settled extrajudicially
In which case it shall be paid on or before expiration of the extension and running of the Statute of Limitations for assessment shall be suspended for the period of any such extension. The Commissioner may require a bond not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary when an extension for payment is granted. Restrictions as to Extension of Time to Pay: No extension shall be allowed when taxes are assessed by reason of: i. negligence ii. intentional disregard of rules and regulations iii. fraud on the part of the taxpayer (2) Liability for payment Discharge of liabilities If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability, the Commissioner as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax shall notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. Distribution of Estate Upon payment, the administrator shall deliver the distributive share in the inheritance to any heir or beneficiary. The estate tax clearance issued by the Commissioner or the Revenue District Officer having jurisdiction over the estate will serve as the authority to distribute the remaining/distributable properties/share in the inheritance to the heir or beneficiary. In case of installment payments, the clearance shall be released only with respect to the property the corresponding tax has been paid.
(iii) Payment of capital gains tax Pay as you file However, if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required: In case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, and subject to the penalties prescribed under applicable provisions of this Code: If the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments, the tax due from each installment payment shall be paid within thirty (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid.
b.
Estate Taxes
(1) Payment of Tax: Time of Payment GENERAL RULE: at the time the return is filed by the executor, administrator or the heirs but before delivery of the distributive share in the inheritance to any heir or beneficiary. EXCEPTION: when the Commissioner finds that payment on due date would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax:
Page 106 of 165
Definition of deficiency The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax. (3) Payment before delivery by executor or administrator No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid is shown. Payment of tax antecedent to the transfer of shares, bonds or rights There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said
depositors. (4) Duties of certain officers and debtors Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is shown, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the nonpayment of the tax discovered by them. A debtor of the deceased shall not pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. (5) Restitution of tax upon satisfaction of outstanding obligations If, after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid. c. Donors Taxes Within thirty days (30) after the date the gift (donation) is made. A separate return will be filed for each gift (donation) made on the different dates during the year reflecting therein any previous net gifts made during the same calendar year. If the gift (donation) involves conjugal/community/property, each spouse will file separate returns corresponding to his/ her respective share in the conjugal/community property. This rule will also apply in the case of co-ownership over the property. VAT (Please see discussion under Tax Returns)
d.
4. Penalties Suspension of business operations: In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the Commissioner of
Page 107 of 165
Internal Revenue or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations: i. Failure to issue receipts and invoices ii. Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code iii. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter iv. Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code Surcharge, interest and other penalties: The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code.
companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer. [Sec. 24 B] Each partner shall report as gross income his distributive share constructively received in the net income of the partnership. (Sec. 26) Assignment of Income Doctrine Ex: A is entitled to his salary of P10 Million but assigns it to B for unknown reasons. In this case, both A and B realized income. A constructively received income (because he was able to assign and thus has complete control/dominion over it) and B actually received it. The income is taxable in the hands of both A and B. c. Inventory method for income determination i. Basis: Revenue Memorandum Circular No. 43-74 ii. The taxpayers net worth is determined both at the beginning and end of the taxable year. iii. The increase or decrease in the net worth is adjusted by adding all non-deductible items and subtracting therefrom non-taxable receipts. iv. The general theory is that the taxpayers money and other assets in excess of liabilities after accurate and proper adjustment of non-deductible and non-taxable items not accounted for in his tax return is deemed to be unreported income. Conditions of the Net Worth Method: 1. Inadequate records as prerequisite - The taxpayers books of account do not clearly reflect his income or he has no books, or if he has books, he refuses to produce them; 2. Need for evidence of source of income - That there is evidence of possible source/ sources of income to account for the increases in the net worth or expenditures; 3. A definite starting point or opening net worth - That there is a fixed starting point or opening net worth (date beginning with a taxable year or prior to it when his financial condition can be established with definiteness); 4. Proper adjustments to conform with income tax laws That the circumstances are such that the method does not reflect his income with accuracy and certainty and proper and just additions of personal expenses and non-deductible expenditures were made and correct, fair and equitable credit were given by way of eliminating non-taxable items.
======================================
TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE G. Tax remedies under the NIRC
====================================== 1. CONCEPT OF ASSESSMENT What Constitutes an Assessment? An assessment contains not only a computation of tax liabilities but also a demand for payment within the prescriptive period. There is no form for an assessment. It can be written anywhere as long as it is signed by the BIR. Any notice sent to the taxpayer demanding the tax liability is an assessment. a. Requisites for valid assessment The law requires that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. [Sec. 228]
b. Constructive methods of income determination Doctrine of Constructive Receipt an income is constructively received when it is credited, or segregated in favor of a person. The person may withdraw the said account anytime without any substantial limitations or conditions upon which payment or enjoyment is to be made or exercised. Examples: Cash and/or property dividends constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund
Page 108 of 165
d. Jeopardy assessment A jeopardy assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial trial in light of the Revenue Officers belief that assessment and collection of tax will be jeopardized by the delay caused by the taxpayers failure to 1) comply with audit and investigation requirements and 2) substantiate any or all claims, deductions or credits in his return. e. Tax delinquency and tax deficiency Delinquency means: Failure to pay: 1. tax due on any return required to be filed, or 2. tax due for which no return is required, or 3. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner. Deficiency means: The amount by which the tax imposed exceeds the amount shown as tax by the taxpayer on his return. The amount shown on the return shall be increased by the amounts previously assessed as a deficiency, and decreased by the amount previously abated, credited, return or repaid. If no amount is shown as tax by the taxpayer on his return, or if no return is made, then the amount by which the tax exceeds the amount previously assessed (or collected without assessment) as a deficiency, but such previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited, return or repaid.
3)
4) 5) 6)
regular basis from: (a) Any person other than the person under investigation or (b) Any office or officer of the national/local government, government agencies and instrumentalities (Bangko Sentral, GOCCs) To Summon (a) The person liable for tax or required to file a return or (b) Any officer or employee of such person or (c) Any person having in his possession/custody/ care 1. The books of accounts 2. Accounting records of entries relating to the business of the person liable for tax or any other person To Produce such books, papers, records and other data and to give testimony To take the Testimony of the person concerned, under oath as may be relevant to the inquiry To cause revenue officers and employees to make a Canvass of any revenue district or region Nothing in Section 5 shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for under Sec. 6 (F) of the Code (authority to inquire into bank deposits).
Power to make assessments, prescribe requirements for tax administration and enforcement (Sec. 6) 1) Examination of returns and determination of tax due (a) After a return has been filed the Commissioner or his representative may authorize i. Examination of any taxpayer; and ii. Assessment of the correct amount of tax; (b) Failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer; Any tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or his representative. Any return, statement or declaration filed in any authorized office shall not be withdrawn; but within THREE YEARS from date of filing, the same may be modified, changed or amended; provided that no notice for audit or investigation of such return, has in the meantime, been actually served upon the taxpayer. Failure to submit required returns and other documents (a) If a person: i. Fails to file a required return or report at the time prescribed or ii. Willfully or otherwise files a false or fraudulent return,
2. POWER OF COMMISSIONER TO MAKE ASSESSMENTS AND PRESCRIBE ADDITIONAL REQUIREMENTS FOR TAX ADMINISTRATION AND ENFORCEMENT. a. Power to obtain information, summon, examine and take testimony of persons (Sec. 5) For the Commissioner to ascertain: (a) Correctness of any return or in making a return where none has been made (b) Liability of any person for any internal revenue tax or in correcting such liability (c) Tax compliance The Commissioner is authorized: 1) To Examine any relevant Book, paper, record or other data 2) To Obtain any Information (costs, volume of production, receipts, sales, gross income, etc), on a
2)
Page 109 of 165
(b) The Commissioner shall Make or Amend the return from: i. His own knowledge or ii. From such information as he can obtain through testimony or otherwise iii. Which shall be prima facie correct and sufficient for all legal purposes 3) Inventory-taking, Surveillance, Presumptive Gross Sales (a) The Commissioner may, at any time during the taxable year v. Order the inventory taking of goods of any taxpayer; or vi. May place the business operations of any person (natural/juridical) under observation or surveillance vii. If there is reason to believe that such person is not declaring his correct income, sales or receipts for tax purposes. viii. The findings may be used as basis for assessing the taxes and shall be deemed prima facie correct. (b) Commissioner may prescribe a minimum amount of gross receipts, sales and taxable base (taking into account the sales and income of other persons engaged in similar business) : i. When a person has failed to issue receipts as required by Sec. 113 (Invoice requirements for VAT-registered persons) and Sec. 237 (Issuance of Receipts or Commercial Invoices); or ii. When the books of accounts or records do not correctly reflect the declarations made or required to be made in a return, iii. Such minimum amount shall be prima facie correct Terminate taxable period Commissioner shall declare the tax period of a taxpayer terminated and send notice to the taxpayer of such decision with a request for immediate payment of the tax, when it has come to the knowledge of the Commissioner: (RIRHO) (a) That a taxpayer is Retiring from business subject to tax or (b) Is Intending to leave the Philippines or (c) To Remove his property therefrom or (d) To Hide or conceal his property or (e) Is performing any act tending to Obstruct the proceedings for the collection of tax Prescribe Real Property Values The Commissioner is authorized to: (a) Divide the Philippines into different zones or areas and
(b) Determine the fair market value of real properties located in each zone or area For tax purposes, the value of the property shall be whichever is higher of: (a) Fair market value as determined by the Commissioner; or (b) Fair market value as shown in the schedule of values of the provincial and city assessors. 6) Authority to Inquire into Bank Deposit Notwithstanding R.A. 1405 (Bank Secrecy Law) the Commissioner is authorized to inquire into the Bank deposits of: (a) A decedent to determine his gross estate (b) A taxpayer who has filed an application to compromise payment of tax liability by reason of financial incapacity (c) A taxpayer subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of: Provided, That the information obtained from banks and financial institutions may be used by the BIR for tax assessment, verification, audit and enforcement purposes. The taxpayers application for compromise shall not be considered unless he waives in writing his privilege under R.A. 1405 and other general or special laws. Such waiver shall authorize the Commissioner to inquire into his bank deposits. The Commissioner shall provide the tax information obtained from banks and financial institutions pursuant to a convention or agreement upon request of the foreign tax authority when such requesting foreign tax authority has provided information to demonstrate the relevance of the information under R.A. 10021. RMC No. 29-2010 publishes R.A. 10021 entitled An Act to Allow the Exchange of Information by the Bureau of Internal Revenue on Tax Matters Pursuant to Internationally-Agreed Tax Standards, Amending Section (F), and 270 of the National Internal Revenue Code (NIRC) of 1997, as Amended, and for Other Purposes. The following are specified in the RA: (a) Authority of the Commissioner of Internal Revenue to inquire into bank deposit accounts and related information held by financial institutions (b) Allowing a Foreign Tax Authority to examine Income Tax Returns of taxpayers in the Philippines (c) Authority of the Commissioner of Internal Revenue to supply information to a Foreign Tax Authority which is at his disposal
4)
5)
Page 110 of 165
(d) Penalties, for willful refusal to supply information (e) Obligation to maintain confidentiality of information received (f) Notice to taxpayers regarding respect for exchange of information 7) Authority to Register tax agents (a) The Commissioner shall Accredit and Register, individuals and general professional partnerships and their representatives who prepare and file tax returns and other papers or who appear before the BIR (b) The Commissioner shall create national and regional accreditation boards Those who are denied accreditation may appeal the same to the Sec. of Finance who shall rule on the appeal within 60 days from receipt of such appeal. Failure of the Sec. of Finance to rule on the appeal within the said period shall be deemed as approval for accreditation. 8) Authority to Prescribe Additional Requirements
a. Prescriptive period for assessment GENERAL RULE 3 years after the date the return is due or filed, whichever is later (Sec 203) Note: A return filed before the last day prescribed by law for filing shall be considered as filed on the last day. - False, fraudulent, and non-filing of returns EXCEPTIONS: 1. Failure to file return: 10 years from date of discovery of the omission to file the return (Sec. 222A) 2. False or fraudulent return with intention to evade the tax: 10 years from the date of the discovery of the falsity or fraud (Sec 222A) a. Nothing in Sec 222A shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. b. Fraud must be alleged and proved as a fact. It must be the product of a deliberate intent to evade taxes. It may be established by the: intentional and substantial understatement of the tax liability by the taxpayer (substantial under declaration of income; >30% of that declared [Sec. 248]) intentional and substantial overstatement of deductions of exemptions (>30% of the actual deductions [Sec. 248]) c. Falsity constitutes a deviation from the truth due to mistake, carelessness or ignorance. NOTE: 1. Agreement in writing to the extension of the period to assess between the CIR and the taxpayer before the expiration of the 3 year period. Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period... The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized. The waiver should be duly notarized. CIR v. Kudos Metal Corp. [G.R. 178087, May 5, 2010] 2. Notice of the assessment must be released, mailed or sent to the taxpayer within the 3 year period. It is not required that the notice be received by the taxpayer within the prescribed period. But the sending of the notice must clearly be proven. Basilan Estate v. CIR, [G.R. No. L-22492, September 5, 1967]
The Commissioner may prescribe the manner of compliance with any documentary or procedural requirement for the submission or preparation of financial statements accompanying tax returns. 3. WHEN ASSESSMENT IS MADE Sections 203 and 222 of the NIRC provide for a statute of limitations on the assessment and collection of internal revenue taxes in order to safeguard the interest of the taxpayer against unreasonable investigation. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. As was held in Republic of the Phils. vs. Ablaza: The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. Phil. Journalists, Inc. v. CIR, [G.R. 162852, December 16, 2004] Rules on Prescription 1. When the tax law itself is silent on prescription, the tax is imprescriptible 2. When no return is required, tax is imprescriptible NOTE: Remedy of taxpayer is to file a return
Page 111 of 165
Amendment of Return If the amended return is substantially different from the original return, the prescriptive period shall be counted from the filing of the amended return. CIR v. Phoenix Assurance Co., [L-19727, May 20, 1965] b. Suspension of running of statute of limitations 1. when the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court, and for 60 days thereafter when the taxpayer requests for a reinvestigation which is granted by the CIR when the taxpayer cannot be located in the address given by him in the return, unless he informs the CIR of any change in his address when the warrant of distraint or levy is duly served and no property is located when the taxpayer is out of the Philippines (Sec. 223)
Prima facie evidence of a false or fraudulent return as determined by the Commissioner pursuant to the rules and regulations promulgated by the Sec. of Finance: 1. substantial under declaration of taxable sales, receipts or income failure to report sales, receipts or income in an amount exceeding 30% of that declared per return 2. substantial overstatement of deductions claim of deductions in an amount exceeding 30% of actual deductions b. Interest A) There shall be assessed and collected an Interest at 20% per annum on any unpaid amount of tax B) OR higher rate prescribed by rules and regulations from the date prescribed for payment until the amount is fully paid. C) FROM the date prescribed for its payment until the full payment. a) Deficiency Interest in the tax due b) Delinquency Interest In case of failure to pay: 4. tax due on any return required to be filed, or 5. tax due for which no return is required, or 6. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner. D) Interest shall form part of the tax. NOTE: Pursuant to Section 249 of the Tax Code, the imposition of interest on delinquency is mandatory. Jamora v. Meer, [74 Phil. 22] The imposition of interest is but a just compensation to the state for the delay in the payment of the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's hands.[BIR Ruling No. 019-03] E) Interest on extended payment. a. any person who is qualified and elects to pay the tax on installment but fails to pay the tax, or any installment, or any part on or before the date prescribed; or b. where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, c. from the date of notice and demand until it is paid.
2. 3.
4. 5.
4. GENERAL PROVISIONS ON ADDITIONS TO THE TAX a. Civil penalties A) Penalty: 25% of the amount due, in addition to the tax required to be paid in case of the following: RIDT (lets get RID of Tax) a) Failure to file any Return and pay the tax on the date prescribed; or b) Filing a return with an Internal revenue officer other than those with whom the return is required to be filed, unless otherwise authorized by the Commissioner; or c) Failure to pay the Deficiency tax within the time prescribed for its payment in the notice of assessment; or d) Failure to pay on or before the date prescribed for its payment: 1. the full or part of the amount of Tax shown on any return required to be filed; 2. the full amount of tax due for which no return is required to be filed. B) Penalty: 50% of the tax or of the deficiency tax, in case any payment has been made on the basis of a return before the discovery of the falsity or fraud. In case of: [ FiFa ] a) Willful neglect to File the return within the period prescribed; or b) False or fraudulent return is willfully made, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud.
Page 112 of 165
5. ASSESSMENT PROCESS a. Tax audit b. Notice of informal conference A written notice informing a taxpayer that the findings of the audit conducted on his accounting records indicate that additional taxes or deficiency assessment has to be paid. If, after the culmination of an audit, a revenue officer recommends the imposition of deficiency tax assessment, this recommendation is communicated by the BIR to the taxpayer during an informal conference. The taxpayer shall have 15 days from the receipt of the notice of informal conference to explain his side. c. Issuance of preliminary assessment notice Communication issued by the BIR informing a taxpayer who has been audited of the findings by the BIR. The assessment shall be in writing, and should inform the taxpayer of the law and the facts on which the assessment is made; otherwise, the assessment is void. There is a presumption of correctness and good faith on the part of the CIR, thus, the burden lies on the taxpayer. Otherwise, the finding of the CIR will be conclusive and he will assess the taxpayer. The same is true even if the CIR is wrong, if the taxpayer does not controvert it. Cagayan Robina Sugar Milling v. CA, [G.R. No. 122451, October 12, 2000] Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence. From the provision [of RR 12-99] it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the "due process requirement in the issuance of a deficiency tax assessment," the absence of which renders nugatory any assessment made by the tax authorities. CIR v. METRO STAR SUPERAMA, [G.R. 185371, December 8, 2010]
d. Notice of informal conference (see above) e. Issuance of preliminary assessment notice (see above) f. Exceptions to issuance of preliminary assessment notice Instances where a pre-assessment notice NEED NOT be given: MET DC when the finding for deficiency tax is a result of Mathematical error in the computation of tax appearing on the face of the return; or Discrepancy is determined between the tax withheld and the amount actually remitted by the withholding agent a taxpayer who opted to claim a refund or tax credit was determined to have Carried over and applied the amount against succeeding tax liabilities Excise tax has not been paid an article locally purchased or imported by an exempt person has been sold, traded or Transferred to non-exempt persons g. Reply to preliminary assessment notice If the taxpayer disagrees with the PAN, he has 15 days to file a written reply to contest the proposed assessment. h. Issuance of formal letter of demand and assessment notice/final assessment notice A notice of assessment is a formal letter of demand where a declaration of deficiency taxes is issued to a taxpayer who fails to respond to a preassessment notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. This is commonly known as the final assessment notice. i. Disputed assessment j. Administrative decision on a disputed assessment
6. PROTESTING ASSESSMENT a. Protest of assessment by taxpayer - Protested assessment A protest is a vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case of administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the
Page 113 of 165
official actuations of the CIR. This is equivalent to a pleading. - When to file a protest File a request for reinvestigation or reconsideration within 30 days from receipt of the assessment - Forms of protest a. request for reinvestigation a plea for reevaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. Involves a question of fact or law or both. b. request for reconsideration a plea for reevaluation of the assessment on the basis of existing records without need of additional evidence. Involves a question of fact or law or both. b. Submission of documents within 60 days from filing of protest Submission of documents within the 60 days period is optional to the taxpayer. The relevant supporting documents mentioned in the law refers to such documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted, otherwise the taxpayer would always be at the mercy of the BIR which may require production of such documents which taxpayer could not produce. Standard Chartered Bank v. CTA, [CTA Case No. 5696, August 16, 2001] After the company submitted its letter-reply stating that it would not comply with the presentation of the proof of DST payment, no reply was then heard from the CIR. The company has complied with the requisites in disputing an assessment, which provides that in case the protest is not acted upon within 180-days from the submission of the documents, the taxpayer adversely affected may appeal to the CTA within 30days from the lapse of the 180-day period. Thus, the tax assessment cannot be considered as final, executory and demandable. CIR v. First Express Pawnshop Company, Inc., [G.R. No. 172045-46, June 16, 2009] c. Effect of failure to protest Within 60 days from filing of protest, all relevant supporting documents should have been submitted, otherwise, the assessment shall become FINAL (cannot be appealed). (Sec. 228)
7. RENDITION OF DECISION BY COMMISSIONER a. Denial of protest - Commissioners actions equivalent to denial of protest If protest is denied, elevate the matter with the CIR within 30 days from receipt of the decision of the CIRs duly authorized representative. (a) Filing of criminal action against taxpayer Criminal action may be filed during the pendency of an administrative protest in the BIR It is not a requirement for the filing thereof that there be a precise computation and assessment of the tax, since what is involved in the criminal action is not the collection of tax but a criminal prosecution for the violation of the NIRC. Provided, however, that there is a prima facie showing of a willful attempt to evade taxes. An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. Ungab v. Cusi, [L-41919-24, May 30, 1980] See also CIR v. Pascor Realty, [G.R. No. 128315, June 29,1999], which reached the same conclusion as in Ungab. HOWEVER, in the case of CIR v. CA, CTA, & Fortune Tobacco [G.R. No. 119761, August 29, 1996), the CIR held a contrary position b. Issuing a warrant of distraint and levy - Inaction by commissioner 8. REMEDIES OF TAXPAYER TO ACTION BY COMMISSIONER Appeal of Protest to the CTA (Judicial Relief) Grounds: a. In case of denial of protest b. In case of inaction by commissioner within 180 days from submission of documents Period to appeal: a. within 30 days from receipt of decision denying the protest or b. 30 days from the lapse of 180 day period
Page 114 of 165
c.
Effect of failure to appeal The decision shall be final, executory and demandable (NOTE: See the CTA case of Lascona which gives the taxpayer the option either to appeal to the CTA after 180 days or to await the decision of the CIR.)
B. COLLECTION 1. REQUISITES 2. PRESCRIPTIVE PERIODS 1. 2. Local taxes, fees or charges five (5) years from the date they became due (sec. 194, LGC) When there is fraud or intent to evade the payment of taxes, fees or charges ten (10) years from discovery of fraud or intent to evade payment (sec. 194, LGC)
serving a copy of the warrant upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the issuing corporation, company, association (c) Debts and Credits 1. leaving a copy of the warrant with the person owing the debts or having in his possession such credits or his agent. 2. the warrant shall be sufficient authority to the person served to pay to the Commissioner the amount of such debts or credits (d) Bank accounts (garnishment) 1. serve a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank 2. bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient [Sec.208] 3) Posting of Notice [Sec. 209] (a) Notice specifying the time and place of sale and the articles disdained. (b) The posting shall be made in not less than 2 public places in the city or municipality where the distraint is made. (c) One of the places for posting of such notice is the Office of the Mayor of such city or municipality. 4) Sale of Property Distrained - Sale of property distrained and disposition of proceeds (a) Release of distrained property upon payment prior to sale - Purchase by the government at sale upon distraint - Report of sale to the BIR - Constructive distraint to protect the interest of the government There may be no actual delinquency. Taxpayer is prohibited from disposing of the property and must preserve the same 4. SUMMARY REMEDY ON REAL PROPERTY a. Advertisement and sale Advertisement of the time and place of sale, which shall contain: a. The amount of tax and penalties due b. Name of the taxpayer c. Short description of the property to be sold The advertisement shall be made within 20 days after the levy, and the same shall be for a period of at least 30 days. It shall be effected by: i. posting a notice at the main entrance of the
Local taxes, fees or charges may be collected within five years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of such period. [Sec. 194, LGC] 3. DISTRAINT OF PERSONAL PROPERTY INCLUDING GARNISHMENT a. Summary remedy of distraint of personal property - Procedure for distraint and garnishment 1) Report on the distraint (Commencement of distraint proceedings) (a) by the distraining officer submitted within 10 days from receipt of the warrant to the Revenue District Officer or Revenue Regional Officer. (b) by the Revenue Regional Director - a consolidated report, as may be required by the Commissioner
The order of distraint may be lifted by the Commissioner or his representative [Sec. 207(a)] 2) Service of warrant of distraint. Procedures with respect to: (a) Goods, effects, chattels and other personal property 1. a copy of an account of the property distrained, signed by the officer, shall be left either with the owner or the person from whom the property was taken or at the dwelling or place of business of such person and with someone of suitable age and discretion 2. together with a statement of the sum demanded 3. and also a note of the time and place of sale (b) Stocks and other Securities
Page 115 of 165
ii.
municipal building or the city hall and in public and conspicuous place in the barrio or district where the property is located by publication once a week for 3 consecutive weeks in newspaper of general circulation in the municipality or city where the property is located [Sec. 213]
an accounting of the same shall rendered to the Chairman of the Commission on Audit. [Sec. 216] c. When property to be sold or destroyed Forfeited property shall not be destroyed until at least 20 days from seizure. d. Disposition of funds recovered in legal proceedings or obtained from forfeiture The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is made, specifying; the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained. At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges. In the case of stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities. Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending; the sale, and no charge shall be imposed for the services of the local internal revenue officer or his deputy. [Sec. 209]
b. Redemption of property sold Within 1 year from the date of sale, the property may be redeemed by the delinquent taxpayer or any one from him, upon the payment of the taxes, penalties and interest thereon from the date of delinquency to the date of sale together with interest on purchase price at 15% per annum from the date of sale to the date of redemption. [Sec. 214] The owner shall not be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. c. Final deed of purchaser If the property is not redeemed, a final deed of sale shall be issued to the purchaser. 5. FORFEITURE TO THE GOVERNMENT FOR WANT OF BIDDER Forfeiture is the divestiture of property without compensation, in consequence of a default or offense. a. Remedy of enforcement of forfeitures - Action to contest forfeiture of chattel In case of the seizure of personal property under claim of forfeiture, the owner desiring to contest the validity of the forfeiture may, at any time before sale or destruction of the property, bring an action against the person seizing the property or having possession thereof to recover the same, and upon giving proper bond, may enjoin the sale; or after the sale and within six (6) months, he may bring an action to recover the net proceeds realized at the sale. [Sec. 231] b. Resale of real estate taken for taxes The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days notice, sell and dispose of the same of public auction or with prior approval of the Secretary of Finance, dispose of the same at private sale. In either case, the proceeds of the sale shall be deposited with the National Treasury, and
Page 116 of 165
6. FURTHER DISTRAINT OR LEVY The remedy of distraint and levy may be repeated if necessary until the full amount of the tax delinquency due including all expenses is collected from the taxpayer. [Sec. 217] Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of his property would escape payment of his tax liability by sacrificing an insignificant portion of his holdings. 7. TAX LIEN Tax Lien is a legal claim or charge on property, either real or personal, established by law as a security in default of the payment of taxes [51 AmJur 881]. Generally, it attaches to the property irrespective of ownership or transfer thereof Nature: a lien in favor of the Government of the Philippines when a person liable to pay a tax neglects or refuses to do so upon demand Duration: lien exists from the time assessment is made by the Commissioner until paid, with interests, penalties and costs that may accrue in addition thereto Extent: upon all property and rights to property belonging to the taxpayer Effectivity against third persons: only when notice of such lien is filed by the Commissioner in the Register of Deeds in the province/city where the property is situated [Sec. 219]
with or without the consent of the Prosecutor People v. Magdaluyo, [G.R. No. L-16235, April 20, 1961] This is more so when the court has rendered a final judgment. As a mere agent of the Government, the Commissioner is not authorized to accept anything less than what is adjudicated in favor of the government by virtue of such final judgment; the government has already acquired a vested rights. The BIR Commissioner may compromise the payment of tax liabilities on the basis of the doubtful validity of the assessment if the assessment is based on a decision by the Supreme Court which is adverse to BIR. [RR No. 30-02 as amended by RR No. 08-04] 9. CIVIL AND CRIMINAL ACTION 1. 2. 3. Must be brought in the name of the Government of the Philippines Conducted by legal officers of the BIR In case of actions for recovery of taxes or enforcement of a fine, penalty or forfeiture, must be filed with the approval of the Commissioner [Sec. 220]
NOTE: A tax lien is superior to judgment claim of private person. Attaches not only from the time the warrant was served BUT from the time tax was due and demandable (from the time when the assessment was made [Sec. 219]. 8. COMPROMISE a. Authority of the commissioner to compromise and abate taxes BIR Commissioner as expressly authorized by the NIRC subject to certain conditions [Sec. 204, NIRC]; 1. Before the complaint is filed with the prosecutors office: the CIR has full discretion to compromise except those involving fraud After the complaint is filed with the prosecutors office but before the information is filed with the court: the CIR can still compromise provided the prosecutor must give consent After information is filed with the court: the CIR is no longer permitted to compromise
a. Suit to recover tax based on false or fraudulent returns Prima facie evidence of a false or fraudulent return as determined by the Commissioner pursuant to the rules and regulations promulgated by the Sec. of Finance: a) substantial under declaration of taxable sales, receipts or income failure to report sales, receipts or income in an amount exceeding 30% of that declared per return b) substantial overstatement of deductions claim of deductions in an amount exceeding 30% of actual deductions C. REFUND 1. GROUNDS AND REQUISITE FOR REFUND a) taxpayer files in writing with the Commissioner a claim for credit or refund for: Taxes erroneously or illegally received Penalties imposed without authority Any sum alleged to have been excessively or in any manner wrongfully collected Refund the value of internal revenue stamps when returned in good condition by the purchaser
2.
3.
Page 117 of 165
b)
a)
Redeem or change unused stamps rendered unfit for use and refund their value upon proof of destruction, in the discretion of the Commissioner application must be filed within 2 yrs after the payment of the tax or penalty (no suit or proceeding shall begun after the expiration of the said 2 yrs regardless of any supervening cause that may arise after the payment) a return filed showing an overpayment shall be considered a written claim for credit or refund
wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. xxx 4. Statutory basis for tax refund under the tax code a. Scope of claims for refund Taxes erroneously or illegally received Penalties imposed without authority Any sum alleged to have been excessively or in any manner wrongfully collected Refund the value of internal revenue stamps when returned in good condition by the purchaser Redeem or change unused stamps rendered unfit for use and refund their value upon proof of destruction, in the discretion of the Commissioner
2. Requirements for refund as laid down by cases a. Necessity of written claim for refund b. Claim containing a categorical demand for reimbursement c. Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause 3. Legal basis of tax refunds Broadly speaking, tax refunds are based on the legal principle of quasi-contracts or solutio indebiti. The pertinent rules are found in Arts. 2142 and 2154 of the Civil Code: Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. Particular references in the NIRC: Sec. 204 C. Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, that a return filed showing an overpayment shall be considered as a written claim for credit or refund. Sec. 229. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner
b. Necessity of proof for claim or refund It partakes of the nature of an exemption and is strictly construed against the claimant. CIR v. Tokyo Shipping Ltd., [244 SCRA 332]. c. Burden of proof for claim of refund The burden of proof is on the taxpayer claiming the refund that he is entitled to the same CIR v. Tokyo Shipping Ltd., [244 SCRA 332]. d. Nature of erroneously paid tax/illegally assessed collected Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at the time that payment is made. Taxes are illegally collected when payments are made under duress. e. Tax refund vis--vis tax credit TAX REFUND Tax refund takes place when there is actually a reimbursement of tax. TAX CREDIT The government issues a Tax Credit Certificate covering the amount determined to be reimbursable, which is applied after proper verification against any sum that may be due to the taxpayer. Tax Credit Certificate: a) may be applied against any internal
Page 118 of 165
b)
c)
revenue tax, EXCEPT withholding taxes original copy is surrendered to the revenue officer no tax refund will be given resulting from availment of incentives granted by law where no actual payment was made (Sec. 204 C)
The following must be established: a) that there was an actual collection and receipt of the government of the tax to be recovered and this requires actual proof; and b) that there is a legal basis for granting the refund or credit including the verification of compliance with the statutory requirements relative to the filing of the claims within the reglamentary two-year period. Forfeiture of cash refund/tax credit: a) Forfeiture of refund in favor of the government when a refund check or warrant remains unclaimed or uncashed within 5 yrs. from date of mailing or delivery b) Forfeiture of Tax Credit a tax credit certificate which remains unutilized after 5 yrs. from date of issue, shall be invalid, UNLESS revalidated. [Sec. 230] f. Essential requisites for claim of refund a) a claim for refund or credit has been filed with the Commissioner b) the suit may be maintained whether or not such tax/penalty/sum has been paid under protest c) in any case, suit must be filed in court within 2 yrs. from date of payment of the tax/penalty regardless of any supervening cause that may arise after payment d) the Commissioner may, even without a written claim, refund or credit a tax, where on the face of the return upon which payment was made, payment appears to be erroneous. [Sec. 204 C, 229] 5. WHO MAY CLAIM/APPLY FOR TAX REFUND/TAX CREDIT a. Taxpayer/withholding agents of non-resident foreign corporation 6. PRESCRIPTIVE PERIOD FOR RECOVERY OF TAX ERRONEOULSY OR ILLEGALLY COLLECTED
Commencement of 2-year period CASE 2-YEAR PERIOD STARTS FROM If the tax sought From date tax to be refunded is was paid [CIR v. illegally or Victorias erroneously Milling] collected If the tax is paid From date of in installment or the last or final only in part installment or CIR v. Prieto, [G.R. No. L13912, September 30, 1960] If the taxpayer merely made a deposit From conversion of the deposit to payment [Union Garment v. Coll]
NOTES
There is no payment until the whole/entire tax liability is fully paid
Merely making a deposit is not equivalent to payment until the amount is actually applied to the purpose for which it was deposited A taxpayer who contributes to the withholding tax system performs and extinguishes his tax obligation for the year concerned. It is only then that the corporation can ascertain whether it made profits or incurred losses. Before the right to refund or credit arises, there is absolutely no basis to file a claim with the CIR or commence a suit in court
If tax has been withheld from source (through the withholding tax system)
Corporate taxpayer
If tax was not erroneously or illegally paid but the taxpayer became entitled to refund because of supervening circumstances
From date it falls due at the end of the taxable year Gibbs v. CIR, [G.R. No. L17406, November 29, 1965] At the earliest, on the date of the filing of the adjusted final return [ACCPA v. CA] From the date the taxpayer becomes entitled to refund and not from the date of payment CIR v. Don Pedro Central Azucarera, [G.R. No. L28467 February 28, 1973]
Page 119 of 165
Section 230 of the NIRC provides for a 2-yr prescriptive period to be counted "from the date of payment of tax" for actions for refund of corporate income tax. Thus, the 2-yr period should be reckoned from the actual filing of the Adjustment Return or Annual ITR, because at this point, it can be determined whether there has been an overpayment of tax. CIR v. CA, CTA & BIR [G.R. No. 117254, January 21, 1999]
A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress [Sec. 229] Similarly, payment under protest is not necessary in refund for local taxes. [Sec. 196 LGC], however, payment under protest is necessary is case of: (a) real property taxes [Sec. 252 LGC] (b) custom duties [Sec 2308 TCC] 3. The Commissioner may, even without a written claim, refund or credit a tax, where on the face of the return upon which payment was made, payment appears to be erroneous. (Sec. 229) The partial payment of a tax cannot be a basis for a tax refund. CIR v. Prieto [G.R. L-11976, August 26, 1961] in case taxes are payable in installments, the twoyear period is counted from the payment of the last installment. CIR v. Palanca [G.R. No. L-16890, October 29, 1966] If a taxpayer had lost his right to dispute the validity of a tax assessment in view of his failure to appeal the Commissioners decision to CTA, may he be granted a refund? NO. The expedient of an appeal from a denial of a tax request for cancellation of warrant of distraint and levy cannot be utilized for the purpose of testing the legality of an assessment, which had become conclusive and binding on the taxpayer, there being no appeal, the procedure set forth in Section 306 (now Sec. 204 C and 229) of the National Internal Revenue Code is not available to revive the right to contest the validity of an assessment once the same had been irretrievably lost not only by the failure to appeal but likewise by the lapse of the reglementary period within which to appeal could have been taken. CIR v. Concepcion [G.R. No. L-23912, March 15, 1968]
If a Revenue Regulation provides for a prescriptive period different from the NIRC, then the regulation is invalid and the NIRC period should be used. PBCom v. CIR, [G.R. No. 112024, January 28, 1999] Suspension of the 2 yr Prescriptive Period 1. there is a pending litigation between the government and the taxpayer 2. The Commissioner in that litigated case agreed to abide by the decision of the SC as to the collection of taxes relative thereto Panay Electric Co. v. Collector, [May 28, 1958] 7. OTHER CONSIDERATION AFFECTING TAX REFUNDS 1. Sec. 112 (A) Zero-Rated or Effectively Zero-Rated Sales. - any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. 2. Payment Under Protest is NOT Necessary under NIRC
4.
5.
6.
Page 120 of 165
III. LOCAL GOVERNMENT CODE OF 1991, as amended

======================================
2. Nature and Source of Taxing Power (CITE LAW) The 1987 Constitution provides that:
Article X Section 5. Each local government unit shall have the power to create its own sources of revenues and to 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. The grant of taxing power to local government units is also embodied in the LGC: Section 129. Power to Create Sources of Revenue. Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. Power to Prescribe Penalties for Tax Violations and Limitations Thereon 1. The Sanggunian is authorized to prescribe fines or other penalties for violations of tax ordinances a. in no case shall fines be less than P1,000 nor more than P5,000 b. nor shall the imprisonment be less than one month nor more than six months Such fine or other penalty shall be imposed at the discretion of the court. The Sanggunian Barangay may prescribe a fine of not less than P100 nor more than P1000.
TOPIC UNDER THE SYLLABUS: A. Local Government Taxation

======================================
1. Fundamental Principles The fundamental principles governing the exercise of the taxing and other revenue-raising powers of LGUs are [ULIP]:
(a) Taxation shall be Uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall (EPuJuL): 1) be Equitable and based as far as practicable on the taxpayer's ability to pay; 2) be levied and collected only for Public purposes; 3) not be unJust, excessive, oppressive, or confiscatory; 4) not be contrary to Law, public policy, national economic policy, or in the restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be Let to any private person; (d) The revenue collected shall Inure solely to the benefit of the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, (e) Each local government unit shall, as far as practicable, evolve a Progressive system of taxation. [Sec. 130] Equality and uniformity in local taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate within the territorial jurisdiction of the taxing authority or local government unit and not necessarily in comparison with other units although belonging to the same political subdivision. In fine, uniformity is required only within the geographical limits of the taxing authority. [Punzalan v. City of Manila, G.R. No. L-4817, May 26, 1954] A city can validly tax the sales to customers outside the city as long as the orders were booked and paid for in the companys branch office in the city. A different interpretation would defeat the tax ordinance in question or encourage tax evasion by simply arranging for the delivery at the outskirts of the city. [Philippine Match Company v. City of Cebu, G.R. No. L-30745 January 18, 1978]
2. 3.
Power to Adjust Local Tax Rate (Sec. 191 LGC) LGUs are authorized to adjust the tax rates as prescribed herein not oftener than once every 5 years, and in no case shall such adjustment exceed 10% of the rates fixed under the LGC. Power to Grant Local Exemptions (Sec. 192 LGC) LGUs, may through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem necessary. Tax exemptions shall be conferred through the issuance of a non-transferable tax exemption certificate.
Page 121 of 165
Tax Exemptions existing before the Effectivity of the LGC: Unless otherwise provided by the LGC, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including GOCCs are hereby withdrawn upon the effectivity of the LGC except the ff: 1. 2. 3. local water districts, cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and educational institutions.
Nature of the Taxing Power of Local Government Units (1987 Constitution Article X Section 5,LGC Sec. 129) . 1. 2. not inherent Everett Steamship Corp. v. Municipality of Medina [G.R. No. L-21191, 30 April 30, 1966] exercised only if delegated to them by law or Constitution Mactan Cebu International Airport v. Marcos [G.R. No. 120082, September 11, 1996] not absolute subject to limitations provided for by law Manila Electric Company v. Province of Laguna [G.R. No. 131359, May 5, 1995]
3.
3. Local Taxing Authority

Tax Exemptions not applicable to Regulatory Fees The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU. Guidelines for the Granting of Tax Exemptions, Tax Incentives and Tax Reliefs (Art. 282 [B], Rules and Regulations Implementing the LGC) 1. On the grant of tax exemptions or tax reliefs: a. the same may be granted in cases of natural calamities, civil disturbance, general failure of crops, or adverse economic conditions such as substantial decrease in prices or agricultural or agri-based products. b. The grant shall be through an ordinance. c. Any exemption or relief granted to a type or kind of business shall apply to all business similarly situated. d. The same shall take effect only during the next calendar year for a period not exceeding 12 months as may be provided by the ordinance. e. In the case of shared revenue, the exemption or relief shall only extend to the LGU granting such exemption or relief. On the grant of tax incentives a. The same shall be granted only to new investments in the locality and the ordinance shall prescribe the terms and conditions therefore. b. The grant shall be for a definite period of not exceeding 1 calendar year. c. The grant shall be by ordinance passed prior to the 1st day of January of any year. d. Any grant to a type or kind of business shall apply to all businesses similarly situated. a) Power to Create Sources of Revenue Each local government unit has the power to: 1. 2. create its own sources of revenue and levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. [Sec. 129]
Such taxes, fees, and charges shall accrue exclusively to the local government units. (NOTE: As distinguished from internal revenue taxes which do not accrue exclusively to the national government but are shared to the local governments in the form of internal revenue allotments. See Title XI, NIRC of 1997) 4. Residual Taxing Powers of the LGU (Sec. 186 LGC) LGUs have the power to levy taxes, fees or charges on any base or subject NOT: a. b. c. specifically enumerated in LGC taxed under the provisions of the NIRC, as amended other applicable laws
2.
Conditions: a. That the taxes, fees or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy. The ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose.
b.
Sources of Revenues 1. Internal Revenue Allotment (IRA) National internal revenue collected and not applied as hereinabove provided or otherwise specially disposed of by law shall accrue to the National Treasury and shall
Page 122 of 165
be available for the general purposes of the Government, with the exception of the amounts set apart by way of allotment as provided for under Republic Act No. 7160, otherwise known as the Local Government Code of 1991. [Sec. 283, NIRC] National internal revenue collected and not applied as hereinabove provided or otherwise specially disposed of by law shall accrue to the National Treasury and shall be available for the general purposes of the Government, with the exception of the amounts set apart by way of allotment as provided for under Republic Act No. 7160, otherwise known as the Local Government Code of 1991. [Sec. 283, NIRC] Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows (c) On the third year and thereafter, 40%... [Sec. 284, RA 7160] 50% share in collections for the ff: (2nd par., Sec. 283, NIRC) a. VAT on sale of goods or properties under Sec. 106, NIRC b. VAT on sale of services and use or lease of properties under Sec. 108, NIRC c. Percentage taxes under Sec. 116, NIRC
a. b.
3. 4.
necessity of quorum submission for approval by the local chief executive c. the matter of veto and overriding the same d. the publication and affectivity Public hearings are required before any local tax ordinance is enacted [Sec. 187, LGC] Within 10 days after their approval, publication in full for 3 consecutive days in a newspaper of general circulation. In absence of such newspaper in the province, city or municipality, then the ordinance may be posted in at least two conspicuous and publicly accessible places [Sec. 189 LGC]
2.
4. Scope of Taxing Power 1. Grant of tax power under existing law [Sec. 129, LGC] 2. Power to prescribe penalties for tax violations and exemptions [Sec. 516, LGC] 3. Power to grant local tax exemptions [Sec. 192, LGC] 4. Power to adjust local tax rates [Sec. 191, LGC] 5. Residual taxing powers of local governments [Sec. 186, LGC] Limitations of the Residual Power 1. 2. 3. Constitutional limitations on taxing power Common limitations prescribed in Sec. 133 of LGC Fundamental principles governing the exercise of the taxing power of the LGUs prescribed under Sec. 130 of the LGC The ordinance levying such residual taxes shall not be enacted without any prior public hearing conducted for the purpose and The principle of preemption
b) Procedure for approval and effectivity of tax ordinances The power to impose a tax, fee or charge or to generate revenue is exercised by the Sanggunian of the LGU concerned through an appropriate ordinance. [Sec. 132] 1. 2. The procedure applicable to local govt ordinances in general should be observed. [Sec. 187, LGC] Procedural details [Secs. 54, 55, and 59 LGC]:
4.
5.
5. Specific Taxing Power of Local Government Unit (LGU)

A. PROVINCES TYPE OF TAX
Tax on Transfer of Real Property Ownership. The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property. Tax on Business of Printing and Publication. The province may impose a tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills,
RATE
Not more than 50% of the 1% of the total consideration or of the fair market value, whichever is higher Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year.
EXCEPTIONS
Sale, transfer or other disposition of real property pursuant to R.A. No. 6657 (CARL)
NOTES
It shall be the duty of the seller, donor, transferor or administrator to pay the tax imposed within 60 days from the date of the execution of the deed or from the date of the decedent's death.
Newly started business, the tax shall not exceed 1/20 of 1% of the capital investment. School texts or references, prescribed by the DECS
Page 123 of 165
certificates, receipts, pamphlets, and others of similar nature. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise. Tax on Sand, Gravel and Other Quarry Resources. The province may levy and collect taxes on ordinary stones, sand, gravel, earth, and other quarry resources extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction. Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, within its territorial jurisdiction. Not more than 10% of fair market value in the locality
shall be exempt from the tax. Newly started business, the tax shall not exceed 1/20 of 1% of the capital investment. The permit to extract resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the Sangguniang Panlalawigan. Proceeds distributed as follows: Province 30% Component City or Municipality where the quarry resources are extracted - 30% Barangay where the quarry resources are extracted - 40%. To be paid to the province where he/she practices his/her profession or where he/she maintains principal office in case the practice is in several places Provided, After payment he/she shall be entitled to practice his/her profession in any part of the Phils. w/out being subjected to any other national or local tax, license, or fee for the practice of the profession. Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions for the payment of tax. In case of fraud or failure to pay, the Sangguniang Panlalawigan may impose surcharges, interest and penalties. The proceeds from the amusement tax shall be shared equally by the province and the municipality where such amusement places are located.
Professional Tax. The province may levy an annual professional tax on each person engaged in the exercise or practice of his profession requiring government examination. st To be paid on or before the 31 day of January. Any person first beginning to practice a profession after the month of January must, however, pay the full tax before engaging therein. Amusement Tax. The province may levy an amusement tax to be collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement
At such amount and reasonable classification as the Sangguniang Panlalawigan may determine but shall in no case exceed P300.00.
Professionals exclusively employed in the government shall be exempt from the payment of this tax.
Not more than 30% of the gross receipts from admission fees.
The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentations, except pop, rock, or similar concerts shall be exempt.
Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products. The province may levy an annual fixed tax for every truck or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery of distilled spirits, soft drinks, cigars and cigarettes, and other products as may be determined by the Sanggunian, to sales outlets, or consumers, whether directly or indirectly, within the province.
Amount not exceeding P500.00.
TAX LAW REVIEWER
Page 124 of 162
B. CITIES The city may levy the taxes, fees, and charges which the province or municipality may impose. The tax rates that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50% except the rates of professional and amusement taxes. [Sec. 151]
NOTES: Rates of Tax within the Metropolitan Manila Area shall not exceed by 50% the maximum rates prescribed for ah. [Sec. 144] The Sanggunian concerned may prescribe a schedule of graduated tax rates but in no case shall exceed the rates prescribed in the LGC. The tax is payable for every separate or distinct establishment or place where business is conducted. [Sec. 146] A tax that bears a direct relation to the volume of sales or when there is a set ration on the volume of sales and the amount of tax, such may not be imposed by the local government since these amounts to percentage tax on sales. Serafica v. Treasurer of Ormoc City, [G.R. No. L-24813, April 28, 1969] However, if the tax is based on past quarterly sales, these could be valid. [MMIC v. Hinobangan]
C. MUNICIPALITIES SCOPE: Municipalities may levy taxes, fees and charges not otherwise levied by provinces. [Sec. 142]
I. Tax on Business
The municipality may impose taxes on the following: a. On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature. On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature. On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of the following essential commodities (where the rate prescribed is only of the regular rate [Sec. 143 par. c, LGC] 1. Rice and corn; 2. Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; 3. Cooking oil and cooking gas; 4. Laundry soap, detergents, and medicine; 5. Agricultural implements, equipment and postharvest facilities, fertilizers, pesticides and other farm inputs; 6. Poultry feeds and other animal feeds; 7. School supplies; and 8. Cement. On retailers On contractors and other independent contractors On banks and other financial institutions, On peddlers engaged in the sale of any merchandise or article of commerce On any business, which the Sanggunian concerned may deem proper to tax. For businesses subject to the excise, value-added or percentage tax, the tax rate shall not exceed 2% of gross sales of the preceding calendar year.
b. c.
II. Fees and Charges

Municipalities may impose: a. The municipality may impose and collect such reasonable fees and charges on business and occupation except professional taxes reserved for provinces. [Sec 147] Reasonable fees for the sealing and licensing of weights and measures. [Sec 148] Fishery rentals, fees and charges, including the authority to grant fishery privileges within municipal waters, as well as issue licenses for the operation of fishing vessels of three tons or less. [Sec. 149]
b. c.
III. Payment of Business Taxes:

a. It shall be payable for every separate or distinct establishment or place where the business subject to the tax is conducted and one line of business does not become exempt by being conducted with some other business for which such tax has been paid. The tax on a business must be paid by the person conducting the same. In cases where a person conducts or operates 2 or more of the businesses mentioned in Section 143 of LGC, the tax shall be computed as follows: 1. If these are subject to the same rate of tax, the tax shall be computed on the combined total gross sales or receipts of the said 2 or more related businesses. 2. If these are subject to different rates of tax, the gross sales or receipts of each business shall be
d. e. f. g. h.
b. c.
TAX LAW REVIEWER
Page 125 of 165
separately reported for the purpose of computing the tax due from each business.
IV. Situs of Local Taxation

a. Situs According to the Cases:
Rule 5: Where there are 2 or more factories, project offices, plants, or plantations located in different localities, the above mentioned 70% shall be prorated among the localities where the factories, project offices, plants, and plantations are located in proportion to their respective volumes of production during the period for which the tax is due. [Sec. 150] NOTE: In case of manufacturers or producers which engage the services of an independent contractor to produce or manufacture some of their products, these rules shall apply except that the factory or plant and warehouse of the contractor utilized for the production and storage of the manufacturers products shall be considered as the factory or plant and warehouse of the manufacturer. (IRR) The city or municipality where the port of loading is located shall not levy and collect reasonable fees unless the exporter maintains in said city or municipality its principal office, a branch, sales office, or warehouse, factory, plant or plantation in which case, the rule on the matter shall apply accordingly. (IRR) D. BARANGAYS Scope of Taxing Powers: The barangays may levy the following taxes and charges, which shall exclusively accrue to them: [ TOBS ] (a) Taxes - On stores or retailers with fixed business establishments with gross sales of receipts of the preceding calendar year of P50,000.00 or less for cities and P30,000.00 or less, in the case of municipalities, rate = not exceeding 1% on gross sales or receipts. (b) Service Fees or Charges for services rendered in connection with the regulations or the use of barangayowned properties or service facilities such as palay, copra, or tobacco dryers. (c) Barangay Clearance. - No city or municipality may issue any license or permit for any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted. (d) Other fees and Charges. - The barangay may levy reasonable fees and charges: (CRB) 1. On commercial breeding of fighting Cocks and cockpits; 2. On places of Recreation which charge admission fees; and On Billboards, signboards, neon signs, and outdoor ads. (Sec. 152) E. COMMON REVENUE-RAISING POWERS OF LGUS (Secs. 153-155) [ SPT ] a. b. Service Fees and Charges for services rendered Pubic Utility Charges for the operation of public utilities owned, operated and maintained by LGUs within their
Excise Tax not dependent on the domicile of the taxpayer, but on the place in which the act is performed or the occupation is engaged in; not upon the location of the office, but the place where the place is perfected. Allied Thread Co., Inc. v. City Mayor of Manila, [G.R. No. L-4029, November 21, 1984] Sales Tax it is the place of the consummation of the sale, associated with the delivery of the things which are the subject matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place of the perfection of the contract. Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur, [105 Phil 1263] b. Situs According to Section 150 of LGC
Rule 1: For purposes of collection of the taxes under Section 143 (tax on business), businesses maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. Rule 2: In case there is no branch or sales outlet in the city or municipality where the sale is made, the sale shall be recorded in the principal office and the taxes due shall accrue and be paid to such city or municipality. Rule 3: The following sales allocation for sales recorded in the principal office of businesses with factories, project offices, plants, and plantations: 30% of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and 70% of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located.
Rule 4: Where the plantation located at a place other than the place where the factory is located, the above mentioned 70% shall be divided as follows: 60% to the city or municipality where the factory is located; and 40% to the city or municipality where the plantation is located.
TAX LAW REVIEWER
Page 126 of 165
c.
jurisdiction. Toll Fees or Charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU concerned. Except: 1. officers and enlisted men of the AFP and PNP on mission, 2. post office personnel delivering mail, 3. physically-handicapped, and disabled citizens who are sixty-five (65) years or older.
The dividends received by a corporation shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation.
3)
Those exempt from the community tax are:
1. 2.
Diplomatic and consular representatives; and Transient visitors when their stay does not exceed 3 months.
4)
Place and time of Payment
F. COMMUNITY TAX Cities or municipalities may levy a community tax (Sec. 156)
1)
Place of Payment - place of residence of the individual, or in the place where the principal office of the juridical entity is located. [Sec. 160] Time for Payment - accrues on the 1st day of Jan. of each year which shall be paid not later than the last day of Feb. of each year Penalties for Delinquency. - An interest of 24% per annum from the due date until it is paid shall be added on the amount due. A community tax certificate may also be issued to any person or corporation not subject to the community tax upon payment of P1.00. [Sec. 162]
5)
Individuals Liable to Community Tax [IER] Inhabitant of the Philippines Eighteen years of age or over Regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of P1,000.00 or more, or who is required by law to file an income tax return
a. b. c.
Rate: P5.00 and an annual additional tax of P1.00 for every P1,000.00 of income regardless of whether from business, exercise of profession or from property which in no case shall exceed P5,000.00. In the case of husband and wife, the tax imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. [Sec. 157]
2)
Presentation of Community Tax Certificate on Certain Occasions: (Sec. 163, LGC)
Juridical Personalities (Sec. 158)
Corporations, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines are also liable to pay an annual community tax. Rate: P500.00 and an annual additional tax, which shall not exceed P10,000.00 in accordance with the following schedule: a. For every P5,000.00 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax - P2.00; and For every P5,000.00 of gross receipts derived by it from its business in the Philippines during the preceding year - P2.00.
A. Individual 1. When an individual subject to the comm. tax acknowledges any document before a notary public; 2. Takes the oath of office upon election or appointment to any position in the government service; 3. Receives any license, certificate or permit from any public authority; 4. Pays any tax or fee; 5. Receives any money from any public fund; 6. Transacts other official business; or 7. Receives any salary or wage from any person or corporation. The presentation of the CTC shall not be required in connection with the registration of a voter. B. Corporation 1. receives any license, certificate or permit from any public authority; 2. pays any tax or fee; 3. receives any money from any public fund; or 4. transacts other official business.
b.
TAX LAW REVIEWER
Page 127 of 165
6. Common Limitations on the Taxing Powers of LGUs and common revenue LGUs CANNOT LEVY: [ IDECTA_BEV_TRELEBI ] (a) Income tax, except on banks and other financial institutions; (NOTE: Since income tax is already imposed by the National Government under NIRC, LGUs cannot impose the same even on banks and other financial institutions. The exception is referring to the percentage tax on banks specified income.) (b) Documentary stamp tax; (c) Estate Tax, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided; (d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues, except wharfage on wharves constructed and maintained by the local government unit concerned; (e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, (f) Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of 6 and 4 years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the national Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided; (j) Taxes on the gross receipts of Transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in the Code; (k) Taxes on premiums paid by way of Reinsurance or retrocession; (l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of Licenses or permits for the driving thereof, except tricycles; (m) Taxes, fees, or other charges on Philippine products actually Exported, except as otherwise provided; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. 6810 and R.A. 6938 (Cooperative Code of the Philippines); and (o) Taxes, fees or charges of any kind on the National Government, its agencies and Instrumentalities, and local government units.
Classification of Common Limitations 1. 2. 3. Taxes which are levied under the NIRC unless otherwise provided by the LGC (*a, b, c, h, I, j) Taxes, fees, etc. which are imposed under the TCC (*d) Taxes, fees and charges where the imposition of which contravenes existing govtal policies or which are violative of the fundamental principles of taxation (*e, f, g, k, m, n, s) Taxes, fees and charges imposed under special laws. (* l) The imposition of 5% tax on the gross receipts on rentals or lease of space in privately-owned public markets are not income tax, rather, these constitutes as valid license fees for the regulation of the business. Progressive Development Corp. v. Quezon City, [G.R. No. L-36081, April 24, 1989]
4.
Principle of Preemption or Exclusion Where the national government elects to tax a particular area, it impliedly withholds from the local government the delegated power to tax the same field. This doctrine principally rests on the intention of Congress. Excluded impositions pursuant to the doctrine of preemption 1.
Taxes which are levied under the NIRC, unless otherwise provided by LGC of 1991; 2. Taxes, fees, etc. which are imposed under the TCC; 3. Taxes, fees, etc. the imposition of which contravenes existing govtal policies or which violates the fundamental principles of taxation; A province may not levy excise taxes on articles already taxed by the NIRC. The current Tax Code already imposes a tax on ALL quarry resources, regardless of origin, hence, the Province may no longer impose any additional amounts from Republic Cement. Province of Bulacan v. CA, [G.R. No. 126232, November 27, 1998] 7. Collection of Business Taxes Taxable Period The tax period of all local taxes, fees and charges shall be the calendar year, unless otherwise provided in the Code. Accrual of Tax All local taxes, fees, and charges accrue on first day of January of each year, unless otherwise provided in the Code. Time of Payment ALL local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be, unless otherwise provided in the Code.
TAX LAW REVIEWER
Page 128 of 165
Surcharges and Penalties on Unpaid Taxes, Fees, or Charges The Sanggunian may impose a surcharge not exceeding twenty five percent (25%) of the unpaid taxes, fees or charges not paid on time. They may impose interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges, until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed thirty six (36) months. Interest on other unpaid revenues On any other source of revenue, LGUs are authorized to impose an interest of a maximum of 2% per month, maximum of 36 months, on the amount unpaid. Collection of Revenues by the Local Treasurer All local taxes, fees and charges shall be collected by the provincial, city, municipal or barangay treasurer, or their duly authorized deputies. The provincial, city or municipal treasurer may designate the barangay treasurer or his deputy to collect local taxes, fees or charges. In case a bond is required for the purpose, the provincial city or municipal government shall pay premiums thereon in addition to the premiums of the bond that may be required under the Code. 8. Taxpayers Remedies a) Periods of assessment and collection of local taxes, fees or charges I. Administrative 1. Before assessment
entitled to a tax credit.

b) Protest of assessment (Sec. 195, LGC)
1.
2.
3.
The Local Treasurer or his duly authorized representative shall issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, surcharges, interests and penalties. Within 60 days from the receipt of the notice of assessment, the taxpayer MAY file a WRITTEN PROTEST with the Local Treasurer contesting the assessment (otherwise the assessment shall become FINAL and EXECUTORY). The Local Treasurer shall decide the protest within 60 days from the time of filing of the written protest. a. IF the protest is found to be MERITORIOUS, he shall issue a notice canceling wholly or partially the assessment. b. IF the assessment is found to be wholly or partly correct, the Local Treasurer shall DENY the protest wholly or partly with notice to the taxpayer. i. The taxpayer has 30 days from the receipt of the denial of the protest or from the lapse of the sixty-day period prescribed herein within which to appeal with the court of competent jurisdiction (otherwise the assessment becomes CONCLUSIVE and UNAPPEALABLE). [Sec. 195, LGC]
c) Claim for refund of tax credit for erroneously or illegally collected tax, free or charge 1. A WRITTEN claim for refund or credit must be filed with the Local Treasurer for the recovery of any tax, fee, or charge erroneously or illegally collected. 2. The claim must be filed within 2 years from the date the taxpayer is entitled to a refund or credit. [Sec. 196, LGC]
Protest against a newly enacted ordinance any question on constitutionality or legality of tax ordinance within 30 days from effectivity thereof to Secretary of Justice (sec. 187, LGC) Such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of tax. 2. After Assessment a. Protest within 60 days from receipt of assessment (sec. 195, LGC). Payment under protest is not necessary. Payment and subsequent refund or tax credit within 2 years from payment of tax to local treasurer (Sec. 196, LGC). It is to be noted that, unlike in internal revenue taxes, the supervening cause applies in local taxation because the period for the filing of the claims for refund or credit of local taxes is counted not necessarily from the date of payment but from the date of taxpayer is
9. Civil Remedies by the LGU for the Collection of Revenues

a) Local governments lien for delinquent taxes, fees or charges b). Civil Remedies, in general i) By administrative actionthrough distraint of personal property and by levy upon real property a. Distraint of personal property b. Levy of real property, procedure c. Further distraint or levy d. Exemption of personal property from distraint or levy e. Penalty on local treasurer for failure to
b.
TAX LAW REVIEWER
Page 129 of 165
issue and execute warrant of distraint or levy ii) Judicial action
(ii) Levy of real property, procedure
Deficiency
NOTE: Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the LGU concerned.
Local Governments Lien Local taxes, fees, charges and other revenues, constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by any appropriate administrative or judicial action.
Levy of real property before, simultaneously or after distraint of personal property belonging to the delinquent taxpayer.
Local treasurer shall prepare a duly authenticated certificate showing the name of the taxpayer and amount of tax, fee and penalty due him.
c) Procedure for administrative action (i) Distraint of personal property

Deficiency Report on levy within 10 days from levy by the levying officer. Seizure or confiscation of personal property belonging to the person subject to tax or subject to lien in sufficient quantity to satisfy the liability Written notice of levy to the assessor, register of deeds of the province or city where the property is located and the delinquent taxpayer.
Accounting for distrained goods
Posting of notices of the sale of distrained properties in not less than 3 public and conspicuous place, including the office of the chief executive, in the territory of the LGU concerned.
Advertisement of the sale of the property through sale or auction within 30 days after levy. The advertisement shall be effected by: (a) posting a notice in the main entrance of the municipal building or city hall and a conspicuous place in the barangay where the real property is located. (b) publication once a week for 3 consecutive weeks in a newspaper of general circulation in the province, city or municipality where the property is located.
Sale of levied property. The sale shall be scheduled in not less than 20 days after notice to the owner or possessor of the property and the publication and posting the property shall be sold to the highest bidder. The local treasurer shall make a report of the proceedings within 5 days from the sale.
Issuance of the certificate of sale to the purchaser. The owner of the property has 1 year from date of sale to redeem.
Disposition of the proceeds of the sale by application of such proceeds to the delinquency and expenses of sale and return of the balance to the owner.
If property is not disposed of within 120 days from date of distraint, the property shall be considered sold to the LGU concerned for the amount of the assessment made thereon by the Committee on Appraisal. The tax delinquency shall be cancelled to the extent of such amount.
If property redeemed, a certificate of redemption will be issued. If not redeemed, a final deed of sale shall be issued to the purchaser. The local treasurer shall purchase the property on behalf of the LGU if: (a) there is no bidder for the real property (b) the highest bid is insufficient to pay the deficiency tax. In this case, the owner also has 1 year to redeem.
TAX LAW REVIEWER
Page 130 of 165
(iii) Further distraint or levy (iv) Exemption of personal property from distraint or levy The following property shall be exempt from distraint and the levy, attachment or execution thereof for delinquency in the payment of any local tax, fee or charge, including the related surcharge and interest: (a) Tools and the implements necessarily used by the delinquent taxpayer in his trade or employment; (b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation; (c) His necessary clothing, and that of all his family; (d) Household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding Ten thousand pesos (P10,000.00); (e) Provisions, including crops, actually provided for individual or family use sufficient for four (4) months; (f) The professional libraries of doctors, engineers, lawyers and judges; (g) One fishing boat and net, not exceeding the total value of Ten thousand pesos (P10,000.00), by the lawful use of which a fisherman earns his livelihood; and (h) Any material or article forming part of a house or improvement of any real property. [Sec. 185, LGC] (v) Penalty on local treasurer for failure to issue and execute warrant of distraint or levy The Local Treasurer who: 1. Fails to issue or execute the warrant of distraint or levy after the expiration of the time prescribed, or 2. Who is found guilty of abusing the exercise thereof by competent authority shall be automatically dismissed from the service after due notice and hearing without prejudice to criminal prosecution under the Revised Penal Code and other applicable laws. [Sec. 177, LGC] d) Procedure for judicial action 2.
speedy and adequate remedy. Action for Declaratory Relief
Injunction if irreparable damage would be caused to the taxpayer and no adequate remedy is available. IV. Jurisdiction of Courts Over Local Taxation Cases 1. With the amendment brought by R.A. No. 9282, the Court of Tax Appeals now has appellate jurisdiction over local taxation cases decided by the RTC in the exercise of its appellate or original jurisdiction. Regular judicial courts are not prohibited from enjoining the collection of local taxes, subject to Rule 58 (Preliminary Injunction) of the Rules of Court. NOTE: Unlike the NIRC, the Local Tax Code does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent may have allowed preliminary injunction where local taxes are involved. But it cannot negate the procedural rules and requirements under Rule 58 of the Rules of Court Valley Trading Co. v. CFI of Isabela [1989]
2.
======================================
TOPIC UNDER THE SYLLABUS: III. LOCAL GOVERNMENT CODE OF 1991 B. Real Property Taxation
====================================== 1. Fundamental Principles in Assessment of Real Property Taxes (Sec. 198) [CUANE] 1. 2. 3. 4. 5. CURRENT and fair market value is the basis of appraisal UNIFORMITY in classification in each local government unit should be observed ACTUAL USE of the property should be the basis of classification Appraisal, assessment, levy and collection should NOT BE LET to any private person. EQUITABLE appraisal and assessment
2. Nature of Real Property Tax 1. Court action a. within 30 days after receipt of decision or lapse of 60 days of Secretary of Justices inaction [Sec. 187, LGC] within 30 days from receipt when protest of assessment is denied [Sec. 195, LGC] if no action is taken by the treasurer in refund cases and the two year period is about to lapse [Sec. 195, LGC] if remedies available does not provide plain, Real Property Tax is a direct tax on ownership of lands and buildings or other improvements thereon payable regardless of whether the property is used or not, although the value may vary in accordance with such factor. Real Property Taxation covers the administration, appraisal, assessment, levy and collection of Real Property Tax, i.e. tax on land and building and other structures and improvements on it, including machineries. (Subject to the definition given by Art. 415 of the Civil Code)
b. c.
d.
TAX LAW REVIEWER
Page 131 of 165
Improvement valuable addition made to a property or amelioration in its condition amounting to more than a mere replacement of parts involving capital expenditures and labor. 3. Imposition of Real Property Tax a. Power to Levy Real Property Tax Characteristic of Real Property Tax [LIPAD] 1. 2. 3. 4. 5. Direct tax on the ownership of real property Ad Valorem tax. The value is based on the tax base Proportion - the tax is calculated on the basis of a certain percentage of the value assessed Indivisible single obligation Local Tax
automatic dispensing machines which are not directly and exclusively used to meet the needs of a particular industry, business or activity shall not be considered within the definition of machinery. [Sec. 290 [o], IRR of RA 7160] Classification of Land for Purposes of Assessment - Sec 218(a) [CARMITS] 1. 2. 3. 4. 5. Commercial Agricultural Residential Mineral Industrial 6. Timberland 7. Special
Properties Liable for Real Property Tax According to the Local Government Code, Real Property liable for Real Prop tax are: 1. 2. 3. 4. Land Buildings Machinery and Other improvements not otherwise exempted under said code [Sec 232]
Special Classes of Real Property (Sec. 216) 1. Hospitals 2. Cultural and scientific purposes 3. owned and used by local water districts 4. GOCCs rendering essential public services in the supply and distribution of water and/or generation or transmission of electric power. b. Properties Exempt from Real Property Tax (Sec. 234) 1. Owned by the REPUBLIC of the PHILS or its political subdivisions. Except: when beneficial use has been granted to a taxable person 2. Charitable institutions, churches, parsonages, convents appurtenant thereto, mosques, non-profit or religious cemeteries, buildings and improvements actually directly and exclusively used for religious, charitable or educational purposes. 3. Machinery and Equipment actually, directly, and exclusively used by local Water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power 4. Real property owned by duly registered Cooperatives under R.A. 6938 5. Machinery & equipment for pollution control and Environment protection Exemptions previously granted, (not falling within the above enumeration) are withdrawn. Although powerless to grant RPT exemption, LGU in MM can exempt the 5% ad valorem tax on idle lands. LGUs (within and outside MM) may also grant condonation which actually partake of exemption. Proof of Tax Exemption: Every person by or for whom real property is declared who shall claim the exemption shall file with the provincial, city or municipal assessor within 30 days from date of declaration of real property sufficient documentary evidence in support of such claim (i.e. corporate charters, title of ownership, articles of incorporation, contracts, affidavits, etc.)
NOTE: Although the term real property has not been expressly defined in the LGC, early decisions of the Supreme Court in Mindanao Bus Co. v. City Assessor of Cagayan de Oro; Board of Assessment Appeals v. Meralco; Manila Electric Co. v. Board of Assessment Appeals, seem to suggest that Art. 415 of the Civil Code could also be controlling. Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or selfpropelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes. [Sec. 199 [o], LGC] Machinery which are of general purpose use including but not limited to office equipment, typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons), microcomputers, facsimile machines, telex machine, cash dispensers, furniture and fixtures, freezers, refrigerators, display cases or racks, fruit juice or beverage
TAX LAW REVIEWER
Page 132 of 165
4. Appraisal and Assessment of Real Property Tax Actual Use of Property as Basis for Assessment (LGC Sec. 217) Real property shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it. Unpaid realty taxes attach to the property and are chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the RPT on the subsequent owner which was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. Estate of Lim v. City of Manila, [G.R. No. 90639, February 21, 1990] Types of Real Property Tax 1. 2. Basic real property tax Special levies: a. Special Education Fund (SEF) 1% additional real estate tax to finance the SEF [Sec. 235, LGC] within MM area only b. Additional Ad Valorem on the Lands not exceeding 5% of the assessed value of the property [Sec. 236. LGC] c. For Public Works on lands specially benefited by public works, projects or improvements funded by the LGU May be imposed even by municipalities outside MM provided: Special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith not apply to lands exempt from basic real property tax and the remainder of the land had been donated to the local government unit concerned for the construction of said projects. [Sec. 240, LGC] Under Sec. 238 of the LGC, idle lands may be exempt from tax by reason of force majeure, civil disturbance, natural calamity or any cause which physically or legally prevents the owner of the property or person having legal interest therein from improving the land 5. Collection of Real Property Tax Steps in the Assessment and Collection of RPT STEP 1 - DECLARATION OF REAL PROPERTY 1. Declared by Owner or Administrator (Secs. 202-203, LGC) If newly acquired property file with the assessor within 60 days from date of transfer a sworn statement containing FMV and description of property If improvement on real property file w/in 60 days upon completion or occupation (whichever is earlier) a sworn statement of FMV and description of property 2. Declared by Provincial / City / Municipal Assessor (Sec. 204, LGC) This is done only when the person under Sec 202 refuses or fails to make the Declaration within the prescribed time. No oath by the assessor is required.
NOTE (1): If filing for exemption under Sec. 206 of LGC, the person claiming exemptions must file with assessor sufficient documentary evidence to support claim within 30 days from the date of declaration of property. If the required evidence is not submitted within 30 days, the property will be listed as taxable. NOTE (2): If property is declared for the first time, Sec. 222 of LGC states that the property shall be assessed for back taxes for not mare than 10 years prior to the date of initial assessment. The taxes shall be computed on the basis of applicable schedule of values in force during the corresponding periods. STEP 2: LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS (Secs. 205, 207, LGC) 1. 2. Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU. All declarations shall be kept and filed under a uniform classification system to be established by the provincial, city or municipal assessor.
What Are Considered as Idle Lands: (Sec. 237, LGC) 1. Agricultural lands More than 1 hectare if more than of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. Not Idle Lands: Agricultural lands planted to permanent or perennial crops with at least 50 trees to a hectare Lands actually used for grazing purposes Non-Agricultural Lands More than 1,000 sq. m. in area if more than of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein.
2.
TAX LAW REVIEWER
Page 133 of 165
STEP 3: APPRAISAL AND VALUATION OF REAL PROPERTY (Secs. 212-214, LGC For machineries: 224-225) How to determine Fair Market Value: FOR LAND 1. Assessor of the province/city or municipality may summon the owners of the properties to be affected and may take depositions concerning the property, its ownership, amount, nature and value. 2. Assessor prepares a schedule of FMV for different classes of properties 3. Sanggunian enacts an ordinance 4. The schedule of FMV is published in a newspaper of general circulation in the province, city or municipality concerned or in the absence thereof, shall be posted in the provincial capitol city or municipal hall places therein.
PERIOD WITHIN WHICH TO COLLECT (LGC Sec 270): within five (5) yrs from the date they become due within ten (10) yrs. from discovery of fraud, in case there is fraud or intent to evade Period of prescription shall be SUSPENDED when: (LGC Sec 270) 1. local treasurer is legally prevented to collect tax 2. the owner of prop requests for reinvestigation and writes a waiver before expiration of period to collect 3. the owner is out of the country or cannot be located Remedies of LGUs for the Collection of Real Property Tax A. Administrative A) Lien (Sec. 257, LGC) superior to all liens, charges or encumbrances and is enforceable by administrative or judicial action. It is extinguished only upon payment of tax and other expenses.
FOR MACHINERY 1. For brand new machinery: FMV is equivalent to acquisition cost 2. In all other cases: FMV = Remaining eco. life X Replacement cost Estimated eco. life STEP 4: DETERMINE ASSESSED VALUE (Sec 218) Procedure 1. take the schedule of FMV 2. Assessed value = FMV X Assessment level 3. Tax = Assessed value X Tax rate STEP 5: PAYMENT AND COLLECTION OF TAX WHEN: January 1 of every year (Sec 246) HOW a. basic real prop tax in 4 equal installments (Mar 31, Jun 30, Sep 30, Dec 31) b. special levy - governed by ordinance NOTE (1): Interest for late payment two percent (2%) each month on unpaid amt. until the delinquent amt is paid. provided in no case shall the total interest exceed thirty-six (36) months NOTE (2): Advance and prompt payment advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC) prompt payment - discount not exceeding 10% of annual tax due(Art 342 IRR) WHO COLLECTS The provincial, city, municipal or barangay treasurer
TAX LAW REVIEWER
Page 134 of 165
B) Levy (Sec. 258, LGC) Issuance of warrant by the LGU treasurer (on or before or simultaneously with the institution of civil action for collection of delinquent tax)
B. Judicial Civil Action (Secs. 266, 270, LGC) filed by the local treasurer within 5 or 10 years as provided in Sec. 270 of the LGC.
7. Taxpayers Remedies
Advertise sale or auction (within 30 days after service of warrant) by posting and publication
A. Administrative 1. Protest
Pay Pay the the tax tax under protest protest
Sale
Report of sale (within 30 days after sale). Preparation of certificate of sale (containing the name of the purchaser, description of the property, amount of delinquent tax and its interest, expenses.
File written protest with local treasurer (within 30 days from payment of tax)
Treasurer decides (within 60 days from receipt of protest) Redemption (within 1 year from date of sale) Approved Issuance of Final Deed to purchaser (upon the delinquent taxpayers failure to redeem) Denied
Apply for tax refund or tax credit
Purchase of property by local treasurer for want of bidder in case there is no bidder for the real property advertised or if the highest bid is insufficient to pay the RPT and other costs.
Appeal with the LBAA (in case of denial or inaction of the treasurer after the lapse of 60 days)
The proceeds of the sale in excess of the delinquent tax, the interest due thereon and the expenses of the sale shall be remitted to the owner of real property or person having legal interest. C. Distraint (Sec. 254, LGC) - with notice of delinquency posted and published. Personal property may be distrained to effect payment.
Appeal with the CBAA (within 30 days from receipt of adverse decision of LBAA)
Appeal to CTA (within 30 days from receipt of adverse decision of CBAA)
6. Claim for Tax Refund or Credit (Sec 253, LGC) a. The taxpayer may file a written claim for refund or credit with the provincial or city treasurer within 2 years from the date the taxpayer is entitled to such reduction or adjustment. b. Provincial or city treasurer should decide the claim within 60 days from receipt of the claim. c. In case of denial of refund or credit, appeal to LBAA within 30 days as in protest case.
Appeal to SC (within 15 days from receipt of adverse decision of CTA)
TAX LAW REVIEWER
Page 135 of 165
2. Redemption of Real Property (Sec. 261, LGC) a. Within 1 year from the date of sale, the owner of the delinquent real property, or person having legal interest or his representative, shall have the right to redeem the property upon payment to the local treasurer the ff: Amount of delinquent tax Interest thereon Expenses of sale from date of delinquency to date of the sale Interest of not more than 2% per month on the purchase price from date of sale to date of redemption
b.
A certificate of redemption shall be issued, and the certificate of sale issued to the purchaser shall be invalidated.
B. Judicial 1. 2. 3. 4. 5. Court Action appeal of CBAAs decision to CTA en banc; Suit assailing the validity of tax; Recovery of refund of taxes paid [Sec. 64, PD 464] Suit to declare invalidity of tax due to irregularity in assessment and collection; Suit assailing the validity of tax sale [Sec. 83, PD 464 and Sec. 267, LGC]
CONDONATION OF REAL PROPERTY TAXES 1. By Sanggunian RPT may be condoned wholly or partially in a given LGU when: a. There is general failure of crops; b. There is substantial decrease in the price of agricultural or agri-based products; or c. There is calamity. By the President of the Philippines - when public interest so requires
2.
TAX LAW REVIEWER
Page 136 of 165
IV. TARIFF AND CUSTOMS CODE OF 1978, as amended

======================================
Jurisdiction of Collector of Customs over Importation of Articles 1. 2. 3. 4. Cause all articles for importation to be entered in the customhouse Cause all such articles to be appraised and classified Assess and collect the duties, taxes and other charges thereon Hold possession of all imported articles until the duties, taxes and other charges are paid thereon (Sec 1206)
TOPIC UNDER THE SYLLABUS: A. Definitions

====================================== 1. 2. TARIFF: Custom duties, toll or tribute payable upon merchandise to government. CUSTOMS DUTIES: Tax assessed upon merchandise from or exported to a foreign country Garcia v. Executive Sec., [211 SCRA 227, 1992]
Territorial Jurisdiction of the BOC 1. 2. All the seas within the jurisdiction of the Phils. All coasts, ports, airports, harbors, bays, rivers and inland waters whether navigable or not from the sea [Sec. 603, 1st par.]
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 B. General Rule
====================================== All imported articles are subject to duty. Importation by the government taxable, Tariff and Customs Code (TCC) Sec. 101. BUREAU OF CUSTOMS Functions: 1. Assessment and collection of the lawful revenues from imported articles and all other dues, fees, charges, fines and penalties accruing under the tariff and customs laws. Prevention and suppression of smuggling and other frauds upon the customs. Supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce. Enforcement of tariff and customs laws, rules and regulations relating to the tariff and customs administration. Supervision and control over the handling of foreign mails arriving in the Phils. For the purpose of the collection of the lawful duty on dutiable articles thus imported and prevention of smuggling through the medium of such mails Supervision and control all import and export cargoes, landed or stored in piers, airports, terminal facilities including container yards and freight stations for the protection of government revenue. Exercise exclusive jurisdiction over seizure and forfeiture cases under the tariff and customs laws. [Sec. 602]
Other Types of Fees Charged by the BOC: 1. 2. Arrastre charge Wharfage due- counterpart of license, charged not for the use of any wharf but for a special fund- Port Works Fund Berthing fee Harbor fee Tonnage due
3. 4. 5.
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 C. Purpose for Imposition
====================================== Tariff and customs duties are taxes constituting a significant portion of the public revenue which are the lifeblood that enables the government to carry out functions it has been instituted to perform. Commissioner of Customs v. Makasiar, [177 SCRA 27]
2. 3.
4.
LIABILITY FOR CUSTOMS DUTIES

GENERAL RULE: No exemptions from customs duties The provisions of general and special laws, including those granting franchises, to the contrary notwithstanding, there shall be no exemptions whatsoever from the payment of customs duties [Sec. 105, last par.]
5.
6.
7.
EXCEPTIONS: 1. If provided under the TCC (e.g. conditionally-free importation) 2. Exemptions granted to GOCCs with existing contracts, commitments, agreements or obligations with foreign countries 3. Exemptions of international institutions, associations or
TAX LAW REVIEWER
Page 137 of 165
4.
organizations pursuant to agreements and special laws Exemptions granted by the President of the Phils. Upon recommendation of NEDA in the interest of national economic development. [Sec. 1205]
of the NEDA in the interest of national economy, general welfare and national security. Sec. 28, ART VI of the 1987 Constitution and Sec. 401, TCC. The President may fix tariff rates, import and export quotas, etc. under TCC 1. To increase, reduce or remove existing protective rates of import duty (including any necessary change in classification) the existing rates may be increased or decreased to any level on one or several stages but in no case shall be higher than a maximum of 100% as valorem To establish import quota or to ban imports of any commodity, as may be necessary To impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary
Liability of Importer for Customs Duties A personal debt due from the importer which can be discharged only by payment in full of all duties and taxes a lien upon imported articles which may be enforced while they are in custody or subject to the control of the government [Sec. 1204] Extend of Importers Liability Limited to the value of the imported merchandise. In case of forfeiture of the seized materials, the maximum civil penalty is the forfeiture itself. Mendoza v. David, [1 SCRA 791] Imported Goods Must be Entered in the Customhouse Imported goods must be entered in the customhouse at their port of entry otherwise they shall be considered as contraband and the importer shall be liable for smuggling [Sec. 1201] Port of entry means a domestic port open to both foreign and coastwise trade including airport of entry. [Sec. 3514] All articles when imported from any country into the Philippines shall be subject to duty upon each importation, even though previously exported from the Phils. except as otherwise specifically provided for in the TCC or other laws. [Sec. 1201]
2. 3.
Limitation Imposed Regarding the Flexible Tariff Clause 1. Conduct by the Tariff Commission of an investigation in a public hearing a. The Commissioner shall also hear the views and recommendations of any government office, agency or instrumentality concerned b. The NEDA thereafter shall submits its recommendation to the President The power of the President to increase or decrease the rates of import duty within the abovementioned limits fixed in the Code shall include the modification in the form of duty. In such a case the corresponding ad valorem or specific equivalents of the duty with respect to the imports from the principal competing country for the most recent representative period shall be used as bases. [Sec. 401, TCC]
2.
3.
Preference on the Owner of Imported Articles for Customs Purposes All articles imported into the Philippines shall be held to be the property of: the person to whom the property is consigned the holder of the bill of lading duly endorsed by the consignee therein named the consignee if consigned to order by the consignor the underwriters of the abandoned articles saved from a wreck at sea, along the coast or in any area in the Phils.
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 E. Requirements for Importation
====================================== 1. Beginning and Ending of Importation Application of the TCC TCC applies only after importation has begun but before importation is terminated Importation Begins: when the conveying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unload therein NOTE: If there is intention to unload, even if cargo not yet unloaded, and there is unmanifested cargo,
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 D. Flexible Tariff
====================================== Import duties which are modified by the President upon investigation by the Tariff Commission and recommendation
TAX LAW REVIEWER
Page 138 of 165
forfeiture may take place because importation has already begun. Importation Terminates: 1. Upon payment of the duties, taxes, and other charges due upon the articles, or secured to be paid at the port of entry and legal permit for withdrawal shall have been granted 2. In case the articles are free of duties, taxes and other charges until they have legally left the jurisdiction of customs [Sec. 1202]
Goods prohibited from being Imported 1. Absolutely prohibited a. b. c. d. e. f. Weapons of war Immoral/obscene or insidious articles Articles for treason Prohibited drugs/narcotics Gambling paraphernalia/devices Those prohibited under Special Laws [Sec. 102, TCC]
REQUIREMENT TO KEEP RECORDS

(Sec. 3514 TCC, as amended by R.A. 9135)
2.
Qualifiedly prohibited
All importers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner of Customs and for a period three (3) years from the date of importation, all the records of their importations and/or books of accounts, business and computer systems and all customs commercial data including payment records relevant for the verification of the accuracy of the transaction value declared by the importers/customs brokers on the import entry. All brokers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner of Customs and for a period of three (3) years from the date of importation copies of the above mentioned records covering transactions that they handle.
Where such conditions as to warrants a lawful importation do not exist, the legal effects of the importation of qualifiedly prohibited articles are the same as those absolutely prohibited articles. Auyong Hian v. CTA, [59 SCRA 110]
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 G. Goods Conditionally-free from Tariff and Customs Duties
====================================== Certain imported articles are exempt from import taxes upon compliance with certain requirements. These are 1. 2. 3. 4. Those provided for in Sec. 105 of the TCC; Those granted to government agencies, GOCC with agreements with foreign countries; Those given to international institutions entitled to exemption by agreement or special law; and Those that may be granted by the President upon NEDAs recommendation.
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 F. Importation in Violation of TCC
======================================
TAX LAW REVIEWER
Page 139 of 165
Exempt articles under Sec. 105 ARTICLE Animals and plants Aquatic products CONDITIONS For scientific, experimental, propagation, botanical, breeding, zoological and national defense purposes caught or gathered by vessels of Philippine registry Not have landed in foreign territory, or if landed, solely for transshipment Bond= 1 x of ascertained duties, taxes and charges Must be exported within 6 months Phil must not have adequate facilities to make repair Vessel was compelled by weather or casualty to go to a foreign port of repair Excludes value of article used for repair to be re-exported upon completion of the repair, processing or reconditioning Bond = 1 x of ascertained duties, taxes and charges
Equipment used for the salvage of vessels or aircraft not available locally Costs of repair made in foreign country of Phil vessels or aircraft
Articles brought into the Philippines for repair, processing, or reconditioning Trophies, prizes (medals, badges, cups) Those received as honorary distinction Samples in such quantity and of such dimensions or constructions as to render them unsaleable or of no appreciable commercial value,
models not adopted for practical use, and samples not for sale marked sample sale punishable by law for purpose of introducing new product imported by person duly registered and identified to be engaged in that trade Importations authorized by Sec of Finance formally declared and listed before departure and identified under oath before the Collector of Customs when exported from the Phil by such returning residents upon their departure therefrom or during their stay abroad personal and household effects including wearing apparel, articles of personal adornment (except luxury items) toilet articles, instruments related to ones profession and analogous personal or household effects, excluding vehicles, watercraft, aircraft and animals, purchased in foreign countries by residents of the Philippines which were necessary, appropriate and normally used for their comfort and convenience during their stay abroad, accompanying them on their return or arriving within a reasonable time which, barring unforeseen and fortuitous events, in no case shall exceed 60 days after the owners return, subject however to the following provisions: 1. That the personal and household effects shall neither be in commercial quantities nor intended for barter, sale or hire and that the total dutiable value of which shall not exceed P10,000 2. That the returning resident has not previously availed of the privilege under this section within 365 days prior to his arrival 3. That a 50% ad valorem duty across the board shall be levied and collected on the personal and household effects in excess of P10,000 arriving within a reasonable time, before or after the owners, in use of and necessary and appropriate for the wear or use of such persons according to their profession or position for the immediate purposes of their journey and their present comfort and convenient. Accompany them or arrive at a reasonable time
Personal and household effects of returning Phil residents
Wearing apparel, articles of personal adornment, toilet articles, portable tools and instruments, theatrical costumes and similar personal effects accompanying travelers or tourists in their baggage Personal and household effects, vehicles of foreign
TAX LAW REVIEWER
Page 140 of 165
consultants and experts hired or rendering service to govt, including staff and families
Professional instruments, tools of trade, wearing apparel, domestic animals, personal and household effects belonging to persons coming to settle in the Phil and OFW
Articles used exclusively for public entertainment; display in public expos; exhibition or competition for prizes; devices for projecting picture
In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Collector may require: written commitment or bond In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Change of residence is bona fide Privilege of free entry was never granted to them before or qualifies under LOI 105, 163, 210 Must file bond Exported within 6 months Not exhibited for profit Otherwise, confiscation +penalty Must file a bond Exported within 6 months (unless extended by the Collector for another 6 months) Principal actors are Filipinos Affidavit by importer that the exposed films are same films previously exported Reciprocity: such foreign country must grant same privilege to Phil. Agencies Such privileges must be accorded in a special agreement between Phil and the foreign country Privilege may be granted only upon specific instructions of Sec. of Finance which will be given only upon request of the DFA Org not for profit For free distribution to the needy Except those that are reusable for shipment or transportation of goods For use or consumption of passengers on board Any surplus or excess shall be dutiable Vessels must have been wrecked or abandoned in Phil waters Not exceed P10,000
Brought by foreign film producers for making or recording motion pictures on location in Phil. Photographic and cinematographic films, undeveloped, exposed outside Phil by resident Filipinos or Phil. producing companies Importations used by foreign embassies, legations, agencies of foreign govt Articles for personal or family use of members and attaches of foreign embassies, legations, consular officers and other reps of foreign govt Articles donated to or for account of relief organization Containers, holders and similar receptacles Supplies of vessel or aircraft Articles and salvage after 2 years from filing protest Coffins or urns containing human remains, bones ashes. Personal and household effects of deceased except vehicles Economic, technical, vocational, scientific, philosophical, historical, and cultural books and publications Phil articles previously exported and returned without increasing value or improved condition. Foreign articles previously exported when returned after having been exported and loaned for use temporarily abroad solely for exhibition Foreign container used in packing exported Phil products Articles and supplies imported by and for use of scheduled airlines operating under congressional franchise Machineries, equipments, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals, transpo and communications
Note that if a drawback or bounty was allowed to any Phil article under this subsection, upon re-importation article shall be subject to duty equal to the bounty or drawback
Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations Used in their agri and industrial operations
TAX LAW REVIEWER
Page 141 of 165
facilities imported by and used by new mines and old mines Aircrafts imported by agro industrial companies, spare parts and accessories Spare parts of vessels or aircrafts of foreign registry engaged in foreign trade Articles for easy identification exported from Phil for repair and subsequently reimported Trailer chassis imported by shipping companies for handling containerized cargo
Brought to Phil as replacement or for emergency repair Spare parts utilized to secure safety, seaworthiness, or airworthiness, enable it to continue voyage or flight Cannot be repaired locally Cost of repair made on article shall pay 30% ad valorem Bond (1 x) to cover 1 year Must be properly identified and registered with the LTO Subject to customs supervision fee Deposited in Customs zone when not in use Upon expiration of period (1 year or as extended by Commissioner) duties and taxes shall be paid Car must have been purchased or ordered before the mission or consulate received his order of recall The value of personal and household effects shall not exceed 30% of his total salary.
Personal and household effects (including one car) officer or employee of DFA, attach, staff assigned to Phil diplomatic mission abroad, personnel of Reparations Missions in Tokyo, AFP military personnel in SEATO, AFP military personnel accorded diplomatic rank on duty abroad = returning from regular assignment, reassignment, dies, resigns or retires
TAX LAW REVIEWER
Page 142 of 165
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 H. Classification of Duties
====================================== 1. Ordinary/ Regular Duties - those which are imposed ordinarily as a matter of course without order from the higher authorities and collected merely as a source of revenue a. Ad Valorem - this is a duty based on the value of the imported article Dutiable Importation Articles although previously exported from the Philippines, become dutiable from the entry of the vessel or aircraft into the Philippine jurisdiction until the payment of duties, taxes, and other charges and the issuance of the permit for the withdrawal of said goods from the custom houses. Methods of Valuation/ Basis of Dutiable Value (Sec. 201 TCC, as amended by RA 9135) (A) Method One. Transaction Value. - The dutiable value of an imported article subject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding: 1. The following to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods: a. Commissions and brokerage fees (except buying commissions); b. Cost of containers; c. The cost of packing, whether for labor or materials; d. The value, apportioned as appropriate, of the following goods and services: materials, components, parts and similar items incorporated in the imported goods; tools; dies; moulds and similar items used in the production of imported goods; materials consumed in the production of the imported goods; and engineering, development, artwork, design work and plans and sketches undertaken elsewhere than in the Philippines and necessary for the production of imported goods, where such goods and services are supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods; e. The amount of royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly,
2.
3.
4.
5.
as a condition of sale of the goods to the buyer; The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller; The cost of transport of the imported goods from the port of exportation to the port of entry in the Philippines; Loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Philippines; and The cost of insurance.
All additions to the price actually paid or payable shall be made only on the basis of objective and quantifiable data. No additions shall be made to the price actually paid or payable in determining the customs value except as provided in this Section: Provided, That Method One shall not be used in determining the dutiable value of imported goods if: a) There are restrictions as to the disposition or use of the goods by the buyer other than restrictions which: Are imposed or required by law or by Philippine authorities; Limit the geographical area in which the goods may be resold; or Do not substantially affect the value of the goods. The sale or price is subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued; Part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions hereof; or The buyer and the seller are related to one another, and such relationship influenced the price of the goods. Such persons shall be deemed related if: They are officers or directors of one anothers businesses; They are legally recognized partners in business; There exists an employer-employee relationship between them; Any person directly or indirectly owns, controls or holds five percent (5%) or more of the outstanding voting stock or shares of both seller and buyer; One of them directly or indirectly controls the other; Both of them are directly or indirectly controlled by a third person; Together they directly or indirectly control a third person; or
b)
c)
d)
TAX LAW REVIEWER
Page 143 of 165
They are members of the same family, including those related by affinity or consanguinity up to the fourth civil degree.
(5) cost of containers and packing, if their values are not included under (1). (E) Method Five. Fallback Value. determined by using other reasonable means and on the basis of data available in the Philippines. b. Specific - this is duty based on the dutiable weight of goods (either the gross weight, legal weight or the net weight) 2. Special Duties - those which are imposed and collected in addition to ordinary duties usually to protect local industries against foreign competition: SPECIAL DUTIES are: NATURE
Persons who are associated in business with one another in that one is the sole agent, sole distributor or sole concessionaire, however described, of the other shall be deemed to be related for the purposes of this Act if they fall within any of the eight (8) cases above. (B) Method Two. Transaction Value of Identical Goods. Where the dutiable value cannot be determined under method one, the dutiable value shall be the transaction value of identical goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Identical goods" shall mean goods which are the same in all respects, including physical characteristics, quality and reputation. Minor differences in appearances shall not preclude goods otherwise conforming to the definition from being regarded as identical. (C) Method Three. Transaction Value of Similar Goods. Where the dutiable value cannot be determined under the preceding method, the dutiable value shall be the transaction value of similar goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Similar goods" shall mean goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark shall be among the factors to be considered in determining whether goods are similar. If the dutiable value still cannot be determined through the successive application of the two immediately preceding methods, the dutiable value shall be determined under method four or, when the dutiable value still cannot be determined under that method, under method five, except that, at the request of the importer, the order of application of methods four and five shall be reversed: Provided, however, That if the Commissioner of Customs deems that he will experience real difficulties in determining the dutiable value using method five, the Commissioner of Customs may refuse such a request in which event the dutiable value shall be determined under method four, if it can be so determined. xxx (D) Method Four. Computed Value. the computed value which is the sum of: (1) cost or the value of materials and fabrication or other processing employed; (2) amount for profit and general expenses; (3) freight, insurance fees and other transportation expenses for the importation of the goods; (4) any assist, if its value is not included under (1); and
AMOUNT /RATE DUMPING Difference between the actual price and the normal value of the article (extent of the underpricing)
IMPOSING AUTHORITY Special Committee on Anti-dumping (Sec. of Financechairman; members: Sec. of DTI, Sec. of Agriculture/ Sec. of Labor)
Imposed on foreign articles: a. Being imported into, sold or is likely to be sold in the Phils. b. At a price less than its normal value The importation or sale of which might injure an industry producing like goods in the Phils.
COUNTERVAILING Imposed upon foreign Equivalent to goods enjoying the bounty, subsidy thus allowing subsidy or them to sell at lower subvention prices to the detriment of local products similarly situated MARKING Imposed upon those 5% ad valorem not properly marked of articles as to the place of origin of the goods DISCRIMINATORY Imposed upon goods coming from countries that discriminate against Philippine products
Secretary of Finance
Commissioner of Customs
President of the Philippines
TAX LAW REVIEWER
Page 144 of 165
Nature and Purpose of Special Customs Duties 1. These are additional import duties imposed on specific kinds of imported articles under certain conditions 2. These are imposed for the protection of consumers and manufacturers as well as Phil. Products from undue competition posed by foreign made products. 3. These cannot be imposed without regular duties because the law says that it is to be in addition to such.
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 J. Tax Remedies under the TCC
====================================== 1. Government I. Administrative/Extrajudicial 1. Tax Lien (Sec. 1508, TCC) Attaches on the goods, regardless of ownership, while still in the custody or control of the Govt. Availed of when the importation is neither prohibited nor improperly made. Administrative Fines and Forfeitures Applied when the importation in unlawful; And it may be exercised even where the articles are not or no longer in Customs custody unless the importation is merely attempted in which case it may be effected only while the goods are still within the Customs jurisdiction or in the hands of a person who is aware thereof [Secs. 2531 & 2530 TCC] Under Sec. 2530 (a) of the TCC, in order to warrant forfeiture, it is not necessary that the vessel or aircraft must itself carry the contraband. The complementary if collateral use of the Cessna plane for smuggling operations is sufficient for it to be deemed to have been used in smuggling Llamado v. Comm. of Customs, [122 SCRA 118] Reduction of customs duties/compromise: Subject to approval of Sec. of finance [Secs. 709, 2316 TCC] Seizure, Search, Arrest [Secs. 2205, 2210, 2211 TCC]
======================================
TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 I. Drawback
====================================== DRAWBACK: It is a device resorted to for enabling a commodity affected by taxes to be exported and sold in foreign markets upon the same terms as if it had not been taxed at all. Uy Chiaco Sons v. Collector of Customs, [24 Phil 562] IMPORT ENTRY: It is a declaration to the BOC showing particulars of the imported article that will enable the customs authorities to determine the correct duties. An importer is required to file an import entry. It must be accomplished at the moment the last cargo is disembarked from the vessel. Conditions for Grant of Drawback 1. 2. 3. Imported material was actually used in the production of article to be exported. Refund or credit shall not exceed 100% of duties paid on the imported material No determination by NEDA of the requirement for certification on non-availability of locally produced or manufactured competitive substitutes for the imported material (no local substitute for the materials) Exportation must be made within 1 year after importation of material and claim for refund or credit must be made within 6 months from exportation When 2 or more result from the used of same imported material, apportionment shall be made. Every application for drawback must pay P500 filing, processing, and supervision fees Claims shall be paid by BoC within 60 days after receipt of properly accomplished claims
2.
3.
4.
4.
II. Judicial This remedy is normally availed of when the tax lien is lost by the release of the goods 1. 2. Civil action [Sec. 1204 TCC] Criminal action
5. 6. 7.
2. Taxpayer I. Administrative 1. Protest Any importer or interested party dissatisfied with published value within 15 days from date of publication, or within 5 days from the date the importer is entitled to refund if payment is
TAX LAW REVIEWER
Page 145 of 165
rendered erroneous or illegal by events occurring after the payment. Taxpayer - within 15 days from assessment. Payment under protest is necessary [Secs. 2308, 2210 TCC]
These are cases which are solely with liability for customs duties, fees, and other charges. Before filing a protest there must first be a payment under protest. When Customs Protest Applicable The customs protest is required to be filed only in case the liability of the taxpayer for duties, taxes, fees and other charges is determined and the taxpayer disputes said liability.
2.
Refund A written claim for refund may be submitted by the importer in abatement cases on missing packages, deficiencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical errors and Drawback cases where the goods are reexported. [Secs. 1701-1708 TCC] Settlement of any seizure by payment of fine or redemption BUT this shall not be allowed in any case where importation is absolutely prohibited or the release would be contrary to law or when there is an actual and intentional fraud [Sec. 2307, TCC]
3.
When Customs Protest NOT Required When there is no dispute, but the claim for refund arises by reason of the happening of supervening events such as when the raw material imported is utilized in the production of finished products subsequently reported and a duty drawback is claimed. Requirements for Making a Protest
4.
Appeal Within 15 days to Commissioner after notification by collector of his decision [Sec. 2313, TCC] II. Judicial 1. Appeal Within 30 days from receipt of decision of the Commissioner or Secretary of Finance to the division of the CTA [Sec. 2403, TCC, Sec. 7 R.A. 1125, as amended by Sec. 9 R.A. 9282] Since Sec. 11 of RA 1125, as amended by Sec. 9 RA 9282 empowers the tax court to issue injunctions, it would appear than an importer may appeal without first paying the duties, such as in seizure but not in protest cases. Action to question the legality of seizure Abandonment (Sec. 1801 TCC) Expressly impliedly i. failure to file an import entry within 30 days from the discharge of goods or ii. having filed an entry, fails to claim within 15 days but it shall not be so effective until so declared by the collector. [Sec. 1801, as amended by R.A. 7651]
1. 2.
3. 4. 5. 6.
Must be in writing Must point out the particular decision or ruling of the Collector of Customs to which to which exception is taken or objection made; Must state the grounds relied upon for relief; Must be limited to the subject matter of a single adjustment; Must be filed when the amount claimed is paid or within 15 days after the payment; Protestant must furnish samples of goods under protest when required.
Procedure on Customs Protest Cases 1. 2. The Collector acting within his jurisdiction shall cause the imported goods to be entered at the customhouse. The Collector shall assess, liquidate, and collect the duties thereon, or detain the said goods if the party liable does not pay the same. The party adversely affected may file a written protest on his foregoing liability with the Collector within 15 days after the liquidated amount (the payment under protest rule applies) Hearing within 15 days from receipt of the duly presented protest. Upon termination of the hearing, the Collector shall decide on the same within 30 days
2. 3.
3.
4.
Two Kinds of Proceedings in the BOC A. Customs Protest Cases
TAX LAW REVIEWER
Page 146 of 165
IF DECISION IS ADVERSE TO THE PROTESTANT Appeal with the Commissioner within 15 days from notice Appeal with CTA division within 30 days from notice Appeal with the CTA en banc
IF DECISION IS ADVERSE TO THE GOVERNMENT Automatic review by Commissioner Automatic review by Sec. of Finance If decision of Commissioner or Sec. is adverse to the protestant, he may appeal to the CTA and SC under the same procedure on the left.
3.
The procedure of passing goods through the customs house Rodriguez v. CA, [September 18, 1995]
Evidence for Conviction in Smuggling Cases Mere possession of the article in question UNLESS the defendant could explain that his possession is lawful to the satisfaction of the court [Sec. 3601, TCC] Payment of the tax due after apprehension is not a valid defense Rodriguez v. CA, [248 SCRA 288]
Appeal by certiorari to the SC within 15 days from notice B. Seizure and Forfeiture Cases These refer to matters involving smuggling. It is civil and administrative in nature and is directed against the res or imported articles and entails a determination of the legality of their importation. These actions are in rem. Thus, it is of no defense that the owner of the vessel sought to be forfeited had no actual knowledge that his property was used illegally. The absence or lack of actual knowledge of such use is a defense personal to the owner himself which cannot in any way absolve the vessel from the liability of forfeiture. Comm. Of Customs v. Manila Starr Ferry, Inc., [227 SCRA 317] Smuggling A. B. An act of any person who shall: Fraudulently import any article contrary to law, or Assist in so doing, or Receive, conceal, buy, sell, facilitate or transport such article knowing its illegal importation [Sec. 3601, TCC] Export contrary to law [Sec. 3514, TCC] The Philippines is divided into various ports of entry entry other than thru port of entry will be SMUGGLING.
Things Subject to Confiscation in Smuggling Cases Anything that was used for smuggling is subject to confiscation, like the vessel, plane, etc. Llamado v. Comm. of Customs, [1983] Exception: Common carriers that are not privately chartered cannot be confiscated. Contraband: Articles of prohibited importations or exportations. [Sec. 3514, TCC] Right of Customs Officers to Effect Seizure & Arrest May seize any vessel. Aircraft, cargo, article, animal or other movable property when the same is subject to forfeiture or liable for any time as imposed under tariff and customs laws, rules and regulations. May exercise such powers only in conformity with the laws and provisions of the TCC [Sec. 2205]
Common Carriers Forfeiture Common carriers are generally not subject to forfeiture although if the owner has knowledge of its use in smuggling and was a consenting party, it may also be forfeited. If a motor vehicle is hired to carry smuggled goods but it has no Certificate of Public Convenience (CPC), It is not a common carrier. It is thus subject to forfeiture and lack of personal knowledge of the owner or carrier is not a defense to forfeiture.
Port of Entry: A domestic port open to both foreign and coastwise trade including airport of entry. [Sec. 3514, TCC] ALL articles imported into the Philippines whether subject to duty or not shall be entered through a customs house at a port of entry.
Properties Not Subject to Forfeiture in the Absence of Prima Facie Evidence The forfeiture of the vehicle, vessel or aircraft shall not be effected if it is established that the owner thereof or his agent in charge of the means of conveyance used as aforesaid has no knowledge of or participation in the unlawful act:
ENTRY in Customs law means 1. 2. The documents filed at the Customs house The submission and acceptance of the documents
TAX LAW REVIEWER
Page 147 of 165
Provided, however, that a prima facie presumption shall exist against the vessel, vehicle or aircraft under any of the following circumstances: 1. If the conveyance has been used for smuggling at least twice before; 2. If the owner is not in the business for which the conveyance is generally used; and 3. If the owner is financially not in the position to own such conveyance.
Persons Having Police Authority to Enforce the Tariff and Customs Laws and Effect Searches, Seizures and Arrests 1. 2. Officials of the BOC, district collectors, police officers, agents, inspectors and guests of the BOC; Officers of the Phil. Navy and other members of the AFP and national law enforcement agencies when authorized by the Comm. Of Customs; Officials of the BIR on all cases falling within the regular performances of their duties, when the payment of internal taxes are involved Officers generally empowered by law to effect arrests and execute processes of courts, when acting under the direction of the Collector. [Sec. 2203, TCC]
3.
Doctrine of Hot Pursuit 4. Requisites: 1. Over Vessels a. An act is done in Phil. Waters which constitute a violation of the tariff and custom laws. b. A pursuit of such vessel began within the jurisdictional waters which i. may continue beyond the maritime zone, and ii. The vessel may be seized on the high seas. Over Imported Articles a. There is a violation of the tariff and customs laws. b. As a consequence, they may be pursued in the Phils. c. With jurisdiction over them at any place therein for the enforcement of the law. [Sec. 603, 2nd par., TCC]
Administrative and Judicial Procedures Relative to Customs Seizures and Forfeitures 1. 2. 3. 4. 5. 6. 7. 8. Determination of probable cause and issuance of warrant. Actual seizure of the articles. Listing of description, appraisal and classification of seized property. Report of seizure to Comm. Of Customs and the Chairman, Comm. On Audit. Issuance by the Collector of warrant of detention. Notification to owner or importer. Formal hearing. District collector renders his decisions. IF DECISION IS NOT FAVORABLE TO THE GOVERNMENT Automatic review by Comm.
2.
Jurisdiction of RTC over seizure and forfeiture proceedings The RTC do not have jurisdiction over seizure and forfeiture proceedings conducted by the BOC and to interfere with these proceedings. The Collector of Customs has exclusive jurisdiction over all questions touching on the seizure and forfeiture of dutiable goods. No petitions for certiorari, prohibition or mandamus filed with the RTC will lie because these are in reality attempt to review the Commissioners actuations. Neither replevin filed with the RTC will issue. Rationale: Doctrine of Primary Jurisdiction. Even if a Customs seizure is illegal, exclusive jurisdiction (to the exclusion of regular courts) still belongs to the Bureau of Customs. Jao v. CA, [October 6, 1995]
IF DECISION IS NOT FAVORABLE TO THE AGGRIEVED OWNER OR IMPORTER Appeal by aggrieved owner or importer
Requirements for Customs Forfeiture 1. The wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same persons of any invoice, letter or paper - all touching on the importation or exportation of merchandise; and That such declaration, affidavit, invoice, letter or paper is false. Farolan, Jr. v. CTA, [217 SCRA 298]
2.
Goods in Customs Custody Beyond Reach of Attachment Goods in the customs custody pending payments of customs duties are beyond the reach of attachment. As long as the importation has not been terminated, the imported goods remain under the jurisdiction of the Bureau of Customs. Viduya v. Berdiago,[73 SCRA 553]
Places Where Searches and Seizures May Be Conducted 1. 2. 3. 4. 5. Enclosures dwelling house (there must be search warrant issued by a judge) vessels or aircrafts and persons or articles conveyed therein vehicles, beasts or persons persons arriving from foreign countries
TAX LAW REVIEWER
Page 148 of 165
Burden of Proof in Seizure or Forfeiture claimant [Sec. 2535, TCC] The reduction or non-imposition of customs duties on certain imported materials as a result of; Damage incurred during voyage; Deficiency in contents package; Loss or destruction of articles after arrival; Death or injury of animals.
Requirements for Manifest A manifest in coastwise trade for cargo and passengers transported from one place or port in the Phils. to another is required when one or both of such places is a port of entry. [Sec. 906, TCC] Manifests are also required of vessels from a foreign port. [Sec. 1005, TCC] Query: Is Manifest Required Only for Imported Goods? No. Articles subject to seizure do not have to be imported goods. Manifests are also required of articles found on vessels or aircrafts engaged in coastwise trade Rigor v. Robles, [117 SCRA 780] Unmanifested Cargo is Subject to Forfeiture Whether the act of smuggling is established or not under the principle of res ipsa loquitur. It is enough that the cargo is unmanifested and that there was no showing that payment of duties thereon had been made for it to be subject to forfeiture. Settlement of Forfeiture Cases General Rule: Settlement of cases by payment of fine or redemption of forfeited property is allowed. Exceptions: 1. 2. 3. The importation is absolutely prohibited or The surrender of the property to the person offering to redeem would be contrary to law, or Where there is fraud [Sec. 2307, TCC]
Fraudulent Practices Considered As Criminal Offences Against Customs Revenue Laws 1. 2. Unlawful importation; Entry of imported or exported article by means of any false or fraudulent practices, invoice, declaration, affidavit or other documents; Entry of goods at less than their true weights or measures or upon a classification as to quality or value; Payment of less than the amount due.
3.
4.
Acquittal in Criminal Charge Not Res Judicata in Seizure or Forfeiture Proceedings Reasons: Criminal proceedings are actions in personam while seizure or forfeiture proceedings are actions in rem. Customs compromise does not extinguish criminal liability Pp. v. Desiderio, [Nov. 26, 1965]
At any time prior to the sale, the delinquent importer may settle his obligations with the Bureau of Customs in which case the aforementioned articles may be delivered upon payment of the corresponding duties and taxes and compliance with all other legal requirements. [Sec. 1508, TCC] Abatement
TAX LAW REVIEWER
Page 149 of 165
V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax Appeals (CTA), as amended, and the Revised Rules of the Court of Tax Appeals
======================================
What is the new law governing the CTA? R.A. 9282, an act expanding the jurisdiction of the CTA, and elevating it to the level of the Court of Appeals What is the composition of the CTA and how may the CTA rule? CTA shall consist of a Presiding Justice and five (5) Associate Justice They may rule as follows: 1. En banc 2. Sitting in 2 divisions, each division with 3 justices each What is the quorum? The affirmative votes of 4 Justices for sessions En Banc and 2 Justices for sessions of a Division shall be necessary for the rendition of a decision or resolution When the required quorum cannot be constituted, the Presiding Justice shall designate any Justice of other Divisions of the court to sit temporarily therein
Original jurisdiction over all criminal offenses arising from violation of the NIRC and TCC and other laws administered by BIR and BOC where the principal amount of taxes and fees, exclusive of charges and penalties claimed, is P1,000,000 or more. Appellate jurisdiction over appeals from the judgments, resolutions or order of the RTC in their original jurisdiction in criminal offenses arising from violation of NIRC and TCC and other laws administered by BIR and BOC where the principal amount is less than P1,000,000 or there is no specified amount. Over petitions for review of the decisions of the RTC in the exercise of their appellate jurisdiction over tax cases originally decided by the MTC.
======================================
TOPIC UNDER THE SYLLABUS: V. JUDICIAL REMEDIES B. Judicial Procedures

======================================
1. Judicial action for collection of taxes

The CTA have jurisdiction over the following cases involving tax collection: Original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is P1,000,000 or more. Appellate jurisdiction over appeals from the judgment, resolutions or orders of the RTC in tax collection cases originally decided by them within their respective jurisdiction. Over petitions for review of the decisions of the RTC in exercise of their appellate jurisdiction over tax collection cases originally decided by MTC.
======================================
TOPIC UNDER THE SYLLABUS: V. JUDICIAL REMEDIES A. Jurisdiction of the Court of Tax Appeals
====================================== What is the APPELLATE JURISDICTION OF THE CTA? The CTA shall exercise exclusive appellate jurisdiction to review by appeal: 1. Decisions of CIR 2. Inaction of CIR 3. Decisions of RTC on local tax cases 4. Decisions of Commissioner of Customs 5. Decisions of CBAA (on exercise of appellate jurisdiction over RPT tax cases decided by LBAA) 6. Decisions of DOF on customs cases elevated to him on automatic review due to adverse decision versus the government 7. Decisions of DTI (on non-agricultural products) and Department of Agriculture (on agricultural products) involving dumping and countervailing duties
What is the Procedure? (Sec. 9, R.A. 9282) 1. Appeal within 30 days from receipt of decision or period of inaction of CIR, COC, Secretary of Finance, Secretary of Trade and Industry or Secretary of Agriculture, or the CBAA or the RTC: a. Generally, appeal will be to a Division b. Except: appeal by filing a petition for review to En Banc in case of decisions of CBAA or RTC in the exercise of its appellate jurisdiction In case the decision of the Division is adverse: a. File MR with same Division within 15 days from notice thereof In case resolution of Division on the MR or new trial is still adverse: a. File petition for review with CTA En Banc
2.
Does the CTA have jurisdiction over criminal cases? Yes, the CTA have jurisdiction over the following cases involving criminal offenses:
3.
TAX LAW REVIEWER
Page 150 of 165
4.
In case the decision of the CTA En Banc is adverse, file a review on certiorari with the SC pursuant to Rule 45 of Rules of Court
Where can you appeal a decision of a local assessment board? (Sec. 9, R.A. 9282) To the Central Board of Assessment Appeals (CBAA) and not yet to the CTA. It is only after the CBAA has ruled that an appeal may be made to the CTA In which case, the appeal shall be by petition for review to the CTA En Banc
What is the rule on suspension of collection? General Rule: no injunction to restrain collection of taxes Exception: Under Section 9 of R.A. 9282, suspension is allowed when the following conditions concur: It is an appeal to the CTA from a decision of CIR, COC or the RTC, provincial, municipal treasurer, or the Secretary of Finance, Secretary of Trade and Industry or Secretary of Agriculture, as the case may be; and In the opinion of the Court, the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or taxpayer
In case of suspension, what is the taxpayer required to do? The taxpayer will be required to either deposit the amount claimed or file a surety bond for not more than double the amount with the Court. General rule: No injunction to restrain collection of taxes. Exception: Suspension is allowed when the following conditions concur: 1. There is an appeal to the CTA, and 2. In the opinion of the court, the collection by the government agencies may jeopardize the interest of the Government and/or the taxpayer, and 3. Taxpayer either to deposit the amount claimed or to file a surety bond for not more than the double the amount with the Court.
Doctrine discussion The jurisdiction of the CTA is to review by appeal decisions of the CIR on disputed assessments. When a taxpayer does not protest an assessment, and appeals the assessment itself to the CTA, his appeal is premature. [CIR v. Villa] A final demand letter for payment of delinquent taxes may be considered a decision on a disputed or
protested assessment. Thus, the taxpayer can file an appeal with the CTA. [CIR v. Isabela Cultural] o Demand letter of the CIR - which states a warning that in the event the taxpayer fails to pay, collection will be enforced - constitutes the order appealable to the CTA. [Surigao Electric v. CIR] o The BIR should always indicate to the taxpayer in clear and unequivocal language what constitutes final action on a disputed assessment. The object is to avoid repeated requests for reconsideration by the taxpayer, thereby delaying the finality of the assessment, and consequently, the collection of the taxes due. o This would also prevent the taxpayer from groping in the dark, speculating as to which communication or action of the BIR may be the decision appealable to the CTA. o Now, the BIR should make it clear to the taxpayer that he can appeal if not satisfied with the assessment. o Since the power to make an assessment may be delegated to subordinate officers, the act of issuance of the demand letter by a subordinate officer is an order that is appealable to the CTA. (Oceanic v. CIR, wherein the taxpayer failed to appeal to the CTA within 30 days of receipt of the demand letter made by the Chief of the Accounts Receivable and Billing Division of the BIR) In this case, the investigation was started and concluded by the same division. Sir asks, what if the CIR himself starts the investigation, and then delegates it to his deputy, do you appeal it to the CIR or straight to the CTA? The jurisdiction of the CTA has been expanded to include not only decisions or rulings but inaction as well of the CIR. [RCBC v CIR] o In case the CIR fails to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: 1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period, or 2. Await the final decision of the Commissioner or the disputed assessments and appeal such final decision to the CTA within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other.
TAX LAW REVIEWER
Page 151 of 165
After availing the first option, but filing it out of time, a taxpayer cannot successfully resort to the second option (awaiting the final decision of the CIR and appealing the same to the CTA, on the pretext that there is yet no final decision on the disputed assessment because of the CIRs inaction). You cant have your cake and eat it too. Remember that when a taxpayer protests an assessment, he is given 60 days to submit supporting documents. From the time he submits the documents, the 180-day period for the CIR to act on the protest starts. But what if the taxpayer submits the documents with the protest? This is what happened in CIR v. First Express Pawnshop. In that case, the CIR was contending that First Express did not submit the relevant documents. However, given that First Express submitted their documents along with their protest, the Court said that the BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. From the case, we learn that the 60-day period is given for the benefit of the taxpayer. He can take up the entire 60 days or not. The taxpayer has a choice of not utilizing the period, by immediately submitting the documents, effectively starting the 180-day period of the BIR to act much earlier. The legal implication of this is when the taxpayer appeals to the CTA because of the expiration of the 180-day period, the taxpayer must allege that the supporting documents were submitted along with the protest. If not, the CTA may dismiss the case because it was filed still within the 180-day period, and thus, prematurely filed. The question is, how does the taxpayer know if the documents are in fact, complete? What if the BIR asks him to submit additional documents to substantiate his claim? If he doesnt submit any more documents, then the 180-day period should start from the time he submitted the initial documents. Because of CIR v. First Express Pawnshop, the BIR cant demand for the specific documents. If he does submit more documents within the 60-day period, then the 180-day period should start from the time he
submitted the additional documents, since the 60-day period is given for the benefit of the taxpayer, and it is his choice whether or not to use the whole period or not. If he submits the additional documents after the 60-day period and there is no decision yet. The 180-day period will start from the time he submitted the first documents, since it is mandatory that the supporting documents have to be given within the 60-day period. Filing a motion for reconsideration of a decision of the CIR denying a protest does not toll or suspend the period to appeal to the CTA. The 30-day period to appeal to the CTA is still reckoned from the date the taxpayer is notified of the denial of the CIR. [Fishwealth Canning Corp v. CIR] Compare this to asking for a reinvestigation and it being granted by the CIR. In that case, what is being tolled is the time for the CIR to collect, not the period to appeal to the CTA. But can the period to appeal to the CTA be extended? Yes. In City of Manila v. Coca-Cola [2009], the Court stated that in appeals to the CTA, the Rules of Court are applicable. Since in the Rules of Court, Rule 42 allows extensions to file petitions for review to be filed with Court of Appeals, the same should be applicable in petitions for review with the CTA. Hence, the 30-day original period for filing a Petition for Review with the CTA may be extended for a period of 15 days. No further extension shall be allowed thereafter, except only for the most compelling reasons, in which case the extended period shall not exceed 15 days.
======================================
TOPIC UNDER THE SYLLABUS: V. JUDICIAL REMEDIES C. Taxpayers Suit Impugning the Validity of Tax Measures
====================================== 1. TAX PAYERS SUIT Not every action filed by a taxpayer can qualify to challenge the legality of official acts done by the government. A taxpayer's suit can prosper only if the governmental acts being questioned involve disbursement of public funds upon the theory that the expenditure of public funds by an officer of the state for the purpose of administering an unconstitutional act constitutes a misapplication of such
TAX LAW REVIEWER
Page 152 of 165
funds, which may be enjoined at the request of a taxpayer. [Dean Jose Coya v. PCCG G.R. No. 96541, August 24, 1993] A taxpayers suit is properly brought only when there is an exercise of the spending or taxing power of Congress. Automotive Industry Workers Alliance v. Romulo [G.R. No. 157509. January 18, 2005] 2. DISTINGUISHED FROM CITIZENS SUIT Taxpayers are allowed to sue, for example, where there is a claim of illegal disbursement of public funds or where a tax measure is assailed as unconstitutional. Voters are allowed to question the validity of election laws because of their obvious interest in the validity of such laws. Concerned citizens can bring suits if the constitutional question they raise is of "transcendental importance" which must be settled early. Legislators are allowed to sue to question the validity of any official action which they claim infringes their prerogatives qua legislators. KILOSBAYAN v. Morato, [G.R. No. 118910, November 16, 1995]
(2) Petitioner is directly affected by the alleged ultra vires act. Anti-Graft League v. San Juan [G.R. No. 97787, August 1, 1996] CONCEPT OF LOCUS STANDI Another requisite rooted in the very nature of judicial power is locus standi or standing to sue. Thus, generally, a party will be allowed to litigate only when he can demonstrate that: (1) he has personally suffered some actual or threatened injury because of the allegedly illegal conduct of the government; (2) the injury is fairly traceable to the challenged action; and (3) the injury is likely to be redressed by the remedy being sought Oliver Lozano v. Speaker Nograles, [G.R. No. 187883, June 16, 2009] DOCTRINE TRANSCENDETAL IMPORTANCE Determinants whether a matter is of transcendental importance: (1) the character of the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a constitutional or statutory prohibition by the public respondent agency or instrumentality of the government; and (3) the lack of any other party with a more direct and specific interest in the questions being raised. (CREBA v. ERC and Meralco, G.R. No. 174697, 8 July 2010; citing Senate of the Philippines vs. Ermita, G.R. No. 169777, April 20, 2006, 488 SCRA 1, 39-40; and Francisco v. Nagmamalasakit na mga Manggagawang Pilipino, Inc., G.R. No. 160261, November 10, 2003, 415 SCRA 44, 139, citing Kilosbayan v. Guingona, G.R. No. 113375, May 5, 1994, 232 SCRA 110, 155-157.) RIPENESS An aspect of the "case-or-controversy" requirement is the requisite of "ripeness." In the United States, courts are centrally concerned with whether a case involves uncertain contingent future events that may not occur as anticipated, or indeed may not occur at all. Another approach is the evaluation of the twofold aspect of ripeness:
Case law in most jurisdictions now allows both "citizen" and "taxpayer" standing in public actions. De Castro v. JBC, [G.R. No. 191002, March 17, 2010] The distinction was first laid down in Beauchamp v. Silk: The plaintiff in a taxpayer's suit is in a different category from the plaintiff in a citizen's suit. In the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern.
As held by the New York Supreme Court in People ex rel Case v. Collins: In matter of mere public right, the people are the real partiesIt is at least the right, if not the duty, of every citizen to interfere and see that a public offence be properly pursued and punished, and that a public grievance be remedied.
With respect to taxpayer's suits, Terr v. Jordan held that: The right of a citizen and a taxpayer to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied.
3. REQUISITES To constitute a taxpayer's suit, two requisites must be met, namely, that: (1) Public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed, and
TAX LAW REVIEWER
Page 153 of 165
(1) the fitness of the issues for judicial decision; and (2), the hardship to the parties entailed by withholding court consideration. In our jurisdiction, the issue of ripeness is generally treated in terms of actual injury to the plaintiff. Hence, a question is ripe for adjudication when the act being challenged has had a direct adverse effect on the individual challenging it. Oliver Lozano v. Speaker Nograles, [G.R. No. 187883, June 16, 2009]
TAX LAW REVIEWER
Page 154 of 165
TAX ON INDIVIDUALS **a nonresident alien engaged in trade or business is an individual who shall come to the Philippines & stay therein for an aggregate period of more than 180 days during any calendar year TAX RATE FOR RESIDENT CITIZEN 20% Final Tax RATE FOR NONRESIDENT CITIZEN (INCL. OCW) 20% Final Tax TAX RATE FOR RESIDENT ALIEN 20% Final Tax NON-RESIDENT ALIEN ENGAGED IN TRADE / BUSINESS 20% Final Tax NON-RESIDENT ALIEN NOT ENGAGED IN TRADE / BUSINESS 25% Final tax
TYPE OF INCOME Interest from any currency bank deposit & yield or any other monetary benefit from deposit substitutes & from trust funds & similar arrangements Royalties (except on books & other literary works & musical compositions) Prizes > P10,000 Other winnings except PCSO & Lotto Royalties on books & other literary works & musical compositions Prizes < P10,000 Winnings from PCSO & Lotto Interest Income received by an individual (except a nonresident individual) from a depositary bank under the expanded foreign currency deposit system Interest income from long term deposit or investment in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts & other investments evidenced by certification in such form prescribed by the BSP Pre-termination of such certificate before the 5th year (i.e. 4 years to less than 5 years) 3 years to less than 4 years less than 3 years Cash and/or Property Dividends from a domestic corp. or from a joint stock co., insurance or mutual fund companies & regional operating headquarters of multinational companies; Share of an individual in the distributable net income after tax of a partnership (except GPP); Share of an individual in the net income after tax
Final Tax of 10% Schedular rate exempt 7.5% Final Tax
Final Tax of 10% Schedular rate exempt exempt
Final Tax of 10% Schedular rate Exempt 7.5% Final Tax
Final Tax of 10% Schedular rate Exempt Exempt
25% Final tax 25% Final tax 25% Final tax Exempt
Exempt from tax
Exempt from tax
Exempt from tax
Exempt from tax
25% Final tax
5% Final tax on the entire income 12% 20% 10% Final Tax
N/A N/A N/A 25% Final tax
TAX LAW REVIEWER
Page 155 of 165
TYPE OF INCOME of an assn., a joint account or a joint venture or consortium taxable as a corp. of w/c he is a member/co-venturer Capital gains from sale, barter, exchange or other disposition of shares of stock (of domestic corp.) not traded in the stock exchange For the first P100,000 On any amount in excess of P100,000 Capital gains from sale, exchange or other disposition of real property located in Philippines, classified as capital assets, including pacto de retro sales & other forms of conditional sales
TAX RATE FOR RESIDENT CITIZEN
RATE FOR NONRESIDENT CITIZEN (INCL. OCW)
TAX RATE FOR RESIDENT ALIEN
NON-RESIDENT ALIEN ENGAGED IN TRADE / BUSINESS
NON-RESIDENT ALIEN NOT ENGAGED IN TRADE / BUSINESS
5% Final tax on net capital gains realized during the taxable yr: 10% 6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
5% Final tax on net capital gains realized during the taxable yr: 10% 6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
5% Final tax on net capital gains realized during the taxable yr:
10% 6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
CG from sale/disposition of principal residence by natural persons, the proceeds of which is fully utilized in acquiring/constructing a new principal residence w/in 18 mos. from date of sale, provided historical cost/adjusted basis of sold prop be carried to the new principal residence built/acquired Commissioner. Duly notified w/in 30 days from sale Tax exemption can only be availed once every 10 years If no full utilization of proceeds of sale, such portion shall be subject to CG tax
Exempt from CG tax
Exempt from CG tax
Exempt from CG tax
Exempt from CG tax
Exempt from CG tax
TAX LAW REVIEWER
Page 156 of 165
TAX ON CORPORATIONS
TYPE OF INCOME Interest on currency bank deposits & yield or any other monetary benefit from deposit substitutes & from trust funds & similar arrangement Royalties (similar within the Philippines) Interest income from a depositary bank under the expanded foreign currency deposit system (EFCDS) CG from sale, barter, exchange or other disposition of shares of stock (of domestic corp.) not traded in the stock exchange For the first P100,000 On any amount in excess of P100,000 Income derived by depositary bank under the EFCDS from foreign currency transactions with non-residents, offshore banking unites in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with FCDS units & other depositary banks under the EFCDS Interest income from foreign currency loans granted by such depository banks under said EFCDS to RESIDENTS Inter-corporate dividends (from a domestic corp.)
DOMESTIC CORP 20% Final Tax
RESIDENT FOREIGN CORP 20% Final Tax
NON-RESIDENT FOREIGN 35%/30% Income Tax
7.5% Final Tax 5% Final tax on net capital gains realized during the taxable yr: 10% Exempt from Final tax Part of gross income subject to 35%/30% corp. income tax (RA 9294) 10% Final Tax Exempt from tax
7.5% Final Tax 5% Final tax on net capital gains realized during the taxable yr: 10% Exempt from Final tax Part of gross income subject to 35%/30% corp. income tax (RA 9294) 10% Final Tax Exempt from tax
Exempt from tax 5% Final tax on net cap.l gains realized during the taxable yr: 10% N/A
N/A 15% Final Tax * subject to the rule on tax credit for tax actually paid and tax deemed paid. Otherwise, subject to regular income tax rate of 35%/30% 35%/30% income tax
CG from sale, exchange or other disposition of lands and/or buildings which are not used in the business of a corp. & are treated as capital assets
6% Final tax on gross selling price or FMV or zonal value, whichever is higher
35%/30% income tax
TAX LAW REVIEWER
Page 157 of 165
TYPE OF CORPORATE TAXPAYER International Air Carrier Gross Phil. Billings = amount of gross revenue derived from carriage of persons, excess baggage, cargo & mail originating from the Philippines in a continuous & uninterrupted flight, irrespective of the place of sale/issue & the place of payment of the ticket or passage document; Includes tickets revalidated, exchanges &/or indorsed to another intl airline if the passenger boards a plane in a port/poi nt in the Philippines. For a flight which originates from the Philippines but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the GPB International Shipping Gross Phil Billings = gross revenue whether for passenger, cargo or mail originating from the Philippines. up to final destination, regardless of the place of sale/ payments of passage of freight documents Offshore Banking Units Branch Profits remitted (connected with the conduct of its trade/business in the Philippines.) = based on the total profits applied/earmarked for remittance without any deduction for the tax component thereof (except the PEZA-registered) Regional/Area Headquarters of Multinational Cos. = do not earn/derive income from the Philippines. & w/c act as supervisory, communication & coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Region & other foreign markets Regional Operating Headquarters of Multinational Companies = engaged in any of the following services: a. General Administration & planning j. Technical support & maintenance b. Business planning & coordination k. Data processing & communication c. Sourcing & procurement of raw materials & components l. Business development d. Corporate finance advisory services e. Marketing control & sales promotion f. Training & personnel mgt. g. Logistic services h. Research & development i. Services & product development
TAX RATE 2 % on Gross Phil Billings
Final Tax of 10% on gross income from transactions with residents 15% on branch profits remittance
Exempt from tax
10% of taxable income
TAX LAW REVIEWER
Page 158 of 165
TYPE OF TAXPAYER Nonresident cinematographic film owner, lessor or distributor (NOTE: Even to individuals) Nonresident owner or lessor of vessels chartered by the Phil. Nationals Nonresident owner or lessor of aircraft, machineries & other equipment
TAX RATE 25% of gross income 4.5% of gross rentals, lease or charter fees 7.5% of gross rentals or fees
TYPE OF INCOME
Gross Income = Salaries, Wages, Annuities, Compensation, Remuneration and Other Emoluments (i.e. honoraria & allowances) received from such cos. Provided, same tax treatment shall apply to Filipinos abroad employed & occupying same positions in these companies Other income (that is income other than compensation from being employed by a RHQ/ROHQ, OBU or Petroleum Service Contractor & Subcontractor)
TAX RATE FOR ALIEN INDIVIDUAL EMPLOYED BY Regional Or Area Headquarters Offshore Banking Units Petroleum Service Contractor & & Regional Operating Subcontractor Headquarters of Multinational Cos. 15% of gross income 15% of gross income 15% of gross income
Subject to regular graduated tax rate
** Multinational company = a foreign firm/entity engaged in international trade with affiliates/subsidiaries/branch offices in the Asia Pacific Region & other foreign markets.
TAX LAW REVIEWER
Page 159 of 165
PROCEDURE TO PROTEST CUSTOM COLLECTORS ASSESSMENT

Articles enter customs house
Articles appraised, classified and assessed
Taxpayer agrees with assessment
Taxpayer disagrees with assessment
Pays duties, taxes, etc.
Files written protest with ruling of Collector (Sec. 2303, TCC) Within 15 days from receipt of assessment No protest considered unless amount due is paid
Goods released
Collector schedules hearing of protest w/in 15 days from receipt of protest
Collector renders decision w/in 30 days from termination of hearing
Protest Granted
Protest Denied
Automatic appeal to Customs Commissioner (Sec. 2313, TCC)
Appeal to Customs Commissioner w/in 15 days from notice (Sec. 2313, TCC)
Commissioner of Customs fails to render decision w/in 30 days
Protest Affirmed
Protest Denied Protest Affirmed Protest Denied
Automatic appeal to Sec. of Finance reports elevated w/in 5 days from promulgation or after lapse of 30 days if no decision
Assessment final
Automatic appeal to Sec. of Finance Assessment final
Assessment final
If unfavorable, appeal to CTA w/in 30 days from receipt of decision (Sec. 7, RA 1125)
CTA decides w/in 30 days
Appeal to SC w/in 15 days from notice (Rule 43, ROC)
No appeal assessment final
TAX LAW REVIEWER
Page 160 of 165
REMEDIES OF GOVERNMENT AND TAXPAYER UNDER NIRC, TCC and LGC NIRC GOVERNMENT REMEDIES A. TO EFFECT TAX COLLECTION: 1. Compromise (Sec. 204) 2. Distraint (actual and constructive) (Sec. 205208) and Levy (Sec. 207-B) 3. Tax Lien (Sec. 219) 4. Civil Action (Sec. 220, 205-B) 5. Criminal Action (Sec. 220, 221, 205-B) 6. Forfeiture of Property (Sec. 224-225) 7. Suspension of Business Operations in Violation of VAT (Sec. 115) 8. Enforcement of Administrative Fine B. TO CANCEL TAX LIABILITY: 1. Abatement (Sec. 204-B) TCC GOVERNMENT REMEDIES A. TO EFFECT TAX COLLECTION: 1. Tax Lien (Sec. 1204) 2. Administrative Fines and Forfeitures (Sec. 2530, 2531) 3. Reduction of customs duties/compromise subject to approval of Sec. of Finance (Sec. 709, 2316) 4. Seizure, Search, Arrest (Sec. 2205, 2210, 2211) 5. Civil Action (Sec. 1204) 6. Criminal Action B. TO CANCEL TAX LIABILITY: 1. Abatement reduction or non-imposition of customs duties on certain imported materials (Sec. 1701-1708) POWER/AUTHORITY TO ASSESS AND COLLECT ALL LAWFUL
REVENUE FROM IMPORTED ARTICLES AND ALL OTHER DUTIES, FEES, CHARGES, FINES AND PENALTIES ACCRUING UNDER TCC IS WITH COMMISSIONER OF CUSTOMS. (Sec. 602)
LGC GOVERNMENT REMEDIES LOCAL TAX A. TO EFFECT TAX COLLECTION: 1. Tax Lien (Sec. 173) 2. Distraint and Levy (Sec. 174, 175) 3. Civil Action (Sec. 183) 4. Purchase of property by local government units for want of bidder (Sec. 181) Property distrained not disposed within 120 days from date of distraint considered sold to the local government for the amount of assessment made and to that extent, the tax delinquency shall be cancelled. (Sec. 175) B. TO CANCEL TAX LIABILITY: May grant tax exemptions but may not condone or remit taxes (Sec. 192) REAL PROPERTY TAX A. TO EFFECT TAX COLLECTION: 1. Tax Lien (Sec. 246, 251) 2. Distraint and Levy (Sec. 254) 3. Civil Action formal demand not required (Sec. 266) 4. Purchase of property by local treasurer for want of bidder (Sec. 263) B. TO CANCEL TAX LIABILITY: Condonation or reduction of real property tax by the President when public interest requires or by the Sanggunian concerned in cases of general failure of crops, or substantial decrease in the price of agricultural/ agri-based products or calamity (Sec. 277, 276)
C.
NOTE: Automatic Appeal if the collector renders decision adverse to the government, it will be automatically elevated to the Commissioner. If affirmed by the latter, decision shall be reviewed automatically by the Secretary of Finance.
PRESCRIPTIVE PERIOD OF ASSESSMENT AND COLLECTION 1. Power/Authority to assess tax: Commissioner of Internal Revenue a. 3 yrs from filing of return or date prescribed by law, whichever is later date
PRESCRIPTIVE PERIOD OF ASSESSMENT AND COLLECTION LOCAL TAX 1. Assessment: a. 5 yrs from the day they become due (Sec. 194)
TAX LAW REVIEWER
Page 161 of 165
2.
3.
NIRC (Sec. 203) b. 10 yrs when (1) no return is filed, (2) the return is false or fraudulent with intent to evade tax (from date of discovery) (Sec. 222) Collection of tax: a. 5 yrs from assessment or within the period for collection agreed upon in writing before expiration of the 5 yr. Period (Sec. 222) Criminal Liability a. 5 yrs from commission or discovery of violation, whichever of later (Sec. 281)
TCC
2.
LGC 10 yrs in case of fraud or intent to evade payment of taxes from discovery of fraud or intent to evade payment (Sec. 194) Collection a. 5 yrs from day of assessment by administrative or judicial action (Sec. 194) b. Local government may appeal to courts from adverse decision of Sanggunian on purely legal issue.
GROUNDS FOR SUSPENSION OF THE RUNNING OF THE STATUTE OF LIMITATIONS: 1. When the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court, and for sixty (60) days thereafter; 2. When the taxpayer requests for a reconsideration which is granted by the CIR; 3. When the taxpayer cannot be located in the address given by him in the return, unless he informs the CIR of any change in his address; 4. When the warrant of distraint or levy is duly served and no property is located; 5. When the taxpayer is out of the Philippines. (Sec. 223)
GROUNDS FOR SUSPENSION OF THE RUNNING OF THE PERIODS OF PRESCRIPTION: 1. When the treasurer is legally prevented from making the assessment or collection; 2. When the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and 3. When the taxpayer is out of the country or otherwise cannot be located. REAL PROPERTY TAX 1. Collection: a. 5 yrs from the date they become due (Sec. 270) b. 10 yrs in case of fraud or with intent to evade payment from the discovery of fraud or intent to evade payment
GROUNDS FOR SUSPENSION OF THE RUNNING OF THE PERIODS OF PRESCRIPTION WITHIN WHICH TO COLLECT: 1. When the local treasurer is legally prevented from collecting the tax 2. When the owner of the property of the person having the legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and 3. When the owner of the property or the person
TAX LAW REVIEWER
Page 162 of 165
NIRC
TCC
LGC having legal interest therein is out of the country or otherwise cannot be located. TAXPAYER REMEDIES LOCAL TAX A. ADMINISTRATIVE: 1. Before Payment a. Appeal any question on constitutionality or legality of tax ordinance within 30 days from effectivity thereof to Secretary of Justice (Sec. 187) b. Declaratory relief whenever applicable 2. After assessment a. Protest within 60 days from receipt of assessment (Sec. 195). Payment under protest not necessary. b. Payment and subsequent refund or tax credit within 2 yrs from payment of tax to local treasurer (Sec. 196) c. Right of redemption 1 yr from the date of forfeiture (Sec. 181) Real Property Tax 1. Protest payment under protest is required. Filed within 30 days (From date of payment) to provincial, city or municipal treasurer 2. Refund or tax credit within 2 years from the date the taxpayer is entitled thereto (Sec. 253) 3. Redemption of real property within 1 yr from date of sale (Sec. 261) 4. Appeal within 60 days from assessment of provincial, city or municipal assessor to LBAA (Sec. 226) Within 30 days from receipt of decision of LBAA to CBAA In case of denial of refund or credit, appeal to BAA as in protest case LOCAL TAX B. JUDICIAL: 1. Court action within 30 days after receipt of decision or lapse of 60 days of Secretary of Justices inaction (Sec. 187) Within 30 days from receipt when
TAXPAYER REMEDIES A. ADMINISTRATIVE: 1. Before Payment a. Protest filing a petition for reconsideration or reinvestigation within 30 days from receipt of assessment (Sec. 228) b. Entering into a compromise (Sec. 204) 2. After Payment a. Filing a claim for refund or tax credit within 2 years from date of payment regardless of any supervening cause (Sec. 229) Note the suspension of the 2-year period (Panay Electric Co. v. Collector; May 28, 1958) Note that payment under protest is not necessary Note that the taxpayer is given the right of redemption within 1 year from the date of sale or forfeiture (Sec. 215)
B.
JUDICIAL: 1. Civil Action a. Appeal within 30 days from receipt of decision on the protest or from the lapse of 180 days inaction of the Commissioner to the CTA (Sec. 228) b. Action to contest forfeiture of chattel (Sec. 231) c. Action for damages (Sec. 227) 2. Criminal Action 1. Against erring BIR officials and employees 2. Injunction when the CTA in its opinion the collection by BIR may jeopardize taxpayer. Court may require deposit of an amount or surety bond for not more than double the amount. (Sec. 1, RA 1125)
TAXPAYER REMEDIES A. ADMINISTRATIVE: 1. Protest a. Any importer or interested party if dissatisfied with published value within 15 days from date of publication or within 5 days from the date the importer is entitled to refund if payment is rendered erroneous or illegal by events occurring after the payment b. Taxpayer within 15 days from assessment. Payment under protest is necessary (Sec. 2308, 2210) 2. Refund a. A written claim for refund may be submitted by the importer in abatement cases on missing packages, deficiencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical errors; and b. Drawback cases where the goods are reexported. (Sec. 1701-1708) 3. Settlement of any seizure by payment of fine or redemption BUT this shall not be allowed in any case where importation is absolutely prohibited, or the release would be contrary to law, or when there is an actual and intentional fraud (Sec. 2307) 4. Appeal within 15 days to Commissioner after notification by collector of his decision (Sec. 2313) B. Judicial 1. Appeal to the CTA division within 30 days from receipt of decision of the Commissioner of Secretary of Finance (Sec. 2403 TCC, Sec. 7 RA 1125) 2. Action to question the legality of seizure
TAX LAW REVIEWER
Page 163 of 165
NIRC 3.
TCC Abandonment (Sec. 1801)
LGC protest of assessment is denied If no action is taken by the treasurer in refund cases and the two year period is about to lapse (Sec. 195) If remedies available do not provide plain, speedy and adequate remedy. 2. Action for declaratory relief 3. Injunction if irreparable damage would be caused to the taxpayer and no adequate remedy is available. REAL PROPERTY TAX 1. Court Action appeal of CBAAs decision to CTA 2. Suit assailing validity of tax; recovery of refund of taxes paid (Sec. 64 PD 464) 3. Suit to declare invalidity of tax due to irregularity in assessment and collection (Sec. 64 PD 464) 4. Suit assailing the validity of tax sale
TAX LAW REVIEWER
Page 164 of 165

2012 Ateneo LawTaxation Law Summer Reviewer

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2012 Ateneo LawTaxation Law Summer Reviewer

Uploaded by

Copyright:

Available Formats

TAXATION LAW BAR REVIEWER

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

TAX granting exemption; or (b) involves franchise

POLICE POWER (in the form of a FEE)

Power to enforce contribution to raise government funds

Plenary, comprehensive and supreme

Government or political subdivisions

Maybe granted to public service companies or public utilities

TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES D. Purpose of Taxation

TAXATION LAW REVIEWER

Double Taxation (DT)

TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES G. Doctrines in Taxation

Prospectivity of tax laws

TAXATION LAW REVIEWER

Escape from Taxation

Exemption from taxation

TAXATION LAW REVIEWER

Compensation and Set-off

TAXATION LAW REVIEWER

Presence of Actual Revenue Loss

Construction and Interpretation of:

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

Real Property Tangible Personal Property Intangible Personal Property Income

Transfer of property Business or Occupation d.

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES K. Requisites of a valid tax

TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES I. Stages of Taxation (LAPR)

CUSTOMS DUTY Kind of tax Goods imported or exported

TAXATION LAW REVIEWER

off Imprisonment is sanction for nonpayment No imprisonment for non-payment

Kind of demand Purpose Amount

TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES

Source Purpose Object

only necessary to carry out regulation

Source Nature Right to set-off

DEBT Based on contract Assignable May be the subject of compensation/ set-off

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

II.NATIONAL INTERNAL REVENUE CODE

TOPIC UNDER THE SYLLABUS: A. Income Taxation

Administration is simple being confined to each transaction or activity

TAXATION LAW REVIEWER

Within the Philippines

Estate and Trust

Taxable Income Taxable Income Taxable Income Gross Income

Domestic Corporation Resident Foreign Corporation Non-resident Foreign corporation

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

Within the Philippines

Estate and Trust

Taxable Income Taxable Income Taxable Income Gross Income

Domestic Corporation Resident Foreign Corporation Non-resident Foreign corporation 8. a.

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

TAXATION LAW REVIEWER

INCOME Interests Dividends

TAXATION LAW REVIEWER

Services (Compensation for labor/personal services) Rentals Royalties

Philippines regardless of where sold