2009 taxation law reviewer

Copyright Page

Copyright and all other relevant rights over this material are owned jointly by

the University of the Philippines College of Law, the Faculty Editor and the

Student Editorial Team.

The ownership of the work belongs to the University of the Philippines College

of Law. No part of this book shall be reproduced or distributed without the

consent of the UP College of Law.

All rights are reserved.

REVIEWER IN TAXATION LAW Table of Contents

i

TAXATION LAW 1

PART I. FUNDAMENTALS OF TAXATIONA. Principles of Sound Tax SystemB. Essential Characteristics of TaxesC. Power of Tax as differentiated from

the Powers of Eminent Domain andPolice Power

D. Tax Distinguished from other Formsof Impositions

E. Theory and Basis of TaxationF. Inherent LimitationsG. Constitutional LimitationsH. Tax systemsI. Classification of TaxesJ. Situs of TaxationK. Double TaxationL. Escape from TaxationM. Interpretation/Construction of Tax

Laws

333

4

45569991010

11

PART II. INCOME TAXATIONI. Principles of Income Taxation

A. Income TaxB. Source of IncomeC. Schedular v. Global Tax system

II. Definition and Classification ofTaxpayers

III. Tax on IndividualsA. Classification of Individual

TaxpayersB. Three Kinds of Income

1. Capital Gains Subject to CapitalGains Tax

2. Passive Income Subject to FinalTax

3. “Other Income” Subject toSchedular Tax Rates

4. Taxation of CompensationIncome of a Minimum WageEarner

C. Deductions in GeneralD. Special Classification of Individuals

and Corresponding Tax TreatmentE. ComputationF. Summary of Tax bases and Tax

RatesIV. Tax on Corporations

A. Coverage of the Term “Corporation”B. Classification of CorporationsC. Scope of TaxationD. Tax on Domestic CorporationsE. Tax on Resident Foreign

CorporationsF. Tax on Non-Resident Foreign

CorporationsG. Special Types of CorporationsH. Summary of Tax Bases and Rates of

Special CorporationsI. Exempt CorporationsJ. Summary of Tax Bases, Tax Rates

and Applicable Tax Regimes forCorporations

1212121315

1517

1718

18

20

20

2121

2324

252626262627

32

3333

3637

38

V. Taxation of Fringe BenefitsA. DefinitionB. Tax Rate and Tax BaseC. Fringe Benefits Which Are Not

TaxableVI. Taxation of Partnerships

A. Classifications of Partnerships forTax Purposes

B. General Professional PartnershipsC. Other Partnerships

VII.Estates and TrustsA. DefinitionB. Computation and Payment of TaxC. How Taxable Income of the Estate

or Trust is ComputedD. Exemption Allowed to Estates and

TrustsE. Illustrative Problems

393939

3941

414141424243

44

4445

PART III. GROSS INCOMEA. Basic PrinciplesB. Supplementary Discussion on Some

Items Included in Gross Income1. Compensation Income2. Gains Derived from dealings in

Property3. Interest Income4. Rental Income5. Dividends6. Annuities7. Pensions8. Cancellation of Debt9. Prizes and Awards10. Damage Recovery11. Bad Debt Recovery12. Tax Refund

4747

4747

4749494949505050505051

PART IV. EXCLUSIONS ANDDEDUCTIONS FROM GROSS INCOMEI. Exclusions from Gross IncomeII. Deductions from Gross Income

A. Itemized DeductionsB. Optional Standard Deduction

III. Personal and Additional ExemptionsIV. Non-Deductible Expenses

52525656696970

PART V. CAPITAL GAINS AND LOSSESI. DefinitionsII. Capital Loss Limitation RuleIII. Sale of Real PropertyIV. Sale of Shares of StockV. Recognition of Gain/Loss in

Exchange of PropertyVI. Computing CGT in General

7373737374

7575

PART VI. RETURNS AND PAYMENTS OFTAX/ WITHHOLDING TAXESA. Returns and Payment of Tax

1. Individual Return2. Corporation Regular Returns

B. Withholding Tax

7878788081


ii

TAXATION LAW 2

PART I. TRANSFER TAXESI. Estate Tax

A. PrinciplesB. Gross EstateC. DeductionsD. Tax Rates ApplicableE. Tax Credit for Estate Taxes

F. Compliance RequirementsG. Illustrations

II. Donor’s TaxA. PrinciplesB. Properties IncludedC. ExemptionsD. ComputationE. Rates of TaxF. Object of TaxationG. ValuationH. Tax CreditI. Compliance Requirements

878787909196969799100100101101102102103103104104

PART II. VALUE ADDED TAXI. ConceptII. Nature and CharacteristicsIII. Transactions Subject to VATIV. Persons LiableV. Rates in General

A. 12% VATB. Zero-rated TransactionsC. Final Withholding VAT

VI. Transactions Exempt from VATVII. Determining the VAT BaseVIII. Input Taxes

A. Creditable Input TaxB. Excess Output or Input TaxC. Refunds or Tax Credits of Input

TaxIX. Substantiation RequirementsX. Invoicing RequirementsXI. Consequences of Issuing

Erroneous VAT Invoice or VATOfficial Receipt

XII. Registrations RequirementsXIII. Filing of Returns and Payment

of VATXIV. Enforcement Measures

105105105106107107107111114115120120120121

122124124

125125

126126

PART III. PERCENTAGE TAXESI. Who Are Liable

A. Persons Exempt from VATB. Domestic Carriers and Keepers

of GarageC. International CarriersD. FranchisesE. Overseas Communications TaxF. Banks and Non bank Financial

Intermediaries PerformingQuasi-Banking Functions

G. Other Non-Bank FinanceIntermediaries

128128128

128128129129

129

130

H. Life Insurance PremiumsI. Agents of Foreign Insurance

CompaniesJ. Amusement TaxesK. WinningsL. Sale, Barter or Exchange of

Shares of StockII. PaymentIII. Summary of Percentage Taxes

130

131131131

132132133

PART IV. EXCISE TAXI. Goods Subject to Excise Tax

A. Alcohol ProductsB. Tobacco ProductsC. Petroleum ProductsD. Miscellaneous Articles

II. Filing of Return and Payment ofExcise Tax on Domestic Products

III. Payment of Excise Tax onImported Articles

IV. Exemption/Conditional Tax-FreeRemoval of Certain Articles

134134134135135135

135

137

137

PART V. DOCUMENTARY STAMP TAXI. General PrinciplesII. Documents and Papers Not

Subject to Documentary StampTax

III. One-Transaction RuleIV. Payment of DSTV. Applicability of DST law on

Electronic DocumentsVI. Tax Rates Applicable

138138

139140140

140140

PART VI. REMEDIESI. Audit Stage

A. Powers of the CommissionerRelative to the Audit Process

B. Letter of AuthorityII. Pre-Assessment Stage

A. Step 1: Issuance of Notice ofInformal Conference

B. Step 2: Informal ConferenceC. Step 3: Issuance of Pre-

Assessment NoticeIII. Formal Assessment Stage

Effects of RA 9282 on the CTA’sJurisdiction

IV. Collection Letter/WarrantsA. Collections of Deficiency TaxesB. Remedies of the Taxpayer

Against Taxes Erroneously orIllegally Paid

C. Remedies of the State forCollection of Taxes

V. Compromise and AbatementVI. Statutory Offenses and Penalties

A. Additions to the TaxB. Crimes, Other Offenses and

Forfeitures

143143

143145145

145145

145146

149150150

151

152156157157

158


iii

VII. Compliance RequirementsVIII. Informer’s RewardFlowchart I: Taxpayer’s Remedies

from Tax AssessmentFlowchart II: Procedures for Distraint

and Levy

161162

163

164

PART VII. LOCAL TAXATIONI. Preliminaries

A. Basic ConceptsB. Fundamental PrinciplesC. Local Taxing AuthorityD. Local Tax OrdinanceE. Common Limitations on Taxing

Powers of LGUsF. Other Relevant Taxing Powers

II. Specific Provisions on the Taxingand Other Revenue-RaisingPowers of the LGUA. ProvincesB. MunicipalitiesC. CitiesD. BarangaysE. Community Tax

III. Collection of TaxesIV. Local Tax RemediesFlowchart III: Taxpayer’s Remedies

from Assessment of Local TaxesOther Than Real Property Taxes

Flowchart IV: Procedure for Distraintand Levy for Purposes ofSatisfying Local Taxes

165165165165166166

166167

167167169173173174175176

177

178

PART VIII. REAL PROPERTYTAXATIONI. Basic ConceptsII. Properties Subject to TaxIII. Taxes and Rates Imposed

A. Basic Real Property TaxB. Special Levies

IV. Exempt PropertiesV. Appraisal and Assessment of Real

PropertyA. Classes of Real Property for

Assessment PurposesB. Basis of Assessment and

AppraisalC. Payment and Collection

VI. Remedies in Real PropertyTaxationA. Remedies Available to Local

GovernmentB. Remedies Available to Taxpayer

VII. Special ProvisionsFlowchart V: Procedure for

Assessment of Land Value forReal Property Tax Purposes

Flowchart VI: Taxpayer’s RemediesInvolving Collection of RealProperty Tax

Flowchart VII: Procedure for Levy for

179179179180180180180

181

181

181181

182

182182183

184

185

Purposes of Satisfying RealProperty Taxes 186

PART IX. TARIFF AND CUSTOMSCODEI. Articles Subject to Duty

A. Export and Import DutiesB. Meaning of ImportationC. Classes of ImportationD. Classification of Custom DutiesE. Special Duties

II. Rates of DutyA. General RulesB. Basis of DutyC. Special DutiesD. Flexible Tariff Rates

III. Imposition of DutiesA. Persons LiableB. DeclarationC. Examination, Appraisal and

ClassificationD. Assessment and TaxesE. Liquidation

IV. Remedies of the GovernmentA. ExtrajudicialB. Judicial

V. Remedies of the TaxpayerA. RefundB. ProtestC. Abandonment

VI. Pertinent Amendments by RA9135

Flowchart VIII: Taxpayer’s Remediesfrom Customs Assessment

Flowchart IX: Remedies from Seizureand Forfeiture Cases

187187187187187188188188188189192193193193193

194194194194194195195195196196

196

197

198


Page 2 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

TAXATION LAW 1

PART I. FUNDAMENTALS OF TAXATIONA. Principles of Sound Tax SystemB. Essential Characteristics of TaxesC. Power of Tax as differentiated from

the Powers of Eminent Domain andPolice Power

D. Tax Distinguished from other Formsof Impositions

E. Theory and Basis of TaxationF. Inherent LimitationsG. Constitutional LimitationsH. Tax systemsI. Classification of TaxesJ. Situs of TaxationK. Double TaxationL. Escape from TaxationM. Interpretation/Construction of Tax

Laws

333

4

45569991010

11

PART II. INCOME TAXATIONI. Principles of Income Taxation

A. Income TaxB. Source of IncomeC. Schedular v. Global Tax system

II. Definition and Classification ofTaxpayers

III. Tax on IndividualsA. Classification of Individual

TaxpayersB. Three Kinds of Income


2. Passive Income Subject to FinalTax

3. “Other Income” Subject toSchedular Tax Rates

4. Taxation of CompensationIncome of a Minimum WageEarner

C. Deductions in GeneralD. Special Classification of Individuals

and Corresponding Tax TreatmentE. ComputationF. Summary of Tax bases and Tax

RatesIV. Tax on Corporations

A. Coverage of the Term “Corporation”B. Classification of CorporationsC. Scope of TaxationD. Tax on Domestic CorporationsE. Tax on Resident Foreign

CorporationsF. Tax on Non-Resident Foreign

CorporationsG. Special Types of CorporationsH. Summary of Tax Bases and Rates of

Special CorporationsI. Exempt CorporationsJ. Summary of Tax Bases, Tax Rates

and Applicable Tax Regimes forCorporations

1212121315

1517

1718

18

20

20

2121

2324

252626262627

32

3333

3637

38

V. Taxation of Fringe BenefitsA. DefinitionB. Tax Rate and Tax BaseC. Fringe Benefits Which Are Not

TaxableVI. Taxation of Partnerships

A. Classifications of Partnerships forTax Purposes

B. General Professional PartnershipsC. Other Partnerships

VII.Estates and TrustsA. DefinitionB. Computation and Payment of TaxC. How Taxable Income of the Estate

or Trust is ComputedD. Exemption Allowed to Estates and

TrustsE. Illustrative Problems

393939

3941

414141424243

44

4445

PART III. GROSS INCOMEA. Basic PrinciplesB. Supplementary Discussion on Some

Items Included in Gross Income1. Compensation Income2. Gains Derived from dealings in

Property3. Interest Income4. Rental Income5. Dividends6. Annuities7. Pensions8. Cancellation of Debt9. Prizes and Awards10. Damage Recovery11. Bad Debt Recovery12. Tax Refund

4747

4747

4749494949505050505051

PART IV. EXCLUSIONS ANDDEDUCTIONS FROM GROSS INCOMEI. Exclusions from Gross IncomeII. Deductions from Gross Income


III. Personal and Additional ExemptionsIV. Non-Deductible Expenses

52525656696970

PART V. CAPITAL GAINS AND LOSSESI. DefinitionsII. Capital Loss Limitation RuleIII. Sale of Real PropertyIV. Sale of Shares of StockV. Recognition of Gain/Loss in

Exchange of PropertyVI. Computing CGT in General

7373737374

7575

PART VI. RETURNS AND PAYMENTS OFTAX/ WITHHOLDING TAXESA. Returns and Payment of Tax

1. Individual Return2. Corporation Regular Returns

B. Withholding Tax

7878788081

REVIEWER IN TAXATION LAW Part I. Fundamentals of Taxation

Page 3 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Rachel P. FolloscoFACULTY EDITOR

ACADEMICS COMMITTEE

Samantha PoblacionDIRECTOR FOR ACADEMICS

EDITOR-IN-CHIEF

Rania JoyaDEPUTY DIRECTOR FOR ACADEMICS

LAYOUT HEAD

TAXATION LAW

Rachel T. UySUBJECT EDITOR

TAXATION LAW 1

Charles Albert LejanoBenedict Evengelista

LEAD WRITER

Maia RiezaEva Sison

WRITERS

LECTURES

Edel CruzHEAD

--------

Kae GuerreroPRINTING AND DISTRIBUTION

--------

Leo ZuluetaLOGO, COVER AND TEMPLATE DESIGN

Taxation Law 1Part I. Fundamentals of Taxation

A. PRINCIPLES OF SOUND TAX SYSTEMB. ESSENTIAL CHARACTERISTICS OF

TAXESC. POWER OF TAX AS DIFFERENTIATED

FROM THE POWERS OF EMINENTDOMAIN AND POLICE POWER

D. TAX DISTINGUISHED FROM OTHERFORMS OF IMPOSITIONS

E. THEORY AND BASIS OF TAXATIONF. INHERENT LIMITATIONSG. CONSTITUTIONAL LIMITATIONSH. TAX SYSTEMSI. CLASSIFICATION OF TAXESJ. SITUS OF TAXATIONK. DOUBLE TAXATIONL. ESCAPE FROM TAXATIONM. INTERPRETATION/CONSTRUCTION OF

TAX LAWS

TAXATION - is a mode by whichgovernments make exactions for revenue inorder to support their existence and carryout their legitimate objectives.

TAXES - are enforced proportionalcontributions from persons and propertylevied by the law-making body of the Stateby virtue of its sovereignty for the supportof the government and all public needs.

The theory or underlying bases oftaxation is governmental necessity, forindeed, without it, government canneither exist nor endure.

A. Principles of A Sound Tax System

1. Fiscal Adequacy – the sources(proceeds) of tax revenue shouldcoincide with, and approximate theneeds of, government expenditures.

2. Theoretical Justice – the tax systemmust be fair to the average taxpayerand must be based on his ability to pay.

3. Administrative Feasibility – the taxsystem should be capable of beingproperly and efficiently administered bythe government and enforced with theleast inconvenience to the taxpayer.

B. Essential Characteristics of Taxes

(1) It is an enforced contribution for itsimposition is in no way dependent uponthe will or assent of the person taxed.

(2) It is generally payable in the form ofmoney, although the law may providepayment in kind;

(3) It is laid by some rule of apportionmentwhich is usually based on ability to pay;

(4) It is levied on persons, property, acts,privileges, or transactions. In each case,however, it is only a person who paysthe tax;

(5) It is levied by the State which hasjurisdiction or control over the subject tobe taxed. This is necessary in order thatthe tax can be enforced;

(6) It is levied by the law-making body ofthe State. The power to tax is legislativepower which only the legislature canexercise. The power to tax is alsogranted to local governments, butsubject to such guidelines andlimitations as may be provided by law;

(7) It is levied for public purpose. Taxationinvolves, and a tax constitutes, a chargeor burden imposed to provide publicrevenue for the support of thegovernment, the administration of thelaw, or the payment of public expenses.A tax levied for a private purposeconstitutes a taking of property withoutdue process of law.


Page 4 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

C. Power to Tax as Differentiatedfrom the Powers of EminentDomain and Police Power

TAXATION EMINENTDOMAIN

POLICEPOWER

Authority who exercises the powerMay beexercised onlyby thegovernment orits politicalsubdivisions

May be:(1) Exercisedby thegovernmentor its politicalsubdivisions;(2) Granted topublic servicecompanies orpublicutilities

May beexercised onlyby thegovernment

PurposeThe property(generally inthe form ofmoney) istaken for thesupport of thegovernment

The propertyis “taken” forpublic use; itmust becompensated.

The use of theproperty is“regulated” forthe purpose ofpromoting thegeneralwelfare; it isnotcompensable.

Persons AffectedOperates upon(1) Communityor(2) Class ofindividuals.

Operated onan individualas the ownerof particularproperty.

Operates upon(1) Communityor(2) Class ofindividuals.

EffectThe moneycontributedbecomes partof the publicfunds

There is atransfer of theright toproperty.

There is notransfer oftitle. At most,there isrestraint onthe injurioususe ofproperty

Benefits ReceivedAssumed thatthe individualreceives theequivalent ofthe tax in theform ofprotection andbenefits hereceives fromthegovernment.

He receivesthe marketvalue of thepropertytaken fromhim.

The personaffectedreceivesindirectbenefits asmay arisefrom themaintenanceof a healthyeconomicstandard ofsociety.

Amount of ImpositionGenerally,there is nolimit on theamount of taxthat may beimposed.

No amountimposed butrather theowner is paidthe marketvalue ofpropertytaken

Amountimposedshould not bemore thansufficient tocover the costof the licenseand necessaryexpenses

D. Tax Distinguished from OtherForms of Impositions:

License and Regulatory Fee

TAXES LICENSE ANDREGULATORY FEE

Imposed under thetaxing power of thestate for purposes ofrevenue.

Levied under the policepower of the state.

Forced contributionsfor the purpose ofmaintaininggovernment functions.

Exacted primarily toregulate certainbusinesses oroccupations.

Generally, unlimitedas to amount

Should notunreasonably exceedthe expenses of issuingthe license and ofsupervision.

Imposed on persons,property and toexercise a privilege.

Imposed only on theright to exercise aprivilege

Failure to pay does notnecessarily make theact or business illegal.

Failure to pay makesthe act or businessillegal.

Progressive Development Corp v. QC (1989): To be considered a license fee:

(1) the imposition questioned mustrelate to an occupation or activitythat so engages the public interestin health, morals, safety anddevelopment as to require regulationfor the protection and promotion ofsuch public interest;

(2) the imposition must also bear areasonable relation to the probableexpenses of regulation, taking intoaccount not only the costs of directregulation but also its incidentalconsequences as well.

Note: Taxes may also be imposed for regulatorypurposes. It is called regulatory tax.

PAL v. Edu (1988): Fees may be properly regarded as taxes

even though they also served as aninstrument of regulation. If the purposeis primarily revenue, or if revenue is, atleast, one of the real and substantialpurposes, then the exaction is properlycalled a tax.

Special Assessment

TAXES SPECIALASSESSMENT

Imposed regardless ofpublic improvements

Imposed because of anincrease in value ofland benefited bypublic improvement

Contribution of ataxpayer for the

Contribution of aperson for the


Page 5 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

support of thegovernment.

construction of apublic improvement

It has generalapplication both as totime and place.

Exceptional both as totime and locality.

Toll

TAXES TOLLPaid for the support ofthe government

Paid for the use ofanother’s property.

Demand of sovereignty Demand ofproprietorship

Generally, no limit onthe amount collectedas long as it is notexcessive,unreasonable orconfiscatory

Amount paid dependsupon the cost ofconstruction ormaintenance of thepublic improvementused.

Imposed only by thegovernment

Imposed by thegovernment or byprivate individuals orentities.

Obligation to Pay Debt

TAXES DEBTBased on laws Generally based on

contract, express orimplied.

Generally cannot beassigned

Assignable

Generally paid inmoney

May be paid in kind.

Cannot be a subject ofset off

Can be a subject of setoff

Non-payment ispunished byimprisonment exceptin poll tax

No imprisonment incase of non-payment(Art. III, Sec. 20 1987Constitution)

Governed by thespecial prescriptiveperiods provided for inthe NIRC.

Governed by theordinary periods ofprescription.

Does not draw interestexcept only whendelinquent

Draws interest when itis so stipulated orwhere there is default.

Imposed only by publicauthority

Can be imposed byprivate individual

E. Theory and Basis of Taxation

1. Necessity Theory/ Lifeblood Theory The power of taxation proceeds

upon theory that the existence ofgovernment is a necessity; that iscannot continue without means topay its expenses; and that for thosemeans it has the right to compel allcitizens and property within itslimits to contribute.

CIR v. Algue: Taxes are the lifebloodof the government and so should becollected without unnecessary

hindrance. It is said that taxes arewhat we pay for civilized society.Without taxes, the governmentwould be paralyzed for lack of themotive power to activate and operateit.

2. Benefits-received theory This principle serves as the basis of

taxation and is founded on thereciprocal duties of protection andsupport between the State and itsinhabitants. Also called “symbioticrelation” between the State and itscitizens.

F. Inherent Limitations

1. Purpose must be public in nature.2. Prohibitions against delegation of the taxing

power (exclusively legislative in nature)3. Exemption of government entities, agencies

and instrumentalities.4. International Comity5. Limitation of territorial jurisdiction.

1. Purpose must be public in nature.

Pascual v. Secretary of Public Works(1960): The test of the constitutionalityof a statute requiring the use of publicfunds is whether the statute is designedto promote the public interest, asopposed to the furtherance of theadvantage of individuals, although eachadvantage to individuals mightincidentally serve the public.

Tio v. Videogram (1987): The publicpurpose of a tax may legally exist even ifthe motive which impelled thelegislature to impose the tax was tofavor one industry over another.

2. Prohibitions against delegation of thetaxing power (exclusively legislativein nature)

Tan v. Del Rosario (1994) : With thelegislature primarily lies the discretionto determine the1. nature (kind),2. object (purpose),3. extent (rate),4. coverage (subjects) and5. situs (place) of taxation.The court cannot freely delve into thosematters which, by constitutional fiat,rightly rest on legislative judgment.


Page 6 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

G. Constitutional Limitations

(1) Due Process of Law

Article III, Section 1, 1987 Consti- Noperson shall be deprived of life, liberty,or property without due process of law,nor shall any person be denied theequal protection of the laws.

(2) Equal Protection of Laws

All persons subject to legislation shallbe treated alike under similarcircumstances and conditions both inthe privileges conferred and liabilitiesimposed.

Uniformity does not prohibitclassification as long as:(1) the standards that are used therefor

are substantial and not arbitrary,(2) the categorization is germane to

achieve the legislative purpose,(3) the law applies, all things being equal,

to both present and future conditions,and

(4) the classification applies equally wellto all those belonging to the sameclass.

(3) Rule of Uniformity and Equity inTaxation

Article VI, Section 28, 1987 Consti- (1)The rule of taxation shall be uniformand equitable. The Congress shallevolve a progressive system of taxation.

(4) Prohibition Against Imprisonment forNon-Payment of Poll Tax

Art III, Section 20, 1987 Consti- Noperson shall be imprisoned for debt ornon-payment of a poll tax.

(5) Prohibition Against Impairment ofObligation of Contracts

Article III, Section 10. No law impairingthe obligation of contracts shall bepassed.

Tolentino v. Secretary of Finance (1994):Not only are existing laws read intocontracts in order to fix obligations asbetween parties, but the reservation ofessential attributes of sovereign poweris also read into contracts as a basicpostulate of the legal order. TheContract Clause has never been thoughtas a limitation on the exercise of theState's power of taxation save onlywhere a tax exemption has beengranted for a valid consideration.

(6) Prohibition Against Infringement ofReligious Freedom

Article III, Section 5, 1987 Consti-. Nolaw shall be made respecting anestablishment of religion, or prohibitingthe free exercise thereof. The freeexercise and enjoyment of religiousprofession and worship, withoutdiscrimination or preference, shallforever be allowed. No religious testshall be required for the exercise of civilor political rights.

(7) Prohibition Against Appropriation ofProceeds of Taxation for the Use,Benefit, or Support of any Church

Article VI, Section 29.1) No money shall be paid out of the

Treasury except in pursuance of anappropriation made by law.

2) No public money or property shall beappropriated, applied, paid, oremployed, directly or indirectly, for theuse, benefit, or support of any sect,church, denomination, sectarianinstitution, or system of religion, or ofany priest, preacher, minister, otherreligious teacher, or dignitary as such,except when such priest, preacher,minister, or dignitary is assigned tothe armed forces, or to any penalinstitution, or government orphanageor leprosarium.

3) All money collected on any tax leviedfor a special purpose shall be treatedas a special fund and paid out forsuch purpose only. If the purpose forwhich a special fund was created hasbeen fulfilled or abandoned, thebalance, if any, shall be transferred tothe general funds of the Government.

(8) Prohibition Against Taxation ofReligious, Charitable andEducational Entities

Article VI, Section 28, 1987Constitution –

xxx(3) Charitable institutions, churches and

personages or convents appurtenantthereto, mosques, non-profitcemeteries, and all lands, buildings,and improvements, actually, directly,and exclusively used for religious,charitable, or educational purposesshall be exempt from taxation.

The tax exemption under thisconstitutional provision covers propertytaxes only.


Page 7 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Lung Center of the Philippines v. QuezonCity (2004): The TEST whether an enterprise is

charitable or not is whether it exists tocarry out a purpose recognized in law ascharitable or whether it is maintainedfor gain, profit, or private advantage.

As a general principle, a charitableinstitution does not lose its character assuch and its exemption from taxessimply because it derives income frompaying patients, whether out-patient, orconfined in the hospital, or receivessubsidies from the government, so longas the money received is devoted orused altogether to the charitable objectwhich it is intended to achieve; and nomoney inures to the private benefit ofthe persons managing or operating theinstitution.

“Exclusive" is defined as possessed andenjoyed to the exclusion of others;debarred from participation orenjoyment; and "exclusively" is defined,"in a manner to exclude; as enjoying aprivilege exclusively." If real property isused for one or more commercialpurposes, it is not exclusively used forthe exempted purposes but is subject totaxation. The words "dominant use" or"principal use" cannot be substitutedfor the words "used exclusively" withoutdoing violence to the Constitutions andthe law. Solely is synonymous withexclusively.

NOTE: Lung Center does not necessarilyoverturned the case of Abra Valley College v.Aquino (1988). Lung center just provided astricter interpretation of the rule. In AbraValley, the court held: The primary use of theschool lot and building is the basic andcontrolling guide, norm and standard todetermine tax exemption, and not the mereincidental use thereof. Under the 1935Constitution, the trial court correctly arrivedat the conclusion that the school building aswell as the lot where it is built, should betaxed, not because the second floor of thesame is being used by the Director and hisfamily for residential purposes (incidental toits educational purpose), but because the firstfloor thereof is being used for commercialpurposes. However, since only a portion isused for purposes of commerce, it is only fairthat half of the assessed tax be returned tothe school involved.

(9) Prohibition Against Taxation of Non-Stock, Non-Profit EducationalInstitutions

Article XIV, Section 4, 1987Constitution – xxx(3) All revenues and assets of non-stock,

non-profit educational institutionsused actually, directly, and exclusivelyfor educational purposes shall beexempt from taxes and duties. Uponthe dissolution or cessation of thecorporate existence of suchinstitutions, their assets shall bedisposed of in the manner provided bylaw.

Proprietary educationalinstitutions, including thosecooperatively owned, may likewise beentitled to such exemptions, subjectto the limitations provided by law,including restrictions on dividendsand provisions for reinvestment.

(4) Subject to conditions prescribed bylaw, all grants, endowments,donations, or contributions usedactually, directly, and exclusively foreducational purposes shall be exemptfrom tax.

(10) Others

a. Grant of tax exemption Article 6, Section 28, 1987

Constitution – xxx(4) No law granting any tax exemption

shall be passed without theconcurrence of a majority of allthe Members of the Congress.

b. Veto of appropriation, revenue, tariffbills by the President Article 6, Section 28, 1987

Constitution –(2) The President shall have the

power to veto any particular itemor items in an appropriation,revenue, or tariff bill, but the vetoshall not affect the item or itemsto which he does not object.

c. Non-impairment of the SC jurisdiction

San Miguel Corp v. Avelino:It is undoubted that under theConstitution, even the legislative bodycannot deprive this Court of itsappellate jurisdiction over all casescoming from inferior courts where theconstitutionality or validity of anordinance or the legality of any tax,impost, assessment, or toll is inquestion.


Page 8 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

d. Revenue bills shall originate exclusivelyfrom the House of Representatives Article VI, Section 24, 1987

Constitution –All appropriation, revenue or tariffbills, bills authorizing increase of thepublic debt, bills of local application,and private bills, shall originateexclusively in the House ofRepresentatives, but the Senate maypropose or concur with amendments.

Tolentino v. Secretary of Finance (1994):“What the Constitution simply means isthat the initiative for filing revenue,tariff, or tax bills, bills authorizing anincrease of the public debt, private billsand bills of local application must comefrom the House of Representatives onthe theory that, elected as they are fromthe districts, the members of the Housecan be expected to be more sensitive tothe local needs and problems.

On the other hand, the senators,who are elected at large, are expected toapproach the same problems from thenational perspective.

Both views are thereby made to bearon the enactment of such laws. TheConstitution does not also prohibit thefiling in the Senate of a substitute bill inanticipation of its receipt of the bill fromthe House, as long as action by theSenate is withheld until receipt of saidbill.”

e. Infringement of press freedom Article III, Section 4, 1987

Constitution –No law shall be passed abridging thefreedom of speech, of expression, or ofthe press, or the right of the peoplepeaceably to assemble and petitionthe government for redress ofgrievances.

This limitation does not meanthat the press is exempt from allforms of taxes. Taxationconstitutes an infringement of pressfreedom when it operates as a priorrestraint to the exercise of thisconstitutional right. When the taxis imposed on the receipts or theincome of the press it is a validexercise of the sovereignprerogative.

f. Grant of franchise Article XII, Section 11, 1987

Constitution –No franchise, certificate, or any otherform of authorization for the operation

of a public utility shall be grantedexcept to citizens of the Philippines or to

corporations or associationsorganized under the laws of thePhilippines,

at least sixty per centum of whosecapital is owned by such citizens;

nor shall such franchise,certificate, or authorization beexclusive in character or for alonger period than fifty years.

Neither shall any such franchise orright be granted except under thecondition that it shall be subject toamendment, alteration, or repeal bythe Congress when the common goodso requires.

The State shall encourage equityparticipation in public utilities by thegeneral public.

The participation of foreigninvestors in the governing body of anypublic utility enterprise shall belimited to their proportionate share inits capital, and all the executive andmanaging officers of such corporationor association must be citizens of thePhilippines.

Tolentino v. Aquino: Section 24 of P.D.No. 1590 provision is evidently intendedto prevent the amendment of thefranchise by mere implication resultingfrom the enactment of a laterinconsistent statute, in consideration ofthe fact that a franchise is a contractwhich can be altered only by consent ofthe parties.

Thus in Manila Railroad Co. v.Rafferty, it was held that an Act of theU.S. Congress, which provided for thepayment of tax on certain goods andarticles imported into the Philippines,did not amend the franchise of plaintiff,which exempted it from all taxes exceptthose mentioned in its franchise. It washeld that a special law cannot beamended by a general law.

In contrast, in the case at bar,Republic Act No. 7716 expressly amendsPAL's franchise (P.D. No. 1590) byspecifically excepting from the grant ofexemptions from the VAT PAL's exemptionunder P.D. No. 1590. This is within thepower of Congress to do under Art. XII,Section 11 of the Constitution, whichprovides that the grant of a franchise forthe operation of a public utility is subjectto amendment, alteration or repeal byCongress when the common good sorequires.


Page 9 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

H. Tax Systems

Article VI, Section 28, 1987 Consti- (1)The rule of taxation shall be uniformand equitable. The Congress shallevolve a progressive system of taxation.

Progressive System of Taxation v.Regressive System of Taxation(1) A progressive system of taxation means

that tax laws shall place emphasis ondirect taxes rather than on indirecttaxes, with ability to pay as theprincipal criterion.

(2) A regressive system of taxation existswhen there are more indirect taxesimposed than direct taxes.

Tolentino v. Secretary of Finance (1994): Regressivity is not a negative standard

for courts to enforce. What Congress isrequired by the Constitution to do is to“evolve a progressive system oftaxation.”

This is a directive to Congress, just likethe directive to it to give priority to theenactment of laws for the enhancementof human dignity. The provisions areput in the Constitution as moralincentives to legislation, not asjudicially enforceable rights.

I. Classification of Taxes

1. As to Scope of the Tax

National – taxes imposed by thenational government. (eg. Internalrevenue taxes and customs duties)

Municipal or Local – taxes imposed bylocal governments (eg. Business taxesthat may be imposed under the LocalGovt Code)

2. As to Who Shoulders the Burden ofthe Tax

Direct Taxes – taxes which aredemanded from persons who areprimarily burdened to pay them (eg.Income, estate, donor’s taxes)

Indirect Taxes – taxes levied upontransactions or activities before thearticles subject matter thereof reach theconsumers to whom the burden of thetax may ultimately be charged or shifted(eg. VAT)

3. As to the Object or Subject Matter ofTax

Personal, Poll or Capitation Tax – tax ofa fixed amount imposed on personsresiding within a specified territory,whether citizens or not, without regardto their property or the occupation orbusiness in which they may be engaged.(i.e. community tax)

Property Tax – tax imposed on property,real or personal, in proportion to itsvalue or in accordance with some otherreasonable method of apportionment.(ie., real estate tax)

Excise Tax – a charge imposed upon theperformance of an act, the enjoyment ofa privilege, or the engaging in anoccupation.

4. As to the Manner of Computing theTax

Specific Tax – is a tax of a fixed amountimposed by the head or number or bysome other standard of weight ormeasurement. It requires noassessment other than the listing orclassification of the objects to be taxed.

Ad Valorem Tax – is a tax of a fixedproportion of the value of the propertywith respect to which the tax isassessed. It requires the interventionof assessors or appraisers to estimatethe value of such property before theamount due from each taxpayer can bedetermined.

5. As to Graduation or Rate

Proportional – based on a fixedpercentage of the amount of theproperty receipts or other basis to betaxed. Example: real estate tax.

Progressive – the rate of which increasesas the tax base or bracket increases.Example: income tax.

Digressive Tax Rate – progressive ratestops at a certain point. Progressionhalts at a particular stage.

Regressive – the rate of which decreasesas the tax base or bracket increases.There is no such tax in the Philippines.

J. Situs of Taxation

Literally, situs of taxation meansplace of taxation. It is the State orpolitical unit which has jurisdiction toimpose a particular tax.


Page 10 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Lex Rei Sitae This is a principle followed in fixing the

situs of taxation of a property. Thismeans that the property is taxable inthe State where it has its actual situs,specifically in the place where it islocated, even though the owner residesin another jurisdiction.

With respect to property taxes, realproperty is subject to taxation in theState where it is located and taxableonly there. Lex rei sitae has also beenadopted for tangible personal propertyunder Article 16 of the Civil Code.

Situs of Tangible Personal Property General Rule: Situs is the domicile of

the owner pursuant to the principle ofmobilia sequuntur personam. This ruleis based on the fact that such propertydoes not admit of any actual locationand that such property receives theprotection and benefits of the law wherethey are located.

Exceptions:1. When it is inconsistent with the

express provisions of the statute2. When the property has acquired a

business situs in anotherjurisdiction

Commissioner v. BOAC (1987): The test oftaxability is the "source"; and the source ofan income is that activity xxx whichproduced the income.

K. Double Taxation

Means taxing twice for the same taxperiod the same thing or activity twice,when it should be taxed once, for thesame purpose and with the same kindof character of tax.

In order to constitute double taxation inthe objectionable or prohibited sense:

the same property must be taxedtwice when it should be taxed once;

both taxes must be imposed on thesame property or subject matter;

for the same purpose; by the same State, Government, or

taxing authority;

within the same jurisdiction ortaxing district;

during the same taxing period; and of the same kind or character of tax.

Villanueva v. City of Iloilo (1968):There is no constitutional prohibitionagainst double taxation in the

Philippines. It is something not favored,but is permissible, provided some otherconstitutional requirement is not therebyviolated, such as the requirement that taxesmust be uniform.

L. Escape From Taxation

1. Shifting the Tax Burden2. Tax Evasion3. Tax Avoidance4. Tax Amnesty5. Tax Condonation6. Exemption from Taxation

(1) Shifting the Tax Burden

SHIFTING - is the transfer of the burden of atax by the original payer or the one on whomthe tax was assessed or imposed to someoneelse.

Ways of Shifting the Tax Burden

1. Forward shifting When the burden of the tax is

transferred from a factor of productionthrough factors of distribution until itfinally settles on the ultimatepurchaser or consumer.

Example: Manufacturer or producermay shift tax assessed to wholesaler,who in turn shifts it to the retailer,who also shifts it to the finalpurchaser or consumer.

2. Backward shifting When the burden of the tax is

transferred from the consumer orpurchaser through the factors ofdistribution to the factor ofproduction.

Example: Consumer or purchaser mayshift tax imposed on him to retailer bypurchasing only after the price isreduced, and from the latter to thewholesaler, and finally to themanufacturer or producer.

3. Onward shifting When the tax is shifted two or more

times either forward or backward. Thus, a transfer from the seller to the

purchaser involves one shift; from theproducer to the wholesaler, then toretailer, we have two shifts; and if thetax is transferred again to thepurchaser by the retailer, we havethree shifts in all.

Taxes that Can Be Shifted

Only indirect taxes may be shifted; directtaxes cannot be shifted.


Page 11 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Impact and Incidence of Taxation

Impact of taxation is the point on which atax is originally imposed. In so far as thelaw is concerned, the taxpayer is theperson who must pay the tax to thegovernment. He is also termed as thestatutory taxpayer – the one on whom thetax is formally assessed. He is the subjectof the tax.

Incidence of taxation is that point onwhich the tax burden finally rests or settledown. It takes place when shifting hasbeen effected from the statutory taxpayerto another.

Relationship between Impact, Shifting, andIncidence of a Tax

The impact is the initial phenomenon, theshifting is the intermediate process, andthe incidence is the result. Thus, theimpact in a sales tax (i.e. VAT) is on theseller (manufacturer) who shifts theburden to the customer who finally bearsthe incidence of the tax.

Impact is the imposition of the tax;shifting is the transfer of the tax; whileincidence is the setting or coming to restof the tax.

(2) Tax Evasion

TAX EVASION - is the use by the taxpayer ofillegal or fraudulent means to defeat or lessenthe payment of a tax. It is also known as “taxdodging.” It is punishable by law.- Example: Deliberate failure to report a

taxable income or property; deliberatereduction of income that has beenreceived.

Elements of Tax Evasion

1. The end to be achieved. Example: thepayment of less than that known by thetaxpayer to be legally due, or in paying notax when such is due.

2. An accompanying state of mind describedas being “evil,” “in bad faith,” “willful” or“deliberate and not accidental.”

3. A course of action (or failure of action)which is unlawful.

(3) Tax Avoidance

TAX AVOIDANCE - is the exploitation by thetaxpayer of legally permissible alternative taxrates or methods of assessing taxableproperty or income in order to avoid or reducetax liability. It is politely called “taxminimization” and is not punishable by law.

(4) Tax Amnesty

Republic v. IAC (1991): A tax amnesty,being a general pardon or intentional

overlooking by the State of its authority toimpose penalties on persons otherwiseguilty of evasion or violation of a revenueor tax law, partakes of an absoluteforgiveness or waiver by theGovernment of its right to collect whatotherwise would be due it, and in thissense, prejudicial thereto, particularly togive tax evaders, who wish to relent andare willing to reform a chance to do soand become a part of the new society witha clean slate.

(5) Tax Condonation

TAX CONDONATION - the State desists orrefrains from exacting, inflicting or enforcingsomething as well as to restore what hasalready been taken.

(6) Exemption from Taxation

TAX EXEMPTION - is the grant of immunityto particular persons or corporations or toperson or corporations of a particular classfrom a tax which persons and corporationsgenerally within the same state or taxingdistrict are obliged to pay. It is an immunityor privilege; it is freedom from a financialcharge or burden to which others aresubjected.- strictly construed against the taxpayer.

Exemption v. ExclusionPLDT v. City of Davao (2003): Indeed, both intheir nature and in their effect there is nodifference between tax exemption and taxexclusion.

Exemption is an immunity or privilege; itis freedom from a charge or burden to whichothers are subjected.

Exclusion, on the other hand, is theremoval of otherwise taxable items from thereach of taxation, e.g., exclusions from grossincome and allowable deductions. Exclusionis thus also an immunity or privilege whichfrees a taxpayer from a charge to which othersare subjected.

Consequently, the rule that tax exemptionshould be applied in strictissimi juris againstthe taxpayer and liberally in favor of thegovernment applies equally to tax exclusions.

M. Interpretation/Construction ofTax Laws

Tax Imposition Must be construed strictly against the

government and liberally in favor ofthe taxpayer.

Tax Exemption Construed against strictly against the

taxpayer claiming tax exemption.

REVIEWER IN TAXATION LAW Part II. Income Taxation

Page 12 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Part II. Income Taxation

I. PRINCIPLES OF INCOME TAXATIONA. INCOME TAXB. SOURCE OF INCOMEC. SCHEDULAR V. GLOBAL TAX SYSTEM

II. DEFINITION AND CLASSIFICATION OFTAXPAYERS

III. TAX ON INDIVIDUALSA. CLASSIFICATION OF INDIVIDUAL

TAXPAYERSB. THREE KINDS OF INCOME

1. CAPITAL GAINS SUBJECT TOCAPITAL GAINS TAX

2. PASSIVE INCOME SUBJECT TOFINAL TAX

3. “OTHER INCOME” SUBJECT TOSCHEDULAR TAX RATES

4. TAXATION OF COMPENSATIONINCOME OF A MINIMUM WAGEEARNER

C. DEDUCTIONS IN GENERALD. SPECIAL CLASSIFICATION OF

INDIVIDUALS AND CORRESPONDINGTAX TREATMENT

E. COMPUTATIONF. SUMMARY OF TAX BASES AND TAX

RATESIV. TAX ON CORPORATIONS

A. COVERAGE OF THE TERM“CORPORATION”

B. CLASSIFICATION OF CORPORATIONSC. SCOPE OF TAXATIOND. TAX ON DOMESTIC CORPORATIONSE. TAX ON RESIDENT FOREIGN

CORPORATIONSF. TAX ON NON-RESIDENT FOREIGN

CORPORATIONSG. SPECIAL TYPES OF CORPORATIONSH. SUMMARY OF TAX BASES AND RATES

OF SPECIAL CORPORATIONSI. EXEMPT CORPORATIONSJ. SUMMARY OF TAX BASES, TAX RATES

AND APPLICABLE TAX REGIMES FORCORPORATIONS

V. TAXATION OF FRINGE BENEFITSA. DEFINITIONB. TAX RATE AND TAX BASEC. FRINGE BENEFITS WHICH ARE NOT

TAXABLEVI. TAXATION OF PARTNERSHIPS

A. CLASSIFICATIONS OF PARTNERSHIPSFOR TAX PURPOSES

B. GENERAL PROFESSIONALPARTNERSHIPS

C. OTHER PARTNERSHIPSVII.ESTATES AND TRUSTS

A. DEFINITIONB. COMPUTATION AND PAYMENT OF TAXC. HOW TAXABLE INCOME OF THE

ESTATE OR TRUST IS COMPUTEDD. EXEMPTION ALLOWED TO ESTATES

AND TRUSTSE. ILLUSTRATIVE PROBLEMS

NATIONAL INTERNAL REVENUE TAXES:(Sec. 21)

1. INCOME TAX2. Estate and Donor’s Tax3. Value-Added Tax4. Other percentage tax5. Excise Tax6. Documentary stamp tax7. Such other taxes as are hereafter may

be imposed and collected by the BIR

I. PRINCIPLES OF INCOMETAXATION

A. Income Tax

Income Tax is defined as a tax on allyearly profits arising from property,professions, trades, or offices, or as atax on the person’s income,emoluments, profits and the like (Fisherv. Trinidad).

It may be succinctly defined as a tax onincome, whether gross or net, realizedin one taxable year.

Definition of INCOME All wealth which flows to the taxpayer

other than a mere return of capital Conwi v. CTA: It is an amount of money

coming to a person within a specifiedtime, whether as payment for services,interest or profit from investment.Unless otherwise specified, it meanscash or its equivalent. Income can alsobe thought of as a flow of the fruits ofone's labor.

Income includes earnings, lawfullyor unlawfully acquired, withoutconsensual recognition, express orimplied, of an obligation to repayand without restriction as theirdisposition.

Nature of income tax (PED)1. PROGRESSIVE TAX – the tax base

increases as the tax rate increases.2. EXCISE TAX (privilege tax) – a tax on

the right to earn income3. DIRECT TAX

Purposes of Income Tax (ROM)1. RAISE revenue to defray the expenses

of the government;2. OFFSET regressive sales and

consumption taxes; and3. MITIGATE the evils arising from the

inequalities of wealth by a progressivescheme of taxation which places theburden on those best able to pay.


Page 13 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Taxability of Income, Requisites (IRN)1. There is INCOME, gain or profit2. RECEIVED or REALIZED during the

taxable year3. NOT EXEMPT from income tax

Capital IncomeA FUND of propertyexisting at aninstant of time

A FLOW of servicesrendered by capitalthrough the payment ofmoney from it or anyother benefit renderedby a fund of capital inrelation to such fundthrough a period of time

Capital is WEALTH Income is the SERVICEOF THE WEALTH

Return of capital isnot subject toincome tax

Income is subject to tax

Madrigal vs. Rafferty (1918): TheSupreme Court of Georgia expresses thethought in the following figurativelanguage: "The fact is that property is atree, income is the fruit; labor is a tree,income the fruit; capital is a tree,income the fruit." A tax on income is nota tax on property. "Income," as hereused, can be defined as "profits orgains."

A mere increase in the value ofproperty is not income, but merelyunrealized increase in capital. Theincrease in the value of property is alsoknown as appraisal surplus orrevaluation increment.

Tests to Determine Realization of Income forTax Purposes1. Realization Test – no taxable income

until there is a separation fromcapital of something ofexchangeable value, therebysupplying the realization ortransmutation which would result inthe receipt of income.

2. Claim of right doctrine – a taxablegain is conditioned upon the presenceof a claim of right to the allegedgain and the absence of a definiteunconditional obligation to return orrepay that which would otherwiseconstitute a gain. Principle of Constructive Receipt

of Income - Income which iscredited to the account of or setapart for a taxpayer and whichmay be drawn upon by him atany time is subject to tax for theyear during which so credited or setapart, although not then actuallyreduced to possession. The income

must be credited to the taxpayerwithout any substantiallimitation or restriction as to thetime or manner of payment orcondition upon which payment isto be made.

3. Economic benefit test – any economicbenefit to the employee that increaseshis net worth is taxable.

B. Source of Income

1. Classification of Income According toSource

a. Income derived from sources within thePhilippine

b. Income derived from sources withoutthe Philippine

c. Income derived from sources partlywithin and partly without thePhilippines

2. Basic Principlesa. Resident Citizens (RC) and Domestic

Corporations (DC) are taxable onincome derived from within and withoutthe Philippines

b. Non-resident Citizens (NRC), Non-resident Aliens (NRA), Resident ForeignCorporations (RFC) and Non-residentForeign Corporations (NRFC) aretaxable only on income derived fromwithin the Philippines.

3. Gross Income From Sources Withinthe Philippines (RIDIC - within)

The following items of gross income shall betreated as gross income from sourcesWITHIN the Philippines:

a. Interests derived from sources withinthe Philippines, and interests on bonds,notes or other interest-bearingobligation of residents

b. Dividends received:i. from a domestic corporation; andii. from a foreign corporation, UNLESS

less than 50% of its gross income forthe previous 3-year period wasderived from sources within thePhilippines [in which case it will betreated as income partly from withinand partly from without].

The income which is consideredas derived from within thePhilippines is obtained by using thefollowing formula:

Philippine Gross Income* x Dividend = Income WithinWorldwide Gross Income*

NOTE: * of the corporation giving the dividend


Page 14 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

c. Compensation for labor or personalservices performed in the Philippines

d. Rentals and royalties from propertylocated in the Philippines or from anyinterest in such property, includingrentals or royalties for – (stackem)i. The use of or the right or privilege to

use in the Philippines anycopyright, patent, design or model,plan, secret formula or process,goodwill, trademark, trade brand orother like property or right;

ii. The use of, or the right to use in thePhilippines any industrial,commercial or scientific equipment;

iii. The supply of scientific, technical,industrial or commercial knowledgeor information;

iv. The supply of any assistance that isancillary and subsidiary to, and isfurnished as a means of enablingthe application or enjoyment of, anysuch property or right as ismentioned in (a), any suchequipment as is mentioned in (b) orany such knowledge or informationas is mentioned in (c);

v. The supply of services by anonresident person or his employeein connection with the use ofproperty or rights belonging to, or theinstallation or operation of anybrand, machinery or other apparatuspurchased from such nonresidentperson;

vi. Technical advice, assistance orservices rendered in connection withtechnical management oradministration of any scientific,industrial or commercial undertaking,venture, project or scheme; and

vii. The use of or the right to use:(i) Motion picture films;(ii) Films or video tapes for use in

connection with television; and(iii) Tapes for use in connection with

radio broadcasting.

e. Gains, profits and Income from thesale of real property located in thePhilippines

f. General Rule: Gains, profits and incomefrom the sale of personal property,subject to the following rules:

Place ofPURCHASE

Place ofSALE

Treatment**

Philippines Abroad Income fromWithout

Abroad Philippines Income fromWithin

** in other words, treated as income from thecountry in which sold

Exceptions:1. Gain from the sale of shares of stock

in a domestic corporation treated as derived entirely from

sources within the Philippinesregardless of where the saidshares are sold.

2. Gains from the sale of(manufactured) personal property:a. produced (in whole or in part)

by the taxpayer within and soldwithout the Philippines, or

b. produced (in whole or in part)by the taxpayer without andsold within the Philippines treated as derived partly

from sources within andpartly from sources withoutthe Philippines.

Place ofPRODUCTION

Place ofSALE

Treatment

Philippines Abroad Partly within,partlywithout

Abroad Philippines Partly within,partlywithout

Allowable Deductions from GrossIncome From Sources Within thePhilippines

General Rule:From the items of gross income above,the following are allowed as deductions:a. expenses, losses and other

deductions properly allocated toitems of gross income

b. ratable part of expenses, interests,losses and other deductionseffectively connected with thebusiness or trade conductedexclusively within the Philippineswhich cannot definitely be allocatedto some items of gross income

Formula for (b):Philippine

Gross Income

WorldwideGross Income

x UnallocatedExpenses

=Expensesallocatedto income

fromwithin

NOTE:The need to distinguish between incomefrom within and without and correspondingdeductible items from income within is onlynecessary if taxpayer is a non-resident.


Page 15 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

4. Gross Income From Sources Withoutthe Philippines (RIDIC - without)

The following items of gross incomeshall be treated as income from sourceswithout the Philippines:

1. Interests other than those derivedfrom sources within the Philippines

2. Dividends other than those derivedfrom sources within the Philippines

3. Compensation for labor or personalservices performed without thePhilippines

4. Rentals or royalties from propertylocated without the Philippines orfrom any interest in such property

5. Gains, profits and Income fromthe sale of real property locatedwithout the Philippines

C. Schedular Tax System and GlobalTax System

1. Global Tax System

It did not matter whether the incomereceived by the taxpayer is classified ascompensation income, business orprofessional income, passive investmentincome, capital gain, or other income.All items of gross income, deductions,and personal and additionalexemptions, if any, are reported in oneincome tax return, and one set of taxrates are applied on the tax base.

2. Schedular Tax System

Different types of incomes are subject todifferent sets of graduated or flatincome tax rates. The applicable taxrate(s) will depend on the classificationof the taxable income and the basiscould be gross income or net income.

II. DEFINITION ANDCLASSIFICATION OF TAXPAYERS

General Principles of Income Taxation inthe Philippines. (Sec. 23)

(A) A citizen of the Philippines residingtherein is taxable on all income derivedfrom sources within and without thePhilippines;

(B) A nonresident citizen is taxable only onincome derived from sources within thePhilippines;

(C) An individual citizen of the Philippineswho is working and deriving income fromabroad as an overseas contract workeris taxable only on income derived fromsources within the Philippines:

Provided, That a seaman who is acitizen of the Philippines and whoreceives compensation for servicesrendered abroad as a member of thecomplement vessel engaged exclusivelyin international trade shall be treated asan oversea contract worker;

(D) An alien individual, whether a residentor not of the Philippines, is taxable onlyon income derived from sources withinthe Philippines;

(E) A domestic corporation is taxable on allincome derived from sources within andwithout the Philippines; and

(F) A foreign corporation, whether engagedor not in trade or business in thePhilippines, is taxable only on incomederived from sources within thePhilippines.

NOTE:180 day rule – the moment an alien stays in thePhilippines for 180 days, he is considered as anon-resident alien engaged in trade andbusiness whether or not he is engaged inbusiness and he earned income.


Page 16 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Classification of Taxpayers

**Similar in the sense that they are both taxed on their gross income subject to FINALWITHHOLDING TAX.

INDIVIDUALS

Citizens

Aliens(Taxable only

for incomewithin)

Resident(Taxable forincome fromwithin andwithout)

Non-Resident(Taxable only

for income fromwithin)

Resident

Non-Resident

Non- ResidentEngaged inTrade andBusiness

Non- ResidentNot Engagedin Trade andBusiness**

CORPORATIONS

Resident(Taxable only

for income fromwithin)

Foreign(Taxable only

for incomewithin)

Resident

Non-Resident**

Apply180-

day test


Page 17 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Definition of Taxpayer

Under Sec 22(N), a taxpayer is any person subject to [income] tax. Income taxpayers (with distinction based on the amount of income subject to tax, or the

applicable tax rates or both) are classified as follows:

PrimaryClassification

Sub-Classification(s)

Individuals

Citizens ofthePhilippines

Residents of the Philippines

Not Residents of the Philippines

Aliens

Residents of the Philippines

NotResidentsof thePhilippines

Engaged in Trade or Business in the Philippines

Not Engaged in Trade or Business in thePhilippines

SpecialClasses ofIndividuals

Individual Employed by Regional or Area Headquarters andRegional Operating Headquarters of Multinational Companies

Individual Employed by Offshore Banking Units

Individual Employed by a foreign service contractor or by aforeign service subcontractor engaged in petroleum operationsin the Philippines

Estates andTrusts

Corporations

Domestic Corporations

ForeignCorporations

Resident Corporations

Non-resident Corporations

Special Classesof Corporations

Proprietary educational institutions and non-profithospitals

Domestic Depositary Bank (Foreign Currency DepositUnits)

Resident international carriers

Offshore Banking Units

Resident Depositary Bank (Foreign Currency DepositUnits)

Regional or Area Headquarters and Regional OperatingHeadquarters of Multinational Companies

Non-resident cinematographic film owners, lessors ordistributors

Non-resident owners or lessors of vessels chartered byPhilippine nationals

Non-resident lessors of aircraft, machinery and otherequipment

III.TAX ON INDIVIDUALS

A. Classification of IndividualTaxpayers

1. Citizens

RESIDENT – a citizen is deemed as aresident of the Philippines unless hequalifies as a non-resident under Sec. 22Eof the NIRC; taxable for income derived from all

sources based on taxable (i.e., net)income

NON-RESIDENT – a citizen of thePhilippines who:(1) establishes to the satisfaction of the

Commissioner the fact of his physicalpresence abroad with a definite intentionto reside therein.

(2) Leaves the Philippines during the taxableyear to reside abroad, either as animmigrant or for employment on apermanent basis.

(3) Works and derives income from abroadand whose employment thereat requires


Page 18 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

him to be physically present abroad mostof the time during the taxable year.

(4) Has been previously considered asnonresident citizen and who arrives inthe Philippines at any time during thetaxable year to reside permanently in thePhilippines shall likewise be treated as anon-resident citizen for the taxable yearin which he arrives in the Philippineswith respect to his income derived fromsources abroad UNTIL the date of hisarrival in the Philippines.

taxable for income derived within thePhilippines based on taxable (i.e., net)income

NOTES:An OVERSEAS CONTRACT WORKER is taxableonly on income from sources within thePhilippines. (Sec. 23 (c))o NOTE FURTHER: A seaman who is a

Filipino citizen and who receivescompensation for services rendered abroadas member of the complement of a vesselengaged exclusively in international trade istreated as an overseas contract worker.

Length of stay is indicative of intention.A citizen of the Philippines who shall havestayed outside the Philippines for 183 daysor more by the end of the year is a non-resident citizen. His presence abroad,however, need not be continuous.

2. Alien

RESIDENT – residence is within thePhilippines and who is not a citizen thereof.An alien actually present in the Philippineswho is not a mere transient or sojourner isa resident of the Philippines for income taxpurposes. A mere floating intention,indefinite as to time, to return to anothercountry is not sufficient to constitute him atransient. taxable for income derived within the

Philippines based on taxable (i.e., net)income

NON-RESIDENT – residence is NOT in thePhilippines and who is not a citizen thereof. Engaged in trade or business in the

Philippines (NRAETB) - is taxable forincome derived within the Philippinesbased on taxable (i.e., net) income

Not Engaged in trade or business inthe Philippines (NRANETB) - is taxablefor income derived within thePhilippines based on gross income.

NOTES:What makes an alien a resident or non-residentalien is his intention with regard to thelength and nature of his stay. Thus:a. One who comes to the Philippines for a

definite purpose which in its very naturemay be promptly accomplished is not aresident citizen.

b. One who comes to the Philippines for adefinite purpose which in its very naturewould require an extended stay, and to thatend, makes his home temporarily in thePhilippines, becomes a resident, though itmay be his intention at all times to return tohis domicile abroad when the purpose forwhich he came has been consummated orabandoned.

Length of stay is indicative ofintention. An alien who shall havestayed in the Philippines for more thanone year by the end of the taxable yearis a resident alien.

NOTE FURTHER: An alien who shall cometo the Philippines and stay for an aggregateperiod of more than one hundred eightydays during a calendar year shall beconsidered a non-resident alien inbusiness in the Philippines. [Sec. 25(A)(1)]

Length of Stay in the Philippines asIndicative of Intent

Length of Stay(aggregate withinthe calendar year)

Status

More than 1 year Resident AlienMore than 180days up to 1 year

NRAETB

180 days or less NRANETB

If an alien stays in the Philippines for180 days or less during the calendaryear, he shall be deemed a non-residentalien not doing business in thePhilippines.

B. Three Kinds of Income


When the asset sold was held as acapital asset, the gain or loss is called acapital gain or loss. When the asset soldwas not held as a capital asset (in otherwords, as an ordinary asset), the gain orloss is called an ordinary gain or loss.

What are capital assets? those notconsidered as ordinary assets!


Page 19 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

What are ordinary assets? FOURCATEGORIES OF ORDINARY ASSETS areas follows [Sec. 39]:1. Stock in trade of the taxpayer or other

property of a kind which would properlybe included in the inventory of thetaxpayer at hand at the close of thetaxable year, or

2. property held by the taxpayer primarilyfor sale to customers in the ordinarycourse of his trade or business, or

3. property used in the trade or business,of a character which is subject to theallowance for depreciation provided inSubsection (F) of Section 34; or

4. real property used in trade or businessof the taxpayer.

RATES:1. On sale, barter, exchange or other

disposition of shares of stock of adomestic corporation not listed andtraded through a local stockexchange, held as a capital asset:

On the net capital gain:

Not over P100,000 = Final Taxof 5%

On any amount in excess ofP100,000 = plus Final Tax of10% on the excess

Key Definitions

Net capital gain: selling priceless cost

Selling price: consideration onthe sale OR fair market value ofthe shares of stock at the time ofthe sale, whichever is HIGHER

Cost: original purchase price

2. On sale, exchange, or other dispositionof real property in the Philippines,held as a capital asset:

On the gross selling price, or thecurrent fair market value at the timeof the sale, whichever is higher, afinal tax of 6%

The capital gains tax is applied onthe gross selling price, or the currentfair market value at the time of thesale, whichever is higher. Any gainor loss on the sale is immaterialbecause there is a conclusivepresumption by law that the saleresulted in a gain.

EXCEPTION: When sale of residenceis not liable for capital gains tax

a. There is a sale or disposition of theirprincipal residence by naturalpersons.

b. The proceeds of the sale are fullyutilized in acquiring or constructinga new principal residence within 18calendar months from the date ofsale or disposition.

The Commissioner shall have beenduly notified by the taxpayer within30 days from the date of sale ordisposition through a prescribedreturn of his intention to avail of thetax exemption.

A deposit is made of the 6% capitalgain tax otherwise due, in cash ormanager’s check, in an interest-bearing account with an AuthorizedAgent Bank (AAB), under an EscrowAgreement between the taxpayerand the Bureau of Internal Revenuethat the same shall be released tothe taxpayer when the proceeds ofthe sale shall have been utilized asintended.

The tax exemption can only beavailed of once every 10 years

If there is no full utilization ofthe proceeds of sale ordisposition, the portion of thegain presumed to have beenrealized from the sale ordisposition shall be subject tocapital gains tax (CGT). The GSPor FMV at the time of sale,whichever is higher, shall bemultiplied by a fraction whichthe unutilized amount bears tothe gross selling price in order todetermine the taxable portion.

i.e.,Unutilizedamount

GSP

x(higher of

GSP or FMV)=

TaxablePortion

ALTERNATIVE TAXATION: In case of a sale or other disposition of

real property to the government or anyof its political subdivisions or agenciesor to government-owned or controlledcorporations, the tax shall be EITHER

The year-end tax of the individual (i.e.,capital gain to be included in thecomputation of income subject toschedular rates),

OR


Page 20 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

The capital gain tax of 6%, at theoption of the taxpayer

What is the tax implication of asale/disposition of a capital assetNOT subject to capital gains tax? The net capital gain or loss is includedin the computation of net incomesubject to schedular rates (5% to 32%).

2. Passive Income Subject to Final Tax

“Final tax” means tax withheld fromsource, and the amount received by theincome earner is net of the tax already.The tax withheld by the income payor isremitted by him to the BIR. The incomehaving been tax-paid already, it neednot be included in the income taxreturn at the end of the year. Thesepassive income items are as follows:

a. Interest Income: on any currency bank deposit, yield

or any other monetary benefit fromdeposit substitutes, trust funds andsimilar arrangements - 20% finaltax

under the expanded foreigncurrency deposit system (EFCDS) -7.5% final tax for residents, exemptif non-residents

on long-term deposit or investmentcertificates (LTDIC) in banks (e.g.,savings, common or individual trustfunds, deposit substitutes,investment management accountsand other investments, which havematurity of 5 years or more) –exempt Should LTDIC holder pre-

terminate LTDIC before the 5thyear, a final tax shall be imposedon the entire income based onthe remaining maturity:

4 years to less than 5 years 5%

3 years to less than 4 years 12%

less than 3 years 20%

b. Dividends cash and/or property dividends

actually or constructively receivedby an individual from

a domestic corporation a joint stock company insurance or mutual fund

companies

regional operating headquartersof multinational companies

share of an individual in thedistributable net income after tax ofa partnership (except a generalprofessional partnership) of whichhe is a partner

share of an individual member orco-venturer in the net income aftertax of an association, a jointaccount, or a joint venture orconsortium taxable as a corporation

RATE: 10% for residents (RC, RA) and

non-resident citizens (NRC); 20% for NRAETB (non-resident

aliens engaged in trade or business)

A stock dividend representing thetransfer of surplus to capitalaccount shall not be subject totax.

However, if a corporation cancelsor redeems stock issued as adividend at such time and in suchmanner as to make the distributionand cancellation or redemption, inwhole or in part, essentiallyequivalent to the distribution of ataxable dividend, the amount sodistributed in redemption orcancellation of the stock shall beconsidered as taxable income tothe extent that it represents adistribution of earnings or profits.(Sec. 73B, NIRC)

[In other words, stock dividendsare generally not subject to taxas long as there are no optionsin lieu of the shares of stock.

On the other hand, a stockdividend constitutes income ifit gives the shareholder aninterest different from thatwhich his formerstockholdings represented.]

c. Royalties

From books, literary works, andmusical compositions – 10%

Other royalties – 20%

d. Winnings, except Philippine Charitysweepstakes / lotto winnings – 20%

e. Prizes exceeding P10,000 – 20% Prize, differentiated from winnings

A prize is the result of an effortmade (e.g., prize in a beautycontest), while winnings are theresult of a transaction where theoutcome depends upon chance (e.g.,betting).


Page 21 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

3. “Other Income” Subject to SchedularTax Rates

Income which is neither capital gainwith capital gain tax, nor passiveincome with final tax, is “other income”or residual income. It may be derivedfrom:1. Employer-employee relationship,

which is called compensationincome

2. Business or profession3. Sale or exchange of property which

is not subject to the capital gain tax4. Incidental sources, such as interest

or dividend, which is not subject tofinal tax (i.e., dividend from aforeign corporation in case ofresident citizens, rent income).

The tax rates on NET ordinary orother income (schedular rates)are as follows:

Incomeover

Butlessthan

Tax Plus ofExcessover

10,000 5%

10,000 30,000 500 10% 10,000

30,000 70,000 2,500 15% 30,000

70,000 140,000 8,500 20% 70,000

140,000 250,000 22,500 25% 140,000

250,000 500,000 50,000 30% 250,000

500,000 125,000 32% 500,000

Rule for Married Individuals:Married individuals, whether citizens,resident or nonresident aliens, who do notderive income purely from compensation,shall file a return for the taxable year toinclude the income of both spouses. [Sec51(D)]1. Compute the income tax separately on

their respective incomes.2. Add the two taxes to arrive at a single

income tax still due and refundable.3. Income which is clearly joint, or which

cannot be identified as exclusively ofone spouse, will be divided equally. [Sec24(A)]

EXCEPTION to the one-return rule:Where it is impracticable for thespouses to file one return, eachspouse may file a separate return ofincome but the returns so filed shallbe consolidated by the Bureau forpurposes of verification for thetaxable year. [Sec 51(D)]

4. Taxation of Compensation Income ofa Minimum Wage Earner, RepublicAct No. 9504 (effective July 6, 2008)

STATUTORY MINIMUM WAGE – earnershall refer to rate fixed by the RegionalTripartite Wage and Productivity Board, asdefined by the Bureau of Labor andEmployment Statistics (BLES) of theDepartment of Labor and Employment.(Sec.22 GG, as amended by RA 9504)

MINIMUM WAGE EARNER – shall refer toa worker in the private sector paid thestatutory minimum wage, or to an employeein the public sector with compensationincome of not more than the statutoryminimum wage in the non-agriculturalsector where he/she is assigned. (Sec.22HH, as amended by RA 9504)

The minimum wage shall be exemptfrom the payment of income tax ontheir taxable income: Provided,further, That the holiday pay, overtimepay, night shift differential pay andhazard pay received by such minimumwage earners shall likewise be exemptfrom income tax

C. Deductions [from Income Subjectto Schedular Tax Rates], InGeneral

The allowable deductions from the grossincome of an individual taxpayer are asfollows:

Business Expenses and Expensesfrom Practice of Profession –deductible only from business grossincome and professional income,respectively but not from compensationincome. The expenses to be deductedmay either be itemized deductions ORthe optional standard deduction.

NOTE: Non-resident aliens not engaged intrade or business are taxed on grossincome. They may not, therefore, avail ofthese deductions.

Thus, the only deductions that may beclaimed by individuals with compensationincome only are personal exemptions andpremium payments on health and/orhospitalization insurance.


Page 22 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Special deduction for actual premiumpayments for health and/orhospitalization insurance taken by anindividual taxpayer provided that thefollowing requisites are met:a. The taxpayer’s family gross income

does not exceed P250,000 in ataxable year.

b. The amount deductible should onlybe limited to P2,400 per family orP200 per month.

In the case of married taxpayers,only the spouse claiming theadditional exemption for dependentsshall be entitled to this deduction.

Personal Exemptions – are arbitraryamounts allowed by law to be deductedfrom income to cover personal, living, orfamily expenses of the taxpayer. Thesedeductions are allowed on the theorythat the minimum requirements ofsubsistence of a taxpayer should be freefrom tax.

Kinds:1. Basic Personal Exemptions

According to RA 9504 (effectiveJuly 6, 2008) basic personalexemption is Fifty thousandpesos (P50,000) for eachindividual taxpayer, regardlesswhether single, married or headof the family.

Prior to RA 9504, the followingrates apply:

Kind of Taxpayer Basic PersonalExemption (BPE)

Single individuals(includes widow/er)

P20,000

Married individual whoare judicially decreed

as legallyseparated, and

with no qualifieddependents

P20,000

Head of Family P25,000

Each marriedindividual *

P32,000

* BUT note Sec 35(A) - In the case ofmarried individuals where only one of thespouses is deriving gross income, onlysuch spouse shall be allowed the personalexemption.

2. Additional Exemptions (AE)

depends on the number ofqualified dependent children

Amount allowed as adeduction P25,000 perdependent child, but not toexceed four children (RA 9504)

NOTE: Before RA 9504, The additionalexemption is only p8,000 for eachdependent not exceeding four.

Who may claim additionalexemptions?

Married Individuals: Additionalexemptions are claimed by onlyone spouse.

Generally, the spouse who isthe gross compensation earneris the claimant of the additionalexemptions.

Where the husband and wife areboth compensation incomeearners, the husband is theproper claimant of the additionalexemptions EXCEPT if there isan express waiver by thehusband in favor of his wife, asembodied in the withholdingexemption certificate.

When the spouses havebusiness and/or professionalincome only, either may claimthe additional exemptions at theend of the year.

The wife claims the additionalexemptions in the followinginstances:i. husband has no incomeii. husband works abroadiii. Legally separated spouses:

Additional exemptions canbe claimed by the spousewith custody of the child orchildren (but the totalamount for the spouses shallnot exceed the maximum offour). [Sec 35(B), NIRC]

Who is a dependent for purposesof additional exemptions?A legitimate, illegitimate or legallyadopted child chiefly dependentupon and living with the taxpayer:1. not more than 21 years old,

unmarried and not gainfullyemployed OR

2. regardless of age, is incapable ofself-support because of mentalor physical defect

NOTE: Only children may be considered“dependent” for purposes of additionalexemptions.


Page 23 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Who may claim personalexemptions?

Citizens (whether resident ornon-resident) and residentaliens are allowed to avail ofbasic personal and additionalexemptions.

Non-resident aliens engaged intrade or business are entitled tobasic personal exemptions onlyby way of reciprocity, but not toadditional exemptions. [Sec. 35,NIRC]o Limit of BPE Allowed to

NRAETB: An amount equalto the exemptions allowed bythe non-resident alien’scountry to Filipino citizensnot residing therein butderiving income therefrom,but not to exceed theamount fixed by NIRC.[Inother words, whichever isLOWER]

Change of Status [Sec 35(C), NIRC]1. If taxpayer marries during

taxable year, taxpayer may claimthe corresponding BPE in full forsuch year (i.e., no need to pro-rate the exemption).

2. If taxpayer should haveadditional dependent(s) duringtaxable year, taxpayer may claimcorresponding AE in full for suchyear.

3. If taxpayer dies during taxableyear, his estate may still claimBPE and AE for himself and hisdependent(s) as if he died at theclose of such year.

4. If during the taxable yeara. spouse dies orb. any of the dependents dies

or marries, turns 21 yearsold or becomes gainfullyemployed, taxpayer may stillclaim same exemptions as ifthe spouse or any of thedependents died, or married,turned 21 years old orbecame gainfully employedat the close of such year.

TIP: When it comes to change of status,the status beneficial to the taxpayer isused for purposes of claimingdeductions as long as the taxpayerachieved such status at any time duringthe taxable period.

D. Special Classification ofIndividuals and CorrespondingTax Treatment[Sec 25(C), (D), (E)]

1. Alien individuals employed by:a. Regional or Area Headquarters

(RAHQ) and Regional OperatingHeadquarters (ROHQ) established inthe Philippines by multinationalcompanieso Multinational company, defined

a foreign firm or entityengaged in international tradewith affiliates or subsidiaries orbranch offices in the Asia-PacificRegion and other foreignmarkets

b. Offshore Banking Units establishedin the Philippines

2. Alien individuals who are permanentresidents of a foreign country but whoare employed and assigned in thePhilippines by a foreign servicecontractor or by a foreign servicesubcontractor engaged in petroleumoperations in the Philippines

Tax Rate and Base - 15% of grossincome received as salaries, wages,annuities, compensation, remunerationand other emoluments, such ashonoraria and allowances The same tax treatment shall apply

to Filipinos employed and occupyingthe same positions as those of aliensemployed by these multinationalcompanies, offshore banking unitsand petroleum service contractorsand subcontractors.

Note that the coverage of the specialclassification (and the correspondingtax rate) is limited to income receivedas wages. Hence, any income earnedfrom all other sources within thePhilippines by the alien employees shallbe subject to the pertinent income tax(example: sale of real property in thePhilippines is subject to 6% capital gaintax, imposed on the gross selling priceor fair market value of the property atthe time of the sale, whichever is higher)


Page 24 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

E. Computation

1. Pure Compensation Income

Gross Compensation Income xxLess: Personal & Additional Exemptions

and hospitalization/health insurancepremium xxTaxable Income xx

x RateIncome Tax xx

Less: Creditable Withholding Tax onCompensation Income xxTax Payable xx

2. Mixed-Income (i.e., compensationincome and business income/incomefrom the practice of profession)

Gross Compensation Income xxLess: Personal & Additional Exemptions

and hospitalization/health insurancepremium xxTaxable Compensation Income xx

ADD: Gross Business Income &/orIncome from Practice of Profession xx

Less: Allowable Deduction (itemizedor optional deduction) xxTaxable Income xx

x RateIncome Tax xx

Less: Creditable Withholding Tax onCompensation Income/OtherAllowable Tax Credit xxTax Payable Xx

3. Pure Business/Professional Income

Gross Business Income &/or Income from Practice of Profession xx

Less: (b) Allowable Deduction(itemized or optional deduction)

(c) Personal & Additional Exemptionsand hospitalization/healthinsurance premium

xx

xxTotal Taxable Income xx

x RateIncome Tax xx

Less: Creditable Withholding Tax onCompensation Income/OtherAllowable Tax Credit xxTax Payable xx


Page 25 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

F. Summary of Tax Bases and Tax Rates (QUICK GLANCE)

CATEGORY OF INCOME

RESIDENT NON-RESIDENT

CITIZEN ALIEN CITIZEN NRAETB NRANETB

All sourcesWithin thePhilippines

Within thePhilippines



1. Compensation / Business / Profession

2. Prizes of P10,000 or less Based on Taxable (i.e, Net) IncomeSchedular Income Tax Rates (Sec. 24, NIRC)

(i.e, 5% to 32%)

GIW – 25%

NotApplicable

3. Interest from any currency bankdeposit , etc., Royalties (other thanfrom books, literary works andmusical compositions), Winnings /Prizes (except prizes P10,000 andbelow)

Gross Income Within the Philippines (GIW) – 20% FinalWithholding Tax

4. Royalties from books, literary works,musical compositions GIW – 10% Final Withholding Tax

5. Interest from long-term deposit orinvestment certificates, which have amaturity of 5 years or more

EXEMPT; However:In case of pre-termination, with remaining maturity of:

4 years to less than 5 years – 5% on entire income3 years to less than 4 years – 12% on entire income

less than 3 years – 20% on entire income

6. Cash / Property Dividends from adomestic corporation, etc., OR sharein the distributable net income aftertax of a partnership (except a generalprofessional partnership), etc.

GIW – 10% Final Withholding Tax GIW – 20%

7. Interest (Expanded Foreign CurrencyDeposit System)

GIW – 7.5% FinalWithholding Tax

EXEMPT

8. Winnings on Philippine Sweepstakes /Lotto EXEMPT

9. Capital Gains on Sale of Shares ofDomestic Corp. (not traded in adomestic stock exchange)

Net Capital Gains within:Not Over P100,000 – 5% Final Tax

Amount in Excess of P100,000 – plus 10% Final Tax on the excess

10. Capital Gains on Sale of Real Propertyin the Philippines

Gross Selling Price or FMV, whichever is higher –6% Final Withholding Tax

11. Sale of Shares of Domestic Corp.(traded in a domestic stock exchange)

½ of 1% of the Selling Price (Stock Transaction Tax)Note: Stock Transaction Tax is not an income tax, but a business

(percentage) tax

12. Sale of Real Property located AbroadSchedular Income Tax Rates (Sec. 24, NIRC)

(i.e, 5% to 32%)13. Sale of Shares of Foreign Corp

14. Passive Income from Abroad


Page 26 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

IV.TAX ON CORPORATIONS

A. Coverage of the Term“Corporation”

The term “corporation” includespartnerships, no matter how created ororganized, joint-stock companies, jointaccounts (cuentas en participacion),associations, or insurance companies

It does NOT include:1. General Professional Partnerships

(partnerships formed by persons forthe sole purpose of exercising theircommon profession, no part of theincome of which is derived fromengaging in any trade or business)

2. Joint Venture or consortiumformed for the purpose ofundertaking construction projectsor engaging in petroleum, coal,geothermal and other energyoperations pursuant to anoperating consortium agreementunder a service contract with theGovernment.

B. Classification of Corporations

General Types1. Domestic Corporation (DC) - one

created or organized in thePhilippines or under its laws [Sec22(C)]

2. Foreign Corporation (FC) – onethat is not domestic [Sec 22(D)]

Resident Foreign Corporation(RFC) - a foreign corporationengaged in trade or businesswithin the Philippines [Sec22(H)]

Non-resident foreigncorporation (NRFC) - a foreigncorporation not engaged in tradeor business within thePhilippines [Sec 22(I)]

NOTE: The qualifier “resident” in the term“resident foreign corporation” should not beequated with the nationality of the corporation.

In determining nationality, the “control test”is often invoked and applied, which considerscorporate nationality by the nationality of itscontrolling shareholders or members.(Mamalateo, citing Winship v. Philippine TrustCo., 90 Phil 744)

Thus, for income tax purposes, a domesticcorporation may be formed or organized by fiveforeigners (as long as three of them are residentsof the Philippines as per the Corporation

Code),provided that it is organized under thelaws of the Philippines.

“DOING OR ENGAGING IN” or “TRANSACTINGBUSINESS” The term implies a continuity of commercial

dealings and arrangements and contemplatesto that extent, the performance of acts orworks or the exercise of some of thefunctions normally insistent to and in theprogressive prosecution of commercial gainor for the purpose and the object of thebusiness organization (Comm. vs. BritishOverseas Airways Corporation – BOAC)

Special Types1. Proprietary educational institutions

and non-profit hospitals2. Domestic Depository Bank (Foreign

Currency Deposit Units)3. Offshore Banking Units4. Resident Depository Bank (Foreign

Currency Deposit Units)5. Resident international carrier6. Non-resident owner or lessor of

vessel7. Non-resident cinematographic film

owner, lessor or distributor8. Non-resident lessor of aircraft,

machinery and other equipment9. Regional/Area Headquarters &

Regional Operating Headquarters ofMultinational companies

C. Scope of Taxation

Quick Glance

Type ofCorporation

Sources ofTaxableIncome

AllowedBusiness

Deductions?DomesticCorporation (DC)

Within andwithout thePhilippines

Yes

Resident ForeignCorporation (RFC)


Yes

Non-residentForeignCorporation(NRFC)


No*

* Ergo, non-resident foreign corporationsare taxed on GROSS INCOME.

NOTE: A good example of a resident foreigncorporation is the Philippine branch of aforeign corporation duly licensed by theSecurities and Exchange Commission.

The Philippine branch is merely anextension of the foreign head office (i.e.,non-resident foreign corporation); hence itdoes not have nor issue Philippine shares ofstock.


Page 27 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

There is only one single entity to speakof.

However, for income tax purposes, onlythe income of the Philippine branch fromsources within the Philippines is subject toincome tax, and the income of thePhilippine branch as well as that of theforeign head office from sources outside thePhilippines are exempt from Philippineincome tax.

NOTE FURTHER: MarubeniCorporation v. Commissioner (177SCRA 500) clarified the single entityconcept:

As a GENERAL RULE, the headoffice of a foreign corporation is thesame juridical entity as its branch inthe Philippines following the “singleentity concept”.

The income from sources withinthe Philippines of the foreign headoffice shall thus be taxable to thePhilippine branch.

BUT when the head office of aforeign corporation independently anddirectly invested in a domesticcorporation without the funds passingthrough its Philippine branch, thetaxpayer with respect to the tax on thedividend income would be the non-resident foreign corporation itselfand the dividend income shall besubject to the tax similarly imposed onnon-resident foreign corporations.

D. Tax on Domestic Corporations

Domestic corporations are subject to any orsome of the following:1. Capital Gain Tax2. Final Tax on Passive Income3. Normal Tax [OR] Minimum Corporate

Income Tax (MCIT) [OR] Gross Income Tax(GIT)

4. Improperly Accumulated Earnings Tax(IAET)


a. On sale, barter, exchange or otherdisposition of shares of stock of adomestic corporation not listedand traded through a local stockexchange, held as a capital asset: On the net capital gain:

Not over P100,000: FinalTax of 5%

On any amount in excess ofP100,000: plus 10% Finaltax on the excess

b. On the sale, exchange ordisposition of lands and/orbuildings which are not actuallyused in the business of acorporation and are treated ascapital assets On the gross sellingprice, or the current fair marketvalue at the time of the sale,whichever is higher, a final tax of6% NOTE: Tax treatment is the

same as that of individuals. The capital gains tax is applied

on the gross selling price, or thecurrent fair market value at thetime of the sale, whichever ishigher. Any gain or loss on thesale is immaterial becausethere is a conclusivepresumption by law that thesale resulted in a gain.


a. Interest Income: on any currency bank deposit,

yield or any other monetarybenefit from deposit substitutes,trust funds and similararrangements - 20%

under the expanded foreigncurrency deposit system(EFCDS) - 7.5%

b. Dividends received from anotherdomestic corporation(Intercompany Dividend) - EXEMPT

c. Royalties (any kind) – 20%

3. Income subject to Normal Tax [OR]Minimum Corporate Income Tax(MCIT) [OR] Gross Income Tax (GIT)

a. Normal Corporate Income TaxRate: 35% of net taxable income

Gross Incomeless Allowable Deductions

Taxable Income

NOTE: This will be 30% starting 2009.Thus, read the facts and determine fromwhat year the income is.

b. Minimum Corporate Income Tax(MCIT): 2% of MCIT Gross Income

Gross Salesless Sales Returns

Sales Returns & AllowancesCost of Goods Sold

MCIT GI


Page 28 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

What is “cost of goods sold”? Itincludes all business expensesDIRECTLY incurred to producethe merchandise to bring themto their present location anduse. [Sec. 27(E)(4)]

MCIT gross income differentiatedfrom the normal tax grossincome: the latter would includeother incidental income items,such as rent income, interest,gain on sale of assets, certaintax refunds, etc.

When is the MCIT computed? beginning of the fourthtaxable year immediatelyfollowing the year in which suchcorporation commenced itsbusiness operations

What amount of income tax ispaid by the corporation to theBIR? Whichever is HIGHERbetween the normal tax and theminimum corporate income tax.

Illustration:E Co., a domestic trading corporation,in its fourth year of operations had agross profit from sales of P300,000 andnet taxable income of P100,000. Howmuch was the income tax paid by thecorporation for the year?

MCIT (P300,000 x 2%) P6,000Normal income tax(P100,000 x 35%) P35,000Income Tax to be paid for the year(whichever is higher) P35,000

Excess MCIT carry-forward

Any excess of the minimumcorporate income tax over thenormal income tax shall be carriedforward and credited against theNORMAL TAX for the three (3)immediately succeeding taxableyears. [Sec. 27(E)(2)] In the year towhich carried forward, the normaltax should be higher than the MCIT.

Illustration:A domestic corporation had thefollowing data on computations of thenormal tax (NT) and the minimumcorporate income tax (MCIT) for fiveyears.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8MCIT 80K 50K 30K 40K 35KNT 20K 30K 40K 20K 70K

The excess MCIT over NT carry-forward is shown below:

Year 4 Year 5 Year 6 Year 7 Year 8MCIT 80,000 50,000 30,000 40,000 35,000NT 20,000 30,000 40,000 20,000 70,000

NT ishigher

n/a n/a 40,000 n/a 70,000

Less:MCITcarry-fwd

(40,000)* (20,000)

(20,000)FromYear 4

FromYear 5FromYear 7

TaxDue

80,000 50,000 - 40,000 30,000

Arrow pointing downward meansthat the normal tax is higher sothat there can be an excess MCITcarry-forward against it.

* Cannot carry forward an amount higherthan the NT, hence the excess of 60K fromYear 4 was reduced to 40K. The unusedP20,000 cannot be used in Year 8 becauseYear 8 was beyond three years from Year 4.

Relief from MCIT (LLBM)

The Secretary of Finance isauthorized to suspend theimposition of the minimumcorporate income tax on anycorporation which suffers LOSSES: on account of prolonged labor

dispute (losses from a strikestaged by employees that lastsfor more than 6 months andcaused the temporary shutdownof operations), or

because of force majeure (actsof God and other calamity;includes armed conflicts like waror insurgency), or

because of legitimate businessreverses (substantial losses dueto fire, robbery, theft or othereconomic reasons).

Gross Income Tax (GIT) The President, upon the

recommendation of the Secretary ofFinance, may allow domesticcorporations the option to be taxed atfifteen percent (15%) of gross income,after the following conditions have beensatisfied:

> >

>


Page 29 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Tax effort ratio 20% of GNP

Ratio of IT collection to totaltax revenue

40%

VAT tax effort 4% of GNP

Ratio of Consolidated PublicSector Financial Position(CPSFP) to GNP

0.90%

Ratio of the Corporation’sCost of Sales to Gross Sales

Does notexceed 55%

Gross Salesless Sales Returns

Sales Returns & AllowancesCost of Goods Sold

GI(same formula from last page)

The election of the gross income taxoption by the corporation shall beirrevocable for three (3) consecutivetaxable years during which thecorporation is qualified under thescheme.

4. Improperly Accumulated EarningsTax (IAET)[Sec. 29, as implemented by RR 2-2001which prescribes rules governing theimposition of IAET]

a) Rule There is imposed for eachtaxable year, in addition to other taxes,a tax equal to 10% of the improperlyaccumulated taxable income ofdomestic and closely-heldcorporations formed or availed of forthe purpose of avoiding the income taxwith respect to its shareholders or theshareholders of any other corporation,by permitting the earnings andprofits of the corporation toaccumulate instead of dividing themamong or distributing them to theshareholders.

b) Rationale It is a tax in the nature ofa PENALTY to the corporation for theimproper accumulation of its earnings,and a DETERRENT to the avoidanceof tax upon shareholders who aresupposed to pay dividends tax on theearnings distributed to them.

c) Exception The use of undistributedearnings and profits for the reasonableneeds of the business would notgenerally make the accumulated or

undistributed earnings subject to thetax.

What is meant by “reasonableneeds of the business” is determinedby the IMMEDIACY TEST.

Immediacy Test - It states that the“reasonable needs of thebusiness” are the1) immediate needs of the

business; and2) reasonably anticipated needs.

How to prove the “reasonableneeds of the business” Thecorporation should prove that thereis1) an immediate need for the

accumulation of the earningsand profits; or

2) a direct correlation ofanticipated needs to suchaccumulation of profits.

d) Composition: The following constituteaccumulation of earnings for thereasonable needs of the business: (ILLABE)

1) ALLOWANCE for the increase in theaccumulation of earnings up to100% of the paid-up capital of thecorporation as of Balance Sheetdate, inclusive of accumulationstaken from other years;

2) Earnings reserved for definitecorporate EXPANSION projects orprograms requiring considerablecapital expenditure as approved bythe Board of Directors or equivalentbody;

3) Earnings reserved for BUILDING,PLANT or EQUIPMENTACQUISITION as approved by theBoard of Directors or equivalentbody;

4) Earnings reserved for compliancewith any LOAN COVENANT or pre-existing obligation establishedunder a legitimate businessagreement;

5) Earnings required by LAW orapplicable regulations to be retainedby the corporation or in respect ofwhich there is legal prohibitionagainst its distribution;

6) In the case of subsidiaries of foreigncorporations in the Philippines, allundistributed earnings intended orreserved for INVESTMENTS


Page 30 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

WITHIN THE PHILIPPINES as canbe proven by corporate recordsand/or relevant documentaryevidence.

e) Covered Corporations Onlydomestic and closely-heldcorporations are liable for IAET.

Closely-held corporations are those:1) at least 50% in value of the

outstanding capital stock; or2) at least 50% of the total combined

voting power of all classes of stockentitled to vote

is owned directly or indirectly by orfor not more than 20 individuals.Domestic corporations not fallingunder the aforesaid definitionare, therefore, publicly-heldcorporations.

To determine whether thecorporation is closely heldcorporation, insofar as suchdetermination is based on stockownership, the following RULES shallbe applied:

a. Stock Not Owned by Individuals.- Stock owned directly or indirectlyby or for a corporation, partnership,estate or trust shall be consideredas being owned proportionately byits shareholders, partners orbeneficiaries.

b. Family and PartnershipOwnership. - An individual shall beconsidered as owning the stockowned, directly or indirectly, by orfor his family, or by or for hispartner.

For purposes of this paragraph,the ‘family of an individual’ includeshis brothers or sisters (whether bywhole or half-blood), spouse,ancestors and lineal descendants.

c. Option to Acquire Stocks. - If anyperson has an option to acquirestock, such stock shall beconsidered as owned by suchperson.

For purposes of this paragraph,an option to acquire such an optionand each one of a series of optionshall be considered as an option toacquire such stock.

d. Constructive Ownership asActual Ownership. - Stockconstructively owned by reason of

the application of (a) or (c) shall, forpurposes of applying (1) or (2), betreated as actually owned by suchperson.

But stock constructively ownedby the individual by reason of theapplication of (b) shall NOT betreated as owned by him forpurposes of again applying suchparagraph in order to make anotherthe constructive owner of suchstock.

BIR Ruling 025-02 The ownership of adomestic corporation for purposes ofdetermining whether it is a closely heldcorporation or a publicly held corporation isultimately traced to the individual shareholdersof the parent company.

Where at least 50% of the outstandingcapital stock or at least 50% of the totalcombined voting power of all classes of stockentitled to vote in a corporation is owned directlyor indirectly by at least 21 or more individuals,the corporation is considered as publicly heldcorporation.

f) Exempt Corporations: (BIG-PEN-T)

1. Banks and other non-bank financialintermediaries;

2. Insurance companies;3. Publicly-held corporations;4. Taxable partnerships;5. General professional partnerships;6. Non- taxable joint ventures; and7. Enterprises that are registered:

a. with the Philippine EconomicZone Authority (PEZA) under R.A.7916;

b. pursuant to the BasesConversion and Development Actof 1992 under R.A. 7227; and

c. under special economic zonesdeclared by law which enjoypayment of special tax rate ontheir registered operations oractivities in lieu of other taxes,national or local.

Words in regular letters are found in Sec.29(B)(2) of the NIRC. Words in italics areadditions made by the revenue regulation toconsolidate Sec. 29 with other pertinentlaws.


Page 31 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

g) Computation: TI + (ET + EG + FT +NOLCOD) – (TP + D + RN) = IATI

Year's taxable income P xx

Add: Income exempt from tax xxIncome excluded from gross

income xx

Income subject to final tax xx

Amount of NOLCO deducted xx

Total P xxLess: Income tax paid/payable for the

taxable year xxDividends actually or

constructively paid from theapplicable year's taxableincome xx

Amount reserved for thereasonable needs of thebusiness emanating from thecovered year's taxable income xx

Improperly accumulated taxable income P xx

Multiplied by IAET rate 10%Improperly accumulated earnings(IAET)

tax P xx

h) Limitation The profit that has beensubjected to IAET shall no longer besubjected to IAET in later years even ifnot declared as dividend. However,profits which have been subjected toIAET, when declared as dividends, shallbe subject to tax on dividends except inthose instances where the recipient isnot subject thereto.

i) Declaration of Dividends fromearnings For purposes ofdetermining the source of earnings orprofits declared or distributed fromaccumulated income, the dividendsshall be deemed to have been paid outof the most recently accumulatedprofits or surplus and shall constitutea part of the annual income of thedistributee for the year in whichreceived pursuant to Section 73(C) ofthe Code. But, where the dividends orportion of the said dividends declaredforms part of the accumulated earningsas of December 31, 1997, oremanates from the accumulatedincome of a particular year and istherefore an exemption to theproceeding statement, such fact mustbe supported by a duly executed BoardResolution to that effect.

j) Period for Payment of Dividend/IAET The dividends must be declared andpaid or issued not later than one year

following the close of the taxableyear, otherwise, the IAET, if any, shouldbe paid within fifteen (15) daysthereafter.

k) Determination of Purpose to AvoidIncome Tax1) The fact that a corporation is a

mere holding company orinvestment company shall beprima facie evidence of a purposeto avoid the tax upon itsshareholders or members A "holding or investment

company" is a corporationhaving practically no activitiesexcept holding property, andcollecting the income therefromor investing the same; and

2) Where the earnings or profits of acorporation are permitted toaccumulate beyond thereasonable needs of the business.

PRIMA FACIE INSTANCES ofaccumulation of profits beyondthe reasonable needs of abusiness (UBE)1) Investment of substantial

earnings and profits of thecorporation in UNRELATEDBUSINESS or in stock orsecurities of unrelatedbusiness;

2) Investment in BONDS andother long-term securities;and

3) Accumulation of earnings INEXCESS OF 100% OFPAID-UP CAPITAL, nototherwise intended for thereasonable needs of thebusiness.

The controlling intention of thetaxpayer is that which ismanifested at the time ofaccumulation. A speculativeand indefinite purpose will notsuffice. The mere recognition ofa future problem or thediscussion of possible andalternative solutions is notsufficient. Definiteness ofplan/s coupled with action/staken towards itsconsummation is essential.


Page 32 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

5. Optional Standard Deduction (OSD)

Before RA 9504, effective July 6, 2009,OSD only applies to individuals exceptnon-resident alien.

But by virtue of RA 9504, it now alsoapplies to corporations except non-resident foreign corporation.

Moreover, the rate was increased from10% to 40%.

ONE LAST NOTE ON THE APPLICABILITY OF TAXRATES OF DOMESTIC CORPORATIONS: Allcorporations, agencies, or instrumentalitiesowned or controlled by the GOVERNMENT aretaxable and shall pay such rate of tax upontheir taxable income as are imposed ondomestic corporations engaged in a similarbusiness, industry, or activity.

EXCEPTIONS (i.e, not taxable):o Government Service Insurance System

(GSIS),o Social Security System (SSS),o Philippine Health Insurance Corporation

(PHIC),o Philippine Charity Sweepstakes Office

(PCSO)Note: Exemption for PAGCOR was withdrawnby RA 9337

E. Tax on Resident ForeignCorporations

Resident foreign corporations are subject to anyor some of the following:1. Capital Gain Tax2. Final Tax on Passive Income3. Normal Tax [OR] Minimum Corporate

Income Tax (MCIT) [OR] Gross Income Tax(GIT)

4. Branch Profit Remittance Tax

1. Capital Gains subject to CapitalGains Tax

On sale, barter, exchange or otherdisposition of shares of stock of adomestic corporation not listed andtraded through a local stock exchange,held as a capital asset:

On the net capital gain:

Not over P100,000:Final Tax of 5%

On any amount in excess ofP100,000:plus Final Tax of 10% on theexcess

NOTE: Tax treatment is the same as that ofindividuals and domestic corporations.

The net taxable income from the sale ofreal property realized by the resident foreign

corporation shall be subject to the normalcorporate income tax.


Interest Income: on any currency bank deposit, yield

or any other monetary benefit fromdeposit substitutes, trust funds andsimilar arrangements - 20%

under the expanded foreign currencydeposit system (EFCDS) - 7.5%

Dividends received from a domesticcorporation (Intercompany Dividend) -EXEMPT

Royalties (any kind) – 20%

3. Income subject to Normal Tax [OR]Minimum Corporate Income Tax(MCIT) [OR] Gross Income Tax (GIT)

The discussion with respect to this topic(income subject to normal tax, MCIT, orGIT) under the subheading of domesticcorporations is equally applicable toresident foreign corporations, both as toconcepts and computations, except thatRFCs are taxed only on income fromsources within the Philippines.

NORMAL CORPORATE INCOME TAXRATE 35% of net taxable incomefrom sources within the Philippines

MINIMUM CORPORATE INCOME TAX(MCIT) 2% of MCIT Gross Incomefrom sources within the Philippines. TheMCIT is imposed on RFCs under thesame conditions as domesticcorporations. [Sec. 28(A)(2)]

GROSS INCOME TAX (GIT) ThePresident, upon the recommendation ofthe Secretary of Finance, may allowresident foreign corporations the optionto be taxed at fifteen percent (15%) ofgross income within the Philippines,under the same conditions as domesticcorporations. [Sec. 28(A)(1)]

4. Branch Profit Remittance Tax [Sec.28(A)(5)]

Taxable transaction – any profit remittedby a branch to its head office

Tax Rate and Base – 15% based on thetotal profits applied or earmarked forremittance without any deduction forthe tax component


Page 33 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Non-taxable activities –activities whichare registered with the PhilippineEconomic Zone Authority

Income NOT TREATED AS BRANCHPROFITS unless effectively connectedwith the conduct of trade or business inthe Philippines:i. Interests, dividends, rents, royalties,

including remuneration for technicalservices

ii. salaries, wages premiums,annuities, emoluments

iii. other fixed or determinable annual,periodic or casual gains, profits,income

iv. capital gains received during eachtaxable year from all sources withinthe Philippines

NOTES: imposed whether the head office of the

foreign corporation is located in a tax treatycountry, in a tax haven or other non-treatycountry.

imposed only on the profits remitted by aPhilippine branch to the head office of aforeign corporation.

OPTIONAL STANDARD DEDUCTION 40% of its gross income (RA 9504,

effective July 6, 2008)

F. Tax on Nonresident ForeignCorporations

Non-resident foreign corporations are subject toany or some of the following:1. Capital Gain Tax2. Final Tax on Passive Income3. Final Tax on [Other] Gross Income from

sources within the Philippines

1. Capital Gains subject to CapitalGains Tax

On sale, barter, exchange or otherdisposition of shares of stock of adomestic corporation not listed andtraded through a local stock exchange,held as a capital asset:

On the net capital gain: Not over P100,000 Final Tax of 5% On any amount in excess of

P100,000 plus Final Tax of 10% onthe excess

NOTE: The gross income from the sale of realproperty realized by the non-resident foreigncorporation shall be subject to a 35% final taximposed on gross income from sources withinthe Philippines.


Interest

on foreign loans contracted on orafter August 1, 1986 – 20%

under the expanded foreigncurrency deposit system (EFCDS) -EXEMPT

Dividends (cash and/or property)received from a domestic corporation

(Intercorporate Dividend) – 15%, ASLONG AS the country in which thenonresident foreign corporation isdomiciled allows a tax credit fortaxes “deemed paid” in thePhilippines equivalent to 15%

20% represents the differencebetween the regular income tax of35% on corporations and the 15%tax on dividends

If the country within which theNRFC is domiciled does NOT allow atax credit, a final withholding tax atthe rate of 35% is imposed on thedividends received from a domesticcorporation. [In other words, thedividends are subject to the thirdkind of tax: Final Tax on [Other]Gross Income from sources withinthe Philippines.]

3. Final Tax on [Other] Gross Incomefrom sources within the Philippines

35% of the gross income received from allsources within the Philippines, such asinterests, dividends, rents, royalties,salaries, premiums (except reinsurancepremiums), annuities, emoluments or otherfixed or determinable annual, periodic orcasual gains, profits and income, andcapital gains EXCEPT capital gainsresulting from the sale of shares of stock ofa domestic corporation not listed andtraded through a local stock exchange, heldas a capital asset.

G. Special Types of Corporations

Special Type of DomesticCorporations

1. Proprietary Educational Institutionsand Hospitals (Non-profit)

Tax Rate and Base – 10% on netincome (except on income subject tocapital gains tax and passive incomesubject to final tax) within and withoutthe Philippines


Page 34 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

CAVEAT: If gross income from unrelatedtrade or business or other activityexceeds 50% of total gross incomederived from all sources, the tax rate of35% shall be imposed on the entiretaxable income. Unrelated trade, business or other

activity- any trade, business orother activity, the conduct of whichis not substantially related to theexercise or performance by sucheducational institution or hospital ofits primary purpose or function.

Proprietary educational institution-any private school maintained andadministered by private individualsor groups with an issued permit tooperate from the DECS, CHED orTESDA.

2. Depository Banks (Foreign CurrencyDeposit Units) [Sec. 27(D)(3) asamended by RA 9294 (2004)]

Coverage of the Rule – ONLY incomederived by a depository bank under theexpanded foreign currency depositsystem from foreign currencytransactions with:

nonresidents, offshore banking units in the

Philippines,

local commercial banks includingbranches of foreign banks that maybe authorized by the Bangko Sentralng Pilipinas (BSP) to transactbusiness with foreign currencydeposit system units and

other depository banks under theexpanded foreign currency depositsystem

Tax Rate: Exempt from all taxes,except net income from suchtransactions as may be specified by theSecretary of Finance, uponrecommendation by the Monetary Boardto be subject to the regular incometax payable by banks

EXCEPTION: Interest income fromforeign currency loans granted by suchdepository banks under said expandedsystem to residents other than offshoreunits in the Philippines or otherdepository banks under the expandedsystem shall be subject to a final tax atthe rate of 10%.

Special Types of Resident ForeignCorporations

1. International Carriers

Tax Rate and Base – 2.5% on GrossPhilippine Billings (GPB)

What is GPB? In the case of International Air Carriers,

GPB refers to the amount of:

gross revenue derived from carriageof persons, excess baggage, cargoand mail originating from thePhilippines in a continuous anduninterrupted flight, irrespective ofthe place of sale or issue and theplace of payment of the ticket orpassage document

gross revenue from ticketsrevalidated, exchanged and/orindorsed to another internationalairline if the passenger boards aplane in a port or point in thePhilippines

for flights which originate from thePhilippines, but transshipment ofpassenger takes place at any portoutside the Philippines on anotherairline, the gross revenue consistingof only the aliquot portion of thecost of the ticket corresponding tothe leg flown from the Philippines tothe point of transshipment [RR 15-2002]

Air Canada vs. CIR (CTA Case No. 6572): A foreign airline company selling tickets

in the Philippines through their localagents shall be considered as residentforeign corporation engaged in trade orbusiness in the country.

The absence of flight operations withinthe Philippine territory cannot alter thefact that the income received wasderived from activities within thePhilippines.

The test of taxability is the source, andthe source is that activity whichproduced the income.

In the case of International Shipping,GPB means: gross revenue whether for

passenger, cargo or mail originatingfrom the Philippines up to finaldestination, regardless of the placeof sale or payments of the passageor freight documents.


Page 35 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

2. Offshore Banking Units authorizedby the Bangko Sentral ng Pilipinas(BSP) [Sec. 28(A)(4) as amended by RA9294 (2004)]

Coverage of the Rule: ONLY incomederived by offshore banking units fromforeign currency transactions with:

nonresidents, other offshore banking units local commercial banks including

branches of foreign banks that maybe authorized by the Bangko Sentralng Pilipinas (BSP) to transactbusiness with offshore bankingunits

TAX RATE: Exempt from all taxes,except net income from suchtransactions as may be specified by theSecretary of Finance, uponrecommendation by the Monetary Boardto be subject to the regular incometax payable by banks

EXCEPTION: Interest incomederived from foreign currency loansgranted to residents other thanoffshore banking units or localcommercial banks, including localbranches of foreign banks that maybe authorized by the BSP totransact business with offshorebanking units, shall be subject onlyto a final tax at the rate of 10%.

3. Resident Depository Bank (ForeignCurrency Deposit Units) [Sec.28(D)(7)(b) as amended by RA 9294(2004)]

Coverage of the Rule: ONLY incomederived by a depository bank under theexpanded foreign currency depositsystem from foreign currencytransactions with:

nonresidents, offshore banking units in the

Philippines,

local commercial banks includingbranches of foreign banks that maybe authorized by the Bangko Sentralng Pilipinas (BSP) to transactbusiness with foreign currencydeposit system units and

other depository banks under theexpanded foreign currency depositsystem

TAX RATE: Exempt from all taxes,except net income from suchtransactions as may be specified by the

Secretary of Finance, uponrecommendation by the Monetary Boardto be subject to the regular incometax payable by banks

EXCEPTION: Interest income fromforeign currency loans granted bysuch depository banks under saidexpanded system to residents otherthan offshore units in thePhilippines or other depositorybanks under the expanded systemshall be subject to a final tax at therate of 10%.

4. Regional or Area Headquarters andRegional Operating Headquarters ofmultinational Companies

Regional or area headquarters: notsubject to income tax

Regional or area headquarters: a branchestablished in the Philippines bymultinational companies and whichheadquarters do not earn or deriveincome from the Philippines and whichact as supervisory, communicationsand coordinating center for theiraffiliates, subsidiaries, or branches inthe Asia-Pacific Region and otherforeign markets.

Regional operating headquarters

10% of their taxable income a branch established in the

Philippines by multinationalcompanies which are engaged in anyof the following services:

(SMART - BAD – PPL)1. general Administration and

planning2. business Planning and

coordination3. sourcing and Procurement of raw

materials and components4. corporate finance Advisory

services5. Marketing control and sales

promotion6. Training and personnel

management7. Logistic services8. Research and development

services and product development9. technical Support and

maintenance10. Data processing and

communications, and11. Business development.


Page 36 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Special Types of Non-residentForeign Corporations

1. Non-resident cinematographic filmowners, lessors or distributors – 25% ofgross income from all sources withinthe Philippines

2. Nonresident Owner or Lessor of VesselsChartered by Philippine Nationals –4.5% of gross rentals, lease or charterfees from leases or charters to Filipinocitizens or corporations, as approvedby the Maritime Authority

3. Nonresident Owner or Lessor of Aircraft,Machineries and Other Equipment –7.5% of gross rentals or fees

H. Summary of Tax Bases and Rates of Special Corporations

QUICK GLANCE

Type of Corporation Tax BaseTaxRate

Domestic Corporations

Proprietary Educational Institutions and Hospitals (Non-profit) Taxable Income from all sources 10%

Depository Banks (Foreign Currency Deposit Units) With respect to income derived under the expanded

foreign currency deposit system from certain foreigncurrency transactions

With respect to interest income from foreign currencyloans to residents other than offshore units in thePhilippines or other depository banks under the expandedsystem

Exempt (except that net incomefrom such transactions is subjectto the regular income tax payableby banks)

-

Amount of interest income 10%

Resident Foreign CorporationsInternational Carriers Gross Philippine Billings 2.5%

Offshore Banking Units With respect to income derived by offshore banking units

from certain foreign currency transactions

With respect to interest income derived from foreigncurrency loans granted to residents other than offshorebanking units or local commercial banks


-


Resident Depository Bank (Foreign Currency Deposit Units) With respect to income derived under the expanded

foreign currency deposit system from certain foreigncurrency transactions

With respect to interest income from foreign currencyloans to residents other than offshore units in thePhilippines or other depository banks under the expandedsystem


-


Regional or Area Headquarters Exempt -

Regional Operating Headquarters of Multinational Companies Taxable Income from within thePhilippines

10%

Non-resident Foreign CorporationsNon-resident cinematographic film owners, lessors or distributors Gross Income from the Philippines 25%

Nonresident Owner or Lessor of Vessels Chartered by PhilippineNationals

Gross Rentals, Lease and CharterFees from the Philippines

4.5%

Nonresident Owner or Lessor of Aircraft, Machineries and OtherEquipment

Gross Rentals, Charges and Feesfrom the Philippines

7.5%


Page 37 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

I. Exempt Corporations [Sec. 30](CREB-CLEF-SMB)

The following organizations shall not betaxed in respect to income receivedby them as such (e.g. membershipfees):1. LABOR, agricultural or horticultural

organization not organizedprincipally for profit

2. MUTUAL savings bank not having acapital stock represented by shares,and cooperative bank withoutcapital stock organized and operatedfor mutual purposes and withoutprofit

3. A BENEFICIARY society, order orassociation, operating for theexclusive benefit of the memberssuch as a fraternal organizationoperating under the lodge system, ormutual aid association or a non-stock corporation organized byemployees providing for the paymentof life, sickness, accident, or otherbenefits exclusively to the membersof such society, order, orassociation, or non-stockcorporation or their dependents

4. CEMETERY company owned andoperated exclusively for the benefitof its members

5. Non-stock corporation orassociation organized and operatedexclusively for RELIGIOUS,charitable, scientific, athletic, orcultural purposes, or for therehabilitation of veterans, no part ofits net income or asset shall belong toor inures to the benefit of anymember, organizer, officer or anyspecific person

6. BUSINESS league chamber ofcommerce, or board of trade, notorganized for profit and no part ofthe net income of which inures tothe benefit of any private stock-holder, or individual

7. CIVIC league or organization notorganized for profit but operatedexclusively for the promotion ofsocial welfare

8. A non-stock and nonprofitEDUCATIONAL institution

9. Government EDUCATIONALinstitution

10. FARMERS' or other mutual typhoonor fire insurance company, mutualditch or irrigation company, mutualor cooperative telephone company, or

like organization of a purely localcharacter, the income of whichconsists solely of assessments,dues, and fees collected frommembers for the sole purpose ofmeeting its expenses and

11. Farmers', fruit growers', or likeassociation organized and operatedas a SALES agent for the purposeof marketing the products of itsmembers and turning back to themthe proceeds of sales, less thenecessary selling expenses on thebasis of the quantity of producefinished by them;

Notwithstanding the exemptions,income of whatever kind and characterof the enumerated organizations fromany of their properties, real orpersonal, or from any of theiractivities conducted for profitregardless of the disposition made ofsuch income, shall be SUBJECT TOTAX.

Note: RA 9178 Barangay Micro BusinessEnterprises (BMBEs) implemented by DO17-04, April 20, 2004 BMBEs shall be exempt from income

tax for income arising from theoperations of the enterprise.

BMBE is any business entity orenterprise engaged in the production,processing or manufacturing ofproducts or commodities, includingagro-processing trading and services,whose total assets including thosearising from loans but exclusive ofland on which the particular businessentity’s office, plant and equipment aresituated, shall not be more than P3M.


Page 38 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

J. Summary of Tax Bases, Tax Rates and Applicable Tax Regimes forCorporations

CATEGORY OF INCOME

DOMESTIC RESIDENT NON-RESIDENT

All sourcesWithin thePhilippines


1. Taxable Income (i.e., income otherthan #s 2 to 9)

35% NormalTax

35% NormalTax

35% of GrossIncome

2. Interest from any currency bankdeposit , etc.

GIW - 20% Final Tax

3. Royalties GIW - 20% Final Tax

4. Interest (Expanded ForeignCurrency Deposit System) GIW - 7.5% Final Tax EXEMPT

5. Cash / Property Dividends from adomestic corporation EXEMPT

15% or 35%,whichever isapplicable

6. Capital Gains on Sale of Shares(not traded in a domestic stockexchange)

Net Capital Gains within:Not Over P100,000 – 5% Final Tax

Amount in Excess of P100,000 – plus 10% Final Taxon the excess during the taxable year

7. Capital Gains on Sale of Landand/or Building

GSP or FMV,whichever ishigher –6% Final

WithholdingTax

35% NormalTax

35% of GrossIncome

8. Sale of Shares (traded in adomestic stock exchange)

½ of 1% of the Selling Price (Stock Transaction Tax)Note: Stock Transaction Tax is not an income tax,

but a business (percentage) tax

TAX REGIMES APPLICABLE

Normal TaxYES YES

YES, but based onGross Income

Minimum Corporate Income Tax YES YES NO

Gross Income Tax YES YES NO

Improperly Accumulated Earnings Tax YES, if closely-held

corporationNO NO

Branch Profit Remittance Tax NO YES Not Applicable

Optional Standard Deduction YES YES NO

Legend:GIW - Gross Income within the PhilippinesGSP – Gross Selling PriceFMV – Fair Market Value


Page 39 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

V. TAXATION OF FRINGE BENEFITS[Sec. 33 of the NIRC]

A. Definition

any good, service or other benefitfurnished or granted in cash or in kindby an employer to an individualemployee except rank and fileemployees (The fringe benefit coveredby Sec 33 refers to those enjoyed bymanagerial and supervisory employees.)

Key definitions:

Managerial employee one who is vested withthe powers or prerogatives to lay down andexecute management policies and/or to hire,transfer, suspend, lay-off, recall, discharge,assign or discipline employees.

Supervisory employees those who, in theinterest of the employer, effectively recommendsuch managerial actions if the exercise of suchauthority is not merely routinary or clerical innature but requires the use of independentjudgment.

All employees not falling within any of theabove definitions are considered rank-and-file employees.

Examples of fringe benefits:1. Housing2. Expense account3. Vehicle of any kind4. Household personnel, such as maid,

driver and others5. Interest on loan at less than market

rate to the extent of the differencebetween the market rate and actual rategranted

6. Membership fees, dues and otherexpenses borne by the employer for theemployee in social and athletic clubs orother similar organizations

7. Expenses for foreign travel8. Holiday and vacation expenses9. Educational assistance to the employee

or his dependents10. Life or health insurance and other non-

life insurance premiums or similaramounts in excess of what the lawallows

B. Tax Rate and Tax Base

[Generally] 32% of the grossed-upmonetary value (GMV)

GMV represents the whole amount ofincome realized by the employee.

How GMV is determined GMV is determined by dividing the

actual monetary value of the fringebenefit by 68% [100% - tax rate of 32%].For example, the actual monetary valueof the fringe benefit is P1,000. TheGMV is equal to P1,470.59 [P1,000 /0.68]. The fringe benefit tax, therefore,is P470.59 [P1470.59 x 32%].

Special Cases: For fringe benefits received by non-

resident alien not engaged in trade ofbusiness (NRANETB), the tax rate is25% of the grossed-up monetary value(GMV). The GMV is determined bydividing the actual monetary value ofthe fringe benefit by 75% [100% - 25%].

For fringe benefits received by alienindividuals and Filipino citizensemployed by regional or areaheadquarters, regional operatingheadquarters, offshore banking units(OBUs), or foreign service contractor,the tax rate is 15% of the grossed-upmonetary value (GMV). The GMV isdetermined by dividing the actualmonetary value of the fringe benefit by85% [100% - 15%].

What is the tax implication if theemployer gives ‘fringe benefits’ to rank-and-file employees? Fringe benefitsgiven to a rank-and-file employee aretreated as part of his compensationincome subject to income tax andwithholding tax on compensation income.

Payor of Fringe Benefit Tax (FBT) – theemployer [but the law allows theemployer to deduct such tax as abusiness expense, in determining histaxable income]

C. Fringe Benefits Which Are NotTaxable [Sec. 33 of the NIRC,consolidated with Sec. 2.33(C) of RR 03-98] [RED CNC]

1. Fringe benefits which are authorizedand EXEMPTED from tax under speciallaws

2. CONTRIBUTIONS of the employer forthe benefit of the employee toretirement, insurance andhospitalization benefit plans

3. Benefits given to the RANK AND FILEemployees, whether granted under acollective bargaining agreement or not

4. DE MINIMIS benefits


Page 40 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

5. If the grant of fringe benefits to theemployee is required by the nature of, orNECESSARY to the trade, business, orprofession of the employer

6. If the grant of fringe benefits is for theCONVENIENCE of the employer[Convenience of the Employer Rule]

NOTES:

De minimis benefits – those which are ofrelatively small value are offered by theemployer as a means of promoting health,goodwill, contentment, or efficiency of hisemployees, such as the following: (CLAMMP– RUST)

1. Monetized unused vacation leavecredits of private employees notexceeding ten (10) days during the yearand the monetized value of leavecredits paid to government officials andemployees;

2. Medical cash allowance todependents of employees not exceedingP750 per semester or P125 per month;

BIR Ruling 019-02: To be considered “deminimis” medical allowance, the followingconditions must concur:a. The amount given to the EE shall be for

his own medical expense;b. The amount actually given and actually

spent shall not exceed P10, 000 in anygiven calendar year;

c. The EE must fully substantiate with orin his name the medical allowance to begranted.

3. Rice subsidy of P350 per month grantedby an employer to his employees;

4. Uniforms given to employees by theemployer;

5. Medical benefits given to theemployees by the employer;

6. Laundry allowance of P150 per month;

7. Employee achievement awards, e.g.for length of service or safetyachievement, which must be in the formof a tangible personal property otherthan cash or gift certificate, with anannual monetary value not exceedingone-half (½) month of the basic salary ofthe employee receiving the award underan established written plan which doesnot discriminate in favor of highly paidemployees;

8. Christmas and major anniversarycelebrations for employees and theirguests;

9. Company picnics and sportstournaments in the Philippines and areparticipated exclusively by employees;and

10. Flowers, fruits, books or similar itemsgiven to employees under specialcircumstances, e.g. on account ofillness, marriage, birth of a baby, etc.[as enumerated in RR 03-98, asamended by RR 10-00]

Tax implication of de minimis benefits:EXEMPTED from tax. However, shouldthe amount of the benefits given be inEXCESS of the ceilings prescribed andthe p30,000 limitation, the followingrules apply: If given to managerial / supervisory

employees The amount in excessof the ceiling prescribed is taxableas a fringe benefit (i.e., there will bea 32% tax imposed on the grossed-up monetary value of the residualamount).

If given to rank-and-file employees The amount in excess of the ceilingprescribed is taxable as salary orcompensation income.

Examples of Convenience of theEmployer Rule:

1. The value of the meals given to theemployee is not taxable, if the employerprovides the meals for a substantialnon- compensatory business purpose(generally, when employee is required tobe on duty during the meal period).

2. Lodging is not taxable if the employeemust accept the lodging on theemployer’s business premises as acondition of his employment.


Page 41 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

VI.TAXATION OF PARTNERSHIPS

A. Classification of Partnerships forTax Purposes

1. General Professional Partnerships (GPP)– partnerships formed by persons forthe sole purpose of exercising theircommon profession, no part of theincome of which is derived fromengaging in any trade or business

2. Other Partnerships (or General Co-partnerships) – partnerships wherein allor part of their income is derived fromthe conduct of trade or business

B. General Professional Partnerships[Sec 26]

Rules:1. A GPP as such shall not be subject to

the income tax.2. The partners shall only be liable for

income tax only in their separate andindividual capacities.

3. For purposes of computing thedistributive share of the partners, thenet income of the GPP shall becomputed in the same manner as acorporation.

4. Each partner shall report as grossincome his distributive share,actually or constructively received,in the net income of the partnership.

5. The share of a partner shall be subjectto a creditable withholding incometax of 15%. (RR 2- 1998)

NOTES: GPP is not a taxable entity

The partnership is a meremechanism or a flow-through entityin the generation of income by, andthe ultimate mechanism distributionof such income to the individualpartners. (Tan v. Commissioner[Oct. 3, 1994])

But, the partnership itself isrequired to file income tax returnsfor the purpose of furnishinginformation as to the share in thegains or profits which each partnershall include in his individualreturn. (RR 2- 1998)

The share of an individual partner inthe net profit of a general professionalpartnership is deemed to have beenactually or constructively received bythe partner in the same taxable year

in which such partnership netincome was earned, and shall be taxedto them in their individual capacities,whether actually distributed or not, atthe graduated income tax ranging from5% to 32%.

Thus, the principle of constructivereceipt of income or profit is beingapplied to undistributed profits of GPPs.The payment [to the partners] of suchtax-paid profits in another year shouldno longer be liable to income tax.(Mamalateo)

C. Other Partnerships (or GeneralCo-partnerships)

Rules:1. The partnership is subject to the same

rules on corporations (capital gains tax,final tax on passive income, normal tax,minimum corporate income tax [MCIT]and gross income tax [GIT]), but is notsubject to the improperly accumulatedearnings tax [IAET]. The partnershipmust file quarterly and year-end incometax returns.

2. The taxable income of the partnership,less the normal corporate income taxthereon, is the distributable net incomeof the partnership.

3. The share of a partner in thepartnership’s distributable net incomeof a year shall be deemed to have beenactually or constructively received bythe partners in the same taxable yearand shall be taxed to them in theirindividual capacity, whether actuallydistributed or not. [Sec. 73(D)] Suchshare will be subjected to a final tax of10% to be withheld by the partnership.[Sec. 24(B)(2)]

Co-ownership: There is co-ownership:1. When two or more heirs inherit and

undivided property from a decedent.2. When a donor makes a gift of an

undivided property in favor of two ormore donees.

When Co-ownership is not subject to taxWhen the co-ownership’s activities arelimited merely to the preservation of theco-owned property. The co-owners areonly liable for income tax in theirseparate and individual capacities.

When Co-ownership is subject to taxWhen the income of the co-ownershipis invested by the co-owners inbusiness, the co-owners have in effect


Page 42 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

constituted themselves into apartnership. In such a case, the co-ownership shall be subject to tax as acorporation.

Automatically converted into an unregisteredpartnership the moment the said commonproperties and/or the incomes derived fromthem are used as a common fund withintent to produce profits for the heirs inproportion to their respective shares in theinheritance as determined in a projectpartition either duly executed in anextrajudicial settlement or approved by thecourt in the corresponding testate orintestate proceeding. [Ona v. CIR, May, 251972]

Partnership as a Taxpayer

Tax Liability GPP (Partnership not subject to tax) General Co-partnerships(Subject to tax)

Partnership itself - The entity itself is not taxable - Taxable like a corporation(32%)

Partners - The partners share in the netincome of the partnership shall betaxable to the partners whetherdistributed or not.

- Partners are considered asstockholders and the profitsdistributed to them areconsidered dividends.

Partners share in thenet loss of thepartnership

- may be claimed by the partner asa deductible expense in hispersonal income tax retain

- not deductible

Payment made by apartner to a partnerfor services rendered

- considered as additional share inthe net income of the partner –(ordinary business income)

- considered as compensationincome of the partner.

Filing of return - Partner should file an “annualincome tax” return

Reason: To furnish the BIR ofinformation as to the share of eachpartner shall be part and includein his personal income tax return

- file a quarterly income taxreturns.

Partner’s distributiveshare in the netincome of thepartnership

- subject to graduated income taxrates

- final tax of 10%

VII. ESTATES AND TRUSTS

A. Definition

ESTATE is the mass of property, rightsand obligations left behind by thedecedent upon his death.

Estates may be classified as follows:1. Estates not under judicial settlement

are subject to income tax generallyas mere co-ownership. The tax liability on income of the

co-ownership levied directly onthe co-owners. Thus, the heirsshall include in their respective

returns their distributive sharesof the net income of the estate.

2. Estates under judicial settlementare subject to income tax in thesame manner as individual. Income received during the

settlement of the estate istaxable to the fiduciary(guardian, executor, trustee,and administrator).

The return should be filed byexecutor or administrator ofthe trust.


Page 43 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

TRUST is an arrangement created bywill or co-agreement under which title toproperty is passed to another forconservation or investment with theincome therefrom and ultimately thecorpus (principal) to be distributed inaccordance with the directions of thecreator as expressed in the governinginstrument.

2 Kinds of Trust:

1. Irrevocable Trust is considered as aseparate taxpayer.

2. Revocable Trust is one where atanytime the power to revert the titleto any part of the corpus of the trustis vested:(a) in the grantor (creator of the

trust) either alone or inconjunction with any person nothaving a substantial adverseinterest in the disposition ofsuch part of the corpus or theincome therefrom; or

(b) in any person not having asubstantial adverse interest inthe disposition of such part ofthe corpus or the incometherefrom.

NOTE: The tax shall be imposed ontaxable income of the grantor.

Various trusts subject to income tax:(1.) Trust where income is accumulated

for the benefit of certain or uncertainpersons or persons with contingentinterest.

(2.) Trust where income is accumulatedor held for future distribution underthe terms of the will or trust.

(3.) Trust where income is to bedistributed currently by the fiduciaryto the beneficiaries.

(4.) Trust where income collected by aguardian of an infant is held ordistributed as the court may direct.

(5.) Trust where income in the discretionof the fiduciary may be eitherdistributed to the beneficiaries oraccumulated.

Exception The tax shall not apply to

employee's trust which forms part ofa pension, stock bonus or profit-sharing plan of an employer for thebenefit of some or all of hisemployees

i. if contributions are made to thetrust by such employer, oremployees, or both for thepurpose of distributing to suchemployees the earnings andprincipal of the fundaccumulated by the trust inaccordance with such plan, and

ii. if under the trust instrument itis impossible, at any time priorto the satisfaction of allliabilities with respect toemployees under the trust, forany part of the corpus or incometo be (within the taxable year orthereafter) used for, or divertedto, purposes other than for theexclusive benefit of hisemployees. NOTE HOWEVER: Any amount

actually distributed to anyemployee or distributee shall betaxable to him in the year inwhich so distributed to theextent that it exceeds theamount contributed by suchemployee or distributee.

B. Computation and Payment of theTax

The tax shall be computed upon thetaxable income of the estate or trustand shall be paid by the fiduciary.(GENERAL RULE)

Exceptions:1. Revocable Trusts: Where at any time the

power to revest in the grantor title toany part of the corpus of the trust isvesteda. in the grantor either alone or in

conjunction with any person nothaving a substantial adverseinterest in the disposition of suchpart of the corpus or the incometherefrom, or

b. in any person not having asubstantial adverse interest in thedisposition of such part of thecorpus or the income therefrom, the income of such part of the

trust shall be included incomputing the taxable income ofthe grantor.

2. Income for Benefit of Grantor: Where anypart of the income of a trusta. is, or in the discretion of the

grantor or of any person not havinga substantial adverse interest in the


Page 44 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

disposition of such part of theincome may be held or accumulatedfor future distribution to thegrantor, or

b. may, or in the discretion of thegrantor or of any person not havinga substantial adverse interest in thedisposition of such part of theincome, be distributed to thegrantor, or

c. is, or in the discretion of the grantoror of any person not having asubstantial adverse interest in thedisposition of such part of theincome may be applied to thepayment of premiums upon policiesof insurance on the life of thegrantor,

such part of the income of the trust shallbe included in computing the taxableincome of the grantor.

NOTE: 'In the discretion of the grantor'means in the discretion of the grantor, eitheralone or in conjunction with any person nothaving a substantial adverse interest in thedisposition of the part of the income inquestion.

Consolidation of Income of Two or MoreTrusts Where, in the case of two or more

trusts, the creator of the trust in eachinstance is the same person, and thebeneficiary in each instance is thesame,the taxable income of all the trusts shallbe consolidated and the tax computedon such consolidated income, and suchproportion of said tax shall be assessedand collected from each trustee whichthe taxable income of the trustadministered by him bears to theconsolidated income of the severaltrusts.

C. How Taxable Income of the Estateor Trust is Computed

[Sec. 61] The taxable income of theestate or trust shall be computed in thesame manner and on the same basisas in the case of an individual,

EXCEPT that:(A) There shall be ALLOWED AS A

DEDUCTION in computing thetaxable income of the estate or trustthe amount of the income of theestate or trust for the taxable yearwhich is to be distributed currentlyby the fiduciary to the beneficiaries,

and the amount of the incomecollected by a guardian of an infantwhich is to be held or distributed asthe court may direct,BUT the amount so allowed as adeduction shall be included incomputing the taxable income of thebeneficiaries, whether distributed tothem or not. Any amount allowed asa deduction under this Subsectionshall not be allowed as a deductionunder Subsection (B) of this Sectionin the same or any succeedingtaxable year.

(B) In the case of income received byestates of deceased persons duringthe period of administration orsettlement of the estate, and in thecase of income which, in thediscretion of the fiduciary, may beeither distributed to the beneficiaryor accumulated,there shall be allowed as anADDITIONAL DEDUCTION theamount of the income of the estateor trust for its taxable year, which isproperly paid or credited duringsuch year to any legatee, heir orbeneficiary but the amount so allowed as a

deduction shall be included incomputing the taxable income ofthe legatee, heir or beneficiary.

(C) In the case of a trust administered ina foreign country, the deductionsmentioned in Subsections (A) and(B) of this Section shall not beallowed: Provided, That the amountof any income included in the returnof said trust shall not be included incomputing the income of thebeneficiaries.

D. Exemption Allowed to Estates andTrusts

P20,000 from the income of the estateor trust.

Fiduciary Returns

Guardians, trustees, executors,administrators, receivers, conservatorsand all persons or corporations, actingin any fiduciary capacity, shall: render, in duplicate, a return of the

income of the person, trust or estatefor whom or which they act, and

be subject to all the provisions whichapply to individuals in case such


Page 45 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

person, estate or trust has a grossincome of P20,000 or over duringthe taxable year.

Such fiduciary or person filing thereturn for him or it, shall: take OATH that

he has sufficient knowledge ofthe affairs of such person, trustor estate to enable him to makesuch return and

that the same is, to the best ofhis knowledge and belief, trueand correct, and

be subject to all the provisions ofthis Title which apply to individuals.

A return made by or for one or two ormore joint fiduciaries filed in theprovince where such fiduciaries reside,under such rules and regulations as theSecretary of Finance shall prescribe,shall be sufficient compliance.

Fiduciaries Indemnified Against Claimsfor Taxes Paid Trustees, executors, administrators and

other fiduciaries are INDEMNIFIEDagainst the claims or demands of everybeneficiary for all payments of taxeswhich they shall be required to make,and they shall have CREDIT for theamount of such payments against thebeneficiary or principal in anyaccounting which they make as suchtrustees or other fiduciaries.

E. Illustrative Problems

1) Taxation of Trusts and Estates

TAXABLE ESTATE TAXABLE TRUSTThe taxable incomeshall be determined inthe same way as thatof individuals, butwith— A special deduction

of any amount ofthe income paid,credited ordistributed to theheirs.

The taxable incomeshall be determined inthe same way as thatof individuals, butwith— A special deduction

for any amount ofthe income paid,credited ordistributed to thebeneficiary/ies,and

A special deductionfor any amount ofthe income appliedfor the benefit of thegrantor.

The exemption isp20,000

The exemption isp20,000

The income tax ratesfor individuals apply.There is a creditable

The income tax ratesfor individuals apply.There is a creditable

withholding tax on theheir of 15%

withholding tax on thebeneficiary of 15%

The income tax returnshall be filed (if thegross income isp20,000 or more) andthe tax paid, by theexecutor oradministrator

The income tax returnshall be filed (if thegross income isp20,000 or more) andthe tax paid, by thefiduciary.

The taxable year is 2007.Distributions were made in 2007:

ESTATE TAXPAYER IN2007

Corpus or Distribution in 2007principal out of the corpus of NONEof the estate. the estate

Distribution in 2007Income in 2006 out of the income in NONE

2006

Income in 2007 (a) Distribution in2007 out of theIncome of 2007 HEIR(b) Retention by theEstate of the incomeOf 2007 ESTATE

Illustration: Mr. V died leaving a net estateof P3,000,000. The estate is in the hand ofthe executor. Mr. W, married, is one of theheirs to the estate. The estate had a grossincome of P300,000 and expenses ofP50,000 on the properties in the estate,from which there was a withholding incometax of 5% on the gross income. Mr. W hadpersonal income and expenses of P50,000and P10,000, respectively, with noquarterly income tax. Data on distributionsmade by the executor to W are as follows:

From the properties(called corpus)

P100,000

From the current year’s income 50,000Income tax withheld from W 7,500

The income tax of the estate is computedas:

Gross Income P300,000Less: Deductions

For expensesFor income dist.

P50,000P50,000 100,000

Net Income P200,000Less: Exemption 20,000Taxable Income P180,000Income Tax (rate for ind. in Sec.24) P32,500Less: Quarterly Income

Tax PaidWithholdingIncome Tax

P0

P15,000 15,000Income Tax still due P17,500


Page 46 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

The income tax of Mr. W shall be computedas follows:

Own gross income P50,000Income distribution received from

the estate 50,000Total Gross Income P100,000Less: Own deductions 10,000Net Income P90,000Less: Personal Exemption 50,000Taxable Income 40,000Income Tax P4,000Less: Income tax withheld by the

Estate (15%) 7,500Income tax refundable P3,500

2) Taxpayers in a Trust Relationship

Illustration 1:A taxable trust, administered in thePhilippines, had gross income from theproperty held in trust of P490,000 andexpenses of P350,000. There was aquarterly income tax paid of P7,000. It wasprovided in the trust instrument thatP10,000 of each year’s net income shall beused for the payment of premium of lifeinsurance of the grantor. For the year, itdistributed P40,000 out of the year’sincome to the beneficiary. The income tax ofthe trust is computed as follows:

Gross Income P490,000Less: Deductions for

ExpensesDist. of income

to beneficiary

P350,000

40,000Income for the

benefit of thegrantor 10,000

Exemption 20,000 420,000Taxable Income P70,000Income Tax 8,500Less: Quarterly Income Tax Paid 7,000Income Tax still due P1,500

Illustration 2:Trust 1 and Trust 2 had a taxable incomeof P200,000 and P300,000, respectively.The two trusts had a common grantor anda common beneficiary. Income taxpayments are P37,500 and P65,000,respectively.

The income tax still due from each trust areas follows:

Taxable Income, Trust 1 P220,000Taxable Income, Trust 2 320,000Total P540,000Less: Exemption 20,000Consolidated Taxable Income P520,000Income Tax P131,400

Allocation of P131,400 and income tax stilldue from each trust:

Trust 1 Trust 2Allocation of P131,400 to:Trust 1:

200k/500k x 131,400 P52,560Trust 2:

300k/500k x 131,400 P78,840Less: Income tax already

paid 37,500 65,000Income tax still due P15,060 P13,840

FIDUCIARYGRANTOR BENEFICIARY

Property(Corpus)

transfersprop to

to be held intrust for

(a)distribute toBeneficiary

(b)for the benefitof the grantor

(c) retained bythe Trust

Income ofProperty

taxable to

taxable to

Taxable Trust

REVIEWER IN TAXATION LAW Part III. Gross Income

Page 47 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Part III. Gross Income

A. BASIC PRINCIPLESB. SUPPLEMENTARY DISCUSSION ON SOME

ITEMS INCLUDED IN GROSS INCOME1. COMPENSATION INCOME2. GAINS DERIVED FROM DEALINGS IN

PROPERTY3. INTEREST INCOME4. RENTAL INCOME5. DIVIDENDS6. ANNUITIES7. PENSIONS8. CANCELLATION OF DEBT9. PRIZES AND AWARDS10. DAMAGE RECOVERY11. BAD DEBT RECOVERY12. TAX REFUND

A. Basic Principles

GROSS INCOME means all income derivedfrom whatever source, including (but notlimited to) the following items: (TRIP CARDGPP)1. Gross income derived from the conduct

of TRADE or business or the exerciseof a profession

2. RENTS3. INTERESTS4. PRIZES and winnings5. COMPENSATION for services in

whatever form paid, including, but notlimited to fees, salaries, wages,commissions, and similar items

6. ANNUITIES7. ROYALTIES8. DIVIDENDS9. GAINS derived from dealings in

property10. PENSIONS11. PARTNER'S distributive share from the

net income of the general professionalpartnership (GPP)

The term “gross income” whenever usedwithout qualification, is comprehensive,as defined above, and is different fromthe limited meaning of gross income forpurposes of minimum corporate incometax or the gross income tax ofcorporations.

B. Supplementary Discussion onSome Items Included in GrossIncome

1. Compensation Incomea. Income arising from an ER-EE

relationship. It means all remunerationfor services performed by an EE for hisER, including the cash value of all

remuneration paid in any medium otherthan cash. [Sec. 78(A)] It includes:1. Salaries and wages2. Commissions3. Tips4. Allowances5. Bonuses6. Fringe Benefits of rank and file EEs

b. It does NOT include remuneration paid: For agricultural labor paid entirely in

products of the farm where the laboris performed, or

For domestic service in a privatehome, or

For casual labor not in the course ofthe employer's trade or business, or

For services by a citizen or residentof the Philippines for a foreign gov’tor an int’l organization. [Sec. 78(A)]

Withholding Tax on CompensationIncome The income recipient (i.e., EE) is the

person liable to pay the tax income, yetto improve the collection ofcompensation income of EEs, the Staterequires the ER to withhold the taxupon payment of the compensationincome.

Fringe Benefits of Rank and File EEsBasic Rule: Convenience of the ER Rule If meals, living quarters, and other

facilities and privileges are furnished toan employee for the convenience of theemployer, and incidental to therequirement of the employee’s work orposition, the value of that privilege neednot be included as compensation.

2. Gains Derived From Dealings InProperty

Dealings in property such as sales orexchanges may result in gain or loss.The kind of property involved (i.e.,whether the property is a capital assetor an ordinary asset) determines the taximplication and income tax treatment, asfollows:

ORDINARY ASSETCAPITALASSET***

Gain fromsale orexchange

Ordinary GainCapitalGain

Loss fromsale orexchange

Ordinary LossCapital

Loss

Excess ofGains overthe Losses

[goes intocomputation of]

Ordinary NetIncome

NetCapitalGain


Page 48 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

*** (except shares of stock not listed nortraded in a local stock exchange and realproperty located in the Philippines subject tocapital gains tax)

TaxableNet Income =

OrdinaryNet Income +

NetCapitalGains

If the asset involved is classified asordinary, the entire amount of the gainfrom the transaction shall be includedin the computation of gross income [Sec32(A)], and the entire amount of the lossshall be deductible from gross income.[Sec 34(D)]. (See XI. AllowableDeductions from Gross Income - Losses)

If the property sold is a capital asset(except shares of stock not listed nortraded in a local stock exchange andreal property subject to capital gainstax), the rules on capital gains andlosses apply in the determination of theamount to be included in gross income.(See Part V. Capital Gains and Losses)

Computation of Gain or Loss [Sec.40(A)]:

Amount realized from sale or otherdisposition of property

Less: Basis or Adjusted Basis

GAIN (LOSS)

Note: Amount realized from sale or otherdisposition of property = sum of moneyreceived + fair market value of the property(other than money) received

In computing the gain or loss from thesale or other disposition of property, theBASIS shall be as follows:1. Property acquired by purchase – its

cost, i.e., the purchase price plusexpenses of acquisition.

2. Property which should be included inthe inventory – its latest inventoryvalue [RR-2 sec 136]

3. Property acquired by devise, bequestor inheritance – its fair market priceor value as of the date of acquisition

4. Property acquired by gift or donation– the same as if it would be in thehands of the donor or at lastpreceding owner by whom it was notacquired by gift, EXCEPT that ifsuch basis is greater than the FMVof the property at the time of the giftthen, for the purpose of determiningloss, the basis shall be such FMV

5. Property (other than capital asset)acquired for less than an adequateconsideration in money’s worth – a)

the amount paid by the transfereefor the property; or b) thetransferor’s adjusted basis at thetime of the transfer whichever isgreater

6. Property acquired in a transactionwhere gain or loss not recognized –The basis shall be the same as itwould have been in the hands of thetransferor increased by the amountof gain recognized by the transferoron the transfer.

Installment Basis

a) Sales of Dealers in Personal Property– A person who regularly sells orotherwise disposes of personal propertyon the installment plan may return asincome therefrom in any taxable yearthat proportion of the installmentpayments actually received that year,which the gross profit realized or to berealized when payment is completed,bears to the total contract price.

Installment Sale v. Defferred PaymentIf the buyer is an individual not engaged intrade or business, the following rules shallapply: (RR 6-01) If the sale is a sale of property on the

installment plan (that is, payments inthe year of sale do not exceed 25% ofthe selling price), no withholding of taxis required to be made on the periodicinstallment payments. In such a case,the applicable rate of tax based on thegross selling price or fair market valueof the property at the time of theexecution of the contract to sell,whichever is higher, shall be withheldon the last installment or installmentsimmediately prior to such lastinstallment, if the last installment is notsufficient to cover the tax due, to bepaid to the seller until the tax is fullypaid. (RR 17-03)

If, on the other hand, the sale is on a“cash basis” or is a “deferred-paymentsale not on the installment plan” (thatis, payments in the year of sale exceed25% of the selling price), the buyer shallwithhold the tax based on the grossselling price or fair market value of theproperty, whichever is higher, on thefirst installment.

However, if the buyer is engaged in trade orbusiness, whether a corporation orotherwise, these rules shall apply: (RR 6-01)


Page 49 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

If the sale is a sale of property on theinstallment plan (that is, payments inthe year of sale do not exceed 25% ofthe selling price), the tax shall bededucted and withheld by the buyer onevery installment which tax shall bebased on the ratio of actual collection ofthe consideration against the agreedconsideration appearing in the Contractto Sell applied to the gross selling priceor fair market value of the property atthe time of the execution of the Contractto Sell, whichever is higher. (RR 17-03)

The term “consideration” refers to theselling price exclusive of interest. Interestearned as an incident of installmentpayment, if any, shall be subject to theordinary income tax rate (RR 17-03).

If, on the other hand, the sale is on a“cash basis” or is “deferred-paymentsale not on the installment plan” (thatis, payments in the year of sale exceed25% of the selling price), the buyer shallwithhold the tax based on the grossselling price or fair market value of theproperty, whichever is higher, on thefirst installment.

b) Sales of Realty and Casual Sales ofPersonal Property1. A casual sale or other casual

disposition of personal property(other than property of a kind whichwould properly be included in theinventory of the taxpayer if on handat the close of the taxable year) for aprice exceeding One thousandpesos (P1000); or

2. A sale or other disposition of realproperty

In either case the initial paymentsmust NOT exceed 25% of the sellingprice

'Initial payments' means the paymentreceived in cash or property other thanevidences of indebtedness of thepurchaser during the taxable period inwhich the sale or other disposition ismade.

Income Tax Treatment: Income may bereturned on the same basis as sales ofdealers in personal property (see sectionA)

c) Sales of Real Property Considered asCapital Asset by Individuals – An

individual who sells or disposes of realproperty, considered as capital asset,and is otherwise qualified to report thegain therefrom under Subsection (B)may pay the capital gains tax ininstallments.

3. Interest Income

e.g., Interest income from governmentsecurities such as Treasury Bills

4. Rental Income

Actual rent itself: included in grossincome (taxable)

Payments by lessee of obligations oflessor to third persons: considered asadditional rent income of the lessor, andtherefore included in gross income(taxable).

Advance Rentals: Receipt of advancerentals by the lessor may or may notconstitute taxable income to himdepending on the true nature of the so-called advance rentals. If the advance rental is in the nature

of prepaid rent (for the lessee),received by the lessor under a claimof right and without restriction as touse, the entire amount is taxableincome of the lessor in the yearreceived.

If the amount received is in thenature of a security deposit for thefaithful compliance by the lessee ofthe terms of the contract, there is noincome to the lessor unless theconditions which make the securitydeposit the property of the lessoroccur (i.e., the lessee violates theterms of the lease agreement)

5. Dividends

Any dividend which is not exempt fromincome tax, or which is not subject tofinal tax, is taxable dividend included inthe computation of the taxable income(gross income) in the income tax returnat the end of the year.

NOTE: Liquidating Dividend – distribution of allthe property of a corporation. It is strictly notdividend income, but rather a sale of shares ofstock resulting in capital gain or loss.

6. Annuities

Income derived from a capital amountpaid to an insurance company.


Page 50 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

7. Pensions

paid for past employment servicesrendered.

8. Cancellation of debt

The cancellation or forgiveness ofindebtedness may have any of threepossible consequences:a. It may amount to payment of

income. If, for example, anindividual performs services to or fora creditor, who, in considerationthereof, cancels the debt, income inthat amount is realized by thedebtor as compensation for personalservices.

b. It may amount to a gift. If a creditorwishes merely to benefit the debtor,and without any considerationtherefore, cancels the debt, theamount of the debt is a gift to thedebtor and need not be included inthe latter’s report of income.

c. It may amount to a capitaltransaction. If a corporation towhich a stockholder is indebtedforgives the debt, the transactionhas the effect of a payment ofdividend.

9. Prizes and Awards

Contest prizes and awards received aregenerally taxable. Such paymentconstitutes gain derived from labor.

The EXCEPTIONS are as follows:

Prizes and awards received inrecognition of religious, charitable,scientific, educational, artistic,literary or civic achievements areEXCLUSIONS from gross income if:a. The recipient was selected

without any action on his partto enter a contest orproceedings; and

b. The recipient is not required torender substantial futureservices as a condition toreceiving the prize or award.

Prizes and awards granted toathletes in local and int’l sportscompetitions and tournaments heldin the Philippines and abroad andsanctioned by their nationalassociations shall be EXEMPT fromincome tax.

10.Damage Recovery

Compensatory damages, as constitutingreturns of capital, are not taxable.Thus, amounts received as moraldamages for personal actions (such asalienation of affection, libel, slander orbreach of promise to marry) are nottaxable.

Recovered damages representingrecoveries of lost profits are taxable,just as profits are taxable in the regularcourse of business. Thus, damagesrecovered in patent infringement suitsare taxable.

11.Bad Debt Recovery

Tax Benefit Rule – Bad debts claimed as adeduction in the preceding year(s) butsubsequently recovered shall be includedas part of the taxpayer’s gross income inthe year of such recovery to the extent of theincome tax benefit of said deduction. Thereis an income tax benefit when thededuction of the bad debt in the prior yearresulted in lesser income and hence taxsavings for the company. (Sec. 4, RR 5-99)

Illustration:Case A Case B Case C

Year 1

Gross Income 500,000 400,000 500,000

Less: AllowableDeductions(before write-offof UncollectibleAccounts/Debts) (200,000) (480,000) (495,000)

Taxable Income(Net Loss) beforewrite-off 300,000 (60,000) 5,000

Deduction forAccountsReceivablewritten off

(2,000) (2,000) (6,000)

Taxable Income(Net Loss) afterwrite-off

298,000 (62,000) (1,000)

Year 2Recovery ofAmountsWritten Off

2,000 2,000 6,000

Taxable Incomeon theRecovery

2,000 - 5,000

Explanation: In Case A, the entire amount recovered

(P2,000) is included in the computationof gross income in Year 2 because thetaxpayer benefited by the same extent.


Page 51 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Prior to the write-off, the taxable incomewas P300,000; after the write-off, thetaxable income was reduced toP298,000.

In Case B, none of the P2,000 recoveredwould be recognized as gross income inYear 2. Note that even without thewrite-off, the taxpayer would not havepaid any income tax anyway. The“taxable income” before the write-offwas actually a net loss.

In Case C, only P5,000 of the P6,000recovered would be recognized as grossincome in Year 2. It was only to thisextent that the taxpayer benefited fromthe write-off. The taxpayer did notbenefit from the extra P1,000 becauseat this point, the P1,000 was already anet loss.

12.Tax Refund

As a general rule, a refund of a taxrelated to the business or the practice ofprofession, is taxable income (e.g.,refund of fringe benefit tax) in the yearof receipt to the extent of the income taxbenefit of said deduction (i.e., the taxbenefit rule applies). However, thefollowing tax refunds are not to beincluded in the computation of grossincome: (EXCEPTIONS) (CAP–IF–FED–VAT)1. Philippine income tax, except the

fringe benefit tax2. Income tax imposed by authority of

any foreign country, if the taxpayerclaimed a credit for such tax in theyear it was paid or incurred.

3. Estate and donor’s taxes4. Taxes assessed against local

benefits of a kind tending toincrease the value of the propertyassessed (Special assessments)

5. Value Added Tax6. Fines and penalties due to late

payment of tax7. Final taxes8. Capital Gains Tax

The enumeration of tax refunds thatare not taxable (income) is derivedfrom an enumeration of taxpayments that are not deductiblefrom gross income.

If a tax is not an allowablededuction from gross income whenpaid (no reduction of taxable income,hence no tax benefit), the refund isnot taxable.

REVIEWER IN TAXATION LAW Part IV. Exclusions and Deductions from Gross Income

Page 52 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Part IV. Exclusions andDeductions from Gross Income

I. EXCLUSIONS FROM GROSS INCOMEII. DEDUCTIONS FROM GROSS INCOME

A. ITEMIZED DEDUCTIONSB. OPTIONAL STANDARD DEDUCTION

III. PERSONAL AND ADDITIONALEXEMPTIONS

IV. NON-DEDUCTIBLE EXPENSES

EXCLUSIONS[Sec. 32 (B)]

DEDUCTIONS[Sec.34]

Amounts earned orreceived by thetaxpayer but do notform part of grossincome

Amounts spent or paidin the process ofearning gross income

Used in computingGROSS INCOME

Used in computingTAXABLE INCOME

Not treated as part ofgross income because:(1) exempted by theConstitution, statute,or treaty;OR(2) not within thedefinition of income(i.e. represents returnon capital)OR(3) subject to anotherkind of internalrevenue tax

Subtracted from grossincome to arrive at netincome by expressprovision of the NIRC.

I. EXCLUSIONS FROM GROSSINCOME[Sec. 32(B)]

The following are excluded from gross income:(GIRL CROM)1. GIFTS, bequests and devises;2. INCOME exempt under treaty;3. RETURN on premiums paid by insured;4. LIFE insurance proceeds;5. COMPENSATION for injuries or sickness;6. RETIREMENT benefits, pensions, gratuities;7. MISCELLANEOUS items;8. OTHER exclusions.

1. GIFTS, bequests and devises;

General rule: The value of propertyacquired by gift, bequest, or devise. These must be given GRATIUTOUSLY,

otherwise, shall be included in grossincome.

Reason: These transactions are alreadysubject to estate or donor’s taxes.

NOTE: Income from such property;

OR Transfers of divided interest where there

is a constraining force of a moral or legalduty, anticipated economic benefit, or whengiven in return for services

Shall be INCLUDED in gross income.

2. INCOME exempt under treaty

Income of any kind, to the extentrequired by any treaty obligationbinding upon the Government of thePhilippines.

3. RETURN on premiums paid byinsured

General rule: The amount received bythe insured as a return of premiumspaid by him under life insurance,endowment, or annuity contracts, eitherduring the term or at the maturity ofthe term mentioned in the contract orupon surrender of the contract is areturn of capital and not income.

This refers to the cash surrendervalue of the contract.

Exception: If the amounts received bythe insured (when added to theamounts already received before thetaxable year under such contract)exceed the aggregate premiums orconsiderations paid (whether or notpaid during the taxable year), then theexcess shall be included in gross income.

4. LIFE insurance proceeds

General rule: The proceeds of lifeinsurance policies paid to heirs orbeneficiaries upon the death of theinsured should be treated as indemnityand not as gain or income.

Exceptions: If such amounts are heldby the insurer under an agreement topay interest thereon, the interestpayments received by the insured shallbe included in gross income.

5. COMPENSATION for injuries orsickness

General rule: Amounts received ascompensation for personal injuries orsickness, plus any damages received,whether by suit or agreement on


Page 53 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

account of such injuries or sickness (i.e.proceeds from Workmen’sCompensation Act, Accident/HealthInsurance) are in the nature ofINDEMNITY and are thus excludedfrom gross income.

Notes: “Personal injuries” are limited to physical

injuries, not injuries to rights. Damages are only exempt if they arise from

physical injury or are in the nature of anindemnity. Thus, damages received whichare NOT due to personal injury and inexcess of the claimant’s actual losses areINCLUDED in gross income.

6. RETIREMENT benefits, pensions,gratuities (RTBVSG or Real True BadVibes Super Grabe):

a. RETIREMENT benefits under RA 7641or under a reasonable private benefitplan

b. TERMINAL payc. BENEFITS from foreign governmentsd. VETERANS benefitse. SSS benefitsf. GSIS benefits

a. RETIREMENT benefits received underRA 7641; ORin accordance with a reasonableprivate benefit plan (RPBP).

RA 7641 RPBPRetiring employeemust be in the serviceof same employerCONTINUOUSLY for atleast five (5) years

Retiring employeemust be in the serviceof the same employerCONTINUOUSLY for atleast ten (10) years.

Retiring employeemust be at least sixty(60) years old at thetime of retirement

Retiring employeemust be at least fifty(50) years old at thetime of retirement

Availed of only once,and only when there isno RPBP

Availed of only once;no other RPBP withsame or anotheremployer allowed,[Sec. 32(B)(6)(a)]

[But employee whoavailed of exclusionunder an RPBP maystill claim exclusionson other grounds (ie.GSIS, SSS, terminalpay)]Must be approved byBIR

A 'reasonable private benefit plan'means a pension, gratuity, stock

bonus or profit-sharing planmaintained by an employer for thebenefit of some or all of hisemployees wherein contributions aremade by such employer for theemployees for the purpose ofdistributing to such employees theearnings and principal of the fundthus accumulated (TRUST FUND)AND

wherein it is provided in the planthat at no time shall any part of thecorpus or income of the fund beused for, or be diverted to, anypurpose other than for the exclusivebenefit of the said officials andemployees.(IRREVOCABLE)

b. TERMINAL pay

Any amount received by anemployee or by his heirs from theemployer as a consequence ofseparation of such official oremployee from the service of theemployer because of death,sickness, other physical disability orfor any cause beyond the control ofthe employee

Notes: Sickness must be life-threatening or

one which renders the employeeincapable of working

Separation of the employee must beinvoluntary. Thus, resignation oravailment of an optional early retirementplan bars a claim under this provision.

BIR Ruling 143-98: The terminal leave pay (amount paid

for the commutation of leave credits)of government employees whoseemployment is coterminous isexempt since it falls within themeaning of the phrase "for anycause beyond the control of the saidofficial or employee" found in Sec.32(B).

c. BENEFITS from foreign governments

The social security benefits,retirement gratuities, pensions andother similar benefits received byresident or nonresident citizensor

aliens permanently residing in thePhilippines

from foreign government agenciesand other institutions


Page 54 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

d. VETERANS benefits

Payments of benefits due or tobecome due to any person residingin the Philippines under the laws ofthe United States administered bythe United States VeteransAdministration

7. MISCELLANEOUS items (II PP 13GGG)

a. INCOME derived by foreign government;b. INCOME derived by the government or its

political institutions;c. PRIZES and awards sports competitions;d. PRIZES and awards in charitable, literary,

educational, artistic, religious, scientific, orcivic achievement (clear sc);

e. 13th month pay and other benefits;f. GSIS, SSS, Medicare, and Other

Contributions;g. GAINS from Sale of Bonds, Debentures, or

other Certificate of Indebtedness;h. GAINS from Redemption of Shares in

Mutual Fund;

a. INCOME derived by foreigngovernment

PASSIVE Income derived from:1) investments in the Philippines in

domestic securities (loans,stocks, bonds, etc.) or

2) interest on deposits in banks inthe Philippines by any of thefollowing:a. foreign governments;b. financing institutions owned,

controlled, or enjoyingrefinancing from foreigngovernments; or

c. international or regionalfinancial institutionsestablished by foreigngovernments.

Note: If foreign government engages intrade, its income is taxable.

b. INCOME derived by the governmentor its political institutions

Income derived from any publicutility or from the exercise of anyessential governmental functionaccruing to the Government of thePhilippines or to any politicalsubdivision thereof.

c. PRIZES and awards sportscompetitions

All prizes and awards granted toathletes:1) in local and international sports

competitions and2) sanctioned by their national

sports associations.

d. PRIZES and awards in charitable,literary, educational, artistic,religious, scientific, or civicachievement (clear sc)

Requisites: Recipient was selected without any

action on his part to enter thecontest or proceeding and

Recipient is not required to rendersubstantial future services as acondition to receiving the prize oraward

e. 13th month pay and other benefits

Gross benefits received byemployees of public and privateentities provided that the totalexclusion shall not exceed P30,000(amounts in excess are consideredcompensation income)

Includes: Benefits received by government

employees under RA 6686 Benefits received by employees pursuant

to PD 851 (13th Month Pay Decree) Benefits received by employees not

covered by PD 851 as amended byMemorandum Order No. 28 and

Other benefits such as productivityincentives and Christmas bonus

f. GSIS, SSS, Medicare, and OtherContributions

GSIS, SSS, Medicare and Pag-ibigcontributions, and union dues ofindividuals.

g. GAINS from Sale of Bonds,Debentures, or other Certificate ofIndebtedness

Gains realized from the sale orexchange or retirement of bonds,debentures or other certificate ofindebtedness with a maturity ofmore than 5 years.


Page 55 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

h. GAINS from Redemption of Shares inMutual Fund

Gains realized by the investor uponredemption of shares of stock in amutual fund company

8. Other Exclusions/Exemptionsfrom Gross Income (PPGFD)

a. PASSIVE Income subject to final tax;b. PCSO and lotto winnings;c. GAIN from buying and selling stocks

classified as capital asset listed and tradedin the PSE;

d. FRINGE benefits already subject to FBT;e. DE MINIMIS benefits.

a. PASSIVE INCOME subject to FINALTAX[Sec. 24 (B) (1)]

Amounts already subject to final taxare no longer subject to income tax.These are withheld by the payor andare no longer form part of grossincome.

(IRDPO) Interest income on bank deposits Royalties Dividends from domestic

corporations Prizes exceeding P10,000

Other winnings from within RP

Note: Passive income which is NOT subjectto final tax shall be INCLUDED in GROSSINCOME (ex. Interest income on loanscontracted between private individuals).

INTEREST INCOME

From ANY CURRENCY bankdeposit/any other monetarybenefit from depositsubstitutes/trust funds/similararrangements (20%FT)- NRA-ETB;OR

Received by a resident individualtaxpayer from a depository bankunder the FCDU System (7 ½%FT);OR

From long-term deposit orinvestment with at least 5-yearmaturity (EXEMPT)

Note: The last item is given as a specificexemption for INDIVIDUAL taxpayersEXCEPT non-resident aliens, who aretaxed at 25%. Corporations do not enjoythis exemption.

ROYALTIES

On books, as well as otherliterary works and musicalcompositions (10%FT);

Other royalties (20%FT)

DIVIDENDS

Cash or property dividends fromdomestic corporations (10%FT)

PRIZES EXCEEDING P10,000.

Prizes amounting to P10,000 orless are included in grossincome.

Other winnings from within RP

Winnings other than from PCSOand lottery are subject to 20%FT.

b. PCSO and lotto winnings [Sec. 24(B)(1)]

c. GAIN from buying and selling stocksclassified as capital asset listed andtraded in the PSE (Sec. 127)

Notes: The gain from such transaction isgiven a specific exemption for one who is nota dealer in securities. Such gain is exemptfrom income tax but subject to percentagetax of ½ of 1%.

d. FRINGE benefits already subject toFBT (RR 3-98)

The actual monetary value offringe benefits received bysupervisory and managerialemployees is EXCLUDED from theircompensation income.

Benefits received by RANK andFILE employees are allowancesNOT subject to FBT and are thusincluded in compensation income.

The FBT paid thereon isDEDUCTIBLE from the businessincome of the EMPLOYER.

e. DE MINIMIS benefits (RR 3-98)

Facilities or privileges of relativelysmall value furnished by anemployer to his employees and areas a means of promoting the health,goodwill, contentment, or efficiencyof his employees.

These are exempt from fringebenefit tax and compensationincome tax.


Page 56 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

II. DEDUCTIONS FROM GROSSINCOME

Deductions are amounts expresslyallowed by law to be deducted fromgross income to arrive at taxableincome.

Notes: A deduction is in the nature of anexemption; it is strictly construed againstthe claimant who must point to a specificprovision allowing it and has the burden ofproving he falls within the purview of suchprovision. Thus, all deductions claimedmust be properly substantiated.

‘Taxable income’ means:

GROSS INCOME less:

Itemized Deductions [Sec. 34 (A-J)]OR

Optional Standard Deduction [Sec. 34(L)]AND/OR

Premium payments on health/hospitalizationinsurance [Sec. 34(M)];

AND/ORPersonal and additional exemptions [Sec. 35]

whenever authorized by the NIRC or speciallaws depending on the type of incomeearned and the type of taxpayer.

TYPE OF TAXPAYER ALLOWABLEDEDUCTIONS

Individuals with grossincome frombusiness/practiceprofession

Itemized deductionsOROptional StandardDeduction;Premium payments onhealth/hospitalizationinsurance [Sec. 34(M)];Personal/additionalexemptions

Individuals earningpurely compensationincome (except non-resident aliens notengaged in trade orbusiness)

Premium payments onhealth/hospitalizationinsurance [Sec. 34(M)];Personal/additionalexemptions

Corporations (exceptnon-resident foreigncorporations), generalprofessionalpartnerships, estatesand trusts engaged inbusiness, proprietaryeducationalinstitutions andhospitals (non-profit),and GOCC

Itemized deductions

Estates and Trusts P20,000 [Sec. 62]

TAX-PAYER

PERSONALEXEMPTION

ADDITIONALEXEMPTION

OSD

Residentcitizen

Yes Yes Yes

Non-residentCitizen

Yes Yes Yes

ResidentAlien

Yes Yes Yes

Non-residentalien(engagedin tradeandbusiness)

Subject tothe rule ofreciprocity

No No

Non-residentalien (Notresidentin tradeandbusiness)

No No No

General Rule: All taxpayers are entitledto deductions

Except: Non-resident aliens notengaged in trade or business in thePhilippines (NRAXTB) and Non-residentforeign corporations (NRFC).

TWO OVERARCHING CATERGORIES OFDEDUCTIONS:


A. Itemized Deductions

ITEMIZED DEDUCTIONS (BELT DID CRP):1. BAD debts;2. EXPENSES;3. LOSSES;4. TAXES;5. DEPRECIATION;6. INTEREST;7. DEPLETION of oil and gas wells & mines;8. CHARITABLE and other contributions;9. RESEARCH and development;10. PENSION trusts

1. BAD debts [Sec. 34(E)]

Debts resulting from the worthlessnessor uncollectibility, in whole or in part, ofamounts due the taxpayer actuallyascertained to be worthless andcharged off within the taxable year.

REQUISITES FOR DEDUCTIBILITY (BadDebts):1. Existing indebtedness due to the

taxpayer which is valid and legallydemandable;


Page 57 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

2. Debt is connected with the taxpayer'strade, business or practice ofprofession;

3. Debt was not sustained in atransaction entered into betweenrelated parties;

4. Actually ascertained to be worthlessand uncollectible as of the end of thetaxable year.; and

5. Actually charged off in the books ofaccounts of the taxpayer as of the endof the taxable year

“Actually ascertained to beworthless” is not measured by aninflexible formula but by the exercise ofsound business judgment. It dependsupon the particular facts and thecircumstances of the case and the proofof two facts:1) Taxpayer had reasonably

investigated the relevant facts andhad drawn a reasonable inferencethat the debt is uncollectible;AND

2) Good faith. The taxpayer may strikea middle course between pessimismand optimism in determining debtsto be worthless. He need not haveperfect discernment. (Sec. 2, RR 5-99 as amended by RR 25-02)

Where a taxpayer has failed to attach astatement showing the propriety of thedeductions for alleged bad debts to histax returns, the account written off willbe disallowed. (Collector v. GoodrichInternational Rubber Co., 21 SCRA 1336)

Notes: The flight, disappearance, insolvency, ordeath of the debtor with insufficient propertiesto pay creditors, may indicate worthlessness ofthe debt.

A creditor cannot deduct the debt of an insolventdebtor unless all efforts have been exhausted tocollect from any solvent guarantor or surety ofsuch debtor.

SECURITIES held as CAPITALASSETS which are ascertained to beworthless and charged off within thetaxable year by a taxpayer other than abank or trust company incorporatedunder the laws of the Philippines asubstantial part of whose business isthe receipt of deposits will not betreated as bad debts, but as capitalloss on the last day of the taxable year[Sec. 34(E)(2)].

Additional requisites for deductibilityof bad debts for BANKS:a. Bad debts uncollected for 6 months;b. Resolution by the BOD of the bank;c. written approval from the BSP of the

writing off of the indebtedness fromthe banks' books of accounts at theend of the taxable year

Receivables from insurance or suretycompanies may only be written-off fromthe taxpayer's books and claimed asbad debts if such company has beendeclared closed due to insolvency orfor any such similar reason by theInsurance Commissioner.

Recovery of Bad Debts PreviouslyDeducted (Tax Benefit Rule)The recovery of bad debts previouslyallowed as deduction in precedingyear(s) shall be included as part of thetaxpayer's gross income in the year ofsuch recovery to the extent of theincome tax benefit of said deduction.(Sec. 4, RR 5-99)

2. EXPENSES [Sec.34 (A)]

BUSINESS EXPENSES including:a. Salaries, wages, compensation,

including the grossed-up monetaryvalue of fringe benefits subject toFBT

b. Travel expensesc. Rentalsd. Entertainment, recreation and

amusement expensese. Other expenses such as repairs or

those incurred by farmers and otherpersons in agribusiness

REQUISITES FOR DEDUCTIBILITY(Business Expenses):1. Ordinary AND necessary;2. Paid and incurred during the taxable

year;3. Paid and incurred for the purpose of

carrying on the business;4. Substantiated with official receipts or

other proper documents (must show theamount of expense deducted and theconnection to the business);

5. Legitimately paid (not a BRIBE,kickback, or otherwise contrary to law,morals, public policy);

6. If subject to withholding tax, proof ofpayment of such tax must be shown(i.e. FBT on fringe benefits);

7. Amount must be reasonable.


Page 58 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

ORDINARY- normal and usual in thetaxpayers business

NECESSARY- appropriate and helpful inthe development of taxpayer's business andare intended to minimize losses or toincrease profits. These are the day-to-dayexpenses.

CAPITAL EXPENDITURES are those thatbenefit not only the current period but alsofuture periods (i.e. purchase of machinery).It is not deductible as a business expensebut depreciable under Sec. 34 (F).

CIR v. General Foods (2003): Advertising isgenerally of two kinds: (1) advertising tostimulate the current sale of merchandise oruse of services and (2) advertising designedto stimulate the future sale of merchandiseor use of services. The second type involves expenditures

incurred, in whole or in part, to createor maintain some form of goodwill forthe taxpayer’s trade or business or forthe industry or profession of which thetaxpayer is a member.

If the expenditures are for theadvertising of the first kind, then,except as to the question of thereasonableness of amount, there is nodoubt such expenditures are deductibleas business expenses.

If, however, the expenditures are foradvertising of the second kind, thennormally they should be spread out overa reasonable period of time.

The court held that the advertisingexpense is not an ordinary andnecessary expense, but a capitalexpenditure that should be spread outover a reasonable time.

It failed to meet the two conditions setby US jurisprudence: (1) reasonablenessof the amount incurred [theiradvertising expense was almost doublethe amount of their administrativeexpense] and (2) not be a capital outlayto create goodwill.

EXCEPTION: Non-profit proprietaryeducational institution may elect either todeduct the amount as an expense ordepreciate it. [Sec. 34 (A) (2)]

Representation Expenses are incurred bya taxpayer in connection with the conductof his trade, business or exercise ofprofession, in entertaining, providingamusement and recreation to, or meetingwith, a guest or guests at a dining place,

place of amusement, country club, theater,concert, play, sporting event, and similarevents or places. [Sec. 2, RR 10-2002]

3. LOSSES [Sec. 34 (D)]

Losses actually sustained during thetaxable year and not compensatedfor by insurance or other forms ofindemnity shall be allowed asdeductions.

Types of Losses

1. Ordinary Lossesa. Operating losses incurred in

trade, profession or business; orb. Casualty losses of property

connected with the trade,business or profession arisingfrom fires, storms, shipwreck,robbery, theft, or embezzlement

2. Capital LossesDeductible only to the extent ofcapital gains (except for banks andtrust companies)a. Incurred in the sale or

exchange of capital assets;b. Resulting from securities held

as capital assets becomingworthless;

c. Losses from short sales ofproperty;

d. Losses due to failure toexercise privilege or option tobuy or sell property.

3. Special Lossesa. Loss from Wash Sales of

Stocks or Securities

Wash sale – a sale or otherdisposition of stock or securitieswhere substantially identicalsecurities are acquired or purchasedwithin a 61-day period, beginning30 days before the sale and ending30 days after the sale. [Sec. 38]

General rule: It is an artificial lossthat is not deductible from grossincome.Except: When incurred by a dealerin securities in the course ofordinary business, such loss isdeductible.

b. Wagering losses are deductible onlyto the extent of wagering gains. Awager is made when the outcomedepends upon CHANCE.

c. Abandonment losses in petroleumoperation and producing well.


Page 59 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

In case a contract area wherepetroleum operations areundertaken is partially orwholly abandoned, allaccumulated exploration anddevelopment expenditurespertaining thereto shall beallowed as a deduction.

In case a producing well isabandoned, the unamortizedcost thereof, as well as theundepreciated cost of equipmentdirectly used therein, shall beallowed as deduction in theyear the well, equipment orfacility is abandoned.

d. Losses due to voluntary removalof building incident to renewal orreplacements are deductible fromgross income.

e. Loss of useful value of capitalassets due to charges in businessconditions is deductible only tothe extent of actual loss sustained(after adjustment for improvement,depreciation and salvage value)

f. Losses from sales or exchanges ofproperty between relatedtaxpayers are not recognized, butthe gains are taxable.

g. Losses of farmers incurred in theoperation of farm business aredeductible.

h. Loss in shrinkage in value ofstock through fluctuation in themarket is not deductible from grossincome.

Exception: If the stock of thecorporation becomes worthless, thecost or other basis may be deductedby its owner in the taxable year inwhich the stock became worthless.

Requisites for Deductibility:1. Loss must be that of the taxpayer

(i.e. losses of the parent corp.cannot be deducted by itssubsidiary);

2. Actually sustained during thetaxable year;

3. Connected with the trade, businessor profession;

4. Evidenced by a close and completedtransaction;

5. Not compensated for by insuranceor other form of indemnity;

6. Not claimed as a deduction forestate tax purposes;

7. In case of casualty, notice of lossmust be filed with the Bureau ofInternal Revenue within 45 daysfrom the date of discovery of thecasualty or robbery, theft orembezzlement.

Exceptions:No loss is recognized in the following:1. Merger, consolidation, or control

securities (where no gains arerecognized either);

2. Exchanges not solely in kind;3. Related taxpayers;

a. Between members of a familyIncludes brothers and sisters (wholeand half-blood), spouse, ancestors,and lineal descendants

b. Between an individual andcorporation more than fiftypercent (50%) in value of theoutstanding stock of which isowned, directly or indirectly, byor for such individual; or

c. Between two corporations morethan fifty percent (50%) in valueof the outstanding stock ofwhich is owned, directly orindirectly, by or for the sameindividual;

d. Between the grantor and afiduciary of any trust;

e. Between the fiduciary of a trustand the fiduciary of anothertrust if the same person is agrantor with respect to eachtrust;

f. Between a fiduciary andbeneficiary of a trust.

4. Wash sales;5. Illegal transactions

Net Operating Loss Carry-Over (NOLCO)[Sec. 34(D)(3)]

Net operating loss is

the excess of allowable deductionsover gross income

for any taxable year immediatelypreceding the current taxable year.

NOLCO: Net operating losses which havenot been previously offset as deduction fromgross income shall be carried over as adeduction from gross income for the next


Page 60 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

three (3) consecutive taxable yearsimmediately following the year of such loss.

Exception: Mines other than oil and gaswells, where a net operating loss incurredin any of the first ten (10) years of operationmay be carried over as a deduction fromtaxable income for the next five (5) yearsimmediately following the year of such loss.

REQUISITES for NOLCO:1. The taxpayer was not exempt from

income tax the year the loss wasincurred;

2. There has been no substantial changein the ownership of the business orenterprise wherein:a. AT LEAST 75% of nominal value of

outstanding issued shares is held byor on behalf of the same persons;or

b. AT LEAST 75% of the paid upcapital of the corporation is held byor on behalf of the same persons.

Note: The 75% interest rule applies to a transferof the taxpayer’s deductible NOLCO as a resultof merger or consolidation. The transferee shallbe entitled to claim the deduction if thetransferor gains control of at least 75% of thenominal value of the outstanding issued sharesor paid up capital of the transferee. (RR 14-2001)

The rule does not apply in case the transfer ofthe shares by the previous stockholders werethrough straight purchase and sale and notthrough merger, consolidation or businesscombination (BIR Ruling 011-02, March 27, 2002)

Taxpayers Entitled to NOLCO1) Individuals engaged in trade or

business or in the exercise of hisprofession (including estates andtrusts);

Note: An individual who avails of optionalstandard deduction cannot simultaneouslyclaim deduction of NOLCO. However, thethree-year period shall continue to runduring such period notwithstanding theelection made by the taxpayer.

2) Domestic and resident foreigncorporations subject to the normalincome tax (e.g., manufacturers andtraders) or preferential tax rates underthe Code (e.g., private educationalinstitutions, hospitals, and regionaloperating headquarters)

Note: Corporations cannot avail of NOLCOas long as it is subject to MinimumCorporate Income Tax in any taxable year.However, the three-year period shallcontinue to run notwithstanding the factthat the corporation paid its income taxunder MCIT during such period.

ILLUSTRATION OF NOLCO:(In Pesos) 2000 2001 2002 2003 2004Gross Income 500,000 600,000 700,000 500,000 800,000Less: Deductions 900,000 500,000 750,000 420,000 450,000Net Loss [OR] (400,000) (50,000)Net Income before NOLCO* 100,000 80,000 350,000Less: NOLCO

From 2000 (100,000) (80,000)

From 2002 (50,000)Taxable Income 0 0 0 0 300,000

* - whichever is applicable

Explanation:The unused net operating loss of P220,000(400,000 – 100,000 – 80,000) of the year 2000could not be carried over beyond 2003. The netoperating loss of 2002 could be carried over to2004, since it is within the three-year period.

Q: As of yearend of 2004, what amount ofNOLCO is available to the company for offsetting

against (potential) gross income of succeedingtaxable years?

Answer: None. While there was an unusedportion of the 2000 NOLCO, such had alreadyexpired by yearend of 2003. The 2002 NOLCO(P50,000) was completely used up in 2004.There is, therefore, no NOLCO available to thecompany for year 2005 and thereafter.


Page 61 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

4. TAXES [Sec. 34(C)]

TAXES PROPER. Refers to national andlocal taxes.

Amounts representing interest, surcharge,or penalties incident to delinquency are notdeductible.(Sec. 80, RR-2)

General Rule:All taxes, national or local, paid or incurredduring the taxable year in connection withthe taxpayer's profession, trade orbusiness, are deductible from gross income

Exceptions:1. Philippine income tax, except Fringe

Benefit Taxes;2. Income tax imposed by authority of any

foreign country; Exception to exception:

When the taxpayer does NOT signifyhis desire to avail of the tax creditfor taxes of foreign countries,the amount may be allowed as adeduction subject to the limitationsset forth by law.

3. Estate and donor’s taxes4. Taxes assessed against local benefits of

a kind tending to increase the value ofthe property assessed (SpecialAssessments)

5. Value Added Tax6. Fines and penalties due to late payment

of tax7. Final taxes8. Capital Gains Tax

Requisites for Deductibility: Such TAX must be:

1. Paid or incurred within the taxableYEAR;

2. Paid or incurred in connection withthe taxpayer’s TRADE, profession orbusiness;

3. Imposed DIRECTLY on the taxpayer.4. Not specifically EXCLUDED by law

from being deducted from thetaxpayer’s gross income.

Examples of Deductible Taxes:1. Import duties2. Business taxes3. Occupation taxes4. Privilege and license taxes5. Excise taxes6. Documentary stamp taxes7. Automobile registration fees8. Real property taxes

Limitation: For nonresident aliens engagedin trade or business (NRAETB) andresident foreign corporations (RFC),deductions for taxes shall be allowed onlyto the extent that they are connected withincome from sources within the Philippines.

Note: A taxpayer qualified to take tax credits forforeign income taxes paid or incurred maychoose to claim them as deductions from grossincome.

TAX CREDITForeign income taxes paid or incurredreduces the Philippine income tax to bepaid.

Such credit is given to a taxpayer inorder to provide relief from too onerous aburden of taxation where the same incomeis subject to both foreign income tax andthe Philippine income tax.

The following may claim tax credits:1. Citizens2. Resident aliens3. Domestic corporations4. Members of General professional

Partnerships5. Beneficiaries of estates or trusts

The following may NOT claim tax credits:1. Non-resident citizens2. Resident aliens3. Alien individuals4. Foreign corporations

Substantiation Requirement:To avail of tax credits, the taxpayer mustshow the ff:1. The total amount of income derived

from sources without the Philippines;2. The amount of income derived from

each country, the tax paid or incurredto which is claimed as a credit undersaid paragraph,; and

3. All other information necessary for theverification and computation of suchcredits.

Limitations: The amount of tax creditallowed is equivalent to the tax paid orincurred to a foreign country during thetaxable year but not to exceed tho followinglimits:1) [Per Country Limit] The amount of tax

credit shall not exceed the sameproportion of the tax against whichsuch credit is taken, which thetaxpayer's taxable income from sourceswithin such country bears to his entiretaxable income for the same taxableyear; and


Page 62 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

2) [Worldwide Limit] The total amount ofthe credit shall not exceed the sameproportion of the tax against whichsuch credit is taken, which thetaxpayer's taxable income from sourceswithout the Philippines taxable bears tohis entire taxable income for the sametaxable year.

Formula:

1. TaxableIncome per

ForeignCountry

WorldwideTaxableIncome

xPhil.

IncomeTax

=Per

CountryLimit

2. TaxableIncome forall ForeignCountries

WorldwideTaxableIncome

xPhil.

IncomeTax

=Worldwide

Limit

Note:The second limitation applies where the taxpayerderives income from more than one foreigncountry.

Illustration:D Co., a domestic corporation, had thefollowing data for a year on taxable incomeand income taxes paid:

Taxable Income, Country A P200,000Taxable Income, Country B P100,000Taxable Income, Philippines P700,000Income Tax Paid – Country A P 60,000Income Tax Paid – Country B P 38,000

What is the Philippine income tax still due,after credit for foreign income taxes (SecnarioA)?Should D Co. choose to treat income taxespaid to foreign countries as deductions fromgross income, what is its Philippine incometax (Scenario B)?

Scenario A: Tax Credit option is chosen.

Step 1: Compute for total taxable incomeand Philippine income tax

Taxable Income, Country A 200,000

Taxable Income, Country B 100,000

Taxable Income, Philippines 700,000

Total Taxable Income fromsources within and without thePhils 1,000,000

Philippine Income Tax (P1Mx35%)

350,000

Step 2: Compute for Limitation A (PerCountry Basis).

To get tax credit per country underLimitation A, this formula is followed:

Taxable Incomefrom Foreign

Country

Taxable Incomefrom all sources

xPhil.

IncomeTax

=Per

CountryLimit

The result after applying the formulaabove is compared to the tax actuallypaid for each foreign country. The lowerof the two amounts for each foreigncountry will be added to get the total taxcredit allowed under Limitation A.

AmountAllowed

(Whichever isLower)

Country A

Limitation A 70,000 60,000

(200/1000 x 350,000)

Actually paid toCountry A

60,000

Country B

Limitation B 35,000 35,000

(100/1000 x 350,000)

Actually paid toCountry B

38,000

Tax credit allowedunder Limitation A

95,000

Step 3: Compute for Limitation B (OverallBasis). To get tax credit (overall basis) under

Limitation B, this formula is followed:

Taxable Incomefrom sources

outside the Phils.

Taxable Incomefrom all sources

xPhil.

IncomeTax

=Worldwide

Limit

The result after applying the formulaabove is compared to the tax actuallypaid in total to foreign countries. Thelower of the two amounts will be addedto get the total tax credit allowed underLimitation B.

AmountAllowed(Whicheveris Lower)

Overall Limit:

300/1000 x 350,000 105,000Total foreign incometaxes paid

98,000

Tax credit allowedunder Limitation B

98,000


Page 63 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Step 4: Compare the respective tax creditsallowed under Limitation A and LimitationB. The lower of the two amounts is the

final allowable tax credit. In this case,the amount computed under LimitationA (P95,000) is lower, thus it becomesthe final allowable tax credit.

Step 5: Compute for the income tax stilldue.

Philippine Income tax 350,000

Less: Allowable Tax Credit 95,000

Philippine Income Tax still due 255,000

Scenario B: Deduction option is chosen.

Taxable Income, Country A P 200,000Taxable Income, Country B 100,000Taxable Income, Phils. 700,000Total Taxable Income(before deduction for foreignincome tax) P1,000,000Less: Deductions forForeign Income Taxes Paid

Country A – P60,000Country B – P38,000 (98,000)

Net Taxable Income P 902,000

Philippine Income Tax(902,000 x 35%) P 315,700

5. DEPRECIATION [Sec. 34(F)]

Definition:The gradual diminution of the useful valueof tangible property resulting from wear andtear and normal obsolescence.

The term is also applied toamortization of the value of intangibleassets (i.e., patents), the use of which inthe trade or business is definitely limited induration.

Deduction Allowable:There shall be allowed as a depreciationdeduction a reasonable allowance for theexhaustion, wear and tear (includingreasonable allowance for obsolescence) ofproperty used in the trade or business. Therationale for this is that property graduallyapproaches a point where its usefulness isexhausted.

Notes:If the property is used in business and forpersonal purposes, depreciation expense mustbe pro-rated to include only the portionattributable to business use as deductible.

The person who sustains an economic lossfrom the decrease in property value due to

depreciation gets the deduction. Ordinarily,this is the person who owns and has a capitalinvestment in the property.

The period of depreciation starts when the assetis placed in service. It ends when the asset isdisposed of, or its usefulness exhausted.

Requisites for Deductibility(Depreciation):1. Must be for property used in the TRADE

or business, or those not being usedtemporarily during the year (Conwell Bros.Co. v. Collector, CTA Case No. 411), with –

2. A limited USEFUL life.3. Allowance must be REASONABLE.4. CHARGED off during the taxable year

from the taxpayer’s books of accounts.5. Not EXCEED the cost of the property.

Determining Useful LifeGeneral Rule: the estimated useful life isdetermined by the taxpayer himself.

Exception: Where the taxpayer and theCommissioner have entered into anagreement in writing specifically dealingwith the useful life and rate of depreciationof any property, the rate so agreed uponshall be binding on both the taxpayer andthe national Government in the absence offacts and circumstances not taken intoconsideration during the adoption of suchagreement.

The responsibility of establishing theexistence of such facts and circumstancesshall rest with the party initiating themodification.

Methods and Rates of Depreciation

1. Straight Line Method2. Declining Balance Method3. Sum of the Years Digits

1) Straight-line cost- salvage valueestimated life

2) Decliningbalance

cost – depreciation x Rateestimated life

3) Sum of theyears digits(SYD)

nth period x cost- salvageSYD

1. Straight Line Method The depreciation expense deductible

in each of the years of the property’sestimated useful life is constant.

Formula:

Deduction forDepreciation

=

Cost - Salvage Value

Estimated Useful Lifeof the Property

Note:(Cost – Salvage Value) is known asdepreciable cost.


Page 64 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Illustration:H Co. acquired a machine at a cost ofP300,000. It has salvage value P50,000value, and the useful life is estimated at25 years. The depreciation expense iscomputed as follows:

DepreciationExpense

= [(300,000 – 50,000) / 25]= P10,000

2. Declining Balance Method The depreciation allowance per year

varies. Depreciation is largest in thefirst year and decreases towards theend of the useful life of the property.Salvage value is ignored in thedeclining balance method.

Steps:1. Determine the rate of depreciation

under the straight line method. (1/#of years useful life)

2. Multiply that rate with the givenrate relative to the straight balancemethod (Ex.200% of straight line) toget the declining balance rate

3. The declining balance rate ismultiplied to the book value (BV) ofthe property at the start of the year.(BV= cost -accumulateddepreciation)

Illustration:P Company acquired a machine onJanuary 1, 2002 at a cost of P400,000.It had a scrap value of P50,000, and auseful life of 4 years. The company usesthe declining balance method, at a rateof 200% of that of the straight linemethod. Determine the depreciationchargeable in years 2002, 2003, 2004and 2005.

Step 1: Compute for thedepreciation rate under thestraight-line method.

Straight LineDepreciationRate

=1

Estimated Useful Life

= ¼, or 25%

Step 2: Compute for the DecliningBalance Rate (DBR).

DecliningBalance

Rate=

StraightLine

DepreciationRate

x

RateRelative to

the StraightLine

DepreciationRate

= 25% x 200%= .25 x 2= 50%

Step 3: Apply the DBR to the bookvalue of the property at the start ofthe current year to get the amountof deduction.

2002 deduction:400K x .50 = 200K

2003 deduction:(400K – accumulated depreciation) x .50(400K – 200K) x .50 = 100,000

2004 deduction:400K – 300K x .50 = 50,000

2005 deduction:(Since this is the last year ofestimated useful life, the entire bookvalue at the start of the year shall bedeductible.)400K – 350K = 50K

3. Sum of the Years Digit Method Under this method, the annual

depreciation is computed byapplying a changing fraction to thedepreciable cost of the property(original cost reduced by the salvagevalue).

In the fraction, the numerator is thenumber of remaining years of theestimated useful life of the propertyand the denominator is the sum ofthe YEARS representing theproperty’s useful life.

Illustration: On January 1, 2001, JCompany acquired a machine at a costof P105,000. It had a salvage value ofP5,000, and an estimated useful life of 5years. The company uses the sum-of-the-years method in determiningdepreciation. Determine thedepreciation chargeable in years 2001,2002, 2003, 2004 and 2005.

Step 1: Compute for the sum of theyears digit by adding the numbersrepresenting the years of property’suseful life (SYD).

SYD for 5 years = 5+4+3+2+1 or 15Step 2: Compute for the depreciablecost of the property.

The depreciable cost is P100,000(P105,000 – P5,000).


Page 65 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Step 3: Compute for the yearlydeduction for depreciation (ColumnD).

A B C D(= B x C)

Year RemainingUseful Life

UsefulLife/

SYD

DepreciableCost

Deduction

2001 5 5/15 P105,000 P35,0002002 4 4/15 P105,000 P28,0002003 3 3/15 P105,000 P21,0002004 2 2/15 P105,000 P14,0002005 1 1/15 P105,000 P7,000

Special Types of Depreciation:

1) Depreciation of Properties Used inPetroleum Operations

An allowance for depreciation inrespect of all properties DIRECTLYrelated to production of petroleumshall be allowed under the straight-line or declining-balance method ofdepreciation at the option of theservice contractor.

However, if the service contractorinitially elects the declining-balancemethod, it may shift to the straight-line method.

The useful life of properties used inor related to production ofpetroleum shall be ten (10) years orsuch shorter life as may bepermitted by the Commissioner.

Properties NOT USED DIRECTLY inthe production of petroleum shall bedepreciated under the straight-linemethod on the basis of an estimateduseful life of 5 years.

2) Depreciation of Properties Used inMining Operations

An allowance for depreciation inrespect of all properties used inmining operations other thanpetroleum operations, shall becomputed as follows:

a. At the normal rate ofdepreciation if the expected lifeis ten (10) years or less;or

b. Depreciated over any number ofyears between five (5) yearsand the expected life IF morethan ten (10) years,

Provided, That the contractornotifies the Commissioner at the

beginning of the depreciation periodwhich depreciation rate allowed willbe used.

Depreciation Deductible byNonresident Aliens Engaged in Tradeor Business (NRAETB) or ResidentForeign Corporations (RFC)

A reasonable allowance for thedeterioration of property arisingout of its use or employment orits non-use in the business,trade or profession shall bepermitted only when suchproperty is located in thePhilippines.

6. INTEREST [Sec 34(B)]

The amount of interest paid or incurredwithin a taxable year on indebtednessin connection with the taxpayer'sprofession, trade or business shall beallowed as deduction from grossincome.

Requisites for Deductibility:1. There is an INDEBTEDNESS.2. The indebtedness is that of the

TAXPAYER.3. The indebtedness is connected with the

taxpayer’s TRADE, profession, orbusiness.

4. The interest must be legally DUE.5. The interest must be stipulated in

WRITING.6. The taxpayer is LIABLE to pay interest

on the indebtedness.7. The indebtedness must have been paid

or accrued DURING the TAXABLEYEAR.

8. The interest payment arrangementmust not be between RELATEDtaxpayers

9. The interest must not be incurred tofinance PETROLEUM operations.

10. In case of interest incurred to acquireproperty used in trade, business orexercise of profession, the same was nottreated as a CAPITAL expenditure,

Limitation:The taxpayer's allowable deduction forinterest EXPENSE shall be reduced by anamount equal to 42% of the interestINCOME subjected to final tax (SEECHAPTER ON TAXATION OF PASSIVEINCOME); provided, that effective January1, 2009, the percentage shall be 33%.


Page 66 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Purpose:To prevent tax arbitrage or the use ofback- to-back loans to take advantage ofthe difference between the tax rate oninterest INCOME (20% final tax) and therate of savings caused by the deduction ofinterest EXPENSE (35%-corporate rate)

Illustration:On Jan. 1, 2007, A Corp borrowedP100,000 from B Bank at a rate of 10% perannum. On the same day A Corp.deposited the same amount to C Bank at10% interest p.a. By the end of the year ACorp would have P10,000 interest INCOMEfrom C Bank, and P10,000 interestEXPENSE payable to B Bank.

Without the limit, the whole 10,000 ofthe interest EXPENSE should have beendeductible.

Applying the limit (which is now 33%),the 10,000 interest EXPENSE will bethe reduced by an amount equal to 33%of 20,000 which is the INTERESTINCOME.

Actual interest expense 10,000

Less: 33% of interestincome (.33 x 20,000)

6,600

Deductible interestexpense

3,400

Exception:Interest expenses incurred or paid by thetaxpayer on all its business related taxesshall be fully deductible from gross incomeand shall not be subject to the abovelimitation on deduction.

Non-Deductible Interest:1. Interest paid in advance by the

taxpayer who reports income on cashbasis shall only be allowed as deductionin the year the indebtedness is paid.

2. If the indebtedness is payable inperiodic amortizations, only theamount of interest which corresponds tothe amount of the principal amortized orpaid during the year shall be allowed asdeduction in such taxable year.

3. Interest payments made betweenrelated taxpayers.

4. Interest on indebtedness incurred tofinance petroleum exploration.

Optional Treatment of Interest Expense:At the option of the taxpayer, interestincurred to acquire property used in

trade, business or exercise of a professionmay be allowed either as a:(2) DEDUCTION, or(3) CAPITAL EXPENDITURE.

7. DEPLETION of oil and gas wells &mines

Definition:The exhaustion of natural resources due toproduction.

It is the reduction of cost or value ofnatural resources such as oil and gas wellsand mines as the resources are convertedinto inventories.

The deduction is allowed only for miningentities with economic interest in mineraldeposits.

Limitation:A reasonable allowance for depletion computedusing the cost-depletion method shall be grantedprovided that the allowance for depletion shallnot exceed the capital invested.

Illustration:Land containing natural resources waspurchased for P100,900,000. It wasestimated that the land, after exploitation ofits natural resources, will have a value ofP900,000. It was estimated that the naturalresource supply was 5,000,000 tons. Ifwithdrawal of resources from the land in2005 was 500,000 tons, how much was thededuction for the year?

Purchase Price P100,900,000Less: Residual Value of theLand 900,000Depletion Base P100,000,000Divided by: Estimated ResourceSupply, in tons 5,000,000Depletion Base per ton P20Multiplied by: Withdrawal ofResources in 2005, in tons 500,000Depletion Expense, 2005 P 10,000,000

ALLOWABLE for a Nonresident Alienindividual Engaged in Trade orBusiness or a Resident ForeignCorporation Allowance for depletion ofoil and gas wells or mines shall beauthorized only in respect to oil and gaswells or mines located within thePhilippines.


Page 67 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

8. CHARITABLE and othercontributions

Requisites for Deductibility:1. Actually paid or made to the ENTITIES

specified by law;2. Made within the TAXABLE year.3. It must be EVIDENCED by adequate

receipts or records.4. Additional Requisite for

Contributions Other than Money: The amount shall be BASED on the

acquisition cost of the property (i.e.,not the fair market value at the timeof the contribution).

5. Additional Requisite forContributions subject to thestatutory limitation: It must notEXCEED 10% (individual) or 5%(corporation) of the taxpayer’s taxableincome before charitable contributions.

Kinds of Contributions:1. Contributions deductible in full;2. Contributions subject to the statutory

limit.

1) Contributions Deductible in Full:(FoNG)

a. Donations to the Government -Donations to the Government of thePhilippines or to any of its agenciesor political subdivisions, includingfully-owned governmentcorporations, exclusively tofinance, to provide for, or to be usedin undertaking PRIORITYACTIVITIES in:

education, health, youth and sports development, human settlements, science and culture, and in economic development.

b. Donations to Certain ForeignInstitutions or InternationalOrganizations - Donations toforeign institutions or internationalorganizations which are fullydeductible in pursuance of or incompliance with agreements,treaties, or commitments enteredinto by the Government of thePhilippines and the foreigninstitutions or internationalorganizations or in pursuance ofspecial laws;

c. Donations to Accredited Non-government Organizations - The

term "non-government organization"means a non-profit domesticcorporation:

Organized and operatedexclusively for: (CRWSH CysChE Com)- Scientific,- Research,- Educational,- Character-building and youth

and sports development,- Health,- social Welfare,- Cultural or- CHaritable purposes, or- a COMbination thereof,no part of the net income ofwhich inures to the benefit ofany private individual;

Which, not later than the 15thday of the third month afterthe close of the accreditedNGO’s taxable year in whichcontributions are received,makes utilization directly forthe active conduct of theactivities constituting thepurpose or function for which itis organized and operated,

o UNLESS an extended periodis granted by the Secretaryof Finance;

The level of administrativeexpense shall, on an annualbasis, not exceed thirtypercent (30%) of the totalexpenses (Sec. 1, RR 13-1998)

Utilization means:a. Any amount, including admin

expenses, paid or utilized by anaccredited NGO to accomplishone or more of its purposes

b. Any amount paid to acquire anasset used directly in carryingout one or more purposes forwhich the accredited NGO wascreated or organized; or

c. Any amount set aside for aspecific project which comeswithin the NGO’s purpose/s,utilized within at least five (5)years

d. Any amount in cash or in kindinvested in any activity related tothe purpose for which the NGOwas created


Page 68 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

e. Any amount invested in capitalsustaining and generatingactivities.

2) Contributions subject to theStatutory Limit (DNGS)

a. Contributions made to theGovernment or any of its agenciesor political subdivisions exclusivelyfor public purposes (contributionsfor non-priority activities)

b. Contributions made to accrediteddomestic corporation orassociations organized exclusivelyfor

religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans

c. Contributions to social welfareinstitutions

d. Contributions to non-governmentorganizations

No part of the net income of whichinures to the benefit of any privatestockholder or individual

Statutory Limit: Amount deductible must not be in

excess of:

10% in the case of an individual,and

5% in the case of a corporation,of the taxpayer's taxable incomederived from trade, business orprofession before the deduction forcontributions and donations.

The amount deductible is the actualcontribution or the statutory limitcomputed, whichever is lower.

9. RESEARCH and development

Costs are for improvements of processesand formulas as well as thedevelopment of improved or newproducts.

General Rule:R&D only extends from the laboratory ordrawing board to prototype status; i.e., solong as an activity still contains an elementof uncertainty/technical risk, it is withinthe realm of R&D.

Quality control, routine product testing,data collection, efficiency surveys,management studies, market researchand sales promotion are NORMALLYNOT CONSIDERED R&D ACTIVITIES.

Treatment as Deductible R&D expenditures which are paid or

incurred by a taxpayer during thetaxable year in connection with histrade, business or profession may betreated EITHER as:1. Ordinary and necessary expenses

allowed as deduction during thetaxable year when paid or incurredor

2. Deferred asset (or deferred expense)which is periodically subject toamortization

The following R&D expenditures may betreated as deferred assets:1. Those paid or incurred by the

taxpayer in connection with histrade, business or profession.

2. Those not treated as expenses.3. Those chargeable to capital account

but not chargeable to depreciableproperty.

Such deferred expenses shall be allowedas deduction ratably distributed overa period of not less than sixty (60)months as may be elected by thetaxpayer.

The taxpayer may elect this alternativenot later than April 15. The methodshall be adhered to in computingtaxable income for the taxable year forwhich the election is made and for allsubsequent taxable years.

UNLESS a change of method isauthorized with the approval of theCommissioner.

The election shall not apply to anyexpenditure paid or incurred during anytaxable year prior to the taxable yearfor which the taxpayer makes theelection.

Limitations: The above tax treatment of R&D

expenses does NOT apply to:1. Any expenditure for the acquisition

or improvement of land or theimprovement of depreciableproperty, used in connection withresearch and development.


Page 69 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

NOTE: Cost of acquisition orimprovements of property subject todepreciation or depletion used inresearch and development becomes partof the cost of the asset, and deductionfrom it is by way of depreciation ordepletion, as the case may be.

2. Any expenditure incurred inascertaining the existence, location,extent, or quality of any deposit ofore or other mineral, including oil orgas.

10. PENSION trusts

Pertains to PAST SERVICE COST, orthe amount so transferred isapportioned and deductible in equalparts over a period of ten (10)consecutive years beginning with theyear in which the transfer or payment ismade.

Present service cost is deductible infull in the year transferred or paid intothe trust; and is considered as anordinary and necessary expenseunder Sec. 34(A)(1).

General Rule:An employer establishing or maintaininga pension trust to provide for the paymentof reasonable pensions to his employeesshall be allowed as a deduction, areasonable amount transferred or paidinto such trust in EXCESS of thecontributions to such trust made duringthe taxable year.

Requisites for Deductibility:1. It has not been claimed as a deduction,

and2. Is apportioned in equal parts over a

period of ten (10) consecutive yearsbeginning with the year in which thetransfer or payment is made.

Premium Paid on Health orHospitalization Insurance[Sec.34 (M)]

Amount of premium paid on healthand/or hospitalization by an individualtaxpayer (head of family or married), forhimself and members of his familyduring the taxable year.

Requisites for Deductibility:1. Insurance must have actually been

taken

2. The amount of premium deductibledoes not exceed P2,400 per family orP200 per month during the taxable ear.

3. That said family has a gross income ofnot more than P250,000 for the taxableyear.

4. In case of married individual, only thespouse claiming additional exemptionshall be entitled to this deduction.

The following may avail of thededuction:1. Individual taxpayers earning purely

compensation income during the year.2. Individual taxpayer earning business

income or in practice of his profession.

B. Optional Standard Deduction[Section 34(L)]

May be taken by an INDIVIDUAL in lieuof itemized deductions EXCEPT thoseearning purely compensation income.

Amount: 40% of GROSS INCOME.(under RA 9504, effective July 6, 2008)

Requisites1. Taxpayer is a citizen or resident alien;2. Taxpayer’s income is not entirely from

compensation;3. Taxpayer signifies in his return his

intention to elect this deduction;otherwise he is considered as havingavailed of the itemized deductions.

4. Election is irrevocable for the year inwhich made; however, he can change toitemized deductions in succeedingyears.

III.PERSONAL AND ADDITIONALEXEMPTIONS

PERSONAL EXEMPTIONS are amountsallowed by law to be deducted from incometo cover personal, living, or family expensesof the taxpayer. These deductions areallowed on the theory that the minimumrequirements of subsistence of a taxpayershould be free from tax.

1. Basic Personal Exemptions (BPE)

The following may claim personalexemptions:1. Citizens and resident aliens;2. Non-resident aliens if there is

reciprocity.


Page 70 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

The following may claim additionalexemptions:1. Married Individuals

Additional exemptions are claimedby only one spouse.

General Rule: the spouse who is thegross compensation earner claimsthe additional exemptions.

Where the husband and wife areboth compensation incomeearners, the husband is theproper claimant of the additionalexemptionso EXCEPT: Express waiver by

the husband in favor of hiswife, as embodied in thewithholding exemptioncertificate.

NOTES: When the spouses have businessand/or professional income only, either mayclaim the additional exemptions at the endof the year.

The wife claims the additional exemptions ifhusband has no income OR works abroad.

2. Legally separated spouses

Additional exemptions can beclaimed by the spouse with custodyof the child or children.

2. Change of Status [Sec 35. (C), NIRC]

Rules to Remember:1. If taxpayer marries during a taxable

year, he may claim the correspondingBPE in full for such year

2. If taxpayer should have additionaldependent(s) during taxable year,taxpayer may claim AdditionalExemptions in full for such year.

3. If taxpayer dies during taxable year, hisestate may still claim BPE and AE forhimself and his dependent(s) as if hedied at the close of such year.

4. If during the taxable year the taxpayer’sspouse dies or any of the dependentsdies, gets married, turns 21 years oldor becomes gainfully employed,taxpayer may still claim same

exemptions as if such eventoccurred at the close of such year.

AMENDMENTS BY RA 9504, effectiveJuly 6, 2008:

1. PERSONAL EXEMPTION: P50,000In the case of married individual

where only one of the spouses isderiving gross income, only suchspouse shall be allowed the personalexemption.

2. ADDITIONAL EXEMPTION: P25,000For each dependent not exceedingfour (4)

IV.NON-DEDUCTIBLE EXPENSES[Sec. 36] (There are 7)

General Rule: In computing net income, nodeduction shall be allowed in respect to:

1. Personal, living or family expenses

Rationale: not related to conduct oftrade or business

2. Any amount paid out for newbuildings or for permanentimprovements, or bettermentsmade to increase the value of anyproperty or estate

Exception: Intangible drilling anddevelopment costs incurred inpetroleum operations which aredeductible under Sec. 34(G)(1)

3. Any amount expended in restoringproperty or in making good theexhaustion thereof for which anallowance [for depreciation ordepletion] is or has been made (i.e.,Major Repairs)

Note:Nos. (2) and (3) are capital expenditures.Examples are:a. The cost of defending or perfecting title

to property constitutes a part of the costof the property and is not a deductibleexpense.

b. The amount expended for architect’sservices is part of the cost of thebuilding

c. Expenditures to promote the sales ofadditional capital stock or the cost,commissions and fees for obtainingstock subscriptions are capitalexpenses. (Atlas Consolidated MiningCo. v. Commissioner, 102 SCRA 246)

4. Premiums paid on any life insurancepolicy covering the life of any officer,employee, or person financiallyinterested in the trade or businesscarried on by the taxpayer, when the


Page 71 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

taxpayer is directly or indirectlya beneficiary under such policy.

A person is said to be “financiallyinterested” in the taxpayer’sbusiness, if he is a stockholderthereof or he is to receive as hiscompensation a share of the profitsof the business.

Illustration:CASE 1 CASE 2

Insured

Officer,employee, or

personfinancially

interested inthe

taxpayer’strade orbusiness


personfinancially

interested inthe taxpayer’s

trade orbusiness

Beneficiaryof Life

InsurancePolicy

Company


personfinancially

interested inthe taxpayer’s

trade orbusiness

Premium adeductibleexpense?

NO (coveredby Sec. 36)

YES (Premiumis likewise afringe benefiton the part of

thebeneficiary.)

5. Losses from sales or exchanges ofproperty between related taxpayers.(Sec.36 B)

a. Between members of the family;

“Family” includes only the brothers,sisters (whether by the whole or halfblood), spouse, ancestors, and linealdescendants of the taxpayer.

b. Between the grantor and a fiduciaryof any trust;

c. Between the fiduciary of a trust andthe fiduciary of another trust if thesame person is a grantor withrespect to each trust;

d. Between a fiduciary of a trust andbeneficiary of such trust.

Except if the loss occurs duringdistributions in liquidation:

i. between an individual and acorporation

more than 50% in value of theoutstanding stock of which

is owned, directly or indirectly, by orfor such individual;

ii. between two corporations more than 50% in value of the

outstanding stock of each of which is owned, directly or indirectly, by or

for the same individual, if either one of such corporations,

(with respect to the taxable year ofthe corporation preceding the dateof the sale of exchange)

was a personal holding company ora foreign personal holding company.

6. Losses on Wash Sales (Sec.38)

A loss from a wash sale of stock orsecurities is generally not deductiblefrom gross income. A wash sale is asale under the followingcircumstances:1. There was a sale or other

disposition of stock or securitiesat a loss.

2. Within a period beginning thirtydays before, and ending thirtydays after, the date of sale ordisposition (known as the sixty-one day period), there was anacquisition of shares orsecurities (or option to acquireshares or securities).

i.e.:

------------------ x ---------------

3. The acquisition, or option,should be a purchase orexchange upon which gain orloss is recognized under theincome tax law.

4. The stock or securities acquiredwere substantially the same asthose disposed of.

5. The taxpayer is NOT a dealer insecurities.

Income Tax Rule:On the shares sold at a loss withcovering acquisitions, NO LOSS shallbe recognized.On the shares sold at a loss with nocovering acquisitions, CAPITAL LOSSshall be recognized (See Part V.Capital Gains and Losses, for theincome tax treatment).

30 days PRIOR OR 30 days AFTERto the sale the sale

Date of sale

AcquisitionoccurredEITHER:


Page 72 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

The loss not recognized shall beadjusted into (i.e., added to) thebasis of the shares acquired withinthe sixty-one day period.

Illustration:S Co., not a dealer in securities, onDecember 27, 2000, sold for P90,000,1,000 shares of common stock of ZZCompany, that it acquired on January20, 2000 for P110,000. On January 5,2001, or nine days after the sale, itacquired 900 shares of common stock ofthe same company for P90,000. OnJune 10, 2001, the latest acquisitionwas sold for P120,000.

Income Tax Implications: There would have been a loss not

recognized of P18,000 on the sale ofDecember 27, 2000.

There would have been a gain ofP12,000 on the sale of June 10,2001.

Supporting Solution:a. Determine if the sale is a wash sale:

YES, because nine days after theDecember 27, 2000 sale (orwithin the sixty-one day period),S. Co. (which is not a dealer insecurities) acquired shares ofstock which were the same asthose disposed of.

b. Computation of loss not recognized

Acquisition Cost P110,000Less: Selling Price 90,000Total Loss P 20,000

No. of shares sold at a loss 1,000Less: Number of sharesacquired within the 61-dayperiod 900No. of shares acquired withno matching acquisition 100

Loss on a wash sale, notrecognized(900/1,000 * 20,000) P18,000Capital Loss recognized(100/1,000 * 20,000) P2,000

c. Computation of basis of the sharesacquired on January 5, 2001 (i.e.,adjusted cost).

Acquisition Cost P 90,000Add: Loss not recognized 18,000Basis of the shares acquiredon January 5, 2001 P108,000

d. Computation of the gain on the saleof June 10, 2001

Selling Price P120,000Less: Adjusted Basis 108,000Gain on the Sale 12,000

What if the taxpayer is a dealer insecurities, and the transaction fromwhich the loss resulted, was made inthe ordinary course of the businessof such dealer? The loss is deductible in full.

7. Illegal Expense (Sec.34.A.1.c)

Bribes, Kickbacks and OtherSimilar Payments made, directly orindirectly, to an official or employeeof the national government/ LGU/GOCC/ foreign government, or to aprivate corporation, generalprofessional partnership, or asimilar entity.

REVIEWER IN TAXATION LAW Part V. Capital Gains and Losses

Page 73 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Part V. Capital Gains and Losses[Sec. 39]

I. DEFINITIONSII. CAPITAL LOSS LIMITATION RULEIII. SALE OF REAL PROPERTYIV. SALE OF SHARES OF STOCKV. RECOGNITION OF GAIN/LOSS IN

EXCHANGE OF PROPERTYVI. COMPUTING CGT IN GENERAL

I. DEFINITIONS

Capital Assets – property held by thetaxpayer (WON connected with his tradeor business), but DOES NOT include1) stock in trade of the taxpayer or other

property of a kind which would properlybe included in the inventory of thetaxpayer if on hand at the close of thetaxable year

2) property held by the taxpayer primarilyfor sale to customers in the ordinarycourse of his trade or business

3) property used in the trade or business,of a character which is subject to theallowance for depreciation

4) real property used in trade or businessof the taxpayer.

Capital Gain – the gain derived from thesale or exchange of capital assets.

Ordinary Gain – gain derived from the saleor exchange of an asset which is notcapital.

Net Capital Gain – gains > loss from salesor exchanges of capital assets.

Net Capital Loss – gains < loss from salesor exchanges of capital assets.

Calasanz v. Commissioner (1986): Thestatutory definition of capital assets isnegative in nature.

If the asset is not among the exceptions,it is a capital asset; conversely, assetsfalling within the exceptions are ordinaryassets.

And necessarily, any gain resulting fromthe sale or exchange of an asset is a capitalgain or an ordinary gain depending on thekind of asset involved in the transaction.

Sale – a delivery of goods for money

Exchange – a delivery of goods for goodsreceived.

HOWEVER, there are transactionswhich the law considers sales or

exchanges though they do not meet thedefinitions given.These are:1. Retirement of bonds, Debentures,

Notes or Certificates or Otherevidences of indebtedness

2. Short sales of properties

A transaction in which aspeculator sells securities whichhe does not own in anticipationof a decline in its price. Theseller intends to cover the saleby purchasing the securitieswhen the price declines, inwhich case he will make a profit.

3. Failure to exercise a privilege oroption to buy or sell property

4. Securities becoming worthless5. Receipt of a liquidating dividend6. Readjustment of interest in a

general professional partnership.

II. CAPITAL LOSS LIMITATION RULE

General Rule:Losses from sales or exchanges of capitalassets shall be allowed only to the extent ofthe gains from such sales or exchanges. Special Rule for Banks and Trust

Companies: If a bank or trust companyincorporated under the laws of thePhilippines, a substantial part of whosebusiness is the receipt of deposits or thesale of bond, debenture, note, certificateor other evidence of indebtedness, anyloss resulting from such sale shall notbe subject to the foregoing limitationand shall not be included indetermining the applicability of suchlimitation to other losses. Rationale: The securities mentioned

are ordinary assets of the bank ortrust company.

III.SALE OF REAL PROPERTY

1. Persons Liable and TransactionsAffected

a. Individual taxpayers, estates andtrusts

Sale or exchange or otherdisposition of real propertyconsidered as capital assets.

The said sale shall include "pactode retro sale" and otherconditional sale.


Page 74 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

b. Domestic Corporation

Sale or exchange or dispositionof lands and/or building whichare not actually used inbusiness and are treated ascapital asset.

2. Rate and Basis of Tax

A final withholding tax of 6% isbased on the gross selling price orfair market value or zonal valuewhichever is higher.

Note: Gain or loss is immaterial,there being a conclusivepresumption of gain.

IV.SALE OF SHARES OF STOCK

RR 6-2008

1. Persons Liable to the Taxa) Individual taxpayer, whether citizen

or alien;b) Corporate taxpayer, whether

domestic or foreign; andc) Other taxpayers not falling under (a)

and (b) above, such as estate, trust,trust funds and pension funds,among others.

2. Persons not liablea) Dealers in securitiesb) Investor in shares of stock in a

mutual fund companyc) All other persons who are

specifically exempt from nationalinternal revenue taxes underexisting investment incentives andother special laws.

3. Sale, Barter or Exchange, orIssuance of Shares of Stock NOTTRADED Through a Local StockExchangea) Tax Rate.

Amount of Capital Gain Tax RateNot over P100,000 5%Amount in excess ofP100,000 10%

b) Tax Base. — the net capital gainsrealized during the taxable yearfrom the sale, barter, exchange ordisposition of shares of stock, exceptshares sold or disposed of throughthe Local Stock Exchange

c) Determination of Amount andRecognition of Gain or Loss.

Determination of Selling Price Cash sale: total consideration per deed

of sale. Partly in money and partly in kind: sum

of money and the FMV of the propertyreceived.

Exchange: FMV of the property received. If FMV of the shares of stock sold,

bartered, or exchanged is greater thanthe amount of money and/or FMV ofthe property received: the excess of FMV of stocks over the

amount of money and the FMV ofthe property received asconsideration shall be deemed a giftsubject to the donor’s tax.

Basis for Determining Gain or Lossfrom Sale or Disposition of Shares ofStock – deducting from the amount ofconsideration contracted to be paid, thevendor/transferor’s basis for the propertysold or disposed plus expenses ofsale/disposition, if any.

Limitation of Capital Losses For transactions subject to the 5%/10%

CGT on the net capital gain during thetaxable year, the capital lossesrealized from this type of transactionduring the taxable year are deductibleonly to the extent of capital gainsfrom the same type of transactionduring the same period.

If the transferor of the shares is anindividual, the rule on holding periodand capital loss carry-over will notapply, notwithstanding Sec.39 of the TaxCode

Shares of Stock Becoming Worthless Treated as capital loss as of the end of

the year. Not deductible against the capital gains

realized during the taxable year, butmust be claimed against other capitalgains to the extent provided for underSec.34

Sec. 34 (4)(b): If securities as defined inSection 22 (T) become worthless duringthe taxable year and are capital assets,the loss resulting shall be considered asa loss from the sale or exchange ofcapital assets on the last day of suchtaxable year.

For the 5% and 10% net capital gainstax to apply, there must be an actual


Page 75 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

disposition of shares of stock held ascapital asset, and the capital gain andcapital loss used as the basis indetermining net capital gain, must bederived and incurred respectively, froma sale, barter, exchange or otherdisposition of shares of stock.

“Deemed Gift” In case the fair market value of the

shares of stock sold, bartered, orexchanged is greater than the amountof money and/or fair market value ofthe property received,

The excess of the fair market value ofthe shares of stock sold, bartered orexchanged over the amount of moneyand the fair market value of theproperty, if any, received asconsideration

Shall be deemed a gift subject to thedonor’s tax under Sec. 100 of the TaxCode, as amended. (RR 6-08)

V. RECOGNITION OF GAIN/LOSS INEXCHANGE OF PROPERTY

General Rule:Upon the sale or exchange of property, theentire gain or loss, as the case may be,shall be recognized.

Exceptions:

1) Transactions where gains and losses areNOT RECOGNIZED:a. Exchange of property, solely in kind

in corporate mergers andconsolidations Between the corporations which

are parties to the merger orconsolidation (property forstocks);

Between a stockholder of acorporation party and the otherparty corporation (stock forstock);

Between a security holder of acorporation party and the otherparty corporation (securities forsecurities).

b. Exchange by a person of hisproperty for stock in a corporationwherein he with others (notexceeding 4 persons) gains controlof the corporation.

2) Transactions where only gain isrecognized but not the lossa. Exchange not solely in kind (Sec.

40C3)

b. Other transactions:

Wash sales (Sec. 38) Transactions between related

taxpayers (Sec. 36B)

Gambling losses (Sec. 34 D6) Wagering Losses. - Losses from

wagering transactions shall beallowed only to the extent of thegains from such transactions.

Illegal transactions Gains/losses attributable to

taxpayer’s failure to exerciseprivileges or options to buy/sell

Control means ownership of stocks in acorporation amounting to at least 51% ofthe total voting power of all classes ofstocks entitled to vote.

Percentage taken into account (Long-term / Short term) by taxpayers: Taxpayers Other than a Corporation

(i.e., individual taxpayers and taxpayerstreated as individuals, such as estatesand trusts) - holding period:- 100% if the capital asset was held for

not more than 12 months- 50% if the capital asset has been

held for more than 12 months

Note:o General Rule- For purposes of

computing capital loss and capitalgain, the actual holding period istaken into account.

o Exception- If securities becomeworthless during the taxable yearand are capital assets, the lossresulting therefrom shall beconsidered as a loss from the sale orexchange, on the last day of suchtaxable year, of capital assets. [Sec.34(D)(4)(b)

Note:Corporate Taxpayers – 100% of the capitalgain or loss, regardless of the holding period

VI.COMPUTING FOR CGT INGENERAL

Net taxable capital gains =Gains of sales of capital assets, or50% thereof – Losses from sales ofcapital assets, or 50% thereof

Net Capital Loss Carry-over: If anindividual taxpayer sustains a net capitalloss in a taxable year, such loss (in an


Page 76 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

amount not in excess of the net income forsuch year) shall be treated in thesucceeding taxable year as a loss from thesale or exchange of a capital asset held fornot more than 12 months (100%deduction).

Rule On Applies ToHolding Period Individuals onlyNet Capital LossCarry-over

Individuals only

Capital LossLimitation

Individuals andCorporation

Illustration 1:Mr. O, a citizen of the Philippines, single, had the following data for 2001 and 2002:

2001 2002Net Income, Business 80,000 90,000Interest Income from notes of clients 4,000 2,000

Capital Gain on assets:50,000

70,000Shares of foreign corporations, held for 3 yearsJewelry, held for 10 months

Capital Loss on bonds, held for 4 months 120,000 -

Mr. O’s taxable income for 2001 was P64,000, and for 2002 was P78,000, computed as follows:

2001 2002

Net Income, Business P 80,000 P 90,000Interest Income 4,000 2,000Ordinary Net Income P84,000 P92,000Capital Gain (50%) P25,000Capital Gain (100%) P70,000Capital Loss (100%) (120,000)

Net Capital Loss (P95,000)

Net Capital Loss Carry-Over from 2001 (64,000)

Net Capital Gain [70,000 – 64,000] 6,000Total P98,000Less: Basic Personal Exemption (20,000) (20,000)

Taxable Income P64,000 P78,000

Legend:

Illustration 2:

P Co., a domestic corporation, had the following results of operations for a taxable year:

Ordinary Net Income P52,000Gain on sale of capital asset, held for ten months 2,000Gain on sale of capital asset, held for eighteen months 2,000Loss on sale of capital asset, held for six months 1,100Loss on sale of capital asset, held for twenty months 2,000

and in the preceding year it had a net capital loss of P1,500 and a taxable income of P60,000.The taxable income of the corporation for the year is computed as follows***:

Ordinary net income P52,000Gain on sale of capital asset, held for ten months (100%) P2,000Gain on sale of capital asset, held for eighteen months (100%) 2,000

Total Capital Gains P4,000Loss on sale of capital asset, held for six months (100%) P1,100Loss on sale of capital asset, held for twenty months (100%) 2,000

Total Capital Loss 3,100

Net Capital Gain 900

Taxable Income P52,900

*** For corporations, capital gains and losses are always considered at 100%, and there isno net capital loss carry-over.

>

>

To determine the maximum that may be carried over to the next year: Taxable Income>Net Capital Loss Carry-Over from the previous year>


Page 77 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

SUMMARY OF RULESFor Corporations:1. Corporations shall recognize 100% of

the capital gain or loss, regardless of theholding period.

2. Corporations cannot carry-over netcapital loss.

3. Losses from sales or exchanges ofcapital assets shall be allowed only tothe extent of the gains from such salesor exchanges.

For Individuals, and Taxpayers Treatedas Individuals:b. The holding period is relevant in

determining the percentage of capitalgains and losses to be taken intoaccount, as follows:- 100% if the capital asset was held

for not more than 12 months- 50% if the capital asset was held for

more than 12 months2. Net capital loss (in an amount not in

excess of the net income for such year)shall be treated in the succeedingtaxable year as a loss from the sale orexchange of a capital asset held for notmore than 12 months (100% deduction)

3. Losses from sales or exchanges ofcapital assets shall be allowed only to theextent of the gains from such sales orexchanges.

REVIEWER IN TAXATION LAW Part VI. Returns and Payments of Tax/Withholding Taxes

Page 78 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Part VI. Returns and Payments ofTax/Withholding Taxes

A. RETURNS AND PAYMENT OF TAX1. INDIVIDUAL RETURN2. CORPORATION REGULAR RETURNS

B. WITHHOLDING TAX

A. RETURNS AND PAYMENT OF TAX

1) Individual Return (Sec. 51, NIRC)

Who are Required to File(a) Every Filipino citizen residing in the

Philippines;(b) Every Filipino citizen residing outside

the Philippines, on his income fromsources within the Philippines;

(c) Every alien residing in the Philippines,on income derived from sources withinthe Philippines; and

(d) Every nonresident alien engaged intrade or business or in the exercise ofprofession in the Philippines.

Those Not Required to FileThe following individuals shall not berequired to file an income tax return:a. An individual whose gross income does

not exceed his total personal andadditional exemptions for dependentsunder Sec. 35

Exception: That a citizen of thePhilippines and any alien individualengaged in business or practice ofprofession within the Philippinesshall file an income tax return,regardless of the amount of grossincome;

b. An individual with respect to purecompensation income, as defined inSection 32 (A)(1), derived from sourceswithin the Philippines, the income taxon which has been correctly withheld Exception: an individual deriving

compensation concurrently from twoor more employers at any timeduring the taxable year (as amendedby RA 9504)

c. An individual whose sole income hasbeen subjected to final withholding taxpursuant to Section 57(A) of this Code

d. A minimum wage earner or anindividual who is exempt from incometax pursuant to the provisions of thisCode and other laws, general or special(as amended by RA 9504, effectiveJuly 6, 2009)

e. Any individual not required to file anincome tax return may nevertheless be

required to file an information returnpursuant to rules and regulationsprescribed by the Secretary of Finance,upon recommendation of theCommissioner.

Special Rules (Sec. 51, NIRC)

1. Husband and Wife Marriedindividuals, whether citizens, residentor nonresident aliens, who do not deriveincome purely from compensation, shallfile a return for the taxable year toinclude the income of both spouses,

but where it is impracticable for thespouses to file one return, eachspouse may file a separate return ofincome but the returns so filed shallbe consolidated by the Bureau forpurposes of verification for thetaxable year.

2. Return of Parent to Include Income

of Children The income ofunmarried minors derived from propertyreceived from a living parent shall beincluded in the return of the parent,except

when the donor's tax has been paidon such property, or

when the transfer of such propertyis exempt from donor's tax.

3. Persons Under Disability If thetaxpayer is unable to make his ownreturn, the return may be made by his

duly authorized agent orrepresentative or

by the guardian or other person charged with the care

of his person or property,

the principal and his representativeor guardian assuming theresponsibility of making the returnand incurring penalties provided forerroneous, false or fraudulentreturns.

Signature Presumed The fact that anindividual's name is signed to a filed returnshall be prima facie evidence for all purposesthat the return was actually signed by him.

Where to file (Sec. 51, NIRC) Except in cases where the

Commissioner otherwise permits, thereturn shall be filed:1) If person has legal residence or

place of business in the Philippineswith:

an authorized agent bank


Page 79 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Revenue District Officer Collection Agent or Duly authorized Treasurer of

the city or municipality inwhich such person has his legalresidence or principal place ofbusiness in the Philippines

2) If there be no legal residence orplace of business in the Philippines:with the Office of the Commissioner.

When to file (Sec. 51, NIRC) The return of any individual specified

above shall be filed on or before thefifteenth (15th) day of April of each yearcovering income for the precedingtaxable year.

When to pay (Sec. 56, NIRC) General Rule: The total amount of tax

imposed by this Title shall be paid bythe person subject thereto at the timethe return is filed.

Installment Payment: When the tax dueis in excess of Two thousand pesos(P2,000), the taxpayer other than acorporation may elect to pay the tax intwo (2) equal installments in whichcase:1. first installment: paid at the time the

return is filed;2. second installment: on or before July

15 following the close of thecalendar year

3. if any installment is not paid on orbefore the date fixed for its payment,the whole amount of the tax unpaidbecomes due and payable, togetherwith the delinquency penalties.

Quarterly Declaration of Income Tax(Sec. 74, NIRC) Every individual subject to income tax

who is receiving self-employmentincome, whether it constitutes the solesource of his income or in combinationwith salaries, wages and other fixed ordeterminable income, shall make andfile a declaration of his estimatedincome for the current taxable year onor before April 15 of the same taxableyear.

In general, “self-employment income”consists of the earnings derived by theindividual from the practice of professionor conduct of trade or business carriedon by him as a sole proprietor or by apartnership of which he is a member.

1. Nonresident Filipino citizens, withrespect to income from without thePhilippines, and nonresident aliensnot engaged in trade or business inthe Philippines, are not required torender a declaration of estimatedincome tax.

2. The declaration shall contain suchpertinent information as theSecretary of Finance, uponrecommendation of theCommissioner, may prescribe, byrules and regulations. An individualmay make amendments of adeclaration filed during the taxableyear under the rules and regulationsprescribed by the Secretary ofFinance, upon recommendation ofthe Commissioner.

Estimated tax means the amountwhich the individual declared as incometax in his final adjusted and annualincome tax return for the precedingtaxable year minus the sum of thecredits allowed under this Title againstthe said tax. If, during the currenttaxable year, the taxpayer reasonablyexpects to pay a bigger income tax, heshall file an amended declaration duringany interval of installment paymentdates.

Return and Payment of EstimatedIncome Tax by Individuals: Theamount of estimated income withrespect to which a declaration isrequired shall be paid in four (4)installments:

1st installment - at the time of thedeclaration

2nd installment - on August 15 ofthe current year

3rd installment – on November 15 ofthe current year

4th installment - on or before April15 of the following calendar yearwhen the final adjusted income taxreturn is due to be filed

Substituted filing for ITR of SalariedIndividuals (RR 19-2002, as amended byRR 10-2008 [Issued July 10, 2008]) Certificate of Compensation

Payment/Tax Withheld (BIR Form No.2316). — In general, every employerrequired to deduct and withhold the taxon compensation including fringebenefits given to rank and fileemployees, shall furnish every employee


Page 80 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

the Certificate of CompensationPayment/Tax Withheld (BIR Form No.2316), on or before January 31 of thesucceeding calendar year, or if theemployment is terminated before theclose of such calendar year, on the dayon which the last payment ofcompensation is made.

The Certificate of CompensationPayment/Tax Withheld (BIR Form No.2316) shall contain a certification to theeffect that the employer’s filing of BIRForm No. 1604-CF shall be consideredas a substituted filing of theemployee’s income tax return to theextent that the amount of compensationand tax withheld appearing in BIR FormNo. 1604-CF as filed with BIR isconsistent with the correspondingamounts indicated in BIR Form No.2316.

It shall be signed by both theemployee and employer attesting tothe fact that the information statedtherein has been verified and is trueand correct to the best of theirknowledge. Withholdingagents/employers are required to retaincopies of the duly signed BIR Form No.2316 for a period of three (3) years.

The employee who is qualified forsubstituted filing of income tax returnshall no longer be required to fileincome tax return (BIR Form No.1700) since BIR Form No. 1604-CFshall be considered a substituted returnfiled by the employer.

BIR Form No. 2316, duly certified byboth employee and employer, shallserve the same purpose as if a BIRForm No. 1700 had been filed, such asproof of financial capacity for purposesof loan, credit card, or otherapplications, or for the purpose ofavailing tax credit in the employee’shome country and for other purposeswith various government agencies.

This may also be used for purposesof securing travel tax exemption, whennecessary.

However, information referring to thecertification, appearing at the bottom ofBIR Form No. 2316, shall not be signedby both the employer and the employeeif the latter is not qualified forsubstituted filing.

In which case, BIR Form No. 2316furnished by the employer to the

employee shall be attached to theemployee’s Income Tax Return (BIRForm No. 1700 or 1701 in case of mixedincome earners) to be filed on or beforeApril 15 of the following year.

In case of successive employmentsduring the taxable year, an extra copyof BIR Form No. 2316 shall befurnished by the employee, dulycertified by his previous employer/s andby him, to his new employer.

Modes of Payment of Taxes ThroughBanksa) "Over–the–counter cash payment" -

payment of taxes to an authorized agentbank in the currencies that are legaltender in the Philippines. The maximumamount allowed per tax payment shallnot exceed ten thousand pesos(P10,000.00)

b) "Bank debit system" - taxpayer,through a bank debit memo/advice,authorizes withdrawals from his bankaccounts for payment of tax liabilities.

c) "Checks"d) Electronic payment system

2) Corporation Regular Returns

Sec. 52, NIRC Every corporation subject to the tax, except

foreign corporations not engaged in trade orbusiness in the Philippines, shall render, induplicate, a true and accuratei. quarterly income tax return andii. final or adjustment return.

The return shall be filed by: president vice-president or other principal officerand shall be sworn to by such officer and bythe treasurer or assistant treasurer.

Corporation may employ either calendaryear or fiscal year as basis for filing ofannual ITR, provided that the corporationshall not change the accounting periodemployed without prior approval from theCommissioner.

When to File (Sec. 77, NIRC) Quarterly declaration – shall be filed

within sixty (60) days following the closeof each of the first three (3) quarters ofthe taxable year.

The final adjustment return – shall befiled on or before the fifteenth (15th) dayof April, or on or before the fifteenth(15th) day of the fourth (4th) month


Page 81 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

following the close of the fiscal year, asthe case may be.

Extension of Time to File Returns(Sec. 53, NIRC) – The Commissionermay, in meritorious cases, grant areasonable extension of time for filingreturns of income (or final andadjustment returns in case ofcorporations)

Where to File (Sec. 77, NIRC) Except as the Commissioner otherwise

permits, the quarterly income taxdeclaration required in Section 75 andthe final adjustment return required inSection 76 shall be filed with:

authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of city or

municipality having jurisdiction overthe location of the principal office ofthe corporation filing the return orplace where its main books ofaccounts and other data from whichthe return is prepared are kept.

When to Pay (Sec. 77, NIRC) The income tax due on the corporate

quarterly returns and the finaladjustment income tax shall be paid atthe time the declaration or return isfiled in a manner prescribed by theCommissioner.

B. WITHHOLDING TAX

Final Withholding Tax at Source Sec. 57. NIRC Subject to rules and

regulations the Secretary of Financemay promulgate, upon therecommendation of the Commissioner,requiring the filing of income tax returnby certain income payees, the taximposed or prescribed by specificsection of the NIRC on specified items ofincome shall be withheld by payor-corporation and/or person and paid inthe same manner and subject to thesame conditions as provided in Section58 of the NIRC.

Withholding of Creditable Tax at Source The Secretary of Finance may, upon the

recommendation of the Commissioner,require the withholding of a tax onthe items of incomepayable to natural or juridical persons,

residing in the Philippines,by payor-corporation/persons asprovided for by law,at the rate of not less than one percent(1%) but not more than thirty-twopercent (32%),which shall be credited against theincome tax liability of the taxpayer forthe taxable year.

Tax-free Covenant Bonds In any case where bonds, mortgages,

deeds of trust or other similarobligations of domestic or residentforeign corporations, contain a contractor provisions by which the obligor agreesto pay any portion of the tax imposed inthis Title upon the obligee or toreimburse the obligee for any portionof the tax or to pay the interestwithout deduction for any tax whichthe obligor may be required orpermitted to pay thereon or to retaintherefrom under any law of thePhilippines, or any state or country,

the obligor shall deduct bonds,mortgages, deeds of trust or otherobligations, whether the interest orother payments are payable annuallyor at shorter or longer periods, andwhether the bonds, securities orobligations had been or will be issued ormarketed, and the interest or otherpayment thereon paid, within orwithout the Philippines.

Withholding of Creditable Tax (RR 2-98) Under the creditable withholding tax

system, taxes withheld on certainincome payments are intended toequal or at least approximate the taxdue of the payee on said income.

The income recipient is still required tofile an income tax return, to report theincome and/or pay the differencebetween the tax withheld and the taxdue on the income.

Taxes withheld on income paymentscovered by the expanded withholdingtax and compensation income arecreditable in nature.

Time of Withholding The obligation of the payor to deduct

and withhold the tax arises at the timean income payment is paid or payable,or the income payment is accrued orrecorded as an expense or asset,


Page 82 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

whichever is applicable, in the payor'sbooks, whichever comes first.

The withholding agent who is“required to deduct and withhold anytax” is made “personally liable for suchtax” and indeed is indemnified againstany claims and demands which thestockholder might wish to make inquestioning the amount of paymentseffected by the withholding agent inaccordance with the provisions of theNIRC (CIR v. PROCTER and GAMBLE,GR No. 66838, December 2, 1991)

Return and Payment of Tax (Sec. 58)

Quarterly Returns and Payments ofTaxes Withheld. - Taxes deducted andwithheld under Section 57 by withholdingagents shall be covered by a return andpaid to, except in cases where theCommissioner otherwise permits, anauthorized Treasurer of the city ormunicipality where the withholding agenthas his legal residence or principal place ofbusiness, or, where the withholding agentis a corporation, where the principal officeis located.

The taxes deducted and withheld by thewithholding agent shall be held as aspecial fund in trust for the governmentuntil paid to the collecting officers.

The return for final withholding taxshall be filed and the payment madewithin twenty-five (25) days from theclose of each calendar quarter

The return for creditable withholdingtaxes shall be filed and the paymentmade not later than the last day ofthe month following the close of thequarter during which withholding wasmade

Provided, That the Commissioner, withthe approval of the Secretary ofFinance, may require these withholdingagents to pay or deposit the taxesdeducted or withheld at more frequentintervals when necessary to protect theinterest of the government.

Withholding on Wages

Wages – The term 'wages' means allremuneration (other than fees paid to apublic official) for services performed by anemployee for his employer, including thecash value of all remuneration paid in anymedium other than cash, except that suchterm shall not include remuneration paid:

(1) For agricultural labor paid entirely inproducts of the farm where the labor isperformed, or

(2) For domestic service in a private home,or

(3) For casual labor not in the course ofthe employer's trade or business, or

(4) For services by a citizen or resident ofthe Philippines for a foreigngovernment or an internationalorganization.

Sec. 79. Income Tax Collected at Source

Requirement of Withholding - Except inthe case of a minimum wage earner, everyemployer making payment of wages shalldeduct and withhold upon such wages atax determined in accordance with the rulesand regulations to be prescribed by theSecretary of Finance, uponrecommendation of the Commissioner. (asamended by RA 9504, effective July 6,2008)

Sec. 79. Liability for Tax

Employer – The employer shall be liablefor the withholding and remittance ofthe correct amount of tax required to bededucted and withheld under thisChapter. If the employer fails towithhold and remit the correct amountof tax as required to be withheld underthe provision of this Chapter, such taxshall be collected from the employertogether with the penalties or additionsto the tax otherwise applicable inrespect to such failure to withhold andremit.

Employee – Where an employee fails orrefuses to file the withholdingexemption certificate or willfullysupplies false or inaccurate informationthereunder, the tax otherwise requiredto be withheld by the employer shall becollected from him including penaltiesor additions to the tax from the duedate of remittance until the date ofpayment. On the other hand, excesstaxes withheld made by the employerdue to:(1) failure or refusal to file the

withholding exemption certificate; or(2) false and inaccurate information

shall not be refunded to theemployee but shall be forfeited infavor of the Government.


Page 83 of 198

TAXATION LAW

TA

XA

TIO

NLA

W1

Sec. 81. Filing of Return and Payment ofTaxes Withheld Except as the Commissioner otherwise

permits, taxes deducted and withheldby the employer on wages of employeesshall be covered by a return and paidto:

An authorized agent bank Collection Agent, or Duly authorized Treasurer of the

city or municipality where theemployer has his legal residence orprincipal place of business, or incase the employer is a corporation,where the principal office is located.

The return shall be filed and thepayment made within twenty-five (25)days from the close of each calendarquarter: Provided, however, That theCommissioner may, with the approval ofthe Secretary of Finance, require theemployers to pay or deposit the taxesdeducted and withheld at more frequentintervals, in cases where suchrequirement is deemed necessary toprotect the interest of the Government.

The taxes deducted and withheld byemployers shall be held in a specialfund in trust for the Government untilthe same are paid to the said collectingofficers.

- end of Taxation Law 1 -


Page 85 of 198

TA

XA

TIO

NLA

W2

TAXATION LAW 2

PART I. TRANSFER TAXESI. Estate Tax

A. PrinciplesB. Gross EstateC. DeductionsD. Tax Rates ApplicableE. Tax Credit for Estate Taxes

F. Compliance RequirementsG. Illustrations

II. Donor’s TaxA. PrinciplesB. Properties IncludedC. ExemptionsD. ComputationE. Rates of TaxF. Object of TaxationG. ValuationH. Tax CreditI. Compliance Requirements

878787909196969799100100101101102102103103104104

PART II. VALUE ADDED TAXI. ConceptII. Nature and CharacteristicsIII. Transactions Subject to VATIV. Persons LiableV. Rates in General

A. 12% VATB. Zero-rated TransactionsC. Final Withholding VAT

VI. Transactions Exempt from VATVII. Determining the VAT BaseVIII. Input Taxes

A. Creditable Input TaxB. Excess Output or Input TaxC. Refunds or Tax Credits of Input

TaxIX. Substantiation RequirementsX. Invoicing RequirementsXI. Consequences of Issuing

Erroneous VAT Invoice or VATOfficial Receipt

XII. Registrations RequirementsXIII. Filing of Returns and Payment

of VATXIV. Enforcement Measures

105105105106107107107111114115120120120121

122124124

125125

126126

PART III. PERCENTAGE TAXESI. Who Are Liable

A. Persons Exempt from VATB. Domestic Carriers and Keepers

of GarageC. International CarriersD. FranchisesE. Overseas Communications TaxF. Banks and Non bank Financial

Intermediaries PerformingQuasi-Banking Functions

G. Other Non-Bank FinanceIntermediaries

128128128

128128129129

129

130

H. Life Insurance PremiumsI. Agents of Foreign Insurance

CompaniesJ. Amusement TaxesK. WinningsL. Sale, Barter or Exchange of

Shares of StockII. PaymentIII. Summary of Percentage Taxes

130

131131131

132132133

PART IV. EXCISE TAXI. Goods Subject to Excise Tax

A. Alcohol ProductsB. Tobacco ProductsC. Petroleum ProductsD. Miscellaneous Articles

II. Filing of Return and Payment ofExcise Tax on Domestic Products

III. Payment of Excise Tax onImported Articles

IV. Exemption/Conditional Tax-FreeRemoval of Certain Articles

134134134135135135

135

137

137

PART V. DOCUMENTARY STAMP TAXI. General PrinciplesII. Documents and Papers Not

Subject to Documentary StampTax

III. One-Transaction RuleIV. Payment of DSTV. Applicability of DST law on

Electronic DocumentsVI. Tax Rates Applicable

138138

139140140

140140

PART VI. REMEDIESI. Audit Stage

A. Powers of the CommissionerRelative to the Audit Process

B. Letter of AuthorityII. Pre-Assessment Stage


B. Step 2: Informal ConferenceC. Step 3: Issuance of Pre-

Assessment NoticeIII. Formal Assessment Stage

Effects of RA 9282 on the CTA’sJurisdiction

IV. Collection Letter/WarrantsA. Collections of Deficiency TaxesB. Remedies of the Taxpayer

Against Taxes Erroneously orIllegally Paid


V. Compromise and AbatementVI. Statutory Offenses and Penalties

A. Additions to the TaxB. Crimes, Other Offenses and

Forfeitures

143143

143145145

145145

145146

149150150

151

152156157157

158


Page 86 of 198

TA

XA

TIO

NLA

W2

VII. Compliance RequirementsVIII. Informer’s RewardFlowchart I: Taxpayer’s Remedies

from Tax AssessmentFlowchart II: Procedures for Distraint

and Levy

161162

163

164

PART VII. LOCAL TAXATIONI. Preliminaries

A. Basic ConceptsB. Fundamental PrinciplesC. Local Taxing AuthorityD. Local Tax OrdinanceE. Common Limitations on Taxing

Powers of LGUsF. Other Relevant Taxing Powers

II. Specific Provisions on the Taxingand Other Revenue-RaisingPowers of the LGUA. ProvincesB. MunicipalitiesC. CitiesD. BarangaysE. Community Tax

III. Collection of TaxesIV. Local Tax RemediesFlowchart III: Taxpayer’s Remedies

from Assessment of Local TaxesOther Than Real Property Taxes

Flowchart IV: Procedure for Distraintand Levy for Purposes ofSatisfying Local Taxes

165165165165166166

166167

167167169173173174175176

177

178

PART VIII. REAL PROPERTYTAXATIONI. Basic ConceptsII. Properties Subject to TaxIII. Taxes and Rates Imposed

A. Basic Real Property TaxB. Special Levies

IV. Exempt PropertiesV. Appraisal and Assessment of Real

PropertyA. Classes of Real Property for

Assessment PurposesB. Basis of Assessment and

AppraisalC. Payment and Collection

VI. Remedies in Real PropertyTaxationA. Remedies Available to Local

GovernmentB. Remedies Available to Taxpayer

VII. Special ProvisionsFlowchart V: Procedure for

Assessment of Land Value forReal Property Tax Purposes

Flowchart VI: Taxpayer’s RemediesInvolving Collection of RealProperty Tax

Flowchart VII: Procedure for Levy for

179179179180180180180

181

181

181181

182

182182183

184

185

Purposes of Satisfying RealProperty Taxes 186

PART IX. TARIFF AND CUSTOMSCODEI. Articles Subject to Duty

A. Export and Import DutiesB. Meaning of ImportationC. Classes of ImportationD. Classification of Custom DutiesE. Special Duties

II. Rates of DutyA. General RulesB. Basis of DutyC. Special DutiesD. Flexible Tariff Rates

III. Imposition of DutiesA. Persons LiableB. DeclarationC. Examination, Appraisal and

ClassificationD. Assessment and TaxesE. Liquidation

IV. Remedies of the GovernmentA. ExtrajudicialB. Judicial

V. Remedies of the TaxpayerA. RefundB. ProtestC. Abandonment

VI. Pertinent Amendments by RA9135

Flowchart VIII: Taxpayer’s Remediesfrom Customs Assessment

Flowchart IX: Remedies from Seizureand Forfeiture Cases

187187187187187188188188188189192193193193193

194194194194194195195195196196

196

197

198

REVIEWER IN TAXATION LAW Part I. Transfer Taxes

Page 87 of 198

TA

XA

TIO

NLA

W2

FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Rachel P. FolloscoFACULTY EDITOR

ACADEMICS COMMITTEE

Samantha PoblacionDIRECTOR FOR ACADEMICS

EDITOR-IN-CHIEF

Rania JoyaDEPUTY DIRECTOR FOR ACADEMICS

LAYOUT HEAD

TAXATION LAW

Rachel T. UySUBJECT EDITOR

TAXATION LAW 2

Czarina Grace SerranoJasmine Cuizon

WRITERS

--------Kae Guerrero

Kristine BongcaronPRINTING AND DISTRIBUTION

LECTURES

Edel CruzHEAD

Jason MendozaDEPUTY HEAD

Malds MenzonLOGISTICS, HR

--------Leo Zulueta

LOGO, COVER AND TEMPLATE DESIGN

Taxation Law 2Part I. Transfer Taxes

I. ESTATE TAXA. PRINCIPLESB. GROSS ESTATEC. DEDUCTIONSD. TAX RATES APPLICABLEE. TAX CREDIT FOR ESTATE TAXESF. COMPLIANCE REQUIREMENTSG. ILLUSTRATIONS

II. DONOR’S TAXA. PRINCIPLESB. PROPERTIES INCLUDEDC. EXEMPTIONSD. COMPUTATIONE. RATES OF TAXF. OBJECT OF TAXATIONG. VALUATIONH. TAX CREDITI. COMPLIANCE REQUIREMENTS

Two Types of Transfer TaxesDonor’s Tax Estate TaxImposed upon theprivilege to give.

Imposed upon theprivilege to transmitproperty to heirs.

Transfer is betweenthe living.

Transfer is from thedeceased, throughhis/her estate, to theliving.

Transfer may takeplace betweennatural andjuridical persons.

Transfer takes placeonly between naturalpersons.

I. ESTATE TAX

A. PRINCIPLES

Definition

A graduated tax imposed upon theprivilege of the decedent to transmitproperty at death and is based on theentire net estate.

Applicable Law

Estate taxation is governed by thestatute in force at the time of the deathof the decedent.

The estate tax accrues as of the death ofthe decedent and the accrual of the taxis distinct from the obligation to paythe same.

Upon the death of the decedent,succession takes place and the right ofthe State to tax the privilege to transmitthe estate vests instantly upon death.(Section 3, RR 2-2003)

Transfers Affected

1. Transfers Mortis Causa - Gratuitoustransfers after death, either testate orintestate.

2. Transfers Inter Vivos – Generallyattract donor’s tax. However, certaintransfers inter vivos are treated astestamentary dispositions and areaccordingly included in the computationof the gross estate in order to arrive atthe proper estate tax liability.

These transfers are the following:

a. Transfers in contemplation of death(Sec. 85B)

Term does not refer to the generalexpectation of death which all entertain.

The transfers referred to are thoseimpelled by the thought of death (i.e.,the motivating factor or controllingmotive is the thought of death),

Regardless of whether the transferorwas near the possibility of death or not.

b. Transfer with retention orreservation of certain rights (Sec.85B)

It involves cases where the owner


Page 88 of 198

TA

XA

TIO

NLA

W2

transfers his property during life butstill retains the economic benefits – thepossession or enjoyment of theproperty, or the power to designate thepersons who may exercise such rights.

By reason of the restriction thetransferee is incapable of freely enjoyingor disposing of the property until thetransferor’s death.

The transfer may be regarded as havingbeen intended to take effect inpossession or enjoyment at thetransferor’s death.

Illustration:X transfers his property to Y in nakedownership and to Z in usufruct throughoutZ’s lifetime subject to the condition that if Zpredeceases X, the property shall return toX. If X dies during Z’s life, the value of thereversionary interest of X at death isincludible in his gross estate (see Articles756-757 of the Civil Code).

The transfer is taxable as intended totake effect at or after death because thepossibility of reversion to X makes Z’sinterest conditional as long as X lives.

Note:Transfer with retention or reservation of certainrights is grouped by the Tax Code under transferin contemplation of death.

c. Revocable transfers (Sec. 85C) Transfers where the transferor has

reserved the right to alter, amend orrevoke such transfer, regardless ofWON the power is actually exercisedduring his lifetime, and WON the powershould be exercised by him alone orin conjunction with someone else.

The power to alter, amend or revokeshall be considered to exist on thedate of the decedent’s death EVENTHOUGH:

the exercise of the power is subjectto a precedent giving of notice, or

the alteration, amendment orrevocation takes effect only on the

expiration of a stated period afterthe exercise of the power,whether or not on or before the dateof the decedent’s death notice hasbeen given or the power has beenexercised. If notice has not been given or

the power has not beenexercised before the date of hisdeath, such notice shall beconsidered to have been given,or the power exercised, on thedate of his death.

d. Transfers of property arising under ageneral power of appointment (Sec.85D)

Gross estate shall include any propertypassed or transferred under a generalpower of appointment exercised by thedecedent: by will, or by deed executed in contemplation of,

or intended to take effect in possessionor enjoyment at, or after his death, or

by deed under which he has retained(for his life or any period notascertainable without reference to hisdeath or for any period which does notin fact end before his death):

the possession or enjoyment of, orthe right to the income from, theproperty, or

the right, either alone or inconjunction with any person, todesignate the persons who shallpossess or enjoy the property or theincome therefrom

Q: What is a power of appointment?

The power or right to designate by will or bydeed the person(s) who shall succeed to,possess or enjoy the property, or theincome therefrom, received from the estateof the prior decedent. It involves the personcreating the power (donor) and the personto whom is given the right to exercise thepower (donee).

Two Kinds of Appointment and their Effects:

Kind ofAppointment

Nature Tax Implications Effects

General DONEE has power toappoint any person hechooses who shall possessor enjoy the propertywithout restriction

Makes appointed property,for all legal intents, theproperty of the DONEE(includible in his estate)

DONEE holds theappointed property withall the attributes ofownership, under theconcept of owner

Special DONEE must appointsuccessor to the propertyonly within a limited groupor class of persons

Not includible in the grossestate of the DONEE whenhe dies

DONEE holds theappointed property intrust, or under theconcept of trustee


Page 89 of 198

TA

XA

TIO

NLA

W2

e. Transfers for insufficientconsideration (Sec. 85G)

Transfers that are not bona fide sales ofproperty for an adequate and fullconsideration in money or money’s worth. If bona fide sale – no value shall be

included in the gross estate [Case A] If not a bona fide sale - the excess of the

fair market value at the time of deathover the value of the considerationreceived by the decedent shall form partof his gross estate. [Case B]

If inter vivos transfer is provenfictitious/simulated – total value of theproperty at the time of death includedin the gross estate.[Case C]

CaseA

CaseB

CaseC

FMV, transfer 2,000 1,500 2,500FMV, death 2,500 2,000 2,000ConsiderationReceived

2,000 800 0

Value Includedin the GrossEstate

0 1,200 2,000

Exempt Transfers [MTTB] (Sec. 87)a. Merger of the usufruct in the owner of

the naked titleb. Transmission or delivery of the

inheritance or legacy by the fiduciaryheirs or legatee to the fideicommisary

c. Transmission from the first heirs,legatees or donees in favor of anotherbeneficiary in accordance with thedesire of the testator

d. All bequests, devises, legacies ortransfers to social welfare, cultural andcharitable institutions, no part of theincome of which inures to the benefit ofany individual, provided that not morethan 30% of the said bequests, devises,legacies or transfers shall be used foradministrative purposes

COMPARATIVE COMPOSITION OF GROSSESTATE BASED ON LOCATION OF PROPERTY

Resident Non-resident,Or Citizen not citizen

1. Real property in thePhilippines Included Included

2. Real property outsidethe Philippines Included Not Included

3. Tangible personalproperty in thePhilippines Included Included

4. Tangible personalproperty outside thePhilippines Included Not Included

5. Intangible personalproperty in the Phils Included Included

6. Intangible personalproperty outside thePhils Included Not Included

Excluded Properties [DULUTS 200]

1. PROCEEDS of:

a. Life insurance policy taken out by the decedent upon his own

life, when beneficiary is OTHER

THAN the estate, executor oradministrator,

and designation isIRREVOCABLE (Sec. 85E)

NOTE: The presumption is thatthe designation of REVOCABLE.

b. group life insurance policy taken out by a company for its employees,

(law only speaks of policies“taken out by the decedent uponhis own life”)

c. life insurance policies-issued by theGSIS to government officials oremployees, as they are exempt bylaw from taxes of all kinds (PD1146, as amended)

Thus, the proceeds of insurance underpolicies taken out by the decedent uponhis life shall constitute part of the grossestate if the beneficiary is:a. The estate of the decedent, his

executor or administrator, orb. A third person (i.e., a person other

than the estate, executor oradministrator), AND the designationof the beneficiary is revocable.

2. Death benefits received from the SSS,accruing by reason of death (RA 1161,as amended)

3. Amounts received from the Philippineand the U.S. Governments from thedamages suffered during the last war(RA 227)

4. Benefits received by beneficiariesresiding in the Philippines under lawsadministered by the U.S. VeteransAdministration (RA 360)

5. Properties held in Trust by the decedent

6. Transfers by way of bona fide Sales

7. Separate or exclusive property of thesurviving spouse is not deemed part ofthe gross estate of the decedent spouse.(Sec. 85, NIRC)

8. Net estates which are not in excess ofP200,000 are exempt from estate tax.(Sec. 84, NIRC)


Page 90 of 198

TA

XA

TIO

NLA

W2

B. GROSS ESTATE

Composition

The following properties and interesttherein at the time of decedent’s death:

Citizens and Resident Aliens – allproperties, real or personal, tangible orintangible, wherever situated

Non-resident Aliens – only propertiessituated in the Philippines providedthat, with respect to intangible personalproperty, its inclusion in the grossestate is subject to the rule ofreciprocity provided for under Sect 104,NIRC

Decedent’s interest Value to beincluded in the gross estate is the extent ofthe interest therein of the decedent at thetime of his death

Q: What is “residence” for estate taxpurposes?

It refers to the permanent home, the placeto which whenever absent, for business orpleasure, one intends to return, anddepends on facts and circumstances, in thesense that they disclose intent. (Corre v.Tan Corre, 100 Phil 321) It is, therefore, notnecessarily the actual place of residence.The term “residence” and “domicile” aresynonymous and are used interchangeablywithout distinction. (Collector v. Lara, 102Phil 813; Velilla v. Posadas, 62 Phil 624).

Q: What is the situs of intangiblepersonal property?

GR: situs is at the domicile or residence ofthe owner. Exception:

When it is inconsistent with the expressprovisions of statute, or

Justice does not demand that it shouldbe, as where the property has in fact asitus elsewhere.

CASE LAW: Collector v. Lara (102 Phil 813)When the owner of personal property,during his lifetime, extended his activitieswith respect to his interests so as to availhimself of the protection and benefits ofthe laws of the Philippines, so as to bringhis person or property within the reach ofthe Philippines, the reason for a single placeof taxation no longer obtains. His propertyin the Philippines enjoys the protectionof the government so that the right tocollect the estate tax cannot bequestioned.

Q: What are the intangible propertieswhich are considered by law as situatedin the Philippines?

Franchise which must be exercised inthe Philippines

Obligations or bonds issued by anycorporation or sociedad anonimaorganized or constituted in thePhilippines

Shares, obligations or bonds issued byany foreign corporation 85% of thebusiness of which is located in thePhilippines

Shares, obligations or bonds issued byany foreign corporation if such shares,obligations or bonds have acquired abusiness situs in the Philippines

Shares or rights in any partnership,business or industry established in thePhilippines

Q: What is the reciprocity rule? (Sec.104, NIRC)

There is reciprocity if the foreign country ofwhich the decedent was a citizen andresident at the time of his death: did not impose a transfer tax of any

character, in respect of intangiblepersonal property of citizens of thePhilippines not residing in that foreigncountry; or

allowed a similar exemption fromtransfer tax in respect of intangiblepersonal property owned by citizens ofthe Philippines not residing in thatcountry

[In sum, both states must exemptnonresidents (citizens of the other state)from transfer taxes in respect of intangiblepersonal property.]

Note:

For the reciprocity rule to apply, theremust be TOTAL reciprocity.[For instance,] in the Philippines, bothestate and inheritance taxes areimposed on the estate while inCalifornia only inheritance tax isimposed. The reciprocity rule may notbe availed of. Reciprocity has to be total.(CIR v. Fisher, 110 Phil 686)

Reciprocity in exemption does notrequire the “foreign country” to possessinternational personality in thetraditional sense (i.e., compliance withthe requisites of statehood). Thus,Tangier, Morroco (Collector v. Campos-Rueda, 42 SCRA 23) and California, a


Page 91 of 198

TA

XA

TIO

NLA

W2

state in the American Union (Collector v.de Lara, 102 Phil 813) were held to beforeign countries within the meaning ofSection 104.

Valuation of the Gross Estate (§88 of theNIRC and §5 of RR 2-2003)

GENERAL RULE: The propertiescomprising the gross estate shall be valuedbased on FAIR MARKET VALUE (FMV) as ofthe time of death.

Real property – F MV as determined by theCommissioner OR FMV as shown in theschedule of values fixed by the provincialand city assessors, whichever is HIGHER.

Shares of Stocko Listed shares – FMV is the arithmetic

mean between the highest and lowestquotation at a date of death, OR thedate nearest the date of death, if none isavailable on the date of death itself

o Unlisted shares - COMMON shares arevalued based on BOOK VALUE; whilePREFERRED shares are valued at PARVALUE

Right to usufruct, use or habitation,annuity - the probable life of thebeneficiary in accordance with the latestbasic standard mortality table is to betaken into account, to be approved bythe Secretary of Finance, uponrecommendation of the InsuranceCommissioner.

C. DEDUCTIONS

The deductions from the gross estate are:

1. Ordinary Deductionsa. Expenses, losses, indebtedness, taxes,

etc. (ELIT) Funeral expenses; Judicial expenses of testamentary

or intestate proceedings; Claims against the estate; Claims against insolvent persons; Unpaid mortgage or indebtedness

on property, Taxes; Losses

b. Vanishing Deductionc. Transfer for public use

2. Special Deductions**a. Family home;b. Standard deduction;c. Medical Expenses;d. Amount received by heir under RA

4917

** Not available to the estate of non-resident,aliens in the Philippines.

1. Ordinary Deductions

a. Expenses, Losses, Indebtedness andTaxes [ELIT] [fjc cult]

FUNERAL EXPENSES (§86-A1) (max.P200K)

Allowable deduction is whichever islower of

the actual funeral expenses(WON paid) up to the time ofinterment, or

an amount equal to 5% of thegross estate, but in no case toexceed P200,000.

Note: The unpaid portion of the funeralexpenses incurred which is in excess ofthe P200,000 threshold is NOT allowedto be claimed as a deduction under“claims against the estate” (see 1(c)below). (Sec. 6(A)(1) of RR 02-2003)

Examples of funeral expenses (RR 2-2003, Sec. 6-A1)o The MOURNING APPAREL of the

surviving spouse and unmarriedminor children of the deceased,bought and used on the occasion ofthe burial

o EXPENSES for the deceased’sWAKE, including food and drinks

o PUBLICATION CHARGES for deathnotices

o TELECOMMUNICATIONSEXPENSES incurred in informingrelatives of the deceased

o Cost of BURIAL PLOT,TOMBSTONES, MONUMENT orMAUSOLEUM but not their upkeep.In case the deceased owns a familyestate or several burial lots, only thevalue corresponding to the plotwhere he is buried is deductible

o INTERMENT and/or CREMATIONFEES and CHARGES

o All other expenses incurred for theperformance of the RITES andCEREMONIES incident to interment

Expenses NOT deductible as funeralexpenseso Expenses incurred AFTER

INTERMENT, such as for prayers,masses, entertainment, or the like

o Any portion of the funeral andburial expenses BORNE orDEFRAYED by RELATIVES andFRIENDS of the deceased


Page 92 of 198

TA

XA

TIO

NLA

W2

Illustrations:o If five percent (5%) of the gross

estate is P220,000 and the amountactually incurred is P215,000, themaximum amount that may bededucted is only P200,000;

o If five percent (5%) of the grossestate is P 100,000 and the totalamount incurred is P150,000 whereP20,000 thereof is still unpaid, theonly amount that can be claimed asdeduction for funeral expenses isP100,000. The entire P50,000excess amount consisting ofP30,000 paid amount and P20,000unpaid amount can no longer beclaimed as FUNERAL EXPENSES.Neither can the P20,000 unpaidportion be deducted from the grossestate as CLAIMS AGAINST THEESTATE.

JUDICIAL EXPENSES of testamentaryand intestate proceedings (§86-A1)

o Allowable deductions are expensesincurred, in the inventory-taking ofthe assets comprising the grossestate, their administration, thepayment of debts of the estate, aswell as the distribution of the estateamong the heirs,

o DURING THE SETTLEMENT OFTHE ESTATE BUT NOT BEYONDTHE LAST DAY PRESCRIBED BYLAW, or the extension thereof, FORTHE FILING OF THE ESTATE TAXRETURN (RR 2-2003, Sec. 6-A2)

Examples of judicial expenseso Fees of executor or administratoro Attorney’s feeso Court feeso Accountant’s feeso Appraiser’s feeso Clerk hireo Costs of preserving and distributing

the estateo Costs of storing or maintaining

property of the estateo Brokerage fees for selling property of

the estate

Case Law: Commissioner v. CA (328SCRA 666) The notarial fee paid for theextrajudicial settlement is deductiblesince such settlement effected adistribution of the estate to the lawfulheirs. Attorney’s fees to be deductiblefrom the gross estate must be essentialto the collection of assets, payment of

debts or the distribution of property tothe persons entitled to it.

CLAIMS AGAINST THE ESTATE (§86-A1)

Claims – debts or demands of apecuniary nature which could havebeen enforced against the deceasedin his lifetime and could have beenreduced to simple moneyjudgments. May arise out ofcontract, tort or operation of law.

Fees to litigate case among heirs notdeductible

Requisites for deductibility [PVNGF](RR 2-2003, Sec. 6-A3):1) must be a PERSONAL OBLIGATION

of the deceased existing at the timeof his death (except unpaid funeralexpenses and unpaid medicalexpenses, which are classified intotheir own separate categories)

2) liability must have been contractedin GOOD FAITH and for adequateand full consideration in money ormoney’s worth

3) the claim must be a debt or claimwhich is VALID IN LAW andENFORCEABLE IN COURT

4) indebtedness NOT CONDONED bythe creditor or the action to collectfrom the decedent must not haveprescribed.

Dizon v. CTA (2008, Nachura):

Issue: May actual claims of creditors befully allowed as deductions from thegross estate despite the fact that thesaid claims were reduced or condonedthrough compromise agreementsentered into by the Estate with itscreditors.

Held: Post-death development shouldnot be considered.

There is no law, nor do we discernany legislative intent in our tax laws,which disregards the date-of-deathvaluation principle and particularlyprovides that post-death developmentsmust be considered in determining thenet value of the estate.

It bears emphasis that tax burdensare not to be imposed, nor presumed tobe imposed, beyond what the statuteexpressly and clearly imports, taxstatutes being construed strictissimijuris against the government.


Page 93 of 198

TA

XA

TIO

NLA

W2

Any doubt on whether a person,article or activity is taxable is generallyresolved against taxation.

Such construction finds relevanceand consistency in our Rules on SpecialProceedings wherein the term "claims"required to be presented against adecedent's estate is generally construedto mean debts or demands of apecuniary nature which could havebeen enforced against the deceased inhis lifetime, or liability contracted bythe deceased before his death.

Therefore, the claims existing at thetime of death are significant to, andshould be made the basis of, thedetermination of allowable.

CLAIMS AGAINST INSOLVENTPERSONS (§86-A1)

Deductible from the gross estate,provided that the value of thedecedent’s interest in the claim isincluded in the value of the grossestate.

UNPAID MORTGAGES, LOSSES ANDTAXES (§86-A1 and RR 2-2003, Sec. 6-A5)

UNPAID MORTGAGES – Deductiblefrom gross estate, provided:

That the value of the decedent’sinterest in the propertyencumbered by such mortgageor indebtedness is included inthe value of the gross estate

That the deduction shall belimited to the extent that theywere contracted bona fide andfor an adequate and fullconsideration in money ormoney’s worth, if such unpaidmortgages or indebtedness werefounded upon a promise or anagreement.

LOSSES – deductible from the grossestate if ALL of the followingconditions are satisfied:The losses

were INCURRED DURING theSETTLEMENT of the estate

arose from FIRES, STORMS,SHIPWRECK or OTHERCASUALTIES, or fromROBBERY, THEFT orEMBEZZLEMENT

are NOT COMPENSATED BYINSURANCE or otherwise

are not claimed as a deductionfor income tax purposes in anincome tax return

were incurred NOT LATER THANTHE LAST DAY FOR PAYMENTOF THE ESTATE TAX (6 months)

TAXES –Deductible from the grossestate IF:

They have accrued as of thedeath of the decedent

They were unpaid as of the timeof death

Note: This deduction DOES NOTinclude income tax upon incomereceived after death, or propertytaxes not accrued before his death,or the estate tax due from thetransmission of his estate.

b. Property Previously Taxed (VanishingDeductions) (§86-A2)

Deduction allowed on the propertyleft behind by the decedent which hehad acquired previously byinheritance or donation.

Rationale: Previously, a transfer tax had

already been imposed on theproperty, either the estate tax (ifproperty inherited) or the donor’stax (if property donated).

Now that the recipient of theinheritance or donation has died,the same property will again besubjected to a transfer tax, theestate tax.

Thus, to minimize the effects ofa double tax on the same propertywithin a short period of time, i.e. five(5) years, the law allows a deductionto be claimed on the said property.

Example:Mr. A died in December 2003. In March2003, Mr. B (Mr. A’s father) died andleft Mr. A some properties asinheritance. May vanishing deductionsbe claimed as deductions in computingMr. A’s net taxable estate?

YES, vanishing deductions shall beallowed if the following conditions aremet (REQUISITES FORDEDUCTIBILITY): [PINID]

1) Death – the present decedent (Mr. A)died within five years from thereceipt of the property from a priordecedent (Mr. B) or donor;


Page 94 of 198

TA

XA

TIO

NLA

W2

2) Identity of the property – Theproperty with respect to whichdeduction is sought can beidentified as the one received fromthe prior decedent or the donor, oras the property acquired inexchange for the original property soreceived.

3) Inclusion of the property – Theproperty must have formed part ofthe gross estate situated in thePhilippines of the prior decedent, orthe total amount of the gifts of thedonor

4) Previous taxation of the property –the donor's tax on the gift or estatetax on the prior succession (Mr. B’ssuccession) was finally determinedand paid

5) No vanishing deduction on theproperty was allowed to the estate ofthe prior decedent. (Illustration ofhow this requirement may NOT bemet: In the example above, if Mr. Breceived the same properties as adonation from Mr. C in July 2002, avanishing deduction on theproperties was claimed with respectto Mr. B’s estate. Thus, no morevanishing deduction may be claimedby Mr. A’s estate)

Computation of vanishing deduction

Using the facts above, assume thatMr. A inherited a car and a housefrom his father Mr. B.

The FMV of the car was P120,000and the FMV of the house wasP800,000 at the time of Mr. B’sdeath.

At the time Mr. A inherited the land,it was subject to a mortgage ofP80,000. Mr. A paid P70,000 of themortgage during his lifetime (leavinga balance of P10,000).

The FMV of the properties at thetime of Mr. A’s death were P850,000for the land and P70,000 for the car.

Mr. A’s gross estate amounted toP3,200,000 while total deductions(excluding medical expenses,standard deductions, family home)amounted to P600,000.

1) First, GET THE VALUE OF THEPROPERTY PREVIOUSLY TAXED(PPT): compare the values of theproperty at the time of the priordecedent’s death and at the time ofthe present decedent’s death. The

lower amount shall be the initialbasis. in the example, the value of the

PPT shall be P800,000 for theland and P70,000 for the car, fora total of P870,000

NOTE: The value used on the PPT issignificant only for purposes ofcomputing the amount of vanishingdeduction. The value included in thedecedent’s gross estate is ALWAYS thefair market value at the time of hisdeath.

2) Then, THE PPT VALUE SHALL BEREDUCED BY ANY PAYMENTMADE BY THE PRESENTDECEDENT ON ANY MORTGAGEor lien on the property Mr. A paid P70,000 of the

mortgage. Thus, P870,000 less70,000 is P800,000

The P800,000 is known as theINITIAL BASIS

3) The INITIAL BASIS shall beFURTHER REDUCED by an amountequal to:

INITIAL BASIS X Total amount ofGross Estate deductions*

* excluding family home, medicalexpenses, standard deduction andamounts received under RA 4917

800/3200 x 600,000 equals150,000. This will be deductedfrom P800,000, which gives abalance of P650,000

The 650,000 is known as theFINAL BASIS.

4) Finally, the remaining balance shallbe multiplied by the correspondingpercentage:

% If received by inheritance or gift:

100%within one (1) year prior to thedeath of the present decedent

80%More than one year but notmore than two years prior to thedeath of the decedent

60%More than two years but notmore than three years prior tothe death of the decedent

40%More than three years but notmore than four years prior tothe death of the decedent

20%More than four years but notmore than five years prior to thedeath of the decedent

Since Mr. A received theinheritance in March 2003 (within1 year from his death in


Page 95 of 198

TA

XA

TIO

NLA

W2

December 2003), the balance ofP650,000 shall be multiplied by100%. Thus, the allowablevanishing deduction is P650,000

FORMULA:

1) VALUE TAKEN FOR PPT (always the lowervalues)

LESS: MORTGAGE (OR LIEN) PAID IFANY (1ST deduction)

2) INITIAL BASIS (IB)

LESS: 2ND deduction = IB/GE x TotalDeductions lessThose exclusions

3) FINAL BASIS

X RATES IN s86A-2

4) VANISHING DEDUCTION (in an Estate TaxReturn, this is deducted from the ExclusiveProperties of the decedent which form partof the gross estate.

c. Transfers for Public Purpose

The whole amount of all theBEQUESTS, LEGACIES, DEVISESor TRANSFERS to or for the use ofthe Government of the Republic ofthe Philippines, or any politicalsubdivision thereof, for exclusivelypublic purposes shall be deductiblefrom gross estate, provided suchamount or value had been includedin the gross estate.

2. Special Deductions (FSMA)

a. FAMILY HOME (maximum of P1m) It is the dwelling house, including

the land on which it is situated,where the husband and wife, or ahead or the family, and members oftheir family reside, as certified to bythe Barangay Captain of the locality.

It is deemed constituted on thehouse and lot from the time it isactually occupied as the familyresidence and considered as suchfor as long as any of its beneficiariesactually resides therein. (Arts. 152and 153, Family Code) Temporaryabsence from the constituted familyhome due to travel or studies orwork abroad, etc. does not interruptactual occupancy. The family homeis generally characterized bypermanency, that is, the place towhich, whenever absent forbusiness or pleasure, one still

intends to return. (RR 2-2003, Sec.6D)

Requisites for Deductibility

1) The family home must be the actualresidential home of the decedent andhis family at the time of his death, ascertified by the barangay captain ofthe locality.

2) The total value of the family homemust be included as part of the grossestate of the decedent

3) Allowable deduction must be in anamount equivalent to the currentFMV of the family home as declaredor included in the gross estate but inno case shall the deduction exceedP1,000,000

b. STANDARD DEDUCTION (§86-A5)(P1m) An amount equivalent to One

million pesos (P1,000,000) shall bededucted from the gross estatewithout need of substantiation.

c. MEDICAL EXPENSES (§86-A6) (max.of P500K) All medical expenses (cost of

medicine, hospital bills, doctors’fees, etc.) incurred (whether paid orunpaid)

Requisites for Deductibility:

1. The expenses were incurred by thedecedent within one (1) year prior tohis death

2. The expenses are duly substantiatedwith receipts

PROVIDED, that in no case shall thedeductible medical expenses exceedFive Hundred Thousand Pesos(P500,000).

Note: Any amount of medical expensesincurred within one year from death inexcess of P500,000 CANNOT be claimed as adeduction under “Claims against the estate”.(RR 2-2003, Sec. 6-F)

d. AMOUNTS RECEIVED BY HEIRSUNDER RA 4917 (§86-A7) Any amount received by the heirs

from the decedent’s employer as aconsequence of the death of thedecedent-employee in accordancewith RA No. 4917 (this law providesthat retirement benefits of privateemployees shall not be subject toattachment, levy execution or anytax), PROVIDED that such amount


Page 96 of 198

TA

XA

TIO

NLA

W2

is included in the gross estate of thedecedent.

QUICK GLANCE:

Resident or citizendecedent

Non-resident aliendecedent

GROSS ESTATE –all property at thetime of death,wherever situated

GROSS ESTATE –includes only that partof gross estate locatedin the Philippines

DEDUCTIONS funeral expenses judicial expenses claims against

the estate claims against

insolvents unpaid mortgage

and debt taxes and losses transfers for

public use vanishing

deductions family home standard

deduction medical expenses amounts received

under R.A. 4917 share in conjugal

property

DEDUCTIONS funeral expenses judicial expenses claims against the

estate claims against

insolvents unpaid mortgage

and debt taxes and losses transfers for public

use vanishing

deductions share in conjugal

property

NOTE: To compute fortotal allowabledeductions of the firstsix items above, thisformula is used:

GrossEstate,Phils.

GrossEstate,World

X

Worldexpenses,

losses,indebted-

ness,taxes etc.

Note:No deduction shall be allowed in the caseof a non-resident decedent not a citizen ofthe Philippines, unless the executor,administrator, or anyone of the heirs, asthe case may be, includes in the returnrequired to be filed under Section 90 of theCode the value at the time of thedecedent’s death of that part of his grossestate NOT situated in the Philippines.(Section 86, NIRC)

D. TAX RATES APPLICABLE:

If the net estate is:

OVERBUT NOTOVER

TAX IS PLUSOF THEEXCESSOVER

200,000 Exempt

200,000 500,000 0 5% 200,000

500,000 2 million 15,000 8% 500,000

2 million 5 million 135,000 11% 2 million

5 million 10million 465,000 15% 5 million

10 million And Over 1,215,000 20% 10 million

E. TAX CREDIT FOR ESTATE TAXES(§86-E)

Q: What is a tax credit?

It is a remedy against international doubletaxation. To minimize the onerous effect oftaxing the same property twice, tax creditagainst Philippine estate tax is allowed forestate taxes paid to foreign countries.

Q: Who may avail of tax credit?

Only the estate of a decedent who was acitizen or a resident of the Philippines atthe time of his death can claim tax creditfor any estate tax paid to a foreign country.

Q: What is the amount allowable as taxcredit?

General Rule:The estate tax imposed by the Philippinesshall be credited with the amounts of anyestate tax imposed by the authority of aforeign country.

Limitations:a. The amount of the credit in respect to

the tax paid to any country shall notexceed the same proportion of the taxagainst which such credit is taken,which the decedent's net estate situatedwithin such country taxable under theNIRC bears to his entire net estate;(PER COUNTRY BASIS) and

b. The total amount of the credit shall notexceed the same proportion of the taxagainst which such credit is taken,which the decedent's net estate situatedoutside the Philippines taxable underthe NIRC bears to his entire net estate.(OVERALL BASIS)

Illustration:

Assume:

Net Estate – Philippines(reduced by all allowabledeductions, except standarddeduction)

P 1,050,000

Country G Net Estate 300,000Country H Net Estate 150,000Tax paid/incurred:PhilippinesCountry GCountry H

15,0005,0001,400

Net taxable estate is P500,000(1,050,000 + 300,000 + 150,000 –1,000,000 standard deduction). ThePhilippine estate tax on P500,000 isP15,000


Page 97 of 198

TA

XA

TIO

NLA

W2

Solution – Limitation A:

To get tax credit per country underLimitation A, this formula is followed:

Net Estate ina Particular

Country

Net EstateWorldwide

xPhil.

EstateTax

=Tax

Credit

The result after applying the formulaabove is compared to the tax actuallypaid for each foreign country.

The lower of the two amounts for eachforeign country will be added to getthe total tax credit allowed underLimitation A.

AmountAllowedwhicheveris Lower)

Country G(300/1500 x 15,000)

3,0003,000

Actually paid toCountry G

5,000

Country H(150/1500 x 15,000)

1,5001,400

Actually paid toCountry H

1,400

Tax credit allowed underLimitation A

P 4,400

Solution – Limitation B:

Net Estate inall ForeignCountries

Net EstateWorldwide

xPhil.

EstateTax

=Tax

Credit

The result after applying the formulaabove is compared to the tax actuallypaid in total to foreign countries.

The lower of the two amounts will beadded to get the total tax credit allowedunder Limitation B.

AmountAllowed(Lower)

450/1500 x 15,000 4,500Total foreign incometaxes paid

6,400

Tax credit allowed underLimitation B

P 4,500

Compare the tax credit allowed underLimitation A and Limitation B. Thelower of the two amounts is the finalallowable tax credit. In this case, theamount computed under Limitation A(4,400) is lower, thus it becomes thefinal allowable tax credit.

If there is only one foreign countryinvolved, both Limitations will yield thesame answer.

To get the tax credit allowable, use theformula in Limitation A.

The resulting amount will be comparedto the actual tax paid to the foreigncountry. The lower amount will be thefinal allowable tax credit.

(Source: Reyes, Income Tax Law andAccounting)

F. COMPLIANCE REQUIREMENTS

Estate Tax

1. Person Liable for Payment

Primarily, the estate, through the executoror administrator.

Payment shall be made before thedelivery of the distributive share in theinheritance to any heir or beneficiary.

If there are two or more executors oradministrators, all of them are severallyliable for the payment of the tax.

The estate tax clearance issued by theCommissioner or the Revenue DistrictOfficer (RDO) having jurisdiction overthe estate, will serve as the authorityto distribute the remainingproperties/share in the inheritance tothe heir or beneficiary.

Subsidiarily, heirs or beneficiaries, for thepayment of that portion of the estate whichhis distributive share bears to the value ofthe total net estate.

The extent of his liability, however,shall in no case exceed the value ofhis share in the inheritance.

Marcos II v. Court of Appeals: Claims fortaxes, whether assessed before or after thedeath of the deceased, can be collectedfrom the heirs even after thedistribution of the properties of thedecedent.

They are exempted from the applicationof the statute of non-claims. The heirs shallbe liable therefor, in proportion to theirshare in the inheritance.

Thus, the Government has two ways ofcollecting the taxes in question:

One, by going after all the heirs andcollecting from each one of them theamount of the tax proportionate to theinheritance received.


Page 98 of 198

TA

XA

TIO

NLA

W2

Another remedy (pursuant to the liencreated by Section 315 of the Tax Codeupon all property and rights to propertybelong to the taxpayer for unpaid incometax) is by subjecting said property of theestate which is in the hands of an heir ortransferee to the payment of the tax due theestate.

The approval of the court, sitting inprobate, or as a settlement tribunal overthe deceased is not a mandatoryrequirement in the collection of estatetaxes.

2. Notice of Death

A written Notice of Death must be givento the BIR

within two (2) months after thedeath of the decedent or

within a period after the executor oradministrator or executor qualifiesas such:1. In all cases of transfers subject to

tax or2. Where, though exempt from tax,

the gross value of the estateexceeds P20,000.

Estate Tax Return

1. When required

a. When the estate is subject to estatetax,OR

b. When, though exempt from tax, thegross value of the estate exceedsTwo hundred thousand pesos(P200,000),OR

c. Regardless of the gross value of theestate, when the said estate consistsof registered or registrable propertysuch as real property, motor vehicle,shares of stock or other similarproperty for which a clearance fromthe Bureau of Internal Revenue isrequired as a condition precedentfor the transfer of ownership thereofin the name of the transferee.

2. Contents

The executor, or the administrator, or anyof the legal heirs, as the case may be, shallfile a return under oath in duplicate, settingforth:

a. The value of the gross estate of thedecedent at the time of his death, or incase of a nonresident, not a citizen of

the Philippines, of that part of his grossestate situated in the Philippines;

b. The deductions allowed from grossestate in determining the net taxableestate; and

c. Such part of such information as may atthe time be ascertainable and suchsupplemental data as may be necessaryto establish the correct taxes.

d. For estate tax returns showing agross value exceeding Two million

pesos (P2,000,000) there must be astatement duly certified to by a CertifiedPublic Accountant containing thefollowing: Itemized assets of the decedent with

their corresponding gross value atthe time of his death, or in the caseof a nonresident, not a citizen of thePhilippines, of that part of his grossestate situated in the Philippines;

Itemized deductions from grossestate allowed in Section 86; and

The amount of tax due whether paidor still due and outstanding.

3. When filed

General Rule: Filed within six (6) monthsfrom the decedent's death.

Exception: The Commissioner shall haveauthority to grant, in meritorious cases, areasonable extension not exceeding thirty(30) days for filing the return

4. Where filed

Except in cases where the Commissionerotherwise permits, the return shall be filedwith:

an authorized agent bank (AAB), or Revenue District Officer (RDO), Collection Officer, or duly authorized Treasurer of the city or

municipality in which the decedent wasdomiciled at the time of his death, or

if there be no legal residence in thePhilippines, with the Office of theCommissioner.

Payment of Estate Tax

1. When paid

At the time the return is filed by theexecutor, administrator or the heirs.

2. Extension of Payment

The Commissioner may allow an extensionof payment, if he finds that the payment onthe due date of the estate tax or of any part


Page 99 of 198

TA

XA

TIO

NLA

W2

thereof would impose undue hardship uponthe estate or any of the heirs extension not to exceed five (5) years, in

case the estate is settled judicially, or two (2) years in case the estate is

settled extrajudicially

Where the taxes are assessed by reason ofnegligence, intentional disregard of rulesand regulations, or fraud on the part of thetaxpayer, no extension will be granted bythe Commissioner.

If extension granted, the Commissionermay require the executor, oradministrator, or beneficiary, as thecase may be, to furnish a BOND in suchamount, not exceeding DOUBLE theamount of the tax and with suchsureties as the Commissioner deemsnecessary, conditioned upon thepayment of the said tax in accordancewith the terms of the extension.

3. Effects of granting an extension

Payment of the amount in respect ofwhich the extension is granted on orbefore the date of the expiration of theperiod of the extension

Suspension of the running of statute oflimitations for deficiency assessment forthe period of any extension

Any amount paid after the statutory duedate of the tax, but within the extensionperiod, shall be subject to interest butnot to surcharge.

Q: Can estate tax be paid ininstallments?

Yes. In case the available cash of theestate is not sufficient to pay its total estatetax liability, the estate may be allowed topay the tax by installment and a clearanceshall be released only with respect to theproperty the corresponding/computed taxon which has been paid. (RR 2-2003)

G. ILLUSTRATIONS

1. Decedent is an unmarried head of afamily

Real and personal properties 5,000,000

family home 2,000,000

Gross estate 7,000,000

Less: DeductionsOrdinary deductions

Funeral expenses 200,000

Other deductions 1,300,000

(1,500,000)

Special deductionsFamily Home 1,000,000

Standard deduction 1,000,000Medical expenses 500,000

(2,500,000)

Net taxable estate 3,000,000

Note:Although the family home is valued at P2million, the maximum allowable deduction forthe family home is P1million only.

Medical expenses are not included in thedeductions referred under Section 86(A)(1) of theCode but are treated as a special item ofdeduction under Section 86(A)(6) of the sameCode.

2. Decedent is a married man with asurviving spouse

Family home is exclusive property

Conjugal Exclusive TotalReal&personalproperties 5,000,000 5,000,000Family home 2,000,000 2,000,000Otherexclusiveprop 2,500,000 2,500,000Gross estate 5,000,000 4,500,000 9,500,000Less:OrdinaryDeductions

Funeralexpenses 200,000Otherdeductions 1,300,000TotalConjugaldeductions (1,500,000) (1,500,000)

Net estatebefore shareof spouse 3,500,000 4,500,000 8,000,000Less Share of survivingspouse

1/2 of 3,500,000 (1,750,000)Net Estate before specialdeductions 6,250,000Less: Special Deductions

Family Home (1,000,000)Standard Deduction (1,000,000)Medical Expenses (500,000)

Net Taxable Estate 3,750,000

Family home is conjugal or communityproperty

Conjugal Exclusive TotalReal andpersonalproperties 5,000,000 5,000,000Family home 2000000 2,000,000Otherexclusiveproperties 2,000,000 2,000,000Gross estate 7,000,000 2,000,000 9,000,000Less: OrdinaryDeductions

Funeralexpenses 200,000Other ded’ns 1,300,000TotalConjugaldeductions (1,500,000) (1,500,000)


Page 100 of 198

TA

XA

TIO

NLA

W2

Net estatebefore share ofspouse 5,500,000 2,000,000 7,500,000Less Share ofsurviving spouse `

(1/2 of 5,500,000) (2,750,000)Net Estate before specialdeductions 4,750,000Less: Special Deductions

Family Home (1,000,000)Standard Deduction (1,000,000)Medical Expenses (500,000)


Family home is conjugal property, valuedat P1,500,000

Conjugal Exclusive TotalReal andpersonalproperties 5,000,000 5,000,000Family home 1,500,000 1,500,000Otherexclusiveproperties 2,000,000 2,000,000Gross estate 6,500,000 2,000,000 8,500,000Less: OrdinaryDeductions

Funeralexpenses 200,000Otherdeductions 1,300,000TotalConjugaldeductions (1,500,000) (1,500,000)

Net estatebefore share ofspouse 5,000,000 2,000,000 7,000,000Less Share of survivingspouse `

1/2 of 5,000,000 (2,500,000)Net Estate beforespecial deductions 4,500,000Less: Special Deductions

Family Home (750,000)Standard Deduction (1,000,000)Medical Expenses (500,000)


Note:Only 750,000 is allowed as a deduction for thefamily home, considering that it was conjugalproperty valued at P1,500,000. This value issubdivided into P750,000, which belonged to thedecedent, and P750,000, which belonged to thesurviving spouse. The part owned by thedecedent (P750,000) is compared with theP1,000,000 maximum deduction, the lower ofthe two amounts being the allowable deduction.

II. DONOR’S TAX

A. PRINCIPLES

1. Definition

Not defined under the Tax Reform Act of1997. A “gift” is merely subjected to donor’stax.

GIFT or DONATION- “an act of liberalitywhereby a person disposes gratuitously of athing or right in favor of another whoaccepts it.” (Art 725, Civil Code)

REQUISITES for a gift to be subject todonor’s tax: [ACID]1. The donor must have CAPACITY2. There must be an INTENT TO DONATE3. There must be DELIVERY, either actual

or constructive4. The donee must ACCEPT the donation

2. Kinds of Donations

1. Donations inter vivos – a donation madebetween living persons, which isperfected the moment the donor knowsof the acceptance of the gift by thedonee; subject to donor’s tax

2. Donations mortis causa – a donationwhich takes effect upon the death of thedonor; subject to estate tax

Q: What are considered donations for taxpurposes?1. Sales, exchanges and other transfers

of property for less than an adequateand full consideration in money ormoney’s worth

Noteworthy, the element of donativeintent is conclusively presumed intransfers of property for less than anadequate or full consideration in moneyor money’s worth.

2. Condonation or remission of debtwhere the debtor did not render servicein favor of the creditor

However, real property consideredcapital assets under the Tax Code areexcepted from this rule. (Sec 100 inrelation to Sec 24(d))

Under Section 24(d), the fair marketvalue itself, if higher than the grossselling price, is the base for computingthe capital gains tax imposed upon thesale of such capital assets.

Thus, what the seller avoids in thepayment of the donor’s tax, it pays forin the capital gains tax.

3. Applicable Law

The law in force at the time of theperfection/ completion of the donation (Sec11, RR 2-2003)

Note:Any contribution in cash or in kind to anycandidate, political party or coalition of


Page 101 of 198

TA

XA

TIO

NLA

W2

parties for campaign purposes shall begoverned by the Election Code, asamended. (Sec. 99(C), NIRC)

Case Law:Abello v. CIR (Feb. 23, 2005)— Thecontributions of the ACCRA partners to thecampaign funds of Sen. Angara during the1987 national elections constitutes adonation, thus, subject to gift taxes.However, the SC noted that succeedingcases shall be governed by RA 7166enacted by Congress on Nov. 25, 1991. TheRA provides in Sec 13 thatpolitical/electoral contributions, dulyreported to the Commission on Elections,are NOT subject to the payment of any gifttax.

B. PROPERTIES INCLUDED

1. Classes of Donors and their GrossGift

1. Citizens or Residents of thePhilippines – all properties locatednot only within the Philippines butalso in foreign countries

2. Nonresident Alien – all real andtangible properties within thePhilippines, and intangible personalproperty, unless there is reciprocity,in which case it is not taxable

Q: What are the intangible propertieswhich are considered by law as situatedin the Philippines?

1. Franchise which must be exercised inthe Philippines

2. Obligations or bonds issued by anycorporation or sociedad anonimaorganized or constituted in thePhilippines

3. Shares, obligations or bonds issued byany foreign corporation 85% of thebusiness of which is located in thePhilippines

4. Shares, obligations or bonds issued byany foreign corporation if such shares,obligations or bonds have acquired abusiness situs in the Philippines

5. Shares or rights in any partnership,business or industry established in thePhilippines

2. Rule on Reciprocity (Sec 104,NIRC)

There is reciprocity if the foreign country ofwhich the decedent was a citizen andresident at the time of his death:

1. did not impose a transfer tax of anycharacter, in respect of intangiblepersonal property of citizens of thePhilippines not residing in that foreigncountry; or

2. allowed a similar exemption fromtransfer tax in respect of intangiblepersonal property owned by citizens ofthe Philippines not residing in thatcountry

This rule applies to the transmission by giftof intangible personal property located orwith a situs within the Philippines of anonresident alien.

C. EXEMPTIONS

Deductible from gross gifts in order toarrive at the taxable net gifts.

Not to be treated as exclusions from thegross gifts of the donor.

1. Dowries or donations made:a. on account of marriageb. before its celebration or within one

year thereafterc. by parents to each of their

legitimate, recognized natural, oradopted children

d. to the extent of the first P10,000.e. However, this exemption may not be

availed of by a non-resident not acitizen of the Philippines.

Q: Can both parents making adonation to a child in considerationof marriage avail of the P10,000deduction? Yes. If both spouses made the gift,

then the gift is taxable one-half toeach donor spouse.

Separate donor’s tax returns mustbe filed; husband and wife areconsidered as separate and distincttaxpayers for purposes of donor’stax. (Section 12, RR 2-2003)

However, where there is failure toprove that the donation was actuallymade by both spouses, the donationis taxable as an exclusive act of thehusband (Tang Ho v. BTA, 97 Phil890), without prejudice to the rightof the wife to question the validity ofthe donation without her consentpursuant to the provisions of theCivil Code and the Family Code.(Section 12, supra)

2. Gifts made to or for the use of theNational Government or any entitycreated by any of its agencies which is


Page 102 of 198

TA

XA

TIO

NLA

W2

not conducted for profit, or to anypolitical subdivision of the saidGovernment

3. Gifts in favor of an educational and/orcharitable, religious, cultural or socialwelfare corporation, institution,accredited non-governmentorganization, trust or philanthropicorganization or research institution ororganization, Provided not more than30% of said gifts will be used by suchdonee for administration purposes

Q: What is a non-profit educationaland/or charitable corporation, etc?It is a school, college or universityand/or charitable corporation,accredited NGO, trust or philanthropicorganization and/or research institutionor organization: Incorporated as a non-stock entity, Paying no dividends,

Governed by trustees who receive nocompensation, and

Devoting all its income, whetherstudents’ fees or gifts, donations,subsidies or other forms ofphilanthropy, to the accomplishmentand promotion of the purposesenumerated in its Articles ofIncorporation

4. Encumbrances on the property donatedif assumed by the donee in the deed ofdonation

5. Donations made to entities exemptedunder special laws, e.g.:

o Aquaculture Department of theSoutheast Asian FisheriesDevelopment Center of thePhilippines

o Development Academy of thePhilippines

o Integrated Bar of the Philippineso International Rice Research Instituteo National Museumo National Libraryo National Social Action Councilo Ramon Magsaysay Foundationo Philippine Inventor’s Commissiono Philippine American Cultural

Foundationo Task Force on Human Settlement on

the donation of equipment, materialsand services

6. Donations to persons not strangerswhere the total of such net gifts for the

calendar year is not more thanP100,000.00

“Net Gifts” The net economic benefit from the

transfer that accrues to the donee. Accordingly, if a mortgaged property

is transferred as a gift, but imposingupon the donee the obligation to paythe mortgage liability, then the netgift is measured by deducting fromthe fair market value of the propertythe amount of the mortgageassumed. (Section 11, RR 2-2003)

D. COMPUTATION

How is donor’s tax computed?

This general formula shall be followed:

Gross gifts madeLess: Deductions from the gross giftsNet gifts madeMultiplied by applicable rateDonor’s tax on the net gifts

If there were several gifts made duringthe year, this formula is followed:

Gross gifts made on this dateLess: Deductions from the gross giftsNet gifts made on this dateAdd: all prior net gifts during the yearAggregate net giftsMultiplied by applicable rateDonor’s tax on the aggregate net giftsLess: donor’s tax paid on prior net giftsDonor’s tax due on the net gifts to date

E. RATES OF TAX

The applicable donor’s tax rate isdependent upon the relationshipbetween the donor and the donee.

1. If the donee is a stranger to thedonor, the tax rate is equivalent to 30% of the net gifts. A stranger for purposes of the

donor’s taxa. a person who is not a brother,

sister (whether by whole or half-blood), spouse, ancestor or linealdescendant, or

b. a person who is not a relative byconsanguinity in the collateralline within the fourth degree ofrelationship. (Sec. 99(B))

Note that donations made betweenbusiness organizations and those madebetween an individual and a businessorganization shall be considered asdonations made to a stranger (RR 2-2003)


Page 103 of 198

TA

XA

TIO

NLA

W2

2. If the donee is not a stranger to thedonor, the tax for each calendar yearshall be computed on the basis of thetotal net gifts made during the calendaryear:

Over But notOver

Tax Is Plus Of theExcessOver

0 100,000 Exempt

100,000 200,000 0 2% 100,000

200,000 500,000 2,000 4% 200,000

500,000 1M 14,000 6% 500,000

1M 3M 44,000 8% 1M

3M 5M 204,000 10% 3M

5M 10M 404,000 12% 5M

10M 1,004,000 15% 10M

Note: A legally adopted child is entitled to allthe rights and obligations provided by law tolegitimate children, and therefore, adonation to him shall not be considered as adonation made to a stranger.

F. OBJECT OF TAXATION

Donor’s tax shall be imposedwhether the transfer is in trust orotherwise,whether the gift is direct or indirect andwhether the property is real or personal,tangible or intangible.

The computation of the donor’s tax is ona cumulative basis over a period ofone calendar year.

Illustrations:

1. Donation to son by parents on accountof marriage (P100,000): Husband

Net Taxable Gift:P50,000 – 10,000 = P40,000

Tax Due:None, since P40,000 is below theP100,000 threshold

Wife – same as above

2. Donation to son and daughter-in-law byparents on account of marriage(P100,000): Husband

Gift pertaining to the sono Net Taxable Gift:

P25,000 – 10,000 = P15,000o Tax Due:

None, since P15,000 is belowthe P100,000 threshold

Gift pertaining to the daughter-in-lawo Net Taxable Gift:

P25,000o Tax Due:

P25,000 x 30% = P7,500 Wife – same as above

3. Donations to donees not considered strangers for tax purposes were made on:

January 30, 2002 – P 2,000,000March 30, 2002 – P 1,000,000August 15, 2002 – P 500,000

After the firstdonation

After the second donation After the third donation

Net Taxable Gift 2,000,000 January Donation - P2,000,000 January Donation - P2,000,000

March Donation - 1,000,000 March Donation - 1,000,000

Total P3,000,000 August Donation - 500,000

Total P3,500,000

CorrespondingDonor’s Tax(refer toschedule)

124,000 P 204,000 P254,000

Tax Due /Payable

124,000 Donor’s Tax P 204,000 Donor’s Tax P 254,000

Less: Tax Previously Paid124,000

Less: Tax Previously paid(124k+80k) 204,000

Tax Due P80,000 Tax Due P50,000

G. VALUATION

If the gift is made in property, the fairmarket value at that time will beconsidered the amount of gift.

Real Property

taxable base = FMV as determinedby the Commissioner of BIR (Zonal

Value) or FMV as shown in thelatest schedule of values of theprovincial and city assessor (MarketValue per Tax Declaration),whichever is higher.

If there is no zonal value, thetaxable base is the FMV thatappears in the latest tax declaration.


Page 104 of 198

TA

XA

TIO

NLA

W2

Improvement

value of improvement is theconstruction cost per buildingpermit and/or occupancy permitplus 10% per year after year ofconstruction, or the FMV per latesttax declaration.

H. TAX CREDIT

A situation may arise when the propertygiven as a gift is located in a foreigncountry and the donor may be subjectto donor’s tax twice on the sameproperty: first, by the Philippinegovernment and second, by the foreigngovernment where the property issituated.

The remedy of claiming a tax credit is,therefore, aimed at minimizing theburdensome effect of double taxation byallowing the taxpayer to deduct hisforeign tax from his Philippine tax,subject to the limitations provided bylaw.

Q: Who may claim tax credit? Tax credit for donor’s tax may be

claimed only by a resident citizen, non-resident citizen and resident alien.

Q: What are the limitations on the taxcredit?

1. NET GIFT(foreign country)

ENTIRE NET GIFTS

xPHIL

DONOR’S TAX

2. NET GIFT(allforeign countries)

ENTIRE NET GIFTS

xPHIL

DONOR’S TAX

Note: The computation of the donor’s tax creditis the same as the computation for estate taxcredit.

I. COMPLIANCE REQUIREMENTS

Donor’s Tax Return

A. Who Files

Every person, whether natural or juridical,resident or non-resident, who transfers orcauses to transfer property by gift, whetherin trust or otherwise, whether the gift isdirect or indirect and whether the propertyis real or personal, tangible or intangible.

B. Contents of the Donor’s Tax Return

1. Each gift made during the calendar yearwhich is to be included in computingnet gifts;

2. The deductions claimed and allowable;3. Any previous net gifts made during the

same calendar year;4. The name of the donee;5. Relationship of the donor to the donee;6. Such further information as the

Commissioner may require.

C. When Filed

Filed within thirty (30) days after thedate the gift is made or completed.

The tax due thereon shall be paid at thesame time that the return is filed.

D. Where Filed and Paid

Unless the Commissioner otherwisepermits, it shall be filed and the taxpaid to:a. An authorized agent bankb. The Revenue District Officerc. Revenue Collection Officer ord. Duly authorized Treasurer of the

city or municipality where the donorwas domiciled at the time of thetransfer, or

e. If there be no legal residence in thePhilippines, with the Office of theCommissioner.

In the case of gifts made by a non-resident, the return may be filed with:a. The Philippine Embassy or

Consulate in the country where heis domiciled at the time of thetransfer, or

b. Directly with the Office of theCommissioner.

REVIEWER IN TAXATION LAW Part II. Value Added Tax

Page 105 of 198

TA

XA

TIO

NLA

W2

Part II. Value Added Tax

I. CONCEPTII. NATURE AND CHARACTERISTICSIII. TRANSACTIONS SUBJECT TO VATIV. PERSONS LIABLEV. RATES IN GENERAL

A. 12% VATB. ZERO-RATED TRANSACTIONSC. FINAL WITHHOLDING VAT

VI. TRANSACTIONS EXEMPT FROM VATVII.DETERMINING THE VAT BASEVIII. INPUT TAXES

A. CREDITABLE INPUT TAXB. EXCESS OUTPUT OR INPUT TAXC. REFUNDS OR TAX CREDITS OF INPUT

TAXIX. SUBSTANTIATION REQUIREMENTSX. INVOICING REQUIREMENTSXI. CONSEQUENCES OF ISSUING

ERRONEOUS VAT INVOICE OR VATOFFICIAL RECEIPT

XII.REGISTRATION REQUIREMENTSXIII. FILING OF RETURNS AND PAYMENT OF

VATXIV. ENFORCEMENT MEASURES

I. CONCEPT

A. VAT is a percentage tax imposed atevery stage of the distribution processon the sale, barter, or exchange, orlease of goods or properties, and on theperformance of service in the courseof trade or business, or on theimportation of goods, whether forbusiness or non-business purposes.

B. It is a business tax levied on certaintransactions involving a wide range ofgoods, properties, and services, suchtax being payable by the seller, lessor,or transferor. The tax is so-calledbecause it is imposed on the value notpreviously subjected to VAT (De Leon,“The National Internal Revenue CodeAnnotated,” 2000 edition)

C. It is also an excise tax, or a tax on theprivilege of engaging in the business ofselling goods or services, or in theimportation of goods.

D. The taxpayer (seller) determines his taxliability by computing the tax on thegross selling price or gross receipt(output tax), and subtracting orcrediting the earlier VAT on thepurchase or importation of goods or onthe sale of service (input tax) againstthe tax due on his own sale.

VAT payable to BIR = OUTPUT TAX – INPUT TAX

Computation of the VAT Payable:

Gross taxable sales/receipts xxxLess: Sales returns

Sales allowancesSales discounts

xxxxxx

(xxx)Net sales xxxMultiply with the VAT rate 12%Output tax (12% of net sales) Xxx

Input tax carried over from previousperiod

xxx

Domestic purchases xxxImportations xxx

Total xxxInput tax (12% of total) xxx

Total Input tax (xxx)

VAT payable (Output tax less input tax) xxx

(All amounts in the formula must be NET of VAT)

II. NATURE & CHARACTERISTICS

It is an indirect tax, the amount ofwhich may be shifted to or passed onthe buyer, transferee, or lessee of thegoods, properties or services. (Sec. 105)

This rule shall likewise apply to existingcontracts of sale or lease of goods,properties or services at the time of theeffectivity of RA No. 9337. –RR 16-2005

Constitutionality of VAT

ABAKADA Guro Party List, et. al. vErmita (2005):

The validity of raising the VAT rate from10% to 12% by the President wasupheld by SC.

The assailed provisions of RA 9337 arethose that say that the President, uponthe recommendation of the Sec. ofFinance, shall raise the rate of VAT to12% when VAT as a percentage of theGDP of the previous year exceeds 24/5% and when the deficit as apercentage of the previous year’s GDPexceeds 1 ½%.

This is NOT an undue delegation oflegislative power. It is simply adelegation of ascertainment of factsupon which enforcement andadministration of the increased rateunder the law is contingent.

It is the ministerial duty of thePresident to immediately impose the12% rate upon the existence of any ofthe conditions specified by Congress.


Page 106 of 198

TA

XA

TIO

NLA

W2

Another assailed provision is Sec. 8amending Sec. 110(B), which imposes alimitation on the amount of input tax(70% of the output tax) that may becredited against the output tax.

The Court says this does not violate dueprocess. The excess input tax, if any, isretained in a business’ books ofaccounts and remains creditable in thesucceeding quarter/s.

In addition, Sec. 112(B) allows a VAT-registered person to apply for theissuance of a tax credit certificate orrefund for any unused input taxes, tothe extent that such input taxes havenot been applied against the outputtaxes. Such unused input tax may beused in payment of his other internalrevenue taxes.

The input tax is NOT a property or aproperty right within the constitutionalpurview of the due process clause.

A VAT-registered person’s entitlement tothe creditable input tax is a merestatutory privilege.

The right to credit input tax as againstthe output tax is clearly a privilegecreated by law, a privilege that also thelaw can remove, or in this case, limit.

[Note: This limitation of creditable input taxhas been eliminated by RA 9361, effectiveDecember 2006. Pls refer to the discussionon input taxes on page 36.]

With respect to Sec. 8, amending Sec.110 (A), which provides for 60-monthamortization of the input tax on capitalgoods purchased: It is not oppressive,arbitrary, and confiscatory. Thetaxpayer is not permanently deprived ofhis privilege to credit the input tax. Forwhatever is the purpose, it involvesexecutive economic policy andlegislative wisdom in which the Courtcannot intervene.

The tax law is uniform: it provides astandard rate of 0% or 10% (or 12%now) on all goods or services. The lawdoes not make any distinction as to thetype of industry or trade that will bearthe 70% limitation on the creditableinput tax, 5-year amortization of inputtax on purchase of capital goods, or the5% final withholding tax by thegovernment.

It is equitable: The law is equipped witha threshold margin (P1.5M). Also, basicmarine and agricultural products intheir original state are still not subjectto tax. Congress also provided formitigating measures to cushion theimpact of the imposition of the tax onthose previously exempt. Excise taxeson petroleum products and natural gaswere reduced. Percentage tax ondomestic carriers was removed. Powerproducers are now exempt from payingfranchise tax.

VAT, by its very nature, is regressive.BUT the Constitution does not reallyprohibit the imposition of indirecttaxes (which is essentially regressive).

What it simply provides is thatCongress shall “evolve a progressivesystem of taxation”.

In Tolentino v. Sec. of Finance, the Courtsaid that direct taxes are to bepreferred, and as much as possible,indirect taxes should be minimized…but not avoided entirely because it isdifficult, if not impossible, to avoidthem.

Tolentino v. Guingona:

Regressivity is not a negative standardfor courts to enforce.

What Congress is required by theConsti to do is to “evolve a progressivesystem of taxation.”

This provision is placed in theConsti as moral incentives to legislation,not as judicially enforceable rights.

The regressive effects are corrected bythe zero rating of certain transactionsand through the exemptions.

The transactions which are subject toVAT are those which involve goods andservices which are used or availed ofmainly by higher income groups ( realproperties held primarily for sale tocustomers, right or privilege to usepatent, copyright...)

III.TRANSACTIONS SUBJECT TO VAT

A. Any sale, barter or exchange of goodsand properties, or similar transactionsin the course of trade or business

B. Any sale of services, or similartransactions, in the course of trade orbusiness


Page 107 of 198

TA

XA

TIO

NLA

W2

C. Any lease of goods and properties orsimilar transactions, in the course oftrade or business

D. Any importation of goods, whether inthe course of trade or business or not

IV.PERSONS LIABLE (Sec. 105)

A. Any person who, in the course of tradeor business,(1) sells, barters, exchanges goods or

properties,(2) leases goods or properties, and(3) renders services.

The phrase “in the course of trade orbusiness” means:

the regular conduct or pursuit ofa commercial or an economicactivity, including transactionsincidental thereto,

by any person regardless of whetheror not the person engaged therein isa non-stock, nonprofit organization

irrespective of the disposition of itsnet income and whether or not itsells exclusively to members or theirguests, or government entity. (Sec105)

Exception:When the annual sales do not exceedP1,500,000(meaning not considered to be in thecourse of trade or business but only forsubsistence, even if he, in the course oftrade or business, (1) sells, barters,exchanges goods or properties, (2) leasesgoods or properties, and (3) rendersservices; hence, he is not liable for eitherVAT or percentage tax)

B. Any person who imports goods

RR 16-2005: the importer, whetheran individual or corporation andwhether or not made in the courseof his trade or business, shall beliable to pay VAT.

V. RATES IN GENERAL [12%, 0%]

A. 12% VAT

1. SALE OF GOODS OR PROPERTIES2. IMPORTATION OF GOODS

3. SALE OF SERVICES

1. SALE OF GOODS OR PROPERTIES(§ 106, A)

Rate: 12% VAT (beginning 1 February 2006(RMC No. 7-06)

Basis: Gross selling price or gross value inmoney of the goods or properties.

Who Pays: Paid by SELLER

Goods or properties – all tangible andintangible objects which are capable ofpecuniary estimation, including:(a) Real properties held primarily for sale to

customers or held for lease in theordinary course of trade or business;

(b) The right or the privilege to use patent,copyright, design, or model, plan, secretformula or process, goodwill,trademark, trade brand or other likeproperty or right;

(c) The right or the privilege to use in thePhilippines of any industrial,commercial or scientific equipment;

(d) The right or the privilege to use motionpicture films, films tapes and discs;

(e) Radio, television, satellite transmissionand cable television time.

Gross Selling Price (GSP) – The totalamount of money or its equivalent whichthe purchaser pays or is obligated to pay tothe seller in consideration of the sale,barter or exchange of the goods orproperties, excluding the value-added tax.The excise tax, if any, on such goods orproperties shall form part of the grossselling price xxx

1) The consideration stated in the salesdocument, or

2) The fair market value (FMV), whicheveris the HIGHER of:a) FMV as determined by the

Commissioner (zonal value), orb) FMV as shown in schedule of values

of the Provincial & City assessors(real property tax declaration)

If GSP is based on the zonal value ormarket value of the property, the zonalor market value shall be deemedINCLUSIVE of VAT.

If the VAT is not billed separately, theselling price stated in the salesdocument shall be deemed to beINCLUSIVE of VAT.

SALE OF REAL PROPERTY ONINSTALLMENT PLAN (RR 16-2005)

Scope (§ 4.106 – 3) Sale of real property by a real estate

dealer, the initial payments of which inthe year of sale (down payment + allpayments actually or constructivelyreceived during the year of sale) do notexceed 25% of the gross selling price.


Page 108 of 198

TA

XA

TIO

NLA

W2

However, in the case of sale of realproperties on the deferred-paymentbasis, not on the installment plan,(meaning the initial payments in theyear of sale exceed 25% of the grossselling price), the transaction shall betreated as cash sale which makes theentire selling price taxable in the monthof sale.

The real estate dealer shall be subjectto VAT on the installment payments,including interest and penalties,actually and/or constructively receivedby the seller.

Sale of residential lot exceeding P1.5M,residential house and lot or otherresidential dwellings exceeding P2.5M,where the instrument of sale isexecuted on or after July 1, 2005, shallbe subject to [12%] VAT.

Where the instrument of sale wasexecuted prior to July 1, 2005, the priceneeds only to exceed P1M for theinstallment sale of residential houseand lot or other residential dwellings tobe subject to 10% VAT.

Transmission of property to a trusteeshall NOT be subject to VAT IF theproperty is to be merely held in trust forthe trustor and/or beneficiary.However, IF the property transferred isone for sale, lease or use in the ordinarycourse of trade or business AND thetransfer constitutes a completed gift,the transfer is subject to VAT as adeemed sale transaction. The transferis a completed gift if the transferordivests himself absolutely of controlover the property, i.e., irrevocabletransfer of corpus and/or irrevocabledesignation of beneficiary.

TRANSACTIONS DEEMED SALE (subjectto 12% VAT) (§ 106, B) [DR TC]

(1) Transfer, use or consumption not in thecourse of business of goods propertiesoriginally intended for sale or for use inthe course of business(e.g. when a VAT-registered personwithdraws goods from his business forhis personal use.- RR 16-2005)

(2) Distribution or transfer to:(a) Shareholders or investors as share

in the profits of the VAT-registeredpersons; or

(b) Creditors in payment of debt;

Note:Property dividends which constitutestocks in trade or properties primarilyheld for sale or lease declared out ofretained earnings on or after Jan. 1,1996 and distributed by the company toits shareholders shall be subject to VATbased on the zonal value or FMV at thetime of the distribution, whichever isapplicable. (RR 16-2005)

(3) Consignment of goods if actual sale isnot made within 60 days following thedate such goods were consigned; and

Note:Consigned goods returned by the consigneewithin the 60-day period are not deemedsold. - RR 16-2005)

(4) Retirement from or cessation ofbusiness, with respect to inventories oftaxable goods existing as of suchretirement or cessation. With respect to ALL goods on hand,

whether capital goods, stock-in-trade, supplies or materials, as ofthe date of such retirement orcessation, whether or not thebusiness is continued by the newowner or successor.

Examples are change of ownershipof the business (e.g. when a soleproprietorship incorporates, or theproprietor sells his entire business)and dissolution of a partnership andcreation of a new partnership whichtakes over the business. - RR 16-2005)

TAX BASE on transactions deemed sale

Output tax = market value of the goodsdeemed sold as of the time of theoccurrence of the transactions.

TAX BASE in case ofretirement/cessation of business

Tax Base = acquisition cost or currentmarket price of the goods or properties,whichever is lower.

CHANGES IN OR CESSATION OF STATUSOF A VAT-REGISTERED PERSON (12%VAT)

1) Under § 106, C of the NIRC VAT shall apply to goods disposed

of or existing as of a certain dateif under the circumstances to beprescribed in rules and regulationsto be promulgated by the Secretary


Page 109 of 198

TA

XA

TIO

NLA

W2

of Finance, upon recommendation ofthe Commissioner, the status of aperson as a VAT-registered personchanges or is terminated xxx

2) Under RR 16-2005 § 4.106, BA) Subject to output tax—applicable

to goods/properties originallyintended for sale or use in businessand capital goods which are existingas of the occurrence of the following:a) Change of business activity from

VAT taxable status to VAT-exempt status.

b) Approval of a request forcancellation of registration dueto reversion to exempt status

c) Approval of a request forcancellation of registration dueto a desire to revert to exemptstatus AFTER the lapse of 3consecutive years from the timeof registration by a person whovoluntarily registered despitebeing exempt under Sec. 109 (2)

d) Approval of request forcancellation of registration ofone who commenced businesswith the expectation of grosssales/receipts exceeding P1.5Mbut who failed to exceed thisamount during the first 12months of operation

B) NOT subject to output taxa) Change of control of a

corporation by the acquisition ofthe controlling interest of suchcorporation by anotherstockholder or group ofstockholders.

b) Change in the trade or corporatename of the business

c) Merger or consolidation ofcorporations. The unused inputtax of the dissolved corporation,as of the date of merger orconsolidation, shall be absorbedthe surviving or new corp.

2. IMPORTATION OF GOODS (§107,A)

Rate: 12% (as amended)

Basis: total value used by the Bureau ofCustoms in determining tariff and customsduties, plus customs duties, excise taxes, ifany, and other charges,

Where the customs duties aredetermined on the basis of the quantity

or volume of the goods, the value-addedtax shall be based on the landed costplus excise taxes, if any.

Who Pays: Paid by the importer prior to therelease of such goods from customs custody

Transfer of Goods by Tax-ExemptPersons (§107, B):

If importer is tax-exempt, thesubsequent purchasers, transferees orrecipients of such imported goods shallbe considered as importers who shall beliable for the tax on importation.

The tax due on such importation shallconstitute a lien on the goods superiorto all charges or liens on the goods,irrespective of the possessor thereof.(as amended by RA 9337)

3. SALE OF SERVICES & USE/LEASEOF PROPERTIES (§ 108, A)

Rate: 12% (as amended)

Basis: Gross receipts derived from the saleor exchange of services, including the use oflease of properties.

Lease of Properties: Subject to the tax imposed irrespective

of the place where the contract of leaseor licensing agreement was executed ifthe property is leased or used in thePhilippines.

'Gross Receipts' the total amount of money or its

equivalent representing the contractprice, compensation, service fee, rentalor royalty, including the amountcharged for materials supplied with theservices and deposits and advancedpayments actually or constructivelyreceived during the taxable quarter forthe services performed or to beperformed for another person, excludingvalue-added tax xxx (as amended by RA9337, underscored parts amended oradded by RA 9337)

To be excluded, the official receipt mustbe in the name of the ultimate payor.(RR 16-2005)

Notes:(unless otherwise indicated, from RR 16-2005)1. Persons engaged in milling,

processing, manufacturing orrepacking goods for others are subjectto VAT, EXCEPT palay into rice, corn


Page 110 of 198

TA

XA

TIO

NLA

W2

into corn grits, and sugarcane into rawsugar

2. For dealers in securities, “grossreceipts” means gross selling price lesscost of the securities sold. RR 7-95:Pre-need companies are considereddealers in securities.

3. Lending investors: all persons OTHERthan banks, non-bank financialintermediaries, finance companies andother financial intermediaries NOTperforming quasi-banking functionswho make a practice of lending moneyfor themselves or others at interest

4. Subject to VAT: Franchise grantees ofelectric utilities, telephone andtelegraph, radio and/or TV broadcastingand all other franchise grantees(including PAGCOR and itslicensees/franchisees) EXCEPT franchise grantees of radio

and/or TV broadcasting whoseannual gross receipts of thepreceding year do not exceed P10M(which shall be subject to 3%franchise tax under Sec. 119,subject to optional registration), andfranchise grantees of gas and waterfacilities (under Sec. 109, subject to2% franchise tax).

With respect to franchise grantees oftelephone and telegraph services,

amounts received for overseasdispatch, message, or conversationoriginating from the Philippines aresubject to the percentage tax underSec. 120 and hence exempt fromVAT.

5. In a lease contract, the advancepayment by the lessee may be:a) a loan to the lessor from the lessee

NOT subject to VATb) an option money for the property

NOT subject to VATc) a security deposit to insure the

faithful performance of certainobligations of the lessee to the lessor

NOT subject to VAT BUT if the security deposit is

applied to rental, it shall besubject to VAT at the time of itsapplication.

d) Pre-paid rental: subject to VAT whenreceived, irrespective of theaccounting method employed by thelessor.

6. On transportation:

All receipts from service, hire, oroperating lease of transportationequipment not subject to thepercentage tax on domesticcommon carriers and keepers ofgarages shall be subject to VAT.

Common carrier Transporting Kind of carrier Tax LiabilityBy land Persons Domestic 3%, Sec. 117

Goods/cargo Domestic 12% VATBy sea

Whether transportingpersons or goods/cargo

Domestic Domestic trip - 12%VATInternational trip –zero-rated

International 3%, Sec. 118By air Domestic Domestic flight - 12%

VATInternational flight –zero-rated

International 3%, Sec. 118

7. Sale of electricity by generation,transmission, and distributioncompanies shall be subject to 12% VAT, EXCEPT sale of power or fuel

generated through renewablesources of energy, such as, but notlimited to, biomass, solar, windhydropower, geothermal, oceanenergy, and other emerging energysources using technologies such asfuel cells and hydrogen fuels, which

shall be subject to 0% rate of VAT(zero-rated).

The universal charge passed on andcollected by distribution companiesand electric cooperatives shall beexcluded from the computation ofgross receipts.

8. Insurance and reinsurancecommissions, as opposed to premiums,whether life or non-life, are subject toVAT.


Page 111 of 198

TA

XA

TIO

NLA

W2

Non-life insurance premiums aresubject to VAT.

Life insurance premiums are NOTsubject to VAT, for they are subjectto percentage tax.

B. 0% VAT (ZERO-RATEDTRANSACTIONS)

A zero-rated sale by a VAT-registeredperson is a taxable transaction for VATpurposes, but shall not result in anyoutput tax.

Input tax on purchases of goods,properties or services related to suchzero-rated sale shall be available as taxcredit or refund. (RR 16-2005)

Transactions:a) Sale of goods or propertiesb) Services and use/lease of properties

1. ZERO-RATED SALE OF GOODS ORPROPERTIES (§ 106, (2))

Export sales (IF-GONE)

1) The sale and actual shipment ofgoods from the Philippines to aForeign country AND paid for inacceptable foreign currency or itsequivalent in goods or services, ANDaccounted for in accordance withthe rules and regulations of theBSP;

2) Sale of raw materials or packagingmaterials to a Nonresident buyer fordelivery to a resident local export-oriented enterprise to be used inmanufacturing, processing, packingor repacking in the Philippines ofthe said buyer's goods AND paid forin acceptable foreign currency ANDaccounted for in accordance withthe rules and regulations of the BSP

3) Sale of raw materials or packagingmaterials to Export-orientedenterprise whose export salesexceed seventy percent (70%) of totalannual production. Any enterprise whose export

sales exceed 70% of the totalannual production of thepreceding taxable year shall beconsidered an export-orientedenterprise upon accreditationunder the rules & regulations ofExport Development Act, RA7844 (RR 7-95)

4) Sale of Gold to the Bangko Sentralng Pilipinas (BSP);

5) Those considered export sales under theOmnibus Investment Code of 1987, andother special laws (ex. Bases Conversion& Development Act of 1992)

Under Omnibus Investment Code:a) Phil. port FOB value of export

products exported directly by aregistered export producer;

b) Net selling price of exportproducts sold by a registeredexport producer to anotherexport producer, or to an exporttrader that subsequently exportsthe same (only when actuallyexported by the latter).

Constructive Exports:a) sales to bonded manufacturing

warehouses of export-orientedmanufacturers;

b) sales to export processing zones;c) sales to registered export traders

operating bonded tradingwarehouses supplying raw materialsin the manufacture of exportproducts;

d) sales to diplomatic missions andother agencies and/orinstrumentalities granted taximmunities, of locallymanufactured, assembled orrepacked products, whether paid forin foreign currency or not.

Provided that export sales ofregistered export traders mayinclude commission income, andthat exportation of goods onconsignment shall not be deemedexport sales until the exportproducts consigned are in fact soldby the consignee, and

Provided finally that sales by a VAT-registered supplier to amanufacturer/producer whoseproducts are 100% exported areconsidered export sales.

A certification to his effect must beissued by the Board of Investmentwhich shall be good for 1 yearunless subsequently re-issued. (RR16-2005)

6) The sale of goods, supplies, equipmentand fuel to persons engaged inInternational shipping or internationalair transport operations. (added by RA9337)


Page 112 of 198

TA

XA

TIO

NLA

W2

Provided, that the same is limited togoods, supplies, equipment and fuelpertaining to or attributable to thetransport of goods and passengersfrom a port in the Phil. directly to aforeign port without docking orstopping at any other port in thePhil., and that if any portion of suchfuel, goods, or supplies is used forpurposes other than that mentionedhere, such portion of fuel, goods,and supplies shall be subject to 12%VAT.

Foreign Currency Denominated Sale(FCDS)

Sale to a nonresident of goods:o except those mentioned in

Sections 149 and 150(automobiles and non-essentialgoods like jewelry, perfume, andyachts)

o assembled or manufactured inthe Philippines for delivery to aresident in the Philippines

o paid for in acceptable foreigncurrency AND accounted for inaccordance with the rules andregulations of the BSP.

Sales of locally manufactured orassembled goods for householdand personal use to Filipinosabroad and other non-residents ofthe Philippines as well as returningOverseas Filipinos under theInternal Export Program of thegovernment paid for in convertibleforeign currency AND accounted forin accordance with the rules andregulations of the BSP shall also beconsidered export sales.

Sales to persons or entities whoseexemption under special laws orinternational agreements to whichthe Philippines is a signatoryeffectively subjects such sales to zerorate.

e.g.a) sales to enterprises duly

registered & accredited with thei) Subic Bay Metropolitan

Authority,ii) Philippine Economic Zone

Authority (PEZA),b) international agreements to

which the Phil. is signatory,such as

i) Asian Development Bank(ADB),

ii) International Rice ResearchInstitute (IRRI)

Section 6 of RR 4-2007, datedFebruary 7, 2007:The term effectively zero-rated sale ofgoods and properties shall refer to thelocal sale of goods and properties bya VAT-registered person to a personor entity who was granted indirecttax exemption under special laws orinternational agreement.

Note:RR 4-2007 removed the distinctionbetween automatic and effectivelyzero-rated transactions found in priorRevenue Regulations (including RR 16-2005) with respect to prior application.

The following line in RR 16-2005 hasbeen DELETED by RR 4-2007:“Other cases of zero-rated sales shallrequire prior application with theappropriate BIR office for effective zero-rating. Without an approvedapplication for effective zero-rating, thetransaction otherwise entitled to zero-rating shall be considered exempt. Theforegoing rule notwithstanding, theCommissioner may prescribe such rulesto effectively implement the processingof applications for effective zero-rating.”

CIR vs. Seagate Technology (Philippines)February 11, 2005: The BIR regulations additionally

requiring an approved prior applicationfor effective zero rating cannot prevailover the clear VAT nature of Seagate’stransactions (subject to zero-rating, asan entity registered with the PEZA).

Other than the general registration of ataxpayer the VAT status of which isaptly determined, no provision under ourVAT law requires an additionalapplication to be made for suchtaxpayer’s transactions to be consideredeffectively zero-rated.

An effectively zero-rated transactiondoes not and cannot become exemptsimply because an applicationtherefor was not made or, if made,was denied.

RMC 74-99: Tax Treatment of Sales ofGoods and Services Made by Suppliers fromWestern Territory to a PEZA registeredenterprise and Sale Transactions made by


Page 113 of 198

TA

XA

TIO

NLA

W2

PEZA registered enterprises Within andWithout the Zone

CROSS- BORDER/DESTINATIONPRINCIPLE (Generally adhered to by ourVAT System)

NO VAT shall be imposed to form part ofthe cost of goods destined forCONSUMPTION OUTSIDE of theterritorial border of the taxing authority.

Hence, actual export of goods andservices from the Phil to a foreigncountry must be free from VAT.

Conversely, those destined for use orconsumption WITHIN the Phil shall beimposed with the 10% VAT. (now 12%,as amended)

CIR v. American Express (2005):The court enumerated the exceptions to thedestination principle.

As a general rule, the value-added tax(VAT) system uses the destinationprinciple.

However, our VAT law itself provides fora clear exception, under which the supplyof service shall be zero-rated when thefollowing 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) ofthe Tax Code; and

(3) it is paid for in acceptable foreigncurrency that is accounted for inaccordance with the regulations of theBangko Sentral ng Pilipinas.

Tax Treatment of Sales Made:

A. Any sale of goods, property or servicesmade by a VAT registered supplier fromthe Customs Territory* to any registeredenterprise operating in the ecozone,REGARDLESS of the class or type of thelatter’s PEZA registration, is actuallyqualified and thus LEGALLY ENTITLEDTO THE 0% VAT. Accordingly, all sales of goods or

property to such enterprise made bya VAT registered supplier from theCustoms Territory shall be treatedSUBJECT TO 0% VAT.

* “Customs Territory” means thenational territory of the Phil OUTSIDE ofthe proclaimed boundaries of theECOZONES.

B. By a VAT-Exempt Supplier from theCustoms Territory to a PEZA registeredenterprise Sale of goods, property and services

by VAT-Exempt supplier from theCustoms Territory to a PEZAregistered enterprise shall be treatedEXEMPT FROM VAT, regardless ofwhether or not the PEZA registeredbuyer is subject to taxes under theNIRC or enjoying the 5% special taxregime.

C. By a PEZA Registered Enterprise

1) Sale of Goods by a PEZA registeredenterprise to a buyer from theCustoms Territory (ie domesticsales) -- this case shall be treated asa technical IMPORTATION made bythe buyer. Such buyer shall betreated as an IMPORTER thereofand shall be imposed with thecorresponding VAT.

2) Sale of Services by a PEZAregistered enterprise to a buyer fromthe Customs Territory – this is NOTembraced by the 5% special taxregime, hence, such seller shall beSUBJECT TO 10% VAT.

3) Sale of Goods by a PEZA registeredenterprise to Another PEZAregistered enterprise (ie Intra-ECOZONE Sales of Goods) – thisshall be EXEMPT from VAT.

4) Sale of Services by ECOZONEenterprise, to Another ECOZONEenterprise (Intra-ECOZONEenterprise Sale of Service)

(a) if PEZA registered seller issubject to 5% special tax regime EXEMPT from VAT

(b) if PEZA registered seller issubject to taxes under NIRC (ienot subject to 5% special taxregime) – subject to 0% VATpursuant to “cross borderdoctrine”

2. ZERO-RATED SALE OF SERVICES& USE/LEASE OF PROPERTIES (§108, B)

Zero-rated transactions

1) Processing, manufacturing or repackinggoods for other persons doing businessoutside the Philippines which goods are


Page 114 of 198

TA

XA

TIO

NLA

W2

subsequently exported, where theservices are paid for in acceptableforeign currency AND accounted for inaccordance with the rules andregulations of the BSP

2) Services other than those mentioned inthe preceding paragraph rendered to

a person engaged in businessconducted outside the PhilippinesORa nonresident person not engaged inbusiness who is outside the Philippineswhen the services are performed,

the consideration for which is paid forin acceptable foreign currency ANDaccounted for in accordance with therules and regulations of the BSP

3) Services rendered to persons or entitieswhose exemption under special lawsor international agreements to whichthe Philippines is a signatory effectivelysubjects the supply of such services tozero percent (0%) rate [as amended byRA 9337]

4) Services rendered to persons engagedin international shipping orinternational air transportoperations, including leases of propertyfor use thereof [as amended by RA9337];

Provided, however, that the servicesreferred to herein shall not pertain tothose made to common carriers by airand sea relative to their transport ofpassengers, goods or cargoes from oneplace in the Phil. to another place in thePhil. (the same being subject to 12%VAT under Sec. 108)

5) Services performed by subcontractorsand/or contractors in processing,converting, of manufacturing goods foran enterprise whose export sales exceedseventy percent (70%) of total annualproduction.

6) Transport of passengers and cargo byair or sea vessels from the Philippines toa foreign country [as added by RA 9337];(pls see table on page 29) and;

7) Sale of power or fuel generatedthrough renewable sources of energysuch as, but not limited to, biomass,solar, wind, hydropower, geothermal,ocean energy, and other emergingenergy sources using technologies suchas fuel cells and hydrogen fuels. [asadded by RA 9337]

Zero-rating shall apply strictly to thesale of power or fuel generatedthrough renewable sources of energy,and shall not extend to the sale ofservices related to the maintenance oroperation of plants generating saidpower.

RR 4-2007 removed the distinctionbetween automatic and effectively zero-rated transactions found in prior RevenueRegulations (inc. RR 16-2005) with respectto prior application.

C. FINAL WITHHOLDING VAT-5% (§114, C)

The Government or any of its politicalsubdivisions, instrumentalities oragencies, including GOCCs

shall, before making payment onaccount of each purchase of goodsand services which are subject tothe VAT imposed in Sections 106and 108 of this Code,

deduct and withhold a final VAT atthe rate of five percent (5%) of thegross payment thereof:

Provided, That the payment for lease oruse of properties or property rights tononresident owners shall be subject toten percent (10%) withholding tax at thetime of payment.

The payor or person in control of thepayment is considered as thewithholding agent.

The VAT withheld shall be remittedwithin ten (10) days following theend of the month the withholdingwas made.

[NOTE: This 5% final VAT withheld bythe government is an innovation of RA9337.]

RR 16-2005: The 5% final VAT shallrepresent the net VAT payable of the seller.The remaining 5% (or 7%, with the raise ofVAT to 12%) effectively accounts for thestandard input VAT, in lieu of the actualinput VAT directly attributable or ratablyapportioned to such sales.

(This means that where the 5% final VATapplies, the basic formula of output tax lessinput tax does not apply.)

Should actual input VAT exceed 7% ofthe gross payments, the excess mayform part of the sellers’ expense or cost.


Page 115 of 198

TA

XA

TIO

NLA

W2

On the other hand, if actual input VATis less than 7% of gross payment, thedifference must be closed to expense orcost, in effect reducing it.

However, 12% shall be withheld withrespect to the following:1) Lease or use of properties or property

rights owned by non-residents;2) Services rendered to local insurance

companies, with respect to reinsurancepremiums payable to non-residents;and;

3) Other services rendered in thePhilippines by non-residents.

VI.TRANSACTIONS EXEMPT FROMVAT (§ 109)

Amendments introduced by RA 9337 indicated,text in ALL CAPS added by RA 9337

SEC. 109. Exempt Transactions. –

(1) Subject to the provisions of Subsection(2) hereof, the following shall be exemptfrom the value-added tax:

(a) Sale or importation of agriculturaland marine food products in theiroriginal state, livestock and poultryof or kind generally used as, oryielding or producing foods forhuman consumption; and breedingstock and genetic materials therefor. Products classified under this

paragraph shall be considered intheir original state even if theyhave undergone the simpleprocesses of preparation orpreservation for the market,such as freezing, drying, salting,broiling, roasting, smoking orstripping.

Polished and/or husked rice,corn grits, raw cane sugar andmolasses, ordinary salt, ANDCOPRA shall be considered intheir original state;

(b) Sale or importation of fertilizers;seeds, seedlings and fingerlings;fish, prawn, livestock and poultryfeeds, including ingredients,whether locally produced orimported, used in the manufactureof finished feeds (except specialtyfeeds for race horses, fighting cocks,aquarium fish, zoo animals andother animals generally consideredas pets);

(c) Importation of personal andhousehold effects belonging tothe residents of the Philippinesreturning from abroad andnonresident citizens coming toresettle in the Philippines: Provided, That such goods are

exempt from customs dutiesunder the Tariff and CustomsCode of the Philippines;

(d) Importation of professionalinstruments and implements,wearing apparel, domesticanimals, and personal householdeffects (except any vehicle, vessel,

aircraft, machinery other goodsfor use in the manufacture andmerchandise of any kind incommercial quantity)

belonging to persons coming tosettle in the Philippines, for theirown use and not for sale, barteror exchange, accompanyingsuch persons, or arriving withinninety (90) days before or aftertheir arrival, upon theproduction of evidencesatisfactory to theCommissioner, that suchpersons are actually coming tosettle in the Philippines and thatthe change of residence is bonafide;

(e) Services subject to percentage taxunder Title V;

(f) Services by agricultural contractgrowers and milling for others ofpalay into rice, corn into grits andsugar cane into raw sugar;

(g) Medical, dental, hospital andveterinary services except thoserendered by professionals.

(h) Educational services rendered byprivate educational institutions,duly accredited by the Departmentof Education (DEPED), theCommission on Higher Education(CHED), The Technical Educationand Skills Development Authority(TESDA), and those rendered bygovernment educationalinstitutions;

(i) Services rendered by individualspursuant to an employer-employee relationship;


Page 116 of 198

TA

XA

TIO

NLA

W2

(j) Services rendered by regional orarea headquarters established inthe Philippines by multinationalcorporations which act assupervisory, communications andcoordinating centers for theiraffiliates, subsidiaries or branchesin the Asia-Pacific Region and donot earn or derive income from thePhilippines;

(k) Transactions which are exemptunder international agreements towhich the Philippines is asignatory or under special laws,except those under PresidentialDecree No. 529 [PetroleumExploration Concessionaires underthe Petroleum Act of 1949]

(l) Sales by agricultural cooperativesduly registered with theCooperative Development Authorityto their members as well as sale oftheir produce, whether in its originalstate or processed form, to non-members; their importation of directfarm inputs, machineries andequipment, including spare parts, tobe used directly and exclusively inthe production and/or processing oftheir produce;

(m) Gross receipts from lendingactivities by credit or multi-purpose cooperatives dulyregistered with the CooperativeDevelopment Authority;

(n) Sales by non-agricultural, non-electric and non-creditcooperatives duly registered withthe Cooperative DevelopmentAuthority: Provided, That the sharecapital contribution of each memberdoes not exceed Fifteen thousandpesos (P15,000) and regardless ofthe aggregate capital and netsurplus ratably distributed amongthe members;

(o) Export sales by persons who arenot VAT-registered;

(p) Sale of real properties notprimarily held for sale tocustomers or held for lease in theordinary course of trade orbusiness or

i. real property utilized for low-costand socialized housing asdefined by Republic Act No.7279, otherwise known as the

Urban Development andHousing Act of 1992, and otherrelated laws;

ii. residential lot valued at onemillion five hundred thousandpesos (P1,500,000) and below,house and lot, and otherresidential dwellings valued attwo million five hundredthousand pesos (P2,500,000)and below: Provided, That not later than

January 31, 2009 and everythree (3) years thereafter, theamounts herein stated shallbe adjusted to their presentvalues using the ConsumerPrice Index, as published bythe national Statistics Office(NSO);

(q) Lease of a residential unit with amonthly rental not exceeding TENTHOUSAND PESOS (10,000);Provided, That not later thanJanuary 31, 2009 and every three(3) years thereafter, the amountherein stated shall be adjusted to itspresent value using the ConsumerPrice Index as published by theNational Statistics Office (NS0);

(r) Sale, importation, printing orpublication of books and anynewspaper, magazine review orbulletin which appears at regularintervals with fixed prices forsubscription and sale and which isnot devoted principally to thepublication of paid advertisements;and

(s) Sale, importation or lease ofpassenger or cargo vessels andaircraft, including engine,equipment and spare parts thereoffor domestic or internationaltransport operations;

(t) Importation of fuel, goods, andsupplies by persons engaged ininternational shipping or airtransport operations;

(u) Services of banks, non-bankfinancial intermediaries performingquasi-banking functions and othernon-bank financial intermediaries;and

(v) Sale or lease of goods or propertiesor the performance of services otherthan the transactions mentioned


Page 117 of 198

TA

XA

TIO

NLA

W2

in the preceding paragraphs, thegross annual sales and/or receiptsdo not exceed the amount of onemillion five hundred thousandpesos (P1,500,0000):

Provided, That not later thanJanuary 31, 2009 and everythree (3) years thereafter, theamount herein stated shall beadjusted to its present valueusing the Consumer Price Index,as published by the NationalStatistics Office (NSO).

(2) A VAT-registered person may elect thatsubsection (1) not apply to its sale ofgoods or properties or services:provided, that an election made underthis subsection shall be irrevocable for aperiod of three (3) years from thequarter the election was made.

Notes on Exempt Transactions (from RR 16-2005):

Editor’s Note:This is an expansion of the enumeration under§109. There is substantial replication ofinformation but this is necessary in order tojuxtapose the recent amendments to the law.

VAT-EXEMPT TRANSACTIONS

Refer to sale of goods or propertiesand/or services and the use or lease ofproperties that is NOT subject to VAT(output tax) and the seller is not allowedany tax credit of VAT (input tax) onpurchases. The person making theexempt sale of goods, properties orservices shall not bill any output tax tohis customers because the saidtransaction is not subject to VAT.

1. Sale/ import of agricultural, marinefood products in original state; oflivestock and poultry

Original state even if they haveundergone the simple processes ofpreparation or preservation for themarket, such as freezing, drying,salting, broiling, roasting, smokingor stripping.

Polished and/or husked rice, corngrits, raw cane sugar and molasses,ordinary salt, AND COPRA shall beconsidered in their original state;

Livestock or poultry does notinclude fighting cocks, race horses,zoo animals and other animals

generally considered as pets. [RR16-2005]

Original state – includingpreservation using advancedtechnological means of packaging,such as shrink wrapping in plastics,vacuum packing, tetra-pack, andother similar packaging methods.[RR 16-2005]

2. Sale/ import of fertilizers; seeds,seedlings and fingerlings; fish, prawn,livestock and poultry feeds

3. Import of personal and householdeffects of Phil resident returning fromabroad and nonresident citizens comingto resettle in the Philippines

4. Import of professional instruments andimplements, wearing apparel, domesticanimals, and personal household effectsbelonging to persons coming to settle inthe Philippines, for their own use andnot for sale, barter or exchange

5. Services subject to percentage taxunder Title V:[refer to percentage tax,next part]

6. Services by agricultural contractgrowers and milling for others of palayinto rice, corn into grits and sugar caneinto raw sugar;

7. Medical, dental, hospital and veterinaryservices except those rendered byprofessionals:

Laboratory services are exempted. Ifthe hospital or clinic operates apharmacy or drug store, the sale ofdrugs and medicine is subject to VAT.[RR 16-2005]

8. Educational services rendered byprivate educational institutions, dulyaccredited by DEPED, CHED, TESDA,and those rendered by governmenteducational institutions; [AMENDED]

“Educational services” does not includeseminars, in-service training, reviewclasses and other similar servicesrendered by persons who are notaccredited by the DepED, CHED,and/or TESDA. [RR 16-2005]

9. Services rendered by individualspursuant to an employer-employeerelationship;

10. Services rendered by regional or areaheadquarters established in thePhilippines by multinational


Page 118 of 198

TA

XA

TIO

NLA

W2

corporations which act as supervisory,communications and coordinatingcenters for their affiliates, subsidiariesor branches in the Asia-Pacific Regionand do not earn or derive income fromthe Philippines;

11. Transactions which are exempt underinternational agreements to which thePhilippines is a signatory or underspecial laws, except those underPresidential Decree No., 529 [PetroleumExploration Concessionaires under thePetroleum Act of 1949];

12. Sales by agricultural cooperatives dulyregistered with the CooperativeDevelopment Authority to theirmembers as well as sale of theirproduce. Exemption includesimportation of direct farm inputs,machineries and equipment, includingspare parts thereof, to be used directlyand exclusively in the productionand/or processing of their produce.

13. Gross receipts from lending activities bycredit or multi-purpose cooperativesduly registered with the CooperativeDevelopment Authority; [AMENDED]

14. Sales by non-agricultural, non- electricand non-credit cooperatives dulyregistered with the CooperativeDevelopment Authority are exempt BUTtheir importation of machineries andequipment, including spare partsthereof, to be used by them areSUBJECT to VAT.

15. Export sales by persons who are notVAT-registered;

16. Sale of real properties – the ff. sales areexempt:

(1) Sale of real properties NOT primarilyheld for sale to customers or heldfor lease in the ordinary course oftrade or business.

(2) Sale of real properties utilized forlow-cost housing as defined by RANo. 7279, otherwise known as the"Urban Development and HousingAct of 1992" and other related laws,such as RA No. 7835 and RA No.8763.

“Low-cost housing" refers to housingprojects intended for homeless low-income family beneficiaries,undertaken by the Government orprivate developers, which may eitherbe a subdivision or a condominium

registered and licensed by theHousing and Land Use RegulatoryBoard/Housing (HLURB) under BPBlg. 220, PD No. 957 or any othersimilar law, wherein the unit sellingprice is within the selling priceceiling per unit of P750,000.00under RA No. 7279, and other laws,such as RA No. 7835 and RA No.8763.

(3) Sale of real properties utilized forsocialized housing as definedunder RA No. 7279, and otherrelated laws, such as RA No. 7835and RA No. 8763, wherein theprice ceiling per unit isP225,000.00 or as may from timeto time be determined by theHUDCC and the NEDA and otherrelated laws.

"Socialized housing" refers tohousing programs and projectscovering houses and lots or homelots only undertaken by theGovernment or the private sector forthe underprivileged and homelesscitizens which shall include sitesand services development, long-termfinancing, liberated terms oninterest payments, and such otherbenefits in accordance with theprovisions of RA No. 7279and RANo. 7835 and RA No. 8763.

"Socialized housing" shall alsorefer to projects intended for theunderprivileged and homelesswherein the housing package sellingprice is within the lowest interestrates under the Unified HomeLending Program (UHLP) or anyequivalent housing program of theGovernment, the private sector ornon-government organizations.

(4) Sale of residential lot valued atP1.5M and below, or house & lotand other residential dwellingsvalued at P2.5M and below, wherethe instrument ofsale/transfer/disposition wasexecuted on or after July 1, 2005;[to be adjusted every 3 years fromJan 31, 2009];

If two or more adjacentresidential lots are sold ordisposed in favor of one buyer,for the purpose of utilizing thelots as one residential lot, thesale shall be exempt from VAT


Page 119 of 198

TA

XA

TIO

NLA

W2

only if the aggregate value of thelots does not exceed P1.5M.

Adjacent residential lots,although covered by separatetitles and/or separate taxdeclarations, when sold ordisposed to one and the samebuyer, whether covered by oneor separate Deed of Conveyance,shall be presumed as a sale ofone residential lot. [RR 16-2005]

17. Lease of residential units with amonthly rental per unit not exceedingP10K, regardless of the amount ofaggregate rentals received by the lessorduring the year.

Lease of residential units where themonthly rental per unit exceeds 10Kbut the aggregate of such rentals ofthe lessor during the year do notexceed One Million Five HundredPesos P1.5M shall likewise beexempt from VAT, however, thesame shall be subjected to threepercent (3%) percentage tax.

In cases where a lessor has severalresidential units for lease, someare leased out for a monthly rentalper unit of not exceeding P10K whileothers are leased out for more thanP10K per unit, his tax liability willbe as follows:a. The gross receipts from rentals

not exceeding P10K per monthper unit shall be exempt fromVAT regardless of the aggregateannual gross receipts.

b. The gross receipts from rentalsexceeding P10K per month perunit shall be subject to VAT IFthe aggregate annual grossreceipts from said units only (notincluding the gross receipts fromunits leased for not more thanP10K) exceeds P1.5M.Otherwise, the gross receipts willbe subject to the 3% taximposed under Section 116 ofthe Tax Code.

The term 'residential units' shallrefer to apartments and houses &lots used for residential purposes,and buildings or parts or unitsthereof used solely as dwellingplaces (e.g., dormitories, rooms andbed spaces) except motels, motelrooms, hotels and hotel rooms.

The term 'unit' shall mean anapartment unit in the case ofapartments, house in the case ofresidential houses; per person in thecase of dormitories, boarding housesand bed spaces; and per room incase of rooms for rent. [RR 16-2005]

18. Sale, importation, printing orpublication of books and anynewspaper, magazine review or bulletinwhich appears at regular intervals withfixed prices for subscription and saleand which is not devoted principally tothe publication of paid advertisements;

19. Sale, importation or lease of passengeror cargo vessels and aircraft, includingengine, equipment and spare partsthereof for domestic or internationaltransport operations;[added by RA9337]

The exemption from VAT on theimportation and local purchase ofpassenger and/or cargo vesselsshall be limited to those of 150 tonsand above, including engine andspare parts of said vessels;

Provided, further, that thevessels to be imported shall complywith the age limit requirement, atthe time of acquisition counted fromthe date of the vessel's originalcommissioning, as follows:(i) for passenger and/or cargo

vessels, the age limit is 15 yearsold,

(ii) for tankers, the age limit is 10years old, and

(iii) for high-speed passenger crafts,the age limit is 5 years old [RR16-2005]

20. Importation of fuel, goods, and suppliesby persons engaged in internationalshipping or air transport operations;[added by RA 9337]

Provided, that the said fuel, goodsand supplies shall be usedexclusively or shall pertain to thetransport of goods and/or passengerfrom a port in the Philippinesdirectly to a foreign port withoutstopping at any other port in thePhilippines;

Provided, further, that if any portionof such fuel, goods or supplies isused for purposes other than thatmentioned in this paragraph, suchportion of fuel, goods and supplies


Page 120 of 198

TA

XA

TIO

NLA

W2

shall be subject to 10% VAT [RR 16-2005]

21. Services of banks, non-bank financialintermediaries performing quasi-banking functions and other non-bankfinancial intermediaries; and

22. Sale or lease of goods or properties orthe performance of services other thanthe transactions mentioned in thepreceding paragraphs, the gross annualsales and/or receipts do not exceed theamount ofP1,500,0000: [to be adjustedevery 3 years from Jan 31, 2009]

For purposes of the threshold of P1,5M,the husband and the wife shall beconsidered separate taxpayers.However, the aggregation rule for eachtaxpayer shall apply.

For instance, if a professional, asidefrom the practice of his profession,also derives revenue from other linesof business which are otherwisesubject to VAT, the same shall becombined for purposes ofdetermining whether the thresholdhas been exceeded.

The VAT-exempt sales shall NOT beincluded in determining thethreshold. [RR 16-2005]

VII. DETERMINING THE VAT BASE

a) Sale of Goods

VAT Base = gross selling price or grossvalue in money of the goods sold orexchanged

Gross selling price shall include:

charges for packaging, delivery &insurance

excise taxes if goods are subject toexcise tax

For transactions deemed sale, theoutput tax shall be based on themarket value of the goods deemedsold as of the time of the occurrenceof the transactions.

However, in case of retirement orcessation of business, the tax baseshall be the acquisition cost or thecurrent market price of the goods orproperties, whichever is LOWER.

In the case of a sale where the grossselling price is unreasonably lowerthan the fair market value, theactual market value shall be the taxbase.

b) Sale of Services

VAT Base = Gross Receipts

“Gross receipts” means the totalamount of money or its equivalentrepresenting the contract price,compensation, service fee, rental orroyalty, including the amount chargedfor materials supplied with the servicesand deposits and advance paymentsactually or constructively received duringthe taxable quarter for the servicesperformed or to be performed foranother person, excluding VAT.

“Constructive receipt” occurs when themoney consideration or its equivalent isplaced at the control of the person whorendered the service without restrictionsby the payor. Examples:1) deposit in banks which are made

available to the seller of serviceswithout restrictions

2) issuance by the debtor of a notice tooffset any debt or obligation andacceptance thereof by the seller aspayment for services rendered

3) transfer of the amounts retained bythe contractee to the account of thecontractor.

c) Importation of Goods

VAT Base = total value (used byBureau of Customs in determiningtariff and customs duties) + customsduties + excise tax (if any) + othercharges

In case the valuation used byBureau of Customs in computingcustoms duties is by volume orquantity, the LANDED COST* shallbe the tax base.

*LANDED COST = invoice amount +customs duties + freight + insurance+ other charges + excise tax (if any)

Note:The VAT on importation shall bepaid by the importer PRIOR to therelease of such goods from customscustody. (RR 16-2005)

VIII. INPUT TAXES

A. Creditable Input Tax (§ 110, A)

(1) Any INPUT TAX evidenced by a VATinvoice or official receipt issued inaccordance with Section 113 hereof onthe following transactions shall be


Page 121 of 198

TA

XA

TIO

NLA

W2

creditable against the OUTPUT TAX:(a) Purchase or importation of goods:

(i) For sale; or(ii) For conversion into or intended

to form part of a finishedproduct for sale includingpackaging materials; or

(iii) For use as supplies in thecourse of business; or

(iv) For use as materials supplied inthe sale of service; or

(v) For use in trade or business forwhich deduction for depreciationor amortization is allowed underthis Code.

(b) Purchase of services on which a VAThas been actually paid.

(2) Input tax on domestic purchase ORIMPORTATION of goods or propertiesshall be creditable:(a) To the purchaser upon

consummation of sale and onimportation of goods or properties;and

(b) To the importer upon payment ofthe value-added tax prior to therelease of the goods from thecustody of the Bureau of Customs.

Provided, That the input tax ongoods purchased or imported in acalendar month for use in trade orbusiness for which deduction fordepreciation is allowed under thisCode, shall be spread evenly overthe month of acquisition and thefifty-nine (59) succeeding months ifthe aggregate acquisition cost forsuch goods, excluding the VATcomponent thereof, exceeds Onemillion pesos (P1,000,000):

Provided, however, That if theestimated useful life of the capitalgood is less than five (5) years, asused for depreciation purposes, thenthe input VAT shall be spread oversuch a shorter period:

Provided, finally, that in the case ofpurchase of services, lease or use ofproperties, the input tax shall becreditable to the purchaser, lesseeor licensee upon payment of thecompensation, rental, royalty orfee.

(3) A VAT-registered person who is alsoengaged in transactions not subject tothe value-added tax shall be allowedtax credit as follows:(a) Total input tax which can be

directly attributed to transactionssubject to value-added tax; and

(b) A ratable portion of any input taxwhich cannot be directly attributedto either activity.

INPUT TAX – the VAT due from or paid bya VAT-registered person in the course of histrade or business on importation of goodsor local purchase of goods or services,including lease or use of property, from aVAT-registered person.

It includes the transitional input taxdetermined in accordance with Section111 of this Code.

It includes input taxes which can bedirectly attributed to transactionssubject to the VAT plus a ratableportion of any input tax which cannotbe directly attributed to either thetaxable or exempt activity.

Input tax must evidenced by a VATinvoice or official receipt issued by aVAT-registered person in accordancewith Secs. 113 and 237 of the Tax. [RR16-2005]

OUTPUT TAX – the VAT due on the sale orlease of taxable goods or properties orservices by any person registered orrequired to register under Section 236 ofthis Code.

B. Excess Output or Input Tax (§110, B)

If at the end of any taxable quarter:

the output tax exceeds the inputtax, the excess shall be paid by theVAT-registered person.

the input tax exceeds the outputtax, the excess shall be carried overto the succeeding quarter orquarters:

Provided, however, that any input taxattributable to zero-rated sales by aVAT-registered person may at his optionbe refunded or credited against otherinternal revenue taxes, subject to theprovisions of Section 112.

Determination of Creditable Input Tax (§110, C)

The sum of the excess input tax carriedover from the preceding month orquarter and the input tax creditable to aVAT-registered person during the


Page 122 of 198

TA

XA

TIO

NLA

W2

taxable month or quarter shall bereduced by the amount of claim forrefund or tax credit for value-added taxand other adjustments, such aspurchase returns or allowances andinput tax attributable to exempt sale.

The claim for tax credit referred toincludes not only those filed with theBIR but also those filed with othergovernment agencies, such as the Boardof Investments the Bureau of Customs.

Transitional Input Tax Credits (§ 111, A)

Any person liable for VAT or who electsto be a VAT-registered person shall beallowed INPUT TAX in his beginninginventory of goods, materials andsupplies

equivalent to TWO PERCENT (2%) ofthe value of such inventory OR

the actual VAT paid on such goods,materials and supplies, whichever ishigher,

which shall be creditable against theOUTPUT TAX.

Presumptive Input Tax Credits (§ 111, B)

(1) Persons or firms engaged in theprocessing of sardines, mackerel andmilk, and in manufacturing refinedsugar and cooking oil and packednoodle based instant meals, shall beallowed a presumptive input tax,creditable against the output tax,equivalent to FOUR PERCENT (4%) ofthe gross value in money of theirpurchases of primary agriculturalproducts which are used as inputs totheir production.

"Processing" shall mean pasteurization,canning and activities which throughphysical or chemical process alter theexterior texture or form or inner substanceof a product in such manner as to prepareit for special use to which it could not havebeen put in its original form or condition.

C. Refunds or Tax Credits of InputTax

1) Zero-Rated Sales (§ 112, A)

Any VAT-registered person, whosesales are zero-rated or effectivelyzero-rated may apply for theissuance of a tax credit certificate orrefund of creditable input tax due orpaid attributable to such sales,

except transitional input tax, to theextent that such input tax has notbeen applied against output tax:[within two (2) years after the closeof the taxable quarter when thesales were made]

PROVIDED, however, that in thecase of zero-rated sales underSection 106(A)(2)(a)(1), (2) and (B)and Section 108 (B)(1) and (2), theacceptable foreign currencyexchange proceeds had been dulyaccounted for in accordance withthe rules and regulations of theBangko Sentral ng Pilipinas (BSP):

PROVIDED, further, that where thetaxpayer is engaged in zero-rated oreffectively zero-rated sale and also intaxable or exempt sale of goods ofproperties or services, and theamount of creditable input tax dueor paid cannot be directly andentirely attributed to any one of thetransactions, it shall be allocatedproportionately on the basis ofthe volume of sales.

Provided, finally, that for a personmaking sales that are zero-ratedunder section 108 (b)(6), the inputtaxes shall be allocated ratablybetween his zero-rated and non-zero-rated sales.

2) Cancellation of VAT Registration.(§ 112, C)

A person whose registration hasbeen cancelled due to retirement fromor cessation of business, or due tochanges in or cessation of statusunder Section 106(C) of this Codemay, within two (2) years from thedate of cancellation, apply for theissuance of a tax credit certificatefor any unused input tax whichmay be used in payment of his otherinternal revenue taxes.

Provided, however, that he shall beentitled to a refund if he has nointernal revenue tax liabilitiesagainst which the tax creditcertificate may be utilized.

Period within which refund or tax creditcertificate/refund of input taxes shall bemade (§ 112, D)

In proper cases, the Commissioner ofInternal Revenue shall grant a tax credit


Page 123 of 198

TA

XA

TIO

NLA

W2

certificate/refund for creditable inputtaxes within one hundred twenty (120)days from the date of submission ofcomplete documents in support of theapplication filed in accordance withsubparagraph (a) above.

In case of full or partial denial of theclaim for tax credit certificate/refund asdecided by the Commissioner of InternalRevenue,

The taxpayer may appeal to theCourt of Tax Appeals (CTA) withinthirty (30) days from the receipt ofsaid denial, otherwise the decisionshall become final.

However, if no action on the claimfor tax credit certificate/refund hasbeen taken by the Commissioner ofInternal Revenue after the onehundred twenty (120) day periodfrom the date of submission of theapplication with completedocuments, the taxpayer mayappeal to the CTA within 30 daysfrom the lapse of the 120-dayperiod. [RR 16-2005]

Notes from RR 16-2005:

Apportionment of Input Tax on MixedTransactions.

A VAT-registered person who is alsoengaged in transactions not subject toVAT shall be allowed to recognize inputtax credit on transactions subject toVAT as follows:1. All the input taxes that can be

directly attributed to transactionssubject to VAT may be recognizedfor input tax credit;

Provided, that input taxes thatcan be directly attributable to VATtaxable sales of goods and servicesto the Government or any of itspolitical subdivisions,instrumentalities or agencies,including GOCCs shall not becredited against output taxes arisingfrom sales to non-Governmententities; and

2. If any input tax cannot be directlyattributed to either a VAT taxable orVAT-exempt transaction, the inputtax shall be pro-rated to the VATtaxable and VAT-exempttransactions and only the ratableportion pertaining to transactionssubject to VAT may be recognizedfor input tax credit.

Illustration: ERA Corporation has thefollowing sales during the month:

Sale to private entities subject to 12% 100,000.00Sale to private entities subject to 0% 100,000.00Sale of exempt goods 100,000.00Sale to gov't. subjected to 5% final VATw/holding 100,000.00Total sales for the month 400,000.00

The following were its input taxes (orpassed on by its VAT suppliers):

Input tax on taxable goods (12%) 5,000.00Input tax on zero-rated sales 3,000.00Input tax on sale of exempt goods 2,000.00Input tax on sale to government 4,000.00Input tax on depreciable capital goodnot attributable to any specific activity(monthly amortization for 60 months) 20,000.00

Step 1: The creditable input tax for themonth shall be computed as follows:

Input tax on sale subject to 12% P5,000.00Input tax on zero-rated sale 3,000.00Ratable portion of the input tax not directlyattributable to any activity, computed below

Taxable sales(0% and 12%)

Total Sales

xAmount of input tax

not directlyattributable

P200,000.00

P400,000.00x P20,000.00 = P10,000.00

Total creditable input tax for the month:P18,000.00 (P5,000+P3,000+P10,000)

Step 2: The input tax attributable to salesto government for the month shall becomputed as follows:

Input tax on sale to gov't. P4,000.00

Ratable portion of the input tax notdirectly attributable to any activity,computed as follows:

Taxable salesto government

Total Sales

xAmount of input tax

not directlyattributable

P100,000.00

P400,000.00x P20,000.00 = P5,000.00

Total input tax attributable to sales togovernment: P9,000.00 (P4,000 +P5,000)

These amounts are not available for inputtax credit but may be recognized as cost orexpense. That is because as far as sales togovernment are concerned, there is a VATthat is finally withheld (at 5%).

Step 3: The input tax attributable to VAT-exempt sales for the month shall becomputed as follows:

Input tax on VAT-exempt sales P2,000.00


Page 124 of 198

TA

XA

TIO

NLA

W2

Ratable portion of the input tax notdirectly attributable to any activity,computed below:

VAT-exempt sales

Total Salesx

Amount of input taxnot directlyattributable

P100,000.00

P400,000.00x P20,000.00 = P5,000.00

Total input tax attributable:P7,000.00VAT-exempt sales (P2,000+ P5,000)

These amounts are not available for inputtax credit but may be recognized as cost orexpense.

IX.SUBSTANTIATIONREQUIREMENTS

RR 16-2005: Substantiation of Input TaxCredits

(a) INPUT TAXES must be substantiatedand supported by the followingdocuments, and must be reported in theinformation returns required to besubmitted to the Bureau:(1) For the importation of goods

Import entry or otherequivalent document showingactual payment of VAT on theimported goods.

(2) For the domestic purchase ofgoods and properties Invoice showing the information

required under Secs. 113 and237 of the Tax Code.

(3) For the purchase of real property public instrument i.e., deed of

absolute sale, deed ofconditional sale,contract/agreement to sell, etc.,together with VAT invoice issuedby the seller.

(4) For the purchase of services official receipt showing the

information required underSecs. 113 and 237 of the TaxCode.

A cash register machine tape issued toa registered buyer shall constitute validproof of substantiation of tax credit onlyif it shows the information requiredunder Secs. 113 and 237 of the TaxCode.

(b) TRANSITIONAL INPUT TAX shall besupported by an inventory of goods asshown in a detailed list to be submittedto the BIR.

(c) Input tax on "DEEMED SALE"TRANSACTIONS shall be substantiatedwith the invoice required (please refer tothe table on page 46).

(d) INPUT TAX FROM PAYMENTS MADETO NON-RESIDENTS (such as forservices, rentals and royalties) shall besupported by a copy of the MonthlyRemittance Return of Value Added TaxWithheld (BIR Form 1600) filed by theresident payor in behalf of the non-resident evidencing remittance of VATdue which was withheld by the payor.

(e) ADVANCE VAT ON SUGAR shall besupported by the Payment Ordershowing payment of the advance VAT.

X. INVOICING REQUIREMENTS(§ 113)

A VAT-registered person shall issue:(1) A VAT invoice for every sale, barter

or exchange of goods or properties;and

(2) A VAT official receipt for everylease of goods or properties, and forevery sale, barter or exchange ofservices.

Information Contained in the VATInvoice or VAT Official Receipt:

(1) A statement that the seller is a VAT-registered person, followed by histaxpayer's identification number (TIN);

(2) The total amount which the purchaserpays or is obligated to pay to the sellerwith the indication that such amountincludes the value-added tax:

(3) Provided, that:(a) The amount of the tax shall be

shown as a separate item in theinvoice or receipt;

(b) If the sale is exempt from value-added tax, the term "VAT-exemptsale" shall be written or printedprominently on the invoice orreceipt;

(c) If the sale is subject to zero percent(0%) value-added tax, the term"zero-rated sale" shall be written orprinted prominently on the invoiceor receipt;

(d) If the sale involves goods, propertiesor services some of which aresubject to and some of which areVAT zero-rated or VAT-exempt, theinvoice or receipt shall clearlyindicate the breakdown of thesale price between its taxable,


Page 125 of 198

TA

XA

TIO

NLA

W2

exempt and zero-ratedcomponents, and the calculation ofthe value-added tax on each portionof the sale shall be shown on theinvoice or receipt:

(e) "Provided, That the seller may issueseparate invoices or receipts for thetaxable, exempt, and zero-ratedcomponents of the sale.

(4) The date of transaction, quantity, unitcost and description of the goods orproperties or nature of the service; and

(5) In the case of sales in the amount of onethousand pesos (P1,000) or more wherethe sale or transfer is made to a VAT-registered person, the name, businessstyle, if any, address and taxpayeridentification number (TIN) of thepurchaser, customer or client. xxx

Invoicing & Recording Deemed Sale Transactions

Transaction Invoicing RequirementTransfer, use or consumption not inthe course of business of goods orproperties originally intended for saleor for use in the course of business

Memorandum entry in the subsidiary sales journal torecord withdrawal of goods for personal use

Distribution or transfer toshareholders/investors or creditors

Invoice, at the time of the transaction, which shouldinclude all the info prescribed in Sec. 113(B)

Consignment of goods if actual sale isnot made within 60 days

Invoice, at the time of the transaction, which shouldinclude all the info prescribed in Sec. 113(B)

Retirement from or cessation ofbusiness with respect to all goods onhand

An inventory shall be prepared and submitted to theRDO who has jurisdiction over the taxpayer’sprincipal place of business not later than 30 daysafter retirement or cessation from the business. Aninvoice shall be prepared for the entire inventory,which shall be the basis of the entry into thesubsidiary sales journal. The invoice need notenumerate the specific items appearing in theinventory regarding the description of the goods. Ifthe business is to be continued by the new owners orsuccessors, the entire amount of output tax on theamount deemed sold shall be allowed as input taxes.

XI.CONSEQUENCES OF ISSUINGERRONEOUS VAT INVOICE ORVAT OFFICIAL RECEIPT (§ 113, D)

(1) If a person who is not a VAT-registeredperson issues an invoice or receiptshowing his Taxpayer IdentificationNumber (TIN), followed by the word"VAT":(a) The issuer shall, in addition to any

liability to other percentage taxes,be liable to:(i) The tax imposed in Section 106

or 108 without the benefit of anyinput tax credit; and

(ii) A 50% surcharge under Section248 (B) of this code;

(b) The VAT shall, if the other requisiteinformation required underSubsection (B) hereof is shown onthe invoice or receipt, be recognizedas an input tax credit to thepurchaser under Section 110 of thisCode.

(2) If a VAT-registered person issues a VATinvoice or VAT official receipt for a VAT-exempt transaction, but fails to displayprominently on the invoice or receiptthe term "VAT-exempt Sale", theissuer shall be liable to account for thetax imposed in Section 106 or 108 as ifSection 109 did not apply.

XII. REGISTRATIONREQUIREMENTS (§ 236, F)

Cancellation of Registration.

(1) General Rule: The registration of anyperson who ceases to be liable to a taxtype shall be cancelled upon filing withthe Revenue District Office where he isregistered, an application forregistration information update in aform prescribed therefor;

(2) Cancellation of VAT Registration.(a) He makes written application and

can demonstrate to theCommissioner's satisfaction that his


Page 126 of 198

TA

XA

TIO

NLA

W2

gross sales or receipts for thefollowing twelve (12) months, otherthan those that are exempt underSection 109 (A) TO (U), will notexceed One million five hundredthousand pesos (P1,500,000); or

(b) He has ceased to carry on his tradeor business, and does not expect torecommence any trade or businesswithin the next twelve (12) months.

The cancellation of registration will beeffective from the first day of thefollowing month.

Persons Required to Register for VAT (§236, G)

(1) Any person who, in the course of tradeor business, sells, barters or exchangesgoods or properties, or engages in thesale or exchange of services, shall beliable to register for Value-added tax if:(a) His gross sales or receipts for the

past twelve (12) months, other thanthose that are exempt under section109 (a) to (u), have exceeded Onemillion five hundred thousand pesos(P1,500,000); or

(b) There are reasonable grounds tobelieve that his gross sales orreceipts for the next twelve (12)months, other than those that areexempt under Section 109 (A) to (U),will exceed one million five hundredthousand pesos (P1,500,000).

(2) Every person who becomes liable to beregistered under paragraph (1) of thisSubsection shall register with theRevenue District Office which hasjurisdiction over the head office orbranch of that person, and shall pay theannual registration fee prescribed inSubsection (B) hereof.

If he fails to register, he shall beliable to pay the tax under Title IVas if he were a VAT-registeredperson, but without the benefit ofinput tax credits for the period inwhich he was not properlyregistered.

Optional Registration for Value-addedTax of Exempt Person. (§ 236, H)

(1) Any person who is not required toregister for Value-added tax underSubsection (G) hereof may elect toregister for Value-added tax byregistering with the Revenue DistrictOffice that has jurisdiction over the

head office of that person, and payingthe annual registration fee inSubsection (B) hereof.

(2) Any person who elects to register underthis Subsection shall not be entitled tocancel his registration underSubsection (F)(2) for the next three (3)years.

For purposes of Title IV of this Code,any person who has registered value-added tax as a tax type in accordancewith the provisions of Subsection (C)hereof shall be referred to as a "VAT-registered person" who shall beassigned only one TaxpayerIdentification Number (TIN). xxx(amended by RA 9337)

Cancellation of VAT registration:

A VAT-registered person may cancel hisregistration for VAT as provided for inSec. 236 (F) (2), and also in thefollowing instances:1. A change of ownership, in the case

of a single proprietorship;2. Dissolution of a partnership or

corporation;3. Merger or consolidation with respect

to the dissolved corporation(s);4. A person who has registered prior to

planned business commencement,but failed to actually start hisbusiness

XIII. FILING OF RETURNS &PAYMENT OF VAT

Vat Returns(§ 114)

Filed by person liable to pay the VAT

Quarterly return of the amount of hisgross sales or receipts within twenty-five (25) days after the close of eachtaxable quarter prescribed for eachtaxpayer:

Note: VAT paid on a monthly basis

XIV. ENFORCEMENT MEASURES

RR 16-2005: Administrative and PenalProvisions.

(a) Suspension of business operations. Inaddition to other administrative andpenal sanctions provided for in the TaxCode and implementing regulations, theCommissioner of Internal Revenue orhis duly authorized representative mayorder suspension or closure of a


Page 127 of 198

TA

XA

TIO

NLA

W2

business establishment for a period ofnot less than five (5) days for any of thefollowing violations:(1) Failure to issue receipts and

invoices.(2) Failure to file VAT return as

required under the provisions ofSec. 114 of the Tax Code.

(3) Understatement of taxable salesor receipts by 30% or more of hiscorrect taxable sales or receipt forthe taxable quarter.

(4) Failure of any person to registeras required under the provisions ofSec. 236 of the Tax Code.

(b) Surcharge, interest and otherpenalties. The interest on unpaidamount of tax, civil penalties andcriminal penalties imposed in Title XI ofthe Tax Code shall also apply toviolations of the provisions of Title IV ofthe Tax Code.

REVIEWER IN TAXATION LAW Part III. Percentage Taxes

Page 128 of 198

TA

XA

TIO

NLA

W2

Part III. Percentage Taxes

I. WHO ARE LIABLEII. PAYMENTSIII. SUMMARY OF PERCENTAGE TAXES

I. WHO ARE LIABLE

Under Sections 116-127 of the NIRC, thepercentage taxes are:A. 3% percentage tax on persons exempt

from the valued-added tax because theirgross annual sales do not exceed onemillion five hundred thousand pesos(P1,500,000), and who are not requiredto pay any other percentage tax;

B. Tax on domestic carriers;C. Tax on international carriers;D. Franchise tax;E. Overseas communications tax;F. Tax on banks and non-bank financial

intermediaries performing quasi-banking functions;

G. Tax on other non-bank financialintermediaries;

H. Tax on like insurance companies;I. Tax on agents of foreign insurance

companies;J. Amusement tax;K. Tax on winnings;L. Tax on stock transactions

A. TAX ON PERSONS EXEMPT FROMVAT (Sec. 116, NIRC)

3% of gross quarterly sales or receipts.

Q: Who are liable?

General Rule: Any person who are exemptfrom VAT and who is not a VAT-registeredperson. Those whose gross annual sales and

receipts does not exceed P1.5M areexempted from VAT

Exception:

Cooperatives shall be exempt from the3% GRT.

Those earning LESS THAN P100,000which is neither covered by percentagetax nor by VAT.

B. TAX ON DOMESTIC CARRIERSAND KEEPERS OF GARAGES (Sec.117, NIRC)

3% of quarterly gross receipts Gross receipts of common carriers

derived from INCOMING andOUTGOING freight is NOT subject tolocal taxes under the Local Gov’t Code.

Q: Who are covered? (ReCoLaKe no BA)

1. Cars for Rent or hire driven by lessee;2. Transportation Contractors, including

persons who transport passengers forhire;

3. Other domestic carriers by LAND;4. Keepers of garages.

Except:1. Owners of Bancas2. Owners of Animal-drawn two-wheeled

vehicles

Minimum quarterly gross receipts:

JeepneysManila and other cities P2,400Provincial P1,200

Public Utility BusNot exceeding 30 passengers P3,600> 30 but not > 50 passengers P6,000Exceeding 50 passengers P7,200

TaxisManila and other cities P3,600Provincial P2,400

Car for hire (with chauffeur) P3,000Car for hire (w/o chauffeur) P1,800

C. TAX ON INTERNATIONALCARRIERS (Sec. 118, NIRC)

3% of their quarterly gross receipts. To be subject to this percentage tax,

they MUST BE DOING BUSINESS INTHE PHILIPPINES.

Q: Who are liable?

1. International air carriers2. International shipping carriers

Amendment introduced by RA 9337(July 2005):

CommonCarrier

Transporting Kind ofCarrier

Tax Liability

By land Persons Domestic 3%, Sec. 117Goods/cargo Domestic 12% VAT

By sea

Whethertransportingpersons or

goods/cargo

Domestic Domestictrip - 12%VATInternationaltrip – zero-rated

International 3%, Sec. 118By air Domestic Domestic

flight - 12%VATInternationalflight – zero-rated

International 3%, Sec. 118


Page 129 of 198

TA

XA

TIO

NLA

W2

D. TAX ON FRANCHISES (Sec. 119)

Q: Who are liable?

1. Radio and broadcasting companiesa. annual gross receipts of the

preceding year does not exceedP10M

b. 3% of gross receipts derived frombusiness covered by law grantingthe franchise.

c. The franchisee has the option toregister as VAT taxpayer and paythe VAT instead.

d. once option is exercised, it isIRREVOCABLE.

2. Gas and water utilities 2% of gross receipts derived from

business covered by the lawgranting the franchise.

Electric companies are now subject toVAT and not percentage tax.

E. OVERSEAS COMMUNICATIONSTAX (Sec. 120)

10% of the amount paid for theservices.

Levied upon EVERY overseas dispatch,message or conversation TRANSMITTEDFROM THE PHILIPPINES by: Telephone Telegraph Telewriter Exchange

Wireless Other communication equipment

services.

Q: Who are liable?

Payable by: the person paying for theservices rendered;

Payable to: the person rendering theservice, who will in turn pay the taxes atthe end of the quarter.

Q: Who are exempted? (D’ GIN)

1. Government and any of its politicalsubdivisions and instrumentalities;

2. Diplomatic services (any embassy andconsular offices of a foreign gov’t)

3. International Organizations (if bases inthe Phils. and enjoying privileges,exemptions and immunities pursuant toan international agreement)

4. News services (which dealsEXCLUSIVELY with the collection ofnews and dissemination to the public)

F. TAX ON BANKS AND NON-BANKFINANCIAL INTERMEDIARIESPERFORMING QUASI-BANKINGFUNCTIONS (Sec. 121, NIRC)

Tax on gross receipts derived fromsources within the Philippines by allbanks and non-bank financialintermediaries

Definitions (from RR 09-04, Sec 2):

Non-bank Financial Intermediariesrefer to persons or entities whoseprincipal functions include the lending,investing or placement of funds orevidences of indebtedness or equityDeposited with them, Acquired by themor otherwise Coursed through them,either for their own account or for theaccount of others. (LIP – DAC)

Quasi-banking Activities refer to theborrowing of funds from 20 or morepersonal or corporate lenders at any onetime for purposes of relending orpurchasing receivables and othersimilar obligations.

Exception:

If borrowing of funds is for LIMITEDPURPOSE of financing their own needsor the needs of their agents or dealers.

RECEIPTS MATURITY RATE1. interest, commissions,

discounts from lendingactivities and financialleasing bases onremaining maturities ofinstruments:

maturityperiod is5yrs or less

maturityperiod ismore than5yrs

5%

1%

2. dividends & equityshares in net income ofsubsidiaries

0%

3. royalties, rentals ofproperty(real/personal), profitsfrom exchange and allother items treated asgross income undersec. 32)

7%

4. net trading gains onforeign currency, debtsecurities, derivatives& other similarfinancial instruments

7%


Page 130 of 198

TA

XA

TIO

NLA

W2

Computing for the Net Trading Gains:

Cumulative Total of the net tradinggain/loss since the first month ofthe applicable taxable year

LESS: Figures already reflected in theprevious months of the same year

FIGURE TO BE REPORTED IN THEMONTHLY PERCENTAGE TAX

Net Trading Loss: may only be deducted from the net

trading gain to arrive at the total grossreceipts tax due.

cannot be deducted on net trading gainearned on any taxable year other thanthe year it was incurred

may not be carried over to thesucceeding taxable year.

Rule on Pretermination: In case the maturity period of an

instrument is shortened bypretermination, the maturity periodshall be reckoned to end as of the dateof pretermination for purposes ofclassifying the transaction and applyingthe correct rate of tax. (RR 09-04, Sec.5)

Case Law:China Bank v. CTA (GR 146749, June 10,3003) – The 20% withholding tax oninterest income shall form part of the grossreceipts in computing gross receipts tax onbanks. ‘Gross Receipts’ is commonlyunderstood as the entire receipts withoutany deductions.

G. TAX ON OTHER NON-BANKFINANCE INTERMEDIARIES (Sec.122, NIRC)

Tax on gross receipts derived by othernon-bank finance intermediaries,DOING BUSINESS IN THEPHILIPPINES, from:

Interest Commissions Discounts from lending activities financial leasing

Tax is based on the remainingmaturities of the instruments fromwhich receipts are derived

MATURITY RATESmaturity period is 5 yrs orless

5%

maturity period is more than5 yrs

3%

RR 10-2004 has classified pawnshops asunder “NON-BANK FINANCIALINTERMEDIARIES”, thus are now subjectto 5% gross receipts tax. The revenueregulation also required pawnshops toregister, from VAT taxpayers, as percentagetaxpayers.

H. TAX ON LIFE INSURANCEPREMIUMS (Sec. 123, NIRC)

5% of total premiums collected (whetherin money, notes, credits or anysubstitute for money).

Note: Non-life insurance is subject to VAT.

Q: Who are liable?

General Rule: Every person, company orcorporation DOING LIFE INSURANCEBUSINESS OF ANY SORT IN THEPHILIPPINES.

Exception: Purely cooperative companiesor associations.

Cooperative companies orassociations are such if: conducted by the members with the money collected from

among themselves and

solely for their own protection and NOT for profit.

Premiums Not Included in the TaxableReceipts: V-ROAR

1. Premiums Refunded within 6 monthsafter payment on account of rejection ofrisks

2. Premiums paid upon reinsurance by acompany that has Already paid the tax.

3. Premiums collected or received by anybranch of a domestic corporation, firmor association doing business OUTSIDEthe Phils. on account of any lifeinsurance of the insured who is a NON-RESIDENT, if any tax on suchpremiums is imposed by the foreigncountry where the branch isestablished.

4. Premiums collected or received onaccount of any reinsurance, if theinsured of personal insurance,RESIDES OUTSIDE THE PHILS., if anytax on such premiums is imposed bythe foreign country where the originalinsurance has been issued or perfected.


Page 131 of 198

TA

XA

TIO

NLA

W2

5. Portions of premiums collected orreceived by insurance companies onVARIABLE CONTRACTS in excess of theamounts necessary to insure the lives ofvariable contract owners.

Variable Contracts: benefits under thecontract vary as to reflect investmentresults of any segregated portfolios ofinvestments. (PD612)

Case Law:CIR v. Insular Life Assurance (CA GR SP46516) – MUTUALIZED LIFE INSURANCECOMPANY is not subject to premium tax orDST on policies as cooperatives. If amutualized life insurance companysatisfies all the elements of ‘cooperative’[1) managed by members; 2) operated withmoney collected from members; 3) has forits main purpose the mutual protection ofmembers and not for profit] as defined inSec. 123, it shall not be subject topremiums tax.

I. TAX ON AGENTS OF FOREIGNINSURANCE COMPANIES (Sec.124, NIRC)

10% of total premiums collected.

Q: Who are liable?

General Rule: Tax shall be levied uponevery FIRE, MARINE OR MISCELLANEOUSINSURANCE AGENT authorized to procurepolicies of insurance as he may havepreviously been legally authorized totransact on risks located in the Phils FORCOMPANIES NOT AUTHORIZED TOTRANSACT BUSINESS IN THE PHILS.

Exception: Premiums paid on reinsurance.

Where an owner of property obtainsinsurance DIRECTLY from foreigninsurance companies NOT authorized totransact insurance business in thePhils., he shall pay a tax of 5% on thepremiums paid.

J. AMUSEMENT TAXES (Sec. 125,NIRC)

Q: Who are liable?

The proprietor, lessee or operator ofcockpits, cabarets, night or day clubs,boxing exhibitions, professional basketballgames, Jai-Alai and racetracks.

Q: When to pay?

return should be filed and tax paidwithin 20 days after the end of everyquarter

SOURCE RATESCockpits 18%cabarets, night or day clubs 18%boxing exhibitions 10%professional basketball games(in lieu of all other percentagetaxes)

15%

Jai-Alai & racetracks (WONthey charge for admissions)

30%

Exemption: If boxing exhibition is a Worldor Oriental Championship in any divisionfeaturing at least 1 Filipino contenderand promoted by a Filipino or by acorporation with at least 60% Filipinoequity.

Tax Base: GROSS RECEIPTS

it embraces ALL the receipts of theproprietor, lessee or operator of theamusement place; including incomefrom TV, radio and motion picturerights.

RMC 08-88 transferred the EXCLUSIVEJURISDICTION to levy tax on gross receiptsfrom ADMISSIONS to places of amusementto the local government.

K. TAX ON WINNINGS (Sec. 126,NIRC)

Q: Who are liable?

1. every person who wins in horse races2. owners of winning race horses

SOURCE RATESwinnings or dividends (bases onthe actual amount paid to winnerfor every winning ticket AFTERdeducting the cost of the ticket)

10%

winnings from double,forecast/quinella and trifectabets

4%

prizes, in case of owners of racehorses

10%

Tax shall be WITHHELD by theoperator, manager or person in chargeof the horse races before paying thedividends or prizes;

Return shall be filed and tax paid within20 days from the date tax was deductedand withheld.


Page 132 of 198

TA

XA

TIO

NLA

W2

L. TAX ON SALE, BARTER OREXCHANGE OF SHARES OFSTOCK LISTED AND TRADEDTHROUGH THE LOCAL STOCKEXCHANGE OR THROUGHINITIAL PUBLIC OFFERING (IPO)(Sec. 127, NIRC)

1. Through the Local Stock Exchange ½ of 1% of the GROSS SELLING

PRICE or GROSS VALUE IN MONEY(GSP/GVM) of the shares of stockssold, bartered, exchanged orotherwise disposed of through thelocal stock exchange OTHER THANTHE SALE BY A DEALER INSECURITIES.

Tax shall be paid by seller ortransferor.

2. Through IPO Covers sale, barter, exchange of

shares of stock of CLOSELY HELDCORPORATIONS;

Tax shall be paid by the issuingcorporation in the primary offeringor by the seller in the secondaryoffering;

Tax base is the GSP/GVM Levied in accordance with the

proportion of shares sold, bartered,exchanged or disposed, to the totaloutstanding shares after the listingin the local stock exchange:

NUMBER OFSHARES

RATES

up to 25% of allshares

4% GSP/GVM

>25% but not over33.33%

2% GSP/GVM

Over 33.33% 1% GSP/GVM

Closely Held Corporation:Any corporation at least 50% in value of theoutstanding capital stock or at least 50% ofthe total combined voting power of allclasses of stock entitled to vote is owneddirectly or indirectly by or for not morethan 20 individuals.

Rules to be applied to determine whetherthe corporation is closely held:a. Stock owned directly or indirectly by

corporations, partnerships, estates ortrusts shall be considered as actuallyowned by its stockholders, partnersor beneficiaries in proportion to theirshares as individuals.

b. An individual is considered theconstructive owner of the stock ownedby members of his family (includes onlybrothers and sisters—whole/half-blood,spouse, ancestors and linealdescendants)

c. A person having an option to acquirestock is considered the actual owner ofsuch stock

3. Return on Capital Gains realized fromsale of Shares of Stocksa) Return on capital gains realized

from sale of shares of stock listedand traded in the local stockexchange It is the duty of every

stockbroker who effected thesale to collect the tax and remitit to the BIR within 5 bankingdays from date of collection andto submit to the secretary of thestock exchange a true andcomplete return

b) Return on public offerings of sharesof stocks The corporate issuer shall file

the return and pay the taxwithin 30days from the date oflisting of the shares in the localstock exchange.

Note:Both IPOs and sales of stock through thelocal exchange are EXEMPT from capitalgains tax and from regular individual orcorporate income tax. Also, such tax is notdeductible from income tax.

II. PAYMENT OF PERCENTAGETAXES

Q: When to file return and pay?

Persons subject to percentage taxes shallfile a QUARTERLY RETURN and PAY thetax due within 25 days after the end of eachtaxable quarter. (Sec. 128 (A)(1), NIRC)

However, RR 6-2001 has changed theperiod from 25 days after end of quarter to10 days after end of the month.

Exception: Persons whose VAT registration is cancelled and

become liable under Sec 116

liable for the tax due from the dateof cancellation of registration.

retiring from business

must file a return and pay within20 days from closing of thebusiness.


Page 133 of 198

TA

XA

TIO

NLA

W2

Q: Where to file?

At the option of the person liable, hemay file1. a separate return for each branch or

place of business, or2. a consolidated return

with:

1. authorized agent bank,2. Revenue District Office,3. Collection Agent or City/Mun.

Treasurer where the business orprincipal place of business islocated.

The Commissioner may prescribe1. rules and regulations altering the

time and manner of paymentprescribed herein.

2. a minimum amount of grossreceipts where it is found that aperson:a) has failed to issue receipts or

invoicesb) does not file a return, orc) if records of the books of

accounts do not correctly reflectthe declarations in the return.

III. SUMMARY OF PERCENTAGE TAXES

THE TAX TAX BASE RATEA. 3% percentage tax Gross sales/

Gross receipts3%

B. Domestic common carrier’s tax Gross receipts 3%C. International common carrier’s tax Gross receipts 3%D. Franchise tax on:

Gas and water facilities Radio and/or broadcasting companies whose

gross receipts in the preceding year did notexceed P10,000,000

Gross receipts2%

3%E. Overseas communications tax Amount paid 10%F. Tax on banks and non-bank financial

intermediaries performing quasi-judicialfunctions

Gross receipts fromlending/financial leasing*

1% and 5%

Gross receipts from othergross income items

7%

Dividends 0%G. Tax and other non-bank financial intermediaries Gross receipts from

lending/financial leasing*1% and 5%

Gross receipts from othergross income items

5%

H. Tax on life insurance companies Premiums collected 5%I. Tax on agents of foreign insurance companies Premiums collected 10%J. Amusement taxes on:

Boxing exhibitions Professional basketball games Cockpits, cabarets, and night clubs Jai-alai and race tracks

Gross receipts 10%Gross receipts 15%Gross receipts 18%Gross receipts 30%

K. Tax on winnings: On winnings or dividends of persons in horse

races or jai-alai But if from double, forcast, quinella, and

trifecta bets On winnings of owner of winnings horses

Winnings 10%

Winnings 4%Winnings 10%

L. Stock Transaction Tax (secondary offering) Selling price ½ of 1%

REVIEWER IN TAXATION LAW Part IV. Excise Tax

Page 134 of 198

TA

XA

TIO

NLA

W2

Part IV. Excise Tax

I. GOODS SUBJECT TO EXCISE TAXA. ALCOHOL PRODUCTSB. TOBACCO PRODUCTSC. PETROLEUM PRODUCTSD. MISCELLANEOUS ARTICLES

II. FILING OF RETURN AND PAYMENT OFEXCISE TAX ON DOMESTIC PRODUCTS

III. PAYMENT OF EXCISE TAX ON IMPORTEDARTICLES

IV. EXEMPTION/CONDITIONAL TAX-FREEREMOVAL OF CERTAIN ARTICLES

I. GOODS SUBJECT TO EXCISE TAX(Sec. 129, NIRC)

Goods manufactured or produced in thePhilippines for domestic sale orconsumption or other disposition

Things imported

Note: Excise tax is imposed in addition to

VAT. The tax attaches even on articles

illicitly made, or the production ofwhich is prohibited or punished by law.

Two Classifications of Excise Tax:

Specific tax- tax is based on weight orvolume capacity or other physical unitof measurement

Ad valorem tax - tax is based onselling price or other specified value ofthe good

The following are the articles subject toexcise taxes:

(a) Distilled spirits;(b) Wines;(c) Fermented liquors;(d) Tobacco products;(e) Cigars;(f) Cigarettes;(g) Automobiles;(h) Manufactured oils and other fuels;(i) Mineral products;(j) Non-essential goods.

Purpose and justification of excise taxes:

1. To curtail consumption of certaincommodities, excessive orindiscriminate use of which isconsidered harmful to the individual orcommunity.

2. To protect a domestic industry theproducts of which face competition fromsimilar imported articles

3. To distribute the tax burden inproportion to the benefit derived from aparticular government service.

4. To raise revenue.

When Excise Taxes Accrue

As to domestic products –as soon as thearticles are produced, or come intoexistence as in the case of distilledspirits (Sec. 141) and manufacturedand other fuel oils (Sec. 148)

As to imported articles –as soon as thearticles are brought into thePhilippine jurisdiction with theintention to unload them here.

A. Tax on Alcohol Products

Definition:a. distilled spirits – substance known as

ethyl alcohol, ethanol or spirits of wineincluding whiskey, brandy, rum, ginand vodka, from whatever source, bywhatever process produced

b. wines – all alcoholic beveragesproduced by fermentation withoutdistillation from the juice of any kind offruit; and fortified beverages

c. fermented liquor – alcoholic beveragesproduced by fermentation withoutdistillation of grain or malt (beer, lager,ale, porter)

1) Sec. 141 Distilled Spirits (Rates of tax as per RR 3-2006) (for rates see Sec.141)a. Medicinal preparations, flavoring

extracts, other preparations excepttoilet preparations, wherein distilledproducts form chief ingredient

b. Tax shall proportionally increase forany strength of spirit taxed overproof spirits.

c. Tax shall attach as soon as it is inexistence whether it is subsequentlyseparated as pure or impure spiritsor transformed into any othersubstance either in the process oforiginal production or by anysubsequent process.

2) Sec. 142 Wines (Rates of tax as perRR 3-2006) (for rates see sec. 142)

Fortified wines containing more than 25% of alcohol

by volume natural wines to which distilled

spirits are added to increase theiralcoholic strength

taxed as distilled spirits


Page 135 of 198

TA

XA

TIO

NLA

W2

3) Sec. 143 Fermented Liquor (Rates oftax as per RR 3-2006) (For rates, seesec. 143) Beer, lager beer, ale. Porter and other

fermented liquor except tuba, basi, tapuy and similar

domestic fermented liquors

Penal Provisions:

VIOLATION BY: PENALTYBrewer or importer whoknowingly misdeclaresor misrepresents in hissworn statement anypertinent data orinformation

summarycancellation orwithdrawal of hispermit

Corporation, associationor partnership

fined treble theamount ofdeficiency taxes+ surcharges +interest

Person liable for acts oromissions prohibitedunder this section

criminally liableand penalizedunder Sec 254

those who willfully abetor aid in thecommission of such actor omission

liable same asprincipal

offender not citizen ofPhil

deported afterservice ofsentence

B. Tax on Tobacco Products

Definitiona. cigar – all rolls of tobacco or any

substitute wrapped in leaf tobaccob. cigarette – all rolls of finely-cut leaf

tobacco or any substitute wrapped inpaper or any other material

1) Sec. 144 Tobacco Products (Rates oftax as per RR 3-2006) (for rates, seeSec. 144)

2) Sec. 145 Cigars and Cigarettes (Ratesof tax as per RR 3-2006) (for rates,see sec. 145)

Penal Provisions: Same with Wines andSpirits

C. Tax on Petroleum Products

1) Sec. 148 Manufactured Oils andother Fuels (Rates of tax 1997 NIRC,as amended by RA 9337 [2005]) (forrates, see sec. 148)

D. Tax on Miscellaneous Articles

On Automobiles (Sec. 148 of theNIRC, as amended by RA9224)NATURE: Ad valorem tax onautomobiles based on manufacturer’sor importer’s selling price (net excise taxand VAT)

NET SELLING PRICE RATE

Up to P600T 2%

P600T – P1.1M P12,000 + 2% inexcess of P600T

P1.1M – P2.1 M P112T + 40% inexcess of P1.1M

over P2.1M P512T + 60% inexcess of P2.1M

Note: imported cars NOT for sale, tax shall be

based on total landed value +transaction value + customs duty +other charges

cars used exclusively in Freeport zonesare exempt

Sec. 150 Non Essential Goods

Sec. 151 Mineral Products

II. FILING OF RETURN ANDPAYMENT OF EXCISE TAX ONDOMESTIC PRODUCTS (Sec. 130)

(A) Persons liable to file a return, filing ofreturn on removal and payment oftax

1. Person Liable to File a Return-suchperson shall file a separate return foreach place of production setting forth,among others: DAT

Description and quantity or volumeof products removed

Applicable tax base Tax due

in the case of indigenous petroleum,natural gas or liquefied natural gas

excise tax shall be paid by firstbuyer, purchaser or transfereefor local sale, barter or transfer

export products excise tax shall be paid by

owner, lessee, concessionaire oroperator of the mining claim

should domestic products beremoved from the place ofproduction without the payment of


Page 136 of 198

TA

XA

TIO

NLA

W2

tax, the owner or possessor shall beliable for the tax due

2. Time of Filing of Return and Payment ofTax

Generally: return shall be filed andexcise tax shall be paid by themanufacturer or producer beforeremoval of the domestic products fromplace of production unless otherwisespecifically allowed

Exceptions:

PRODUCT TIME OF PAYMENTNon-metallicmineral ormineralproducts andquarrysources

Upon removal of suchproducts from localitywhere mined and extracted

Locallyproduced orextractedmetallicmineral ormineralproducts

Within 15 days after end ofthe calendar quarter whensuch products wereremoved subject toconditions prescribed byrules and regulations to bepromulgated by Secretaryof Finance, uponrecommendation of theCommissioner

Taxpayer shall file bond ≈amount of excise tax due

IMPORTEDmineral ormineralproducts,whethermetallic ornon-metallic

Before their removal fromcustoms duty

3. Place of Filing of Return and Payment ofTax (GENERAL RULE)

a. any authorized agent bank orRevenue Collector Officer, or

b. duly authorized City or MunicipalTreasurer

4. Exceptions (TO GENERAL RULE SETOUT ABOVE)

In General: Sec of Finance, uponrecommendation of Commissioner, mayby rules and regulations prescribe:a. time of filing the return at intervals

for a particular class or classes oftaxpayer

b. manner and time of payment undera tax prepayment, advance depositand other similar schemes

In the Specific Cases of:

a. minerals, mineral products orquarry resources where the place ofextraction is different from the placeof processing or production, or

b. metallic minerals processed abroad, File and pay at the Revenue

District Office havingjurisdiction in the locality whereit was mined, extracted orquarried.

(B) Determination of Gross Selling Priceof Goods Subject to Ad Valorem Tax

Gross Selling Price= Price - VAT

PRICE: That at which the goods aresold at wholesale in the place ofproduction or through their salesagents to the public

If the goods are sold in anotherestablishment where themanufacturer is the owner or in theprofits of which he has an interest,wholesale price there

Note: if price < cost of manufacture +expenses incurred until the goods arefinally sold: a proportionate margin of theprofit (which is not less than 10% of suchmanufacturing costs + expenses) shall beadded to the GSP.

(C) Manufacturer’s or Producer’s SwornStatement

It shall show:

different goods and productsmanufactured or produced,

their corresponding GSP or marketvalue;

Costs of manufacture or production+ expenses incurred or to beincurred until goods are sold

(D) Credit for Excise Tax on GoodsActually Exported

In case goods produced ormanufactured are removed and actuallyexported without returning to thePhilippines:

General Rule: any excise tax paidshall be credited or refunded uponsubmission of proof of actualexportation and upon receipt of theforeign exchange payment

Exception (i.e., NOT credible):mineral productso Exception to Exception: coal &

coke


Page 137 of 198

TA

XA

TIO

NLA

W2

III.PAYMENT OF EXCISE TAX ONIMPORTED ARTICLES (Sec. 131)

(A) Persons Liable

Paid by:

owner or importer to the CustomsOfficers before release from thecustomhouse, OR

person found in possession ofarticles which are exempt fromexcise taxes other than those legallyentitled to exemption

In case tax-free articles brought in byexempted persons or entities oragencies are subsequently sold,transferred or exchanged in thePhilippines purchaser or recipientsshall be considered importers and shallbe liable for duty and internal revenuetax due

Importation of cigar, cigarettes, distilledspirits and wines even if destined to taxand duty-free shops shall be subject toall applicable taxes,

Except: (not subject to tax)1. Such are brought directly into Subic

Special Economic and FreeportZone; Cagayan Special EconomicZone and Freeport; Zamboanga CitySpecial Economic Zone and nottransshipped to any other port inthe Philippines

2. Importation done by government-owned and operated duty free shoplike DFP, PROVIDED such productsare labeled ‘tax and duty free’ and‘not for resale’

Exception to the Exception: if suchproducts are eventually introduced toPhilippine customs territory, then sucharticles shall be deemed imported intoPhil and be subject to all import andexcise taxes

Note: Removal and transfer from oneFreeport to another Freeport shall not bedeemed an introduction to Phil territory.

Violations: cigar, cigarettes, distilled spirits and

wines in duty free shops which are NOTLABELED AS REQUIRED, as well as

those articles obtained from duty freeshops and subsequently FOUND INNON DUTY FREE SHOPS FOR RESALE

Penalty:

articles shall be confiscated andperpetrator punished;

tax due on any such goods, products,machinery, equipment and other similararticles shall constitute a lien on thearticle itself which shall be superior toall other liens.

(B) Rate and Basis of the Excise Tax onImported Articles

Unless otherwise specified, importedarticles shall be subject to the samerate and basis of excise taxesapplicable to locally manufacturedarticles

IV.EXEMPTION/CONDITIONAL TAX-FREE REMOVAL OF CERTAINARTICLES

a. denatured wine/spirits for treatment oftobacco leaf;

b. domestic denatured alcohol renderedunfit for oral intake, but VAT should bepaid;

c. petroleum products sold to: international carriers (Philippine or

foreign carriers) on their use orconsumption outside thePhilippines, provided there isreciprocity

exempt entities covered by taxtreaties, conventions, internationalagreements, provided there isreciprocity

entities which are by law exemptedfrom direct & indirect taxes

d. removal of spirits under bond forrectification;

e. removal of fermented liquors to bondedwarehouse;

f. removal of damaged liquors;g. removal of tobacco products entirely

unfit for chewing/smoking.

REVIEWER IN TAXATION LAW Part V. Documentary Stamp Tax

Page 138 of 198

TA

XA

TIO

NLA

W2

Part V. Documentary Stamp Tax

I. GENERAL PRINCIPLESII. DOCUMENTS AND PAPERS NOT SUBJECT

TO DOCUMENTARY STAMP TAXIII. ONE-TRANSACTION RULEIV. PAYMENT OF DSTV. APPLICABILITY OF DST LAW ON

ELECTRONIC DOCUMENTSVI. TAX RATES APPLICABLE

I. GENERAL PRINCIPLES

Definition:Tax on documents, instruments and papersevidencing the acceptance, assignment, saleor transfer of an obligation, right orproperty thereto

Nature:It is an excise or privilege tax imposed onthe privilege to enter into the transaction.

It is only paid once. The amount of DST depends on the

nature of the document and the valueappearing upon its face.

If the transaction is subsequentlyannulled or invalidated, the tax may berefunded since the law presupposes avalid transaction.

Q: Who are required to file theDocumentary Stamp Tax DeclarationReturn?

a) In case of constructive affixture ofdocumentary stamps, by the personsmaking, signing, issuing, accepting ortransferring documents, instruments,loan agreements and papers,acceptances, assignments, sales andconveyances of the obligation, right orproperty incident thereto wherever the document is made,

signed, issued, accepted ortransferred

when the obligation or right arisesfrom Philippine sources or theproperty is situated in thePhilippines

at the same time such act is done ortransaction had;

b) By metering machine user who imprintsthe Documentary Stamp Tax due on thetaxable documents; and

c) By Revenue Collection Agent, forremittance of sold loose documentarystamps.

Note: Wherever one party to the taxabledocument enjoys exemption from the tax

imposed, the other party who is notexempt will be the one directly liable to fileDocumentary Stamp Tax Declaration andpay the applicable stamp tax.

Q: What are the implications of failure tostamp taxable documents?

The untaxed document will: Not be recorded, Not be admitted or used in evidence in

court until the requisite stamp orstamps have been affixed thereto andcancelled,

Not be notarized (No notary public orother officer authorized to administeroaths will add his jurat oracknowledgment to any documentsubject to Documentary Stamp Taxunless the proper documentary stampsare affixed thereto and cancelled.

When are shares considered issued?

Upon the acquisition of the stockholderof the attributes of ownership over theshares (the right to vote, the right toreceive dividends, the right to dispose,etc., notwithstanding that restrictionson the exercise of any of these rightsmay be imposed by the Corporation’sArticles and/or by-laws, the SEC,stockholder agreement, court order, etc.)

which acquisition of such attributes ofownership shall be manifested by theacceptance by the Corporation of thestockholder’s subscription to its sharesof stock.

The delivery of the certificates of stock tothe stockholders is NOT essential for theDST to accrue. [RR 13-2004]

What is the basis of DST?

The entire shares of stock subscribed areconsidered issued for purposes of DST, evenif not fully paid. [RR 13-2004]

When is a sale or exchange of sharestaxable?

There must be actual or constructivetransfer of beneficial ownership of shares ofstock from one person to another. This maybe manifested by:a) the clear exercise of attributes of

ownership over such stocks by thetransferee, or

b) by an actual entry of a change in thename appearing in the certificate ofstock or in the stock and transferbook of the corporation or by any entry


Page 139 of 198

TA

XA

TIO

NLA

W2

indicating transfer of beneficialownership in any form of registryincluding those of a duly authorizedscripless registry, such as thosemaintained for or by the PhilippineStock Exchange. [RR 13-2004]

II. DOCUMENTS AND PAPERS NOTSUBJECT TO STAMP TAX(BAD- STAF- LIMB-PC40)

a. Policies of insurance or annuities madeor granted by a fraternal or beneficiarysociety, order, association orcooperative company conducted solelyby the members thereof for their benefit.

b. Certificates of oaths administered toany government official in his officialcapacity or of acknowledgment by anygovernment official in the performanceof his official duties; written appearance in any court by

any government official, in hisofficial capacity;

certificates of the administration ofoaths to any person as to theauthenticity of any paper required tobe filed in court by any person orparty thereto, whether theproceedings be civil or criminal;

papers and documents filed incourts by or for the national,provincial, city or municipalgovernments;

affidavits of poor persons for thepurpose of proving poverty;

statements and other compulsoryinformation required of persons orcorporations by the rules andregulations of the national,provincial, city or municipalgovernments exclusively forstatistical purposes and which arewholly for the use of the bureau oroffice in which they are filed, andnot at the instance or for the use orbenefit of the person filing them;

certified copies and other certificatesplaced upon documents,instruments and papers for thenational, provincial, city ormunicipal governments, made at theinstance and for the sole use ofsome other branch of the national,provincial, city or municipalgovernments;

and certificates of the assessedvalue of lands, not exceeding Twohundred pesos (P200) in value

assessed, furnished by theprovincial, city or municipalTreasurer to applicants forregistration of title to land.

c. Borrowing and lending of securitiesexecuted under the SecuritiesBorrowing and Lending Program of aregistered exchange, or in accordancewith regulations prescribed by theappropriate regulatory authority: Provided, however, That any

borrowing or lending of securitiesagreement as contemplated shall beduly covered by a mastersecurities borrowing and lendingagreement acceptable to theappropriate regulatory authority,and which agreements is dulyregistered and approved by theBureau of Internal Revenue. (BIR).

d. Loan agreements the aggregate of whichdoes not exceed Two hundred fiftythousand pesos (P250,000), or any suchamount as may be determined by heSecretary of Finance, executed by an individual for his

purchase on installment for hispersonal use or that of his familyand not for business or resale,barter or hire of a house, lot, motorvehicle, appliance or furniture:

Provided, however, That the amountto be set by the Secretary of Financeshall be in accordance with arelevant price index but not toexceed ten percent (10%) of thecurrent amount and shall remain inforce at least for three (3) years.

e. Sale, barter or exchange of Shares ofstock listed and traded through thelocal stock exchange for a period of five(5) years from the effectivity of this Act.

f. Assignment or transfer of any mortgage,lease or policy of insurance, or therenewal or continuance of anyagreement, contract, charter, or anyevidence of obligation or indebtedness, if there is no change in the maturity

date or remaining period of coveragefrom that of the original instrument.

g. Fixed income and other securitiesTraded in the secondary market orthrough an exchange.

h. Derivatives: Provided, That for purposesof this exemption, repurchaseagreements and reverse repurchase


Page 140 of 198

TA

XA

TIO

NLA

W2

agreements shall be treated similarly asderivatives.

i. Interbranch or interdepartmentalAdvances within the same legal entity.

j. All Forebearances arising from sales orservice contracts including credit cardand trade receivables: Provided, That the exemption be

limited to those executed by theseller or service provider itself.

k. Bank deposit accounts without a fixedterm or Maturity.

l. All contracts, deeds, documents andtransactions related to the conduct ofbusiness of the Banko Sentral ngPilipinas.

m. Transfer of property pursuant to Section40(c)(2) of the National InternalRevenue Code of 1997, as amended.

n. Interbank call loans with maturity ofnot more than seven (7) days to coverdeficiency in reserves against depositliabilities, including those between oramong banks and quasibanks.

III.ONE-TRANSACTION RULE:

Where only one instrument wasprepared, made signed and executed tocover a loan agreement/promissorynote, pledge/mortgage,

The documentary stamp tax shall bepaid and computed on the full amountof the loan or credit granted.

In this regard, the instrument shall betreated as covering only one taxabletransaction, subject to the higherdocumentary stamp tax. (RR 9-94, Sec.8)

IV.PAYMENT OF DOCUMENTARYSTAMP TAX (Sec 200)

Where: filed and paid at

authorized agent bank withinterritorial jurisdiction of RevenueDistrict Officer which hadjurisdiction over residence orprincipal place of business oftaxpayer

Revenue District Officer, collectionagent, duly authorized treasurer ofmunicipality or city where thetaxpayer has his residence orprincipal place of business

Exception:

Tax may be paid thru purchase andactual affixture or imprinting thestamp thru documentary stampmetering machine as prescribed bythe pertinent rules and regulations.

When: 5 days after close of the month

when the taxable document wasmade, signed issued, transferred oraccepted. (RR 6-01) [Note: 10-dayrule provided in Sec. 200(B) of theNIRC no longer applicable)

V. APPLICABILITY OF DST LAW ONELECTRONIC DOCUMENTS:

The DST rates shall be applicable on alldocuments not otherwise expresslyexempted by the law, notwithstandingthat they are in electronic form. Asprovided for in RA 8792 (ElectronicCommerce Act), electronic documentsare the functional equivalent of awritten document under existing laws,and the issuance thereof is thereforetantamount to the issuance of a writtendocument, and therefore subject toDST. (RR 13-04, Sec. 10)

VI.TAX RATES APPLICABLE (1997 NIRC, as amended by RA 9243 [2004])

DOCUMENT TAXABLE UNITTAX DUE PERUNIT

TAXABLE BASE

Debentures & Certificates ofIndebtedness DELETED by RA 9243Original Issue of Shares ofStock with par value

P200.00 or fractionthereof

1.00 Par value of shares ofstocks

Original Issue of Shares ofStock without par value


1.00 Actual considerationfor the issuance ofshares of stocks

Stock Dividends P200.00 or fractionthereof

1.00 Actual valuerepresented by eachshare


Page 141 of 198

TA

XA

TIO

NLA

W2

Sales, Agreements to Sell,Memoranda of Sales, Deliveriesor Transfer of Due-bills,Certificate of Obligation, orShares or Certificates of Stock


0.75 Par value of such due-bills, certificate ofobligation or stocks

In the case of stocks withoutpar value

25% of the DSTpaid upon theoriginal issue ofsaid stock

Bonds, Debentures, Certificateof Stock or Indebtednessissued in foreign Countries


1.50 Par value of suchbonds, debentures orCertificate of Stocks

Certificate of Profits or Interestin Property or Accumulation


0.50 Face value of suchcertificate /memorandum

Bank Checks, Drafts,Certificate of Deposit notbearing interest and otherInstruments

On each Document 1.50

Original issue of debtinstruments-For such debt instrumentswith terms of less than oneyear

P200.00 or fraction 1.00-proportionalamount inaccordance w/ theratio of its term innumber of days to365 days

Issue price of anysuch debt instrument

Bills of exchange (betweenpoints within the Philippines)and drafts


.30 Face value of the billof exchange or draft

Bills of Exchange or orderdrawn in foreign country butpayable in the Philippines


.30 Face value of such billof exchange or orderor the equivalent ofsuch value, ifexpressed in foreigncurrency

Foreign Bills of Exchange andLetter of Credit


.30 Face value of bill ofexchange/ order orthe equivalent of suchvalue if expressed inforeign currency

Life Insurance Policies P200.00 or fractionthereof

.50 Amount of premiumcollected

Policies Of Insurance uponProperty

P4.00 premium orfraction thereof

.50 Premium charged

Fidelity Bonds and otherInsurance Policies

P4.00 premium orfraction thereof

.50 Premium charged

Policies of Annuities, Annuityor other instruments


0.50 Amount of premium orinstallment paymentof contract pricecollected

Pre-Need Plans P200.00 or fraction .20 Premium orcontribution collected

Indemnity Bonds P4.00 or fractionthereof

.30 Premium charged

Certificates of Damage orotherwise and Certificate ordocument issued by anycustoms officers, marinesurveyor, notary public andcertificate required by law orby rules and regulations of apublic office

Each Certificate 15.00


Page 142 of 198

TA

XA

TIO

NLA

W2

Warehouse Receipts (except ifvalue does not exceed P200.00)

Each Receipt 15.00

Jai-alai, Horse Race Tickets,lotto or Other AuthorizedNumber Games

P1.00 cost of ticketandAdditional P0.10 onevery P1.00 orfraction thereof ifcost of ticketexceeds P1.00

.10 Cost of the ticket

Bills of Lading or Receipts(except charter party)

>P100 not > P1000>P1000

1.0010.00

Proxies Each Proxy 15.00Powers of Attorney Each Document 5.00Lease and other Hiringagreements of memorandumor contract for hire, use or rentof any land or tenements orportions thereof

First 2,000for every P1,000 orfractional part inexcess of the firstP2,000 for eachyear of the term ofthe contract oragreement

3.001.00

Mortgages Pledges of lands,estate, or property and Deedsof Trust

First 5,000on each P5,000 orfractional part inexcess of 5,000

20.0010.00

Amount SecuredAmount Secured

Deed of Sale, instrument orwriting and Conveyances ofReal Property (except grants,patents or original certificate ofthe government)

First 1,000for each additionalP1,000 or fractionalpart in excess ofP1,000

15.0015.00

Consideration or FairMarket Value,whichever is higher (ifgovernment is a party,basis shall be theconsideration)

Charter parties and SimilarInstruments

1,000 tons andbelow

P500.00 for the 1st6 months+P50/month orfraction thereof inexcess of 6 mos

Tonnage and durationof the contract

1,001 to 10,000tons

P1,000 for the 1st6 mos +P100/month orfraction thereof inexcess of 6 mos

Over 10,000 tons P1,500 for the 1st6 mos +P150/month orfraction thereof inexcess of 6 mos

Assignment or transfer of anymortgage, lease or policy ofinsuranceRenewal of any agreement/contract

At the same rate asthat imposed onthe originalinstrument

REVIEWER IN TAXATION LAW Part VI. Remedies

Page 143 of 198

TA

XA

TIO

NLA

W2

Part VI. Remedies

I. AUDIT STAGEA. POWERS OF THE COMMISSIONER

RELATIVE TO THE AUDIT PROCESSB. LETTER OF AUTHORITY

II. PRE-ASSESSMENT STAGEA. STEP 1: ISSUANCE OF NOTICE OF

INFORMAL CONFERENCEB. STEP 2: INFORMAL CONFERENCEC. STEP 3: ISSUANCE OF PRE-

ASSESSMENT NOTICEIII. FORMAL ASSESSMENT STAGE

EFFECTS OF RA 9282 ON THE CTA’SJURISDICTION

IV. COLLECTION LETTER/WARRANTSA. COLLECTIONS OF DEFICIENCY TAXESB. REMEDIES OF THE TAXPAYER

AGAINST TAXES ERRONEOUSLY ORILLEGALLY PAID

C. REMEDIES OF THE STATE FORCOLLECTION OF TAXES

V. COMPROMISE AND ABATEMENTVI. STATUTORY OFFENSES AND PENALTIES

A. ADDITIONS TO THE TAXB. CRIMES, OTHER OFFENSES AND

FORFEITURESVII.COMPLIANCE REQUIREMENTSVIII. INFORMER’S REWARD

STAGES IN BIR AUDIT EXAMINATION(Framework of discussion)

Audit Stage/Issuance of Letter of Authority

Pre-Assessment Stage

Formal Assessment Stage

Collection Letter/Warrants

Compromise and Abatement

I. AUDIT STAGE(Issuance of Letter of Authority)

A. Powers of the CommissionerRelative to the Audit Process(PATRIA-CED)

1. EXAMINE RETURNS and DETERMINETAX DUE (§5) Authorizing the examination of any

taxpayer and the assessment of thecorrect amount of tax, WON areturn has been filed by suchtaxpayer.

Note: Any return filed with theCommissioner shall not be withdrawn,BUT the taxpayer may MODIFY,CHANGE or AMEND such returnwithin three (3) years from the date of

filing, provided that no notice for auditor investigation of such return has beenactually served on the taxpayer.

2. CONDUCT INVENTORY-TAKING,SURVEILLANCE and to prescribepresumptive gross sales and receipts(§6C) Inventory-taking – at any time

during the taxable year, for thepurpose of determining the correcttax liabilities.

Surveillance – done if there isreason to believe that the taxpayeris not declaring his correct income,sales or receipts for tax purposes.

Prescribe presumptive gross salesand receipts if: It is found that the taxpayer has

failed to issue receipts andinvoices, or

When there is reason to believethat the books of accounts orother records do not correctlyreflect the declarations made bythe taxpayer

3. Terminate TAXABLE PERIOD (§6D) Terminating taxable period and

ordering the immediate payment ofthe tax for the terminated periodand any remaining tax that isunpaid, when the taxpayer is:

retiring from business subject totax, or

intending to leave thePhilippines or to remove hisproperty therefrom or to hide orconceal his property;

performing any act tending toobstruct the proceedings for thecollection of the tax for the pastor current quarter or year or torender the same totally orpartially ineffective unless suchproceedings are begunimmediately

4. Prescribe REAL PROPERTY VALUES(§6E) Dividing the Philippines into

different zones or areas, anddetermining the FMV of realproperties in each zone or area,upon consultation with competentappraisers from private and publicsectors.

For the purpose of computing anyinternal revenue tax, the value of


Page 144 of 198

TA

XA

TIO

NLA

W2

the property shall be WHICHEVERIS HIGHER OF:

The fair market value asdetermined by theCommissioner, or

The fair market value as shownin the schedule of values of theprovincial and city assessors

5. Inquire into BANK DEPOSITACCOUNTS (§6F) Notwithstanding any contrary

provision of R.A. 1405 (BankSecrecy Law) and other general orspecial laws, the Commissioner isauthorized to inquire into bankdeposits of: A decedent to determine his

gross estate, and

Any taxpayer who has filed anapplication for compromise oftax liability by reason of

financial incapacity: the

taxpayer must waive in writinghis privilege under R.A. 1405and other relevant laws, beforethe Commissioner may inquireinto his bank accounts.

6. Accredit and register TAX AGENTS(§6G) Accrediting and registering tax

agents (may be individuals orgeneral professional partnerships)based on the following criteria:

Professional competence Integrity Moral fitness

7. Prescribe additional PROCEDURAL ORDOCUMENTARY REQUIREMENTS(§6H) In relation to the manner of

compliance of any requirement inconnection with the submission orpreparation of financial statementsaccompanying the tax returns.

8. ACCESS LETTER (§5B) Obtaining on a regular basis, from

any person OTHER THAN theperson whose tax liability issubject to audit or investigation,or from any office or officer of thenational and local governments,government agencies orinstrumentalities, including BSPand GOCCs,

any information such as, but notlimited to, costs and volumes of

production, receipts or sales andgross incomes of taxpayers, andthe names addresses, and financialstatements of corporations, mutualfund companies, insurancecompanies etc.

Note: This is known as the Third PartyInformation Rule.

9. INTERPRET TAX LAWS and to DECIDETAX CASES (§4)

Shall be under the exclusive andoriginal jurisdiction of theCommissioner, subject to review bythe Secretary of Finance.

RMC 44-01

VALIDITY: A ruling by the BIRCommissioner shall be presumedVALID unless modified, reversed orsuperseded by the Secretary of Finance.

REVIEW: A taxpayer who receives anadverse ruling from the Commissionermay, within thirty (30) days from thedate of receipt of such ruling, seek itsreview by the Secretary of Finance,either by himself/itself or thoughhis/its duly authorized representative.

EFFECT OF REVIEW: A reversal ormodification of the BIR ruling shallterminate its effectivity upon the receiptby the taxpayer or the BIR of writtennotice of reversal or modification,whichever came earlier.

Note: DOF Order 7-02 added that theSecretary of Finance may review the rulingsMOTU PROPRIO.

Section 246, NIRC: Non-retroactivity ofRulings

Any revocation, modification or reversalof … any of the rulings or circularspromulgated by the Commissioner shallnot be given retroactive application ifthe revocation, modification or reversalwill be prejudicial to the taxpayers,

Exception:

a) Where the taxpayer deliberatelymisstates or omits material facts fromhis return or any document required ofhim the BIR;

b) Where the facts subsequently gatheredby the BIR are materially different from


Page 145 of 198

TA

XA

TIO

NLA

W2

the facts on which the ruling is based;or

c) Where the taxpayer acted in bad faith.

B. Letter of Authority

Q: What is a letter of authority?

An official document that empowers aRevenue Officer to examine andscrutinize a taxpayer’s books ofaccounts and other accounting records,in order to determine the taxpayer’scorrect internal revenue tax liabilities.

Q: Who issues the Letter of Authority?

Commissioner: for those unitsreporting directly to him

Regional directors: for taxpayers covered

by his particular region. If theCommissioner has already issued an LAto investigate a particular taxpayer, theRegional director shall desist fromissuing another LA for the sametaxpayer.

Q: What are the cases which need not becovered by a valid LA?

Cases involving civil/criminal tax fraudwhich fall under the jurisdiction of thetax fraud division of the EnforcementServices, and

Policy cases under audit by the specialteams in national offices

II. PRE-ASSESSMENT STAGE


What is a notice of informalconference?

A written notice informing a taxpayerthat the findings of the audit conductedon his books of accounts andaccounting records indicate thatadditional taxes or deficiencyassessments have to be paid.

The taxpayer shall then have fifteen (15)days from the date of his receipt of theNotice for Informal Conference toexplain his side.

B. Step 2: Informal Conference

What matters are taken up during theinformal conference?1. Discussion on the merits of the

assessment

2. Attempt of taxpayer to convince theexaminer to conduct a re-investigationand/or re-examination

3. Evaluate if submission of the waiver of

the statute of limitations is necessarybecause evaluation may extend beyondthree years

4. Taxpayer to advise the examiner ifposition paper will be submitted

What is a jeopardy assessment?

A tax assessment made by anauthorized Revenue Officer without thebenefit of complete or partial audit,

in light of the RO’s belief that theassessment and collection of thedeficiency tax will be jeopardized bydelay caused by the taxpayer’s failureto:i. Comply with audit and investigation

requirements to present his books ofaccounts and/or pertinent records

ii. Substantiate all or any of thedeductions, exemptions or creditsclaimed in his return.

It is usually issued when statutoryprescriptive periods for the assessmentor collection of taxes are about to lapsedue principally to the taxpayer’s fault.

C. Step 3: Issuance of Pre-Assessment Notice

What is a pre-assessment notice (PAN)?

A communication issued by theRegional Assessment Division or anyother concerned BIR office, informing ataxpayer who has been audited of thefindings of the Revenue Officer,following the review of these findings.

The assessment shall be:

in writing, and should inform the taxpayer of the

law and the facts on which theassessment is made;

otherwise, the assessment shall bevoid. (Sec. 228, NIRC)

If the taxpayer disagrees with thefindings in the PAN, he has fifteen (15)days from his receipt of the PAN to file awritten reply contesting the proposedassessment.

PAN no longer required when:

(a) The finding for any deficiency tax is theresult of MATHEMATICAL ERROR inthe computation of the tax as appearingon the face of the return; or


Page 146 of 198

TA

XA

TIO

NLA

W2

(b) A DISCREPANCY has been determinedbetween the TAX WITHHELD and theamount ACTUALLY REMITTED by thewithholding agent; or

(c) A taxpayer who opted to claim a refundor tax credit of excess creditablewithholding tax for a taxable period wasdetermined to have carried over andautomatically applied the sameamount claimed against the estimatedtax liabilities for the taxable quarter orquarters of the succeeding taxable year;or

(d) The EXCISE TAX due on excisablearticles has not been paid; or

(e) An article locally purchased or importedby an exempt person, such as, but notlimited to, vehicles, capital equipment,machineries and spare parts, has beensold, traded or transferred to a non-exempt person. (Sec. 228, NIRC)

III.FORMAL ASSESSMENT STAGE

What is a Notice of Assessment (FinalAssessment Notice “FAN” or FormalLetter of Demand)?

A declaration of deficiency taxes issuedto a taxpayer who fails to respond to apre-assessment notice within theprescribed period of time, or whosereply to the PAN was found to bewithout merit.

This is commonly known as the FinalAssessment Notice (FAN).

An assessment contains not only acomputation of tax liabilities, but also ademand for payment within aprescribed period.

The ultimate purpose of assessment isto ascertain the amount that eachtaxpayer is to pay.

An assessment is a notice to the effectthat the amount therein stated is dueas tax and a demand for paymentthereof. (Tupaz v. Ulep, 1999)

The formal letter of demand shall beissued by the Commissioner or his dulyauthorized representative.

The letter of demand calling for thepayment of the taxpayer’s deficiencytaxes shall state the FACTS, the LAW,RULES and REGULATIONS orJURISPRUDENCE on which theassessment is based, OTHERWISE, theformal letter of demand or assessmentnotice shall be VOID. (RR 12-99)

Note: A follow-up letter/demand letter for

payment of taxes is considered a notice ofassessment. [REPUBLIC vs. CA andNIELSON & CO. (April 30, 1987)]

Where the taxpayer is appealing on theground that the assessment is erroneous, itis incumbent upon him to prove what is thecorrect and just liability by a full and fairdisclosure of all pertinent data. [BonifacioSy Po v. CTA]

Within what time may theCommissioner issue a notice ofassessment?

If the taxpayer filed a return: internal

revenue taxes shall be assessed withinthree years after the last dayprescribed by law for the filing of thereturn.

If a return is filed beyond the periodprescribed by law, the three-year periodshall be counted from the day thereturn was filed.

A return filed before the last dayprescribed by law for filing shall beconsidered as filed on the last day.(Sec. 203, NIRC)

Note: In short, the period for assessment iswithin three years from the time the returnis filed or from the time the return is due,WHICHEVER IS LATER.

If the taxpayer DID NOT file a return:internal revenue taxes shall be assessedwithin ten years after the discovery ofthe failure to file the return (Sec. 222a,NIRC)

If the taxpayer filed a false orfraudulent return with intent to

evade tax internal revenue taxesshall be assessed within ten yearsafter the discovery of the falsity or fraud(Sec. 222a, NIRC)

o Fraud or falsity on the return withintent to evade payment of tax is aquestion of fact and thecircumstances constituting fraudmust be alleged and proved in thecourt below.

o The finding of the trial court as toits existence and non-existence isfinal and cannot be reviewed by theSupreme Court unless clearlyshown to be erroneous. [CIR V.Ayala Securities (1976)]


Page 147 of 198

TA

XA

TIO

NLA

W2

Q: Are there tax returns which are falsebut not fraudulent?

YES. There must be a distinctionbetween false returns (due to mistakes,carelessness or ignorance) andfraudulent returns (with intent to evadetaxes).

The fraud contemplated by law is actualand not constructive, and must amountto intentional wrongdoing with the soleobject of avoiding the tax. [Aznar v.CTA (1974)]

WAIVER: The taxpayer and theCommissioner may agree in writing,before the expiration of the timeprescribed in Sec. 203, to extend theperiod of assessment (Sec. 222b, NIRC)

The waiver of prescription must beexecuted properly, otherwise, invalidand results to prescription of theright to assess/collect. [PHILJOURNALISTS INC. v. CIR(December 16, 2004)]

Requirements under RMO 20-90:1. definite agreed date,2. date of acceptance indicated,

and3. taxpayer must be furnished with

a copy of the waiver.

Q: What is the nature of prescription onthe right to assess?

The law on prescription, being aremedial measure, should beLIBERALLY CONSTRUED in order toafford protection.

As a corollary, the exceptions to the lawon prescription should be clearlyconstrued.

Hence, negligence or oversight on thepart of the BIR cannot prejudicetaxpayers, considering that theprescriptive period was preciselyintended to give them peace of mind.[CIR v. Goodrich Philippines (1999)]

Counting of the Prescriptive Periods

CIR v. Parcero (2007): The AdministrativeCode, not the Civil Code, governs thecomputation of legal periods because it isthe latter law.

“Year” shall be understood to betwelve calendar months; “month” ofthirty days, unless it refers to a specificcalendar month in which case it shallbe computed according to the numberof days the specific month contains;

“day”, to a day of twenty-four hoursand; “night” from sunrise to sunset.

A calendar month is “a monthdesignated in the calendar withoutregard to the number of days it maycontain.”

It is the “period of time runningfrom the beginning of a certainnumbered day up to, but not including,the corresponding numbered day of thenext month, and if there is not asufficient number of days in the nextmonth, then up to and including thelast day of that month.”

To illustrate, one calendar monthfrom December 31, 2007 will be fromJanuary 1, 2008 to January 31, 2008;one calendar month from January 31,2008 will be from February 1, 2008until February 29, 2008.

When is an assessment deemed made?

An assessment is deemed made whenthe demand letter or notice isRELEASED, MAILED OR SENT by theBIR to the taxpayer.

The law does not require that thetaxpayer receive the notice within thethree-year or ten-year period. [CIR vs.BAUTISTA (May 27, 1959)]

If the taxpayer does not agree with theassessment, what is his REMEDY?

To contest an assessment by filing aletter of PROTEST stating in detail hisreasons for contesting the assessment.

When no protest is seasonably made bythe taxpayer, the assessment shallbecome final and unappealable, andthus the tax shall be collectible.

Q: What is the nature of an assessmentwhen it is final and executory?

It is in the nature of an enforcementjudgment such that no inquiry can bemade thereon on the merits of theoriginal case.

Within what time may the taxpayerprotest the assessment?

Within thirty (30) days by filing arequest for reconsideration orreinvestigation from receipt of theassessment.

Within sixty (60) days from filing of theprotest, all relevant supportingdocuments must be submitted,


Page 148 of 198

TA

XA

TIO

NLA

W2

otherwise the assessment shall becomefinal. (§228)

What are the characteristics of a validprotest?

A protest is considered validly made if itsatisfies the following conditions:1) it is made in writing, and

addressed to the Commissioner ofInternal Revenue.

2) it contains the information requiredby the rule.

3) It states the FACTS, applicableLAW, RULES and REGULATIONS orJURISPRUDENCE on which hisprotest is based, otherwise theprotest shall be considered void andwithout force and effect.

4) It is filed within the periodprescribed by law

What should the taxpayer do if hisprotest is denied or is not acted upon bythe Commissioner?

Situation 1: If the CommissionerDENIES THE PROTEST filed by the

taxpayer the taxpayer may appeal tothe Court of Tax Appeals within thirtydays from receipt of the decisiondenying the protest (Sec. 228, NIRC)

Where there is a request forreconsideration, final demand letterfrom BIR is considered a decision ona disputed or protested assessmentwhich is therefore appealable to theCTA. [CIR v. ISABELA CULTURALCORP. (July 11, 2001)]

Situation 2: If the Commissioner didNOT ACT UPON THE PROTEST withinone hundred and eighty days fromthe time the documents were

submitted the taxpayer may either:

Appeal to the CTA within thirty daysfrom the lapse of the 180-day periodOR

Wait until the Commissioner decidesbefore he elevates the case to theCTA.

RCBC v. CIR (2007): In case theCommissioner failed to act on the disputedassessment within the 180-day period fromdate of submission of documents, ataxpayer can either:1) file a petition for review with the Court

of Tax Appeals within 30 days after theexpiration of the 180-day period; or

2) await the final decision of theCommissioner on the disputedassessments and appeal such finaldecision to the Court of Tax Appealswithin 30 days after receipt of a copy ofsuch decision.

However, these options are mutuallyexclusive, and resort to one bars theapplication of the other.

When does the 30-day period to appealin Situation 1 commence to run?

The 30-day period starts when thetaxpayer receives the decision of theCommissioner denying the protest.

The decision of the Commissioner mustcategorically state that his action onthe disputed assessment is final,otherwise period to appeal will notcommence to run. [ADVERTISINGASSOCIATES vs. CA (December 26,1984)]

Note: A Division of the CTA shall hear theappeal. (Sec. 11, RA 1125 as amended byRA 9282 [2004])

If the taxpayer is not satisfied with theCTA Division’s ruling, what is hisREMEDY?

FIRST, he may file a motion forreconsideration before the sameDivision of the CTA within fifteen (15)days from notice thereof. (Sec. 11, RA1125 as amended by RA 9282 [2004])

THEN, a party adversely affected by aresolution of a Division of the CTA on amotion for reconsideration may file apetition for review with the CTA enbanc. (Sec. 18, RA 1125 as amended byRA 9282 [2004])

If the taxpayer is not satisfied with thedecision of the CTA en banc, what is hisREMEDY?

A party adversely affected by a decisionor ruling of the CTA en banc may filewith the Supreme Court a verifiedpetition for review on certiorari pursuantto Rule 45 of the 1997 Rules of Court.(Sec. 19, RA 1125 as amended by RA9282 [2004])


Page 149 of 198

TA

XA

TIO

NLA

W2

EFFECTS OF RA 9282 ON THE CTA’S JURISDICTION:

The CTA shall exercise

A. EXCLUSIVE APPELLATE JURISDICTION to review by appeal:

Decisions of the Commissioner ofInternal Revenue

1. disputed assessments,2. refunds of internal revenue taxes, fees or other charges,3. penalties in relation thereto, or4. other matters arising under the National Internal Revenue or

other laws administered by the Bureau of Internal Revenue;Inaction by the Commissioner ofInternal Revenue

1. disputed assessments,2. refunds of internal revenue taxes, fees or other charges,3. penalties in relations thereto, or4. other matters arising under the National Internal Revenue

Code or other laws administered by the Bureau of InternalRevenue, where the National Internal Revenue Code provides aspecific period of action, in which case the inaction shall bedeemed a denial;

Decisions, orders or resolutionsof the Regional Trial Courts

local tax cases originally decided or resolved by them in theexercise of their original or appellate jurisdiction;

Decisions of the Commissioner ofCustoms

liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws

administered by the Bureau of Customs;Decisions of the Central Board ofAssessment Appeals

exercise of its appellate jurisdiction over cases involving theassessment and taxation of real property originally decided by theprovincial or city board of assessment appeals;

Decisions of the Secretary ofFinance

customs cases elevated to him automatically for review fromdecisions of the Commissioner of Customs which are adverse tothe Government under Section 2315 of the Tariff and CustomsCode;

Decisions of the Secretary ofTrade and Industry(nonagricultural product,commodity or article)Secretary of Agriculture(agricultural product, commodityor article)

involving dumping and countervailing duties under Section301 and 302, respectively, of the Tariff and Customs Code,and

safeguard measures under Republic Act No. 8800, whereeither party may appeal the decision to impose or not toimpose said duties.

B. Jurisdiction over cases involvingCRIMINAL OFFENSES:

1. EXCLUSIVE ORIGINALJURISDICTION over all criminaloffenses arising from violations of theNational Internal Revenue Code or Tariffand Customs Code and other lawsadministered by the Bureau of InternalRevenue or the Bureau of Customs:

Exception: That offenses or felonieswhere the principal amount of taxesand fees, exclusive of charges andpenalties, claimed is less than Onemillion pesos (P1,000,000.00) orwhere there is no specified amountclaimed shall be tried by theregular Courts and thejurisdiction of the CTA shall beappellate.

Note: Any provision of law or the Rulesof Court to the contrary

notwithstanding, the criminal actionand the corresponding civil action forthe recovery of civil liability for taxesand penalties shall at all times besimultaneously instituted with, andjointly determined in the sameproceeding by the CTA, the filing of thecriminal action being deemed tonecessarily carry with it the filing ofthe civil action, and no right toreserve the filling of such civil actionseparately from the criminal action willbe recognized.

2. EXCLUSIVE APPELLATEJURISDICTION in criminal offenses:

a) Over appeals from the judgments,resolutions or orders of the RegionalTrial Courts in tax cases originallydecided by them, in their respectedterritorial jurisdiction.


Page 150 of 198

TA

XA

TIO

NLA

W2

b) Over petitions for review of thejudgments, resolutions or orders ofthe Regional Trial Courts in theexercise of their appellatejurisdiction over tax cases originallydecided by the Metropolitan TrialCourts, Municipal Trial Courts andMunicipal Circuit Trial Courts intheir respective jurisdiction.

C. Jurisdiction over TAX COLLECTIONCASES:

1. EXCLUSIVE ORIGINALJURISDICTION in tax collectioncases involving final and executoryassessments for taxes, fees, chargesand penalties.

Exception: Collection caseswhere the principal amount oftaxes and fees, exclusive ofcharges and penalties, claimedis less than One million pesos(P1,000,000.00) shall be triedby the proper Municipal TrialCourt, Metropolitan TrialCourt and Regional TrialCourt.

2. EXCLUSIVE APPELLATEJURISDICTION in tax collection cases:

a. Over appeals from the judgments,resolutions or orders of the RegionalTrial Courts in tax collection casesoriginally decided by them, in theirrespective territorial jurisdiction.

b. Over petitions for review of thejudgments, resolutions or orders ofthe Regional Trial Courts in theExercise of their appellatejurisdiction over tax collection casesoriginally decided by theMetropolitan Trial Courts, MunicipalTrial Courts and Municipal CircuitTrial Courts, in their respectivejurisdiction.

IV. COLLECTIONLETTER/WARRANTS

A. Collection of Deficiency Taxes

Within what time period must collectionof internal revenue taxes be made?

Return filed wasNOT false orfraudulent

No return filed, orthe return was falseor fraudulent.

Collection withPRIORASSESSMENT -should be madewithin three yearsfrom the date ofassessment of thetax.

by distraint orlevy, or by judicialproceedings

Collection withPRIORASSESSMENT -should be madewithin five yearsfrom the date ofassessment (basedon §222c)

by distraint orlevy, or by judicialproceedings

CollectionWITHOUT PRIORASSESSMENT –should be madewithin three yearsfrom the date offiling of return ordate return is due,whichever is LATER(based on §203)

by judicialproceedings

Collection WITHOUTPRIORASSESSMENT –should be madewithin ten yearsafter the discovery ofthe falsity, fraud oromission to file areturn.

by judicialproceedings

If tax was assessed within the differentperiod agreed upon by theCommissioner and the taxpayer, it maybe collected by distraint or levy or by aproceeding in court within the periodagreed upon in writing before theexpiration of the 5-yr period. (Sec. 222d,NIRC)

When shall the period for assessment orcollection of taxes be suspended? (§223)

The running of the statute of limitationsprovided in §203 and §222 shall besuspended for the period: (P-CORN)

1. During which the commissioner isProhibited from making theassessment or beginning distraint orlevy or a proceeding in court, andfor sixty (60) days thereafter

2. When the taxpayer requests for aReinvestigation which is granted bythe Commissioner

CIR vs. WYETH (September 30,1991) The statutory period of


Page 151 of 198

TA

XA

TIO

NLA

W2

limitation for collection may beinterrupted when, by the taxpayer’srepeated requests, the governmenthas been, persuaded to postponecollection to make him feel thedemand was not unreasonable orthat no harassment or injustice wasmeant by government.

RR 12-85 (Difference betweenReconsideration &Reinvestigation)

RECONSIDERATION – refers toa plea of re-evaluation of theassessment on the basis ofexisting records WITHOUTNEED OF ADDITIONALEVIDENCE. It may involve bothquestion of fact or of law or both

REINVESTIGATION – refers to aplea of re-evaluation of anassessment on the basis ofNEWLY-DISCOVEREDEVIDENCE that a taxpayerintends to present in thereinvestigation. It may alsoinvolve a question of fact or lawor both.

PHIL GLOBAL COMMUNICATIONvs. CIR (October 31, 2006) A re-evaluation of existing records whichresults from a request forreconsideration does not toll therunning of the prescription periodfor the collection of an assessed tax.

BPI v. CIR (2005): What suspendsthe running of prescriptive period toassess and collect is a request forreinvestigation granted by BIR.

3. When the taxpayer Cannot belocated in the Address given by himin the return filed upon which a taxis being assessed or collected, BUTif the taxpayer informs theCommissioner of any change inaddress, the running of the statuteof limitations shall not besuspended

4. When the warrant of distraint orlevy is duly served upon thetaxpayer, his authorizedrepresentative, or a member of hishousehold with sufficient discretion,and No Property is located

5. When the taxpayer is Out of thePhilippines

B. Remedies of the taxpayer againsta tax erroneously or illegally paid

When may taxes be refunded orcredited?

Taxes may be refunded or credited inthe following cases:

Taxes erroneously or illegallyassessed or collected

Penalties imposed without authority Value of internal revenue stamps

when they are returned in goodcondition by the purchaser

Unused stamps that have beenrendered unfit for use(Commissioner may redeem, changeor refund their value upon proof ofdestruction)

Any sum alleged to have beenexcessively or in any mannerwrongfully collected

Q: What is the nature of a claim forrefund?

It partakes of the nature of anexemption and is strictly construedagainst the claimant. The burden ofproof is on the taxpayer claiming therefund that he is entitled to the same.[CIR v. Tokyo Shipping (1995)]

Q: When are there erroneously paid, orillegally assessed or collected taxes?

Taxes are erroneously paid when ataxpayer pays under a mistake offact, such as, he is not aware of anexisting exemption in his favor at thetime that payment is made. Taxes areillegally collected when payments aremade under duress.

Q: What is the difference between a taxcredit and refund?

REFUND takes place when there isactual reimbursement.

TAX CREDIT takes place upon theissuance of a tax certificate or tax creditmemo, which can be applied againstany sum that may be due and collectedfrom the taxpayer.


Page 152 of 198

TA

XA

TIO

NLA

W2

Q: Is payment under protest necessary inclaims for refund?

No. Section 229 of the NIRC is specificon this point when it provides that asuit or proceeding for tax refund may bemaintained “whether or not such tax,penalty or sum has been paid underprotest or duress.”

What is the procedure for obtaining arefund or tax credit?

First, the taxpayer must file a claim forrefund before the Commissioner withintwo years from the date of payment.(Sec. 229, NIRC) [GENERAL RULE]

NOTE: Under s229, NRIC, there is noexception to the two-year prescriptionperiod. The language states that : “no suchsuit or proceeding shall be filed after theexpiration of two (2) years from the date ofpayment of the tax or penalty regardless ofany supervening cause that may arise afterpayment xxx

EXCEPTIONS to the rule requiring aclaim for refund: When on the faceof the return upon which payment wasmade, such payment appears clearly tohave been erroneously paid (e.g.mathematical errors), the Commissionermay refund or credit the tax evenwithout a written claim therefor.

Note: A return filed showing anoverpayment shall be considered as awritten claim for credit or refund. (Sec.204C, NIRC)

But how shall the date of payment bedetermined?

i. If the income tax is withheld at

source the taxpayer is deemed tohave paid his tax liability at the end ofthe taxable year.

ii. If the income is paid on a quarterlybasis the two-year period is countedfrom the time of filing the finaladjustment return.

CIR vs. TMX SALES (January 16, 1992):When a tax is paid in installments, theprescriptive period should be counted fromthe date of final payment or the lastinstallment. This rule proceeds from thetheory that there is no payment until theentire tax liability is completely paid.Installments should be treated as advancesor portions of the annual tax due.

What should the taxpayer do if hisclaim for refund is denied or is notacted upon by the Commissioner?

SITUATION 1: The Commissioner

denies the claim for refund thetaxpayer may appeal to the CTA withinthirty (30) days from the receipt of theCommissioner’s decision AND withintwo years from the date of payment.

SITUATION 2: The Commissionerdoes not act on the claim, and the

two-year period is about to lapsethe taxpayer must file a claim before theCTA before the 2-year period lapses,otherwise he may no longer file a claimbefore the CTA in case theCommissioner renders an adversedecision beyond the 2-year period.

If the Commissioner grants the refund,within what time must it be claimed?

Within five years from the date suchwarrant or check was mailed ordelivered, otherwise it shall be forfeitedin favor of the government and theamount thereof shall revert to thegeneral fund.

What can be done with a Tax CreditCertificate?

Tax credit certificates (TCCs) can beapplied against all internal revenuetaxes, excluding withholding tax. TCCswhich remain unutilized after fiveyears from the date of issue shall beconsidered as invalid, unlessrevalidated.

If not revalidated, the amount coveredby the TCC shall revert to the generalfund.


There are two broad categories ofremedies available to the STATE:

1. Administrative Remedies2. Judicial Proceedings

GENERALLY, the remedies of distraint,levy or civil or criminal action may bepursued SIMULTANEOUSLY. (Sec. 205,NIRC)

Remedies of distraint and levy maybe repeated if necessary until thefull amount due, including all


Page 153 of 198

TA

XA

TIO

NLA

W2

expenses, is collected. (Sec. 217,NIRC)

HOWEVER, the remedies ofdistraint and levy shall not beavailable where the amount of thetax involved is not more than Onehundred pesos.

Q: When may the government avail ofthe remedies of collection?

When the assessment shall havebecome final, executory anddemandable.

Note: A court MAY NOT GRANT ANINJUNCTION to restrain the collection ofany national internal revenue tax, fee orcharge imposed under the NIRC. (Sec. 218,NIRC)

Exception: Under Section 11 of RA1125, as amended by RA 9282,suspension is allowed when thefollowing conditions concur:1. it is an appeal to the CTA from a

decision of the Commissioner ofInternal Revenue or Commissionerof Customs or the Regional TrialCourt, provincial, city or municipaltreasurer or the Secretary ofFinance, the Secretary of Trade andIndustry and Secretary ofAgriculture, as the case may be, and

2. in the opinion of the Court of TaxAppeals, the collection mayjeopardize the interest of theGovernment and/or the taxpayer.

Q: In case of suspension, what may thetaxpayer be required to do?

Either to deposit the amount claimed orto file a surety bond for not more thandouble the amount with the Court.

Q: What are tax liens? (Sec. 219, NIRC)

When a taxpayer neglects or refuses topay his internal revenue tax liabilityafter demand, the amount so demandedshall be a lien in favor of thegovernment from the time theassessment was made by the CIR untilpaid with interest, penalties, and coststhat may accrue in addition theretoupon ALL PROPERTY AND RIGHTS TOPROPERTY BELONGING to thetaxpayer.

HOWEVER, the lien shall not be validagainst any mortgagee, purchaser orjudgment creditor until NOTICE of such

lien shall be filed by the Commissionerin the Office of the Register of Deeds ofthe province or city where the propertyof the taxpayer is situated or located.

Q: What is the difference betweenseizure under forfeiture and a seizure toenforce a tax lien?

In the former all the proceeds derivedfrom the sale of the thing forfeited areturned over to the Collector of InternalRevenue; in the latter, the residue ofsuch proceeds over and above what isrequired to pay the tax sought to berealized, including expenses, is returnedto the owner of the property. [BPI v.Trinidad]

1. Administrative Remedies

1) DISTRAINT2) LEVY

1) Distraint involves the SEIZURE by the

Government of PERSONALPROPERTY, tangible or intangible,to enforce the payment of taxes;followed by the PUBLIC SALE ofsuch property, if the taxpayer failsto pay the taxes voluntarily.

What are the kinds of distraint?

a. Actual Distraint – resorted to whenthere is ACTUAL delinquency in taxpayment

b. Constructive Distraint – is apreventive remedy which aims atforestalling a possible dissipation ofthe taxpayer’s assets whendelinquency sets in. Hence, noactual delinquency in payment isnecessary.

How is ACTUAL distraint of personalproperty effected?

Upon failure to pay the delinquenttax at the time required, the properofficer shall SEIZE and DISTRAINTany GOODS, CHATTELS, orEFFECTS, and the PERSONALPROPERTY, including STOCKS andother SECURITIES, DEBTS,CREDITS, BANK ACCOUNTS andINTERESTS in and RIGHTS topersonal property of the taxpayer insufficient quantity to satisfy the tax,expenses of distraint and the cost ofthe subsequent sale.


Page 154 of 198

TA

XA

TIO

NLA

W2

How are different kinds of personalproperty distrained?

Stocks and other securities byserving a copy of the warrants ofdistraint on the taxpayer, AND upon thepresident, manager, treasurer or otherresponsible officer of the corporation,company or association which issuedthe stocks or securities.

Debts and credits by leaving withthe person owing the debts or having inhis possession or under his controlsuch credits, or with his agent, a copyof the warrant of distraint. The personowing the debts shall then pay theCommissioner instead of his creditor(taxpayer) on the strength of suchwarrant.

Bank accounts by serving a warrantof garnishment upon the taxpayer ANDupon the president, manager, treasureror other responsible officer of the bank.The bank shall then turn over to theCommissioner so much of the bankaccounts as may be sufficient to satisfythe claim of the Government. (NOTE:distraint of bank accounts is calledGARNISHMENT)

What is the remedy of the taxpayeronce the Commissioner or otherproper officer issues the warrant ofdistraint?

The taxpayer may request that thewarrant be lifted. The commissionermay, in his discretion, allow thelifting of the order of distraint. Hemay ask for a bond as a conditionfor the cancellation of the warrant.(Sec. 207, NIRC)

If the taxpayer does not ask for thelifting of the warrant, what shall bedone with the seized properties?

The properties will be SOLD in aPUBLIC SALE, and the procedureshall be as follows:

(1) The Revenue District Officer orhis duly authorizedrepresentative (not the officerwho served the warrant), shallcause a notification of the publicsale to be posted in not less thantwo (2) public places in themunicipality or city (one ofwhich is the Office of the Mayor)where the distraint was made.

The notice shall specify thetime and place of the sale.The time of sale shall not beless than twenty (20) daysafter notice to the owner andthe publication or posting ofsuch notice.

(2) At the time of the public sale,the revenue officer shall sell thegoods, chattels, or effects, orother personal property,including stocks and othersecurities so distrained at aPUBLIC AUCTION, to theHIGHEST BIDDER for CASH orwith the approval of theCommissioner, through a DULYLICENSED COMMODITY orSTOCK EXCHANGES.

(3) Any residue over and abovewhat is required to pay theentire claim, including expensesof sale and distraint, shall beRETURNED to the owner of theproperty sold. Expenses shall belimited to actual expenses ofSEIZURE and PRESERVATIONof the property pending the sale,no charge shall be imposed forthe services of the local internalrevenue officer or his deputy.(§209)

(4) If the amount offered by thehighest bidder is not equal to theamount of the tax or is verymuch less than the actualmarket value of the articlesoffered for sale, theCommissioner or his deputy maypurchase the same in behalf ofthe National Government for theamount of taxes, penalties andcosts due. The property sopurchased may be resold by theCommissioner or his deputy.(§212)

(5) If the proceeds from the sale ofthe distrained properties are notsufficient to satisfy the taxdelinquency, the Commissioneror his duly authorizedrepresentative shall within thirty(30) days after execution of thedistraint, proceed with the levyon the taxpayer’s realproperty. (§207B)


Page 155 of 198

TA

XA

TIO

NLA

W2

May the taxpayer recover hisproperty prior to consummation ofthe sale?

YES. If at any time prior to theconsummation of the sale all propercharges are paid to the officerconducting the sale, the goods oreffects distrained shall be restoredto the owner. (Sec. 210, NIRC)

How is CONSTRUCTIVE distrainteffected?

a. By requiring a taxpayer or anyperson in possession or control ofsuch property to SIGN a RECEIPTcovering the property distrained andobligate himself to PRESERVE THESAME INTACT and UNALTEREDand NOT TO DISPOSE of the samein any manner whatever, withoutthe Commissioner’s authority.

b. If the taxpayer or person inpossession or control refuses to signthe receipt, the revenue officer shallprepare a list of the property andleave a copy of such list in thepremises where the properties arelocated, in the presence of two (2)witnesses.

Q: When may property of the taxpayer beplaced in constructive distraint?

The property of a taxpayer may beplaced in constructive distraint, if in theCommissioner’s opinion:a. the taxpayer is retiring from any

business subject to tax;b. the taxpayer is intending to leave

the Philippines;c. the taxpayer is intending to remove

his property from the Philippines orto hide or conceal his property;

d. the taxpayer is planning to performany act tending to obstruct theproceedings for collecting the taxdue or which may be due from him(§206)

Note: In constructive distraint, theproperty is not actually confiscated orseized by the revenue officer

2) Levy The same act of seizure as in

distraint, but in this case, of realproperty, an interest in or rights tosuch property in order to enforce thepayment of taxes. The real property

under levy shall be sold in a publicsale, if the taxes involved are notvoluntarily paid following such levy.

How is levy of real property effected?

(1) After the expiration of time requiredto pay the delinquent tax, realproperty may be levied upon,BEFORE, SIMULTANEOUSLY orAFTER the distraint of personalproperty belonging to thedelinquent. The IR officer designated by the

Commissioner or his dulyauthorized representative shallprepare a DULYAUTHENTICATED CERTIFICATEshowing the name of thetaxpayer and the amounts of taxand penalty due from him.

This certificate shall operate withthe force of LEGAL EXECUTIONthroughout the Philippines.

(2) The certificate shall contain adescription of the property uponwhich levy is made. At the same time, written notice

of the levy shall be mailed to orserved upon the Register ofDeeds of the province or citywhere the property is locatedand upon the taxpayer (if he isabsent from the Philippines, tohis agent or manager ofbusiness in respect to which theliability arose or to the occupantof the property in question)

(3) Within twenty (20) days after thelevy, the officer conducting theproceedings shall proceed toadvertise for SALE the property ora portion as may be necessary tosatisfy the claim and costs of sale.Such advertisement shall cover aperiod of at least thirty (30) days.The notice shall be posted at themain entrance of the city ormunicipal all AND in a public andconspicuous place in the barrio ordistrict where the real property lies.The notice must also be publishedin a newspaper of generalcirculation in the place where theproperty is located, once a week forthree (3) weeks. CONTENTS of notice: statement

of amount of taxes, andpenalties due, time and place of


Page 156 of 198

TA

XA

TIO

NLA

W2

sale, name of taxpayer, shortdescription of property.

(4) The sale shall be held either at themain entrance of the municipal orcity hall or on the premises to besold. Property will be awarded tothe highest bidder. In case theproceeds of the sale exceeds theclaim and costs of sale, the excessshall be turned over to the owner ofthe property. (§213)

(5) If there is no bidder for the realproperty OR if the highest bid is notsufficient to pay the taxes, penaltiesand costs, the IR Officer conductingthe sale shall declare the propertyFORFEITED to the GOVERNMENTin satisfaction of the claim. (Sec.215, NIRC) The Commissioner mayresell the property at a publicauction after the giving of not lessthan twenty (20) days notice. (Sec.216, NIRC)

May the taxpayer recover hisproperty prior to consummation ofthe sale?

YES. At any time before the dayfixed for the sale, the taxpayer maydiscontinue all proceeding by payingthe taxes, penalties and interest.(Sec. 213, NIRC)

May the taxpayer recover hisproperty after the consummation ofthe sale?

YES. Within one (1) year from thedate of sale, the taxpayer or anyonefor him, may pay to the RevenueDistrict Officer the total amount ofthe following:

public taxes penalties interest from the date of

delinquency to the date of sale

interest on said purchase priceat the rate of fifteen percent(15%) per annum from the dateof sale to the date of redemption.

Note: if the property was forfeited infavor of the government, the redemptionprice shall include only the taxes,penalties and interest plus costs of sale– no interest on purchase price since theGov’t did not “purchase” the propertyanyway, it was forfeited)

Note: The taxpayer-owner shall not bedeprived of possession of the saidproperty and shall be entitled to rentsand other income until the expiration ofthe period for redemption (Sec. 214,NIRC)

2. Judicial Proceedings

Civil and criminal action andproceedings instituted in behalf of theGovernment under the authority of thisCode or other law enforced by the BIR: shall be BROUGHT IN THE NAME

OF THE GOVERNMENT of thePhilippines

shall be CONDUCTED BY LEGALOFFICERS OF THE BIR

No civil or criminal action for therecovery of taxes or the enforcement ofany fine, penalty or forfeiture under theNIRC shall be filed in court without theAPPROVAL OF THE COMMISSIONERapproval of the Commissioner. (Sec.220, NIRC)

Q: How is a criminal action a collectionremedy?

The judgment in the criminal case shall:

impose the penalty; and order payment of the taxes subject

of the criminal case as finallydecided by the Commissioner. (Sec.205, NIRC)

Q: Is an assessment necessary beforefiling a criminal charge for tax evasion?

No, an assessment is not necessarybefore a criminal charge can be filed.The criminal charge need only beproved by a prima facie showing of awillful attempt to file taxes, such asfailure to file a required tax return. [CIRv. Pascor Realty (June 29, 1999)]

V. COMPROMISE AND ABATEMENT

1. Compromise (to reduce the amount oftax payable)

Grounds for a compromise:

The Commissioner may compromise thepayment of any internal revenue tax inthe following cases:1) A REASONABLE DOUBT as to the

validity of the claim against thetaxpayer exists; or


Page 157 of 198

TA

XA

TIO

NLA

W2

2) The financial position of thetaxpayer demonstrates a clearinability to pay the assessed tax.(FINANCIAL INCAPACITY)

What are the limits of theCommissioner’s power to compromise?

For cases of financial incapacity: aminimum compromise rate equivalentto ten percent (10%) of the basicassessed tax;

For other cases: a minimumcompromise rate equivalent to fortypercent (40%) of the basic assessed tax

Note: When the basic tax involved exceedsOne Million Pesos (P1,000,000), or wherethe settlement offered is less than theprescribed minimum rates, the compromisemust be approved by the Evaluation Board(composed of the Commissioner and 4deputy commissioners)

May the Commissioner compromisecases of criminal violations?

Generally, ALL CRIMINAL VIOLATIONSmay be compromised, EXCEPT:a) those cases already filed in courtb) those involving fraud

2. Abatement (to cancel the entireamount of tax payable)

When may the Commissioner abate orcancel a tax liability?

The Commissioner may abate or cancela tax liability when:1) the tax or any portion thereof

appears to be UNJUSTLY orEXCESSIVELY ASSESSED; or

2) the ADMINISTRATION andCOLLECTION COSTS do not justifythe collection of the amount due.(costs of collection > amount of taxdue)

VI. STATUTORY OFFENSES ANDPENALTIES

A. Additions to the Tax

1. Civil Penalties

Surcharge A civil penalty imposed by law as an

addition to the main tax required to bepaid.

It is a civil administrative sanctionprovided as a safeguard for the

protection of the State revenue and toreimburse the government for theexpenses of investigation and the lossresulting from the taxpayer’s fraud.

A surcharge added to the main tax issubject to interest.

Rates of Surcharge:

There shall be imposed a penaltyequivalent to twenty-five percent(25%) of the amount due, in thefollowing cases:

FAILURE TO FILE ANY RETURNand PAY THE TAX DUE THEREONon the date prescribed; or

Filing a return with an internalrevenue officer than those withwhom the return is required to befiled (except when authorized by theCommissioner); or

FAILURE TO PAY THE DEFICIENCYTAX within the time prescribed forits payment in the notice ofassessment

FAILURE TO PAY THE FULL ORPART of the amount of tax shown onany return required to be filed, orthe full amount of tax due for whichno return is required to be filed, onor before the date prescribed for itspayment. (Sec. 248A, NIRC)

The penalty shall be fifty percent(50%) of the tax or of the deficiency tax,in the following cases: WILLFUL NEGLECT to FILE THE

RETURN within the periodprescribed

A FALSE OR FRAUDULENTRETURN is willfully made (§248B)o Prima-facie evidence of false or

fraudulent return: substantial underdeclaration

of taxable sales, receipts orincome (failure to reportsales, receipts or income inan amount exceeding 30% ofthat declared per return)

substantial overstatement ofdeductions (a claim ofdeduction in an amountexceeding 30% of actualdeductions)

2. Interest

20% per annum on any unpaid amountof tax or higher rate prescribed by rulesand regulations from the date


Page 158 of 198

TA

XA

TIO

NLA

W2

prescribed for payment until theamount is fully paid.

Deficiency Interest: the term‘deficiency’ means the amount bywhich the taxed imposed under theCode exceeds the amount shown onthe return filed (§249B)

Delinquency Interest: In case offailure to pay:o tax due on any return required

to be filed, oro tax due for which no return is

required, oro a deficiency tax, or any

surcharge or interest thereon onthe due date appearing in thenotice and demand of theCommissioner, there shall beassessed and collected on theunpaid amount, interest at therate prescribed until the amountis fully paid, which interest shallform part of the tax. (§249C)

B. Crimes, Other Offenses andForfeitures

1. General Provisions

Any person convicted of a crime underthe Code shall:

be liable for the payment of the tax, be subject to the penalties imposed

under the Code.

Note: Payment of the tax due after acase has been filed shall not constitutea valid defense in any prosecution forviolation of the provisions under theCode.

Any person who willfully aids or abetsin the commission of a crime penalizedunder the Code or who causes thecommission of any such offense byanother shall be liable in the samemanner as the principal.

If the offender is:

OFFENDER PENALTYNot a citizen ofthe Philippines

he shall be deportedimmediately afterserving the sentence

A public officeror employee

the maximum penaltyprescribed for theoffense shall be imposedon himshall be dismissed frompublic office, andperpetually disqualifiedfrom holding any publicoffice, to vote, and toparticipate in anyelection

CPA his license shall beautomatically revoked orcancelled once he isconvicted

Corporations,associations,partnershipsetc

imposed on the partner,president, generalmanager, branchmanager, treasurer,officer-in-charge andemployees responsiblefor the violation

MINIMUM AMOUNT: The fines imposedfor any violation of the Code shall not belower than the fines imposed herein ortwice the amount of taxes, interests andsurcharges due from the taxpayer,whichever is higher. (§253)

All violations of any provision of theCode shall prescribe after five (5)years.

2. Criminal Offenses

Sec. Offense Who is liable Penalty254 Willful attempt to

evade or defeat tax.Any person who willfully attempts in anymanner to evade or defeat any tax or thepayment thereof.

Fine - P30,000 or 100,000;and Imprisonment - 2 to 4years; Plus other penalties

255 Failure to File Return,Supply Correct andAccurate Information,Pay Tax, Withhold andRemit Tax and RefundExcess Taxes Withheldon Compensation

Any person required to pay any tax,make a return, keep any record, orsupply correct and accurate information

Fine - P10,000 or more;and Imprisonment - 1 to 10years; Plus other penalties

Any person who attempts to make itappear for any reason that he or another

Fine - P10,000 - 20,000;and Imprisonment - 1 to 3


Page 159 of 198

TA

XA

TIO

NLA

W2

has in fact filed a return or statement, oractually files a return or statement andsubsequently withdraws the same returnor statement

years; Plus other penalties

257 Making false entries,records, or reports, orusing falsified or fakeaccountable forms.

Any financial officer or Independent CPAengaged to examine and audit books ofaccounts of taxpayers under Sec.232 (A)and any person under his direction.

Fine - P50,000 - 100,000;and Imprisonment - 2 to 6years

258 Unlawful pursuit ofbusiness

Any person who carries on any businessfor which in annual registration fee isimposed without paying the tax asrequired by law.

Fine - P5,000 - 20,000; andImprisonment - 6 monthsto 2 years

A person engaged in the business ofdistilling, rectifying, repacking,compounding or manufacturing anyarticle subject to excise tax.


259 Illegal Collection ofForeign Payments

Any person who knowingly undertakesthe collection of foreign payments underSec. 67 without a license or withoutcomplying with the implementing rulesand regulations.


260 Unlawful Possession ofCigarette Paper inBobbins or Rolls, Etc.

Any person, manufacturer or importer ofcigar or cigarettes

Fine - P20,000 - 100,000;and Imprisonment - 6 years1 day to 12 years

261 Unlawful Use ofDenatured Alcohol

Any person who for the purpose ofmanufacturing any beverage, usesdenatured alcohol or alcohol speciallydenatured to be used for motive power orwithdrawn under bond for industrialuses or alcohol knowinglymisrepresented to be denatured to beunfit for oral intake or who knowinglysells or offers for sale such preparationscontaining as an ingredient suchalcohol.

Any person who unlawfully recovers orattempt to recover by distillation or otherprocess any denatured alcohol or whoknowingly sells or offers for sale,conceals or otherwise disposes of alcoholas recovered or redistilled


262 Shipment or Removalof Liquor/TobaccoProducts under FalseName or Brand or asan Imitation of anyExisting or KnownProduct Name orBrand

Any person who ships, transports orremoves


263 Unlawful Possession orRemoval of ArticlesSubject to Excise TaxW/o Payment of theTax

Any person who owns or is found inpossession of these articles

Value of goods not >P1,000: Fine – not < thanP1,000 not > P2,000,imprisonment of not < 60days, not > 100 days

Value of goods > P1,000,not > than P50,000: Fine –not < than P10,000 not >P20,000, imprisonment ofnot < 2 yrs, not > 4 years

Value of goods > P50,000,not > than P150,000: Fine– not < than P30,000 not >P60,000, imprisonment ofnot < 4 yrs, not > 6 yearsValue of goods > P150,000:


Page 160 of 198

TA

XA

TIO

NLA

W2

Fine – not < than P50,000not > P100,000,imprisonment of not < 10yrs, not > 12 years

264 Failure or Refusal toIssue Receipts or Salesor CommercialInvoices, ViolationsRelated to the Printingof Such Receipts orInvoices and OtherViolations

Any person who, being required underSection 237 to issue receipts or sales orcommercial invoices

Fine - P 1,000 - 50,000;and Imprisonment - 2 to 4years

265 Offenses Relating toStamps

Fine - P 20,000 - 50,000;and Imprisonment 4-8 yrs

266 Failure to ObeySummons

Any person who being duly summonedto appear to testify, or to appear andproduce books of accounts, records,memoranda or other papers, or tofurnish info. as required under thepertinent provisions of this Code.

Fine - P 5,000 - 10,000;and Imprisonment - 1 to 2yrs

267 Declaration underPenalties of Perjury

Any person who willfully files adeclaration, return or statementcontaining information which is not trueand correct as to every material matter

Perjury under the RevisedPenal Code

268 Misdeclaration orMisrepresentation ofManufacturers Subjectto Excise Tax

Any manufacturer subject to excise tax Summary cancellation orwithdrawal of the permit toengage in business as amanufacturer of articlessubject to excise tax

Forfeiture of PropertyUsed in UnlicensedBusiness or Dies Usedfor Printing FalseStamps, Etc.

Any person who conducts an unlicensedbusiness

Forfeiture

Forfeiture of GoodsIllegally Stored orRemoved

Any person subject to excise tax whofails to store the goods in proper place,or removes goods without payment ofexcise tax

Forfeiture

274 Penalty for Second andSubsequent Offenses

Maximum of the penaltyprescribed for the offense

Forfeiture of PropertyUsed in UnlicensedBusiness or Dies Usedfor Printing FalseStamps, Etc.

Any person who conducts an unlicensedbusiness

Forfeiture

Forfeiture of GoodsIllegally Stored orRemoved

Any person subject to excise tax whofails to store the goods in proper place,or removes goods without payment ofexcise tax

Forfeiture

274 Penalty for Second andSubsequent Offenses

Maximum of the penaltyprescribed for the offense

275 Violation of OtherProvisions of the TaxCode or Rules orRegulations in General

Any person who violates any provision ofthis Code or any rule or regulationpromulgated by the Department ofFinance for which no specific penalty isprovided by law

Fine: not more than P1,000 or Imprisonment: notmore than 6 months, orboth

276 Penalty for Selling,Transferring,Encumbering or in anyway disposing ofproperty Placed underConstructive Distraint

Any taxpayer, whose property has beenplaced under constructive distraint

Fine: not less than twicethe value of the propertybut not less than P 5,000or Imprisonment: 2 yrs 1day - 4 yrs or both

277 Failure to SurrenderProperty Placed underDistraint and Levy

Any person having in his possession orunder his control any property or rightsto property, upon which a warrant ofconstructive distraint or actual distraint

Fine: P 5,000 or more orImprisonment: 6 months 1day - 2 years, or both


Page 161 of 198

TA

XA

TIO

NLA

W2

and levy has been issued278 Procuring Unlawful

Divulgence of TradeSecrets

Any person procures an officer oremployee of the BIR to divulge anyconfidential information regarding thebusiness, income or inheritance of anytaxpayer, knowledge of which wasacquired by him in the discharge of hisofficial duties, and which it is unlawfulfor him to reveal, and any person whopublishes or prints in any mannerwhatever, not provided by law, anyincome, profit, loss or expenditureappearing in any income tax return

Fine: not more than P2,000 or Imprisonment: 6months - 5 years, or both

3. Penalties Imposed on PublicOfficers

The law imposes a fine of not less thanP50,000 nor more than P100,000 orimprisonment for not less than 10 yearsnor more than fifteen years on everyofficial, agent or employee of the BIR orof any agency or employee of theGovernment charged with theenforcement of the Tax Code, who shall:(CONED- FRAP)

a) Extort or willfully oppress undercolor of law;

b) knowingly Demand other or greatersums than are authorized by law orreceive any fee, compensation orreward, except as by law prescribed,for the performance of any duty;

c) willfully Neglect to give receipts, asby law required, for any sumscollected in the performance of duty,or who willfully neglect to performany of the duties enjoined by law;

d) Conspire or collude with another orothers to defraud the revenues orotherwise violate the law;

e) willfully make Opportunity for anyperson to defraud the revenues, orwho do or omit to do any act withintent to enable any other person todefraud the revenues;

f) negligently or by design Permit theviolation of the law by any otherperson;

g) make or sign any False certificate orreturn in any case where the lawrequires the making by them ofsuch entry, certificate or return;

h) having knowledge or information ofa violation of any provision of theCode or of any fraud committed onthe revenues collectible by the BIR,

fail to Report such knowledge orinformation to their superior officer,or to report as otherwise required bylaw; or

i) without the authority of law,demand or Accept or attempt tocollect, directly or indirectly, aspayment or otherwise, any sum ofmoney or other thing of value for thecompromise, adjustment orsettlement of any charge orcomplaint for any violation oralleged violation of law. (§235)

VII. COMPLIANCE REQUIREMENTS

What records are required to be kept bytaxpayers? (Sec. 232, NIRC)

GrossQuarterlySales orOutput

Requirements

P50,000 or less Simplified form ofbookkeeping records dulyauthorized by the Secretary ofFinance all transactions and results

of operation are shown all taxes may be readily and

accurately ascertained atthat time of the year

ExceedingP50,000 butnot more thanP150,000

A journal and ledger or theirequivalent

ExceedingP150,000

Books of accounts, examinedand audited by anindependent CPA and theirincome tax return shall beaccompanied by certified balance sheets profit and loss statements list of income-producing

properties and otherrelevant data


Page 162 of 198

TA

XA

TIO

NLA

W2

Notes:

Taxpayers may also keep othersubsidiary books at their option, as theneeds of their business may requirewhich shall form part of the accountingsystem of the taxpayer. (Sec. 233,NIRC)

Books or records shall be kept in anative language, English or Spanish.The keeping of books and records inany language other than the threementioned is prohibited, unless thetaxpayer makes a true and completetranslation of all the entries in the saidbooks and records. (Sec. 234, NIRC)

All the books and records shall be keptby the taxpayer until the period formaking an assessment under Sections203 and 222 have prescribed. (Sec. 235,NIRC)

Examination and inspection of all booksand records shall be made only once ina taxable year, EXCEPT in these cases:

Fraud, irregularity or mistakes, asdetermined by the Commissioner

The taxpayer requestsreinvestigation

Verification of compliance withwithholding tax laws andregulations

Verification of capital gains taxliabilities

In the exercise of theCommissioner’s power to issue anaccess letter. (Sec. 235, NIRC)

Who are required to register with theBIR?

Every person subject to any internalrevenue tax shall register once with theappropriate Revenue District Officer:

Within ten (10) days from date ofemployment, or

On or before the commencement ofbusiness, or

Before payment of any tax due, or Upon filing of a return, statement or

declaration as required under theCode (Sec. 236, NIRC

What shall the BIR do after thetaxpayer registers?

The BIR shall assign a TaxpayerIdentification Number (TIN) which thetaxpayer shall indicate in every return,

statement or document filed with theBIR.

Only one TIN shall be given a person.Any person who secures more than oneTIN shall be criminally liable. (§236)

VIII. INFORMER’S REWARD (Sec. 282of the NIRC)

To whom given: persons instrumentalin the discovery of violations of theNIRC and in discovery and seizure ofsmuggled goods.

Conditions to qualify for the reward:1. Person is not an internal revenue

official or employee, public official,or employee or relative within 6 thdegree of consanguinity

2. Voluntarily gives definite and sworninformation:a) Not yet in the possession of BIRb) Leading to discovery of fraudsc) Resulting in:

i. the recovery of revenues,surcharges and fees and/or

ii. conviction of the guilty party.d) Not refer to a case already

pending or previouslyinvestigated or examined by theCommissioner or his agents orthe SOF or his agents.

Amount of reward: 10% of therevenues, surcharges or fees recoveredand/or fine/penalty imposed, orP1,000,000, whichever is LOWER. The same amount shall be given if

the offender offered to compromiseand such offer has been acceptedand collected by the Commissioner.

If no revenue, surcharge or fees beactually collected, such person isnot entitled to a reward

For discovery and seizure ofSMUGGLED GOODS: The cashreward is 10% of the FMV of thesmuggled and confiscated goods, orP1,000,000, whichever is LOWER.

The cash rewards shall be subject toincome TAX at the rate of 10%.

Rule of construction: Statutes offeringrewards must be liberally construed infavor of informers and with regard tothe purpose for which they areintended, with mere technicalityyielding to the substantive purpose ofthe law. [Penid v. Virata]


Page 163 of 198

TA

XA

TIO

NLA

W2


Page 164 of 198

TA

XA

TIO

NLA

W2

START

Flowchart II: Procedures for Distraint and Levy-NIRC

Yes

Commissioner seizes sufficientpersonal property to satisfy thetax, charge & expenses of seizure(Sec. 207 (A))

Distraining Officer accounts forthe goods distrained (Sec. 208)

RDO posts notice in at least 2 publicplaces in the municipality/city wherethe distraint is made. One place ofposting must be at the mayor’s office.Time of sale shall not be less than 20days after the notice (Sec. 209)

Goods shall be restored to owner,if charges are paid (Sec. 210)

Officer sells the goods to thehighest bidder for cash orwith the Commissioner’sapproval, through commodity/stock exchanges. (Sec. 209)

Real property may be leviedon before, simultaneously, orafter the distraint of personalproperty (207 (B))

Delinquent taxmore than 1M?

Person owing anydelinquent tax tofails to pay w/inthe time required

RDO seizes sufficientpersonal property to satisfythe tax, charges & expensesof seizure (Sec. 207 (A))

No

Excess of proceeds over theentire claim, shall be returnedto the owner. No charge shallbe imposed for the services ofthe officer (Sec. 209)

W/in 2 days afterthe sale, officershall report to theCommissioner.(Sec. 211)

Commissioner may purchaseproperty for the NationalGovernment (Sec. 212)

Bid less thanamount of tax/FMV of goods

distrained?

Property may be resold andthe net proceeds shall beremitted to the NationalTreasury as internal revenue.(Sec. 212)

Officerconducts

public auctionYes

No, bid just right

W/n 10 days after receipt of thewarrant, levying officer shallreport to the Commissioner whoshall have the authority to lift thewarrant of levy (Sec. 207 B)

Internal revenue officer,designated by the Commissioner,shall prepare a certificate with theforce of a nationwide legalexecution (Sec. 207 B)

Levy shall be affected by writing upon said certificate adescription of the property. Notice of the levy shall beserved upon the Register of Deeds of LGU where theproperty is located and upon the owner (Sec. 207 B)

Excess of proceedsof the sale over claimand cost of sale shallbe turned over to theowner (Sec. 213)

W/n 1 year from sale, theowner may redeem, by payingto the RDO the amount of thetaxes, penalties, and interestthereon from the date ofdelinquency to the date of sale,and 15% per annum interest onpurchase price from the dateof purchase to the date ofredemption. (Sec. 214)

W/n 1 year from forfeiture,the taxpayer, may redeemsaid property by paying fullamount of the taxes andcharges (Sec. 215)

The Commissioner may,after 20 days notice, sellproperty at public auctionor at private sale withapproval of the SoF.Proceeds shall bedeposited with the NationalTreasury (Sec. 216) Levy and distraint

may be repeated untilthe full amount due,and all expenses arecollected. (Sec. 217)

W/n 20 days after levy, officer shall postnotice at the main entrance of themunicipal/city hall & in public place in thebarrio/district where the real estate lies forat least 30 days by AND publish it once aweek for 3 weeks. Owner may preventsale by paying all charges (Sec. 213)

Sale shall be held at themain entrance of the

municipal/city hall, or on thepremises of the leviedproperty. (Sec. 213)

W/n 5 days after the sale,levying officer shall enterreturn of the proceedingsupon the records of the RCO,RDO and RRD (Sec. 213)

Owner shall not bedeprived of thepossession and shallbe entitled to thefruits until 1 yearexpires (Sec. 214)

Officer conducting thesale shall forfeit the

property to theGovernment (Sec. 215)

No bidder orhighest bidinsufficient?

W/n 2 days, he shall make a returnof the forfeiture. Register of Deeds,upon registration of forfeiture shalltransfer title to the Government w/ocourt order. (Sec. 215)

W/in 5 days after sale,distraining officer shall enterreturn of proceedings in therecords of RCO, RDO andRRD (Sec. 213)

No, bid ok

Yes

RCO - Revenue Collection Officer RDO - Revenue District officerRRD - Revenue Regional Director LGU- Local Government Unit

REVIEWER IN TAXATION LAW Part VII. Local Taxation

Page 165 of 198

TA

XA

TIO

NLA

W2

Part VII. Local Taxation

I. PRELIMINARIESA. BASIC CONCEPTSB. FUNDAMENTAL PRINCIPLESC. LOCAL TAXING AUTHORITYD. LOCAL TAX ORDINANCEE. COMMON LIMITATIONS ON TAXING

POWERS OF LGUsF. OTHER RELEVANT TAXING POWERS

II. SPECIFIC PROVISIONS ON THE TAXINGAND OTHER REVENUE-RAISING POWERSOF THE LGUA. PROVINCESB. MUNICIPALITIESC. CITIESD. BARANGAYSE. COMMUNITY TAX

III. COLLECTION OF TAXESIV. LOCAL TAX REMEDIES

I. PRELIMINARIES

A. Basic Concepts

Governing Law

The LGC shall govern the exercise byPROVINCES, CITIES, MUNICIPALITIES,and BARANGAYS of their revenueraising and taxing powers (Sec 128LGC)

Power to Create Sources of Revenue

LGUs have the power to create ownsources of revenue and to levy taxes,fees, and charges, consistent with localautonomy. Taxes levied accrueexclusively to the local governmentunits. (SEC. 129, LGC)

Share in the IRA

National internal revenue generally goesto the National Treasury, exceptamounts set apart by way of allotmentunder R.A. 7160 or the LocalGovernment Code of 1991 (Sec. 284,NIRC)

Nature of LGU's Taxing Power

1. Not inherent2. Legislative in nature3. Exercised only if delegated by law or the

Constitution4. Not absolute; subject to limitations

provided by law5. Limited by public purpose

Interpretation

Taxing powers of LGUs are to beliberally construed (Sec. 5(a), LGC) but

doubt on the application of a taxordinance shall be strictly construedagainst the local government.

Tax exemptions are construed strictlyagainst the grantee.

Principle of Pre-emption

Where national government elects to taxa particular area, the delegated powerof the LGUs to tax the same field isimpliedly limited.

Double Taxation

Provinces and municipalities cannotimpose a tax, which the other mayimpose through a specific grant ofpowers

Provinces, cities and municipalitiescannot impose taxes, which thebarangay is specifically empowered toimpose to the exclusion of all others.

B. Fundamental Principles (UEPIPI)

1. Taxation shall be Uniform in each localgovernment unit;

IRR: the uniformity required isonly within the territorialjurisdiction of an LGU.

2. Taxes, fees, charges and otherimpositions shall: (EPUC)

ii. be Equitable and based as far aspracticable on the taxpayer's abilityto pay;

iii. be levied and collected only forPublic purposes;

iv. not be Unjust, excessive,oppressive, or confiscatory;

v. not be Contrary to law, publicpolicy, national economic policy, orin the restraint of trade;

vi. The collection of local taxes, fees,charges and other impositions shallnot be let to any Private person;

vii. The revenue collected shall Inuresolely to the benefit of, the localgovernment unit levying the tax, fee,charge or other imposition unlessotherwise specifically providedherein; and,

viii. Each local government unit shall, asfar as practicable, evolve aProgressive system of taxation.(SEC. 130, LGC)


Page 166 of 198

TA

XA

TIO

NLA

W2

C. Local Taxing Authority

1. Exercised by the Sanggunian concernedthrough an appropriate Ordinance.(Sec. 132, LGC)

2. Local chief executives of the LGUs,except the punong barangay possessveto powers over ordinances orparticular items thereof which are eitherultra vires or prejudicial to publicwelfare. His reasons shall be stated inwriting. (Sec 55(a), LGC)

3. The Sanggunian may override the vetowith a 2/3 vote of all its members.

4. Veto power may only be exercised once.

5. The veto doesn't affect items notobjected to. (Sec 55(b), LGC)

6. Vetoed items shall not take effect unlessthe sanggunian overrides the veto. Ifvetoed, corresponding item or items inthe appropriations ordinance of theprevious year shall be deemedreenacted. The veto doesn't affect itemsnot objected to. (Sec 55(b), LGC)

D. Local Tax Ordinance

1. Must satisfy the requirements ofprocedural and substantive due process

2. There must be a public hearing withquorum, voting and approval and/orveto requirements

3. Must be published within 10 days fromapproval for 3 consecutive days and/orpublished in at least 2 conspicuousplaces.

E. Common Limitations On TheTaxing Powers Of LocalGovernment Units (Sec 133)

Unless otherwise provided, the followingcannot be levied by the localgovernments: (IDEC-GAPEP-GRR-ECN):

1. Income tax, except when levied onbanks and other financialinstitutions;

2. Documentary stamp tax;

3. Estate tax, inheritance, gifts,legacies and other acquisitionsmortis causa, except as otherwiseprovided;

4. Customs duties, registration fees ofvessel and wharfage on wharves,tonnage dues, and all other kinds of

customs fees, charges and duesexcept wharfage on wharvesconstructed and maintained by theLGU concerned;

5. Taxes, fees or charges on Goodscarried into or out of, or passingthrough, the territorial jurisdictions oflocal government units in the guiseof charges for wharfage, tolls forbridges or otherwise, or other taxes,fees, or otherwise

6. Taxes, fees or charges onAgricultural and aquatic productswhen sold by marginal farmers orfishermen;

7. Taxes on business enterprisescertified to by the Board ofInvestments as Pioneer or non-pioneer for a period of 6 and 4years, respectively from the date ofregistration;

8. Excise taxes on articles enumeratedunder the NIRC, as amended, andtaxes, fees or charges on petroleumproducts;

9. Percentage or VAT on sales, bartersor exchanges or similar transactionson goods or services except asotherwise provided herein;

10. Taxes on the Gross receipts oftransportation contractors andpersons engaged in thetransportation of passengers orfreight by hire and common carriersby air, land or water, except asprovided in the Code;

11. Taxes on premiums paid by way orReinsurance or retrocession;

12. Taxes, fees or charges for theRegistration of motor vehicles andfor the issuance of all kinds oflicenses or permits for the drivingthereof, except tricycles;

13. Taxes, fees, or other charges onPhilippine products actuallyExported, except as otherwiseprovided;

14. Taxes, fees, or charges, onCountryside and Barangay BusinessEnterprises and Cooperatives dulyregistered under the CooperativeCode of the Philippines; and

15. Taxes, fees or charges of any kindon the National Government, its


Page 167 of 198

TA

XA

TIO

NLA

W2

agencies and instrumentalities, andlocal government units

F. Other Relevant Taxing Powers

1. Power to Levy Taxes, Fees orCharges. LGU may levy taxes, fees orcharges on any base or subject notspecifically enumerated in the LGC orNIRC.

2. Authority to Adjust Rates. LGU hasthe authority to adjust the tax ratesprescribed in LGC NOT oftener thanonce every 5 years, in no case to exceed10% of the rates fixed. (Sec. 191, LGC)

3. Authority to Grant Exemption. LGUmay grant tax exemptions, incentives orreliefs by way of an Ordinance. (Sec.192, LGC)

II. SPECIFIC PROVISIONS ON THE TAXING AND OTHER REVENUE-RAISINGPOWERS OF THE LGU (PROVINCES, MUNICIPALITIES, CITIES, BARANGAYS)

A. Provinces

TAX IMPOSED RATE/AMOUNT BASE EXEMPTIONS OTHERS1) Tax on Transfer of Real

Property. Imposed on thesale, donation, barter, or anyother mode of transfer ofownership or title to realproperty

Not more than50% of 1%

Totalacquisitionprice or fairmarketvalue,whichever ishigher

Sale, transfer, orother dispositionof real propertypursuant to R.A.6657(ComprehensiveArarian ReformLaw)

Evidence ofpayment of tax isto be required byRegister of Deedsas a requisite toregistration; andby the provincialassessor as acondition forcancellation of oldtax declaration.

Tax must be paid60 days from thedate of executionof deed or fromthe date ofdecedent's death.

2) Tax on Business of Printingand Publication.a. Imposed on the business

of persons engaged inprinting, and/orpublication of bookds,cards, posters, leaflets,handbills, certificates,receipts, pamphlets, andothers of similar nature

b. Newly started business

Not exceeding50% of 1%

Not exceeding1/20 of 1%

Grossannualreceipts fortheprecedingcalendaryear

Capitalinvestment

Receipts fromprinting and/orpublishing ofbooks and otherreading materialsprescribed by theDECS as schooltexts or references

In the succeedingcalendar year,regardless of whenbusiness startedoperating, taxshall be based ongross receipts forprecedingcalendar year, orany fractionthereof.


Page 168 of 198

TA

XA

TIO

NLA

W2

TAX IMPOSED RATE/AMOUNT BASE EXEMPTIONS OTHERS3) Franchise Tax.

a. Notwithstanding anyexemption granted by anylaw or any other speciallaw, tax may be imposedon business enjoying afranchise

b. Newly-started business

Not exceeding50% of 1%

Not more than1/20 of 1%

Grossannualreceipts fortheprecedingcalendaryear realizedwithin itsterritorialjurisdiction

Capitalinvestment

In the succeedingcalendar year,regardless of whenbusiness startedoperating, taxshall be based ongross receipts forprecedingcalendar year, orany fractionthereof.

4) Tax on Sand, Gravel andOther Quarry Resources.Levied on ordinary stones,gravel, earth and otherquarry resources as definedin the NIRC, extracted frompublic lands or from thebeds of seas, lakes, rivers,streams, creeks, and otherpublic waters within itsterritorial jurisdiction

Not more than10%

Fair marketvalue in thelocality percubic meterof resourcesreferred to inColumn 1

Permit to extractsand, gravel andother quarryresources to beissued exclusivelyby the provincialgovernor pursuantto an Ordinanceby theSangguniangPanlalawigan

Distribution ofproceeds: Province - 30% Component

City/Municipalitywhereresources wereextracted - 30%

Barangaywhereresources wereextracted - 40%

5) Professional Tax. Provincesmay levy annual professionaltax on each person engagedin the exercise of aprofession requiringgovernment examination

Such amount asthe SangguniangPanlalawigan maydetermine in nocase to exceedP300.00

Professionalsexclusivelyemployed by thegovernment

To be paid to theprovince wherethe profession or aprincipal office ismaintained.

A person whopays forprofessional taxmay practice hisprofessionanywhere in thecountry withoutbeing subjected tosimilar taxes.

Employers shallrequire payment


Page 169 of 198

TA

XA

TIO

NLA

W2

TAX IMPOSED RATE/AMOUNT BASE EXEMPTIONS OTHERSof professional taxas a condition foremployment.

6) Amusement Tax. Leviedfrom proprietors lessees, oroperators of theaters,cinemas, concert halls,circuses, boxing stadia, andother places of amusement

Not more than30%

Grossreceipts fromadmissionfees

Holding of operas,concerts, dramas,recitals, painting,and artexhibitions, flowershows, musicalprograms, literaryand oratoricalpresentations

Exception toexemption: Pop,rock, or similarconcerts

In case of theatersor cinemas, taxshall first bededucted andwithheld by theirproprietors,leesees andoperators

Proceeds to beshared equally bythe province andmunicipalitywhere amusementplaces are located.

7) Annual Fixed Tax ForEvery Delivery Truck orVan of Manufacturers orProducers, Wholesalers of,Dealers, or Retailers in,Certain Products. Imposedon vehicles used for thedelivery of distilled spirits,fermented liquors, softdrinks, cigars and cigarettes,and other products as maybe determined by thesanggunian, to sales outlets,or consumers in theprovince, whether directly orindirectly

Amount notexceeding P500

Manufacturers,producers,wholesalers,dealers andretailers referredto in column 1shall be exemptfrom tax onpeddlers

B. Municipalities

Scope of Taxing Powersa. May levy taxes, fees and charges not

levied by provinces.b. Sanggunian concerned may

prescribe a schedule of graduatedtax rates but in no case to exceedthe rates prescribed below.

Tax on Business imposed on:

RATE/AMOUNT AND BASE OTHER INFORMATION

1) Manufacturers, assemblers,repackers, processors, bewers,distillers, rectifiers, andcompounders of liquors, distilledspirits, and wines ormanufacturers of any article ofcommerce of whatever kind ornature

In accordance with the schedule inSection 143 (a), NIRC

2) Wholesalers, distributors, ordealers in any article ofcommerce of whatever kind ornature

Schedule in Article 143 (b), NIRC


Page 170 of 198

TA

XA

TIO

NLA

W2

RATE/AMOUNT AND BASE OTHER INFORMATION

3) Exporters and onmanufacturers, millers,producers, wholesalers,distributor, dealers or retailers ofessential commoditiesenumerated below: (RWC-CLAPS)i. Rice and cornii. Wheat and or cassava flour,

meat, dairy products, locallymanufactured, processed orpreserved food, sugar, salt,and other agricultural,marine, and fresh waterproducts, whether in originalstate or not

iii. Cooking oil and cooking gasiv. Cementv. Laundry soap, detergents,

and medicinevi. Agricultural implements.

equipment and post-harvestfacilities, fertilizers,pesticides, insecticides,herbicides and other farminputs;

vii.Poultry feeds and otheranimal feeds;

viii. School supplies

Not exceeding 1/2 of rates prescribedin the schedule in Sec 143, NIRC

4) Retailers Gross sales or receipts for thepreceding calendar year of:

400k or less: 2% per annum

more than 400k: 1% per annum

Barangays have the exclusivepower to tax gross receiptsamounting to:

50k or less: in cities

30k or less: inmunicipalities

5) Contractors and otherindependent contractors

In accordance with the schedule inSec. 143

6) Banks and other financialinstitutions

Not exceeding fifty percent 50% of 1%on the gross receipts of thepreceding calendar year frominterest, commissions and discountsfrom lending activities, income fromfinancial leasing, dividends, rentalson property and profit from exchangeor sale of property, insurancepremium.

IRR: All other income andreceipts of banks andfinancial institutions NOTotherwise enumerated shallbe excluded from the taxingauthority of the LGU.

7) Peddlers engaged in the sale ofany merchandise or article ofcommerce

Not exceeding P50.00 per peddlerannually.

8) Any business which thesanggunian concerned maydeem proper to tax

Catch-all provision. Anybusiness subject to excise,value-added or percentagetax is subject to tax notexceeding two percent (2%)of gross sales or receipts ofthe preceding calendar year

Payment of Business Taxesa. Taxes in Sec. 143 shall be paid for

every separate or distinctestablishment or place wherebusiness subject to tax isconducted.

b. One line of business is not exemptedby being conducted with some otherbusinesses for which such tax hasbeen paid

c. The tax on a business must be paidby the person conducting it.


Page 171 of 198

TA

XA

TIO

NLA

W2

d. If a person operates 2 or morebusinesses mentioned in Sec 143which are taxed; computation shallbe based on: combined total gross

sales/receipts IF subject to theSAME tax rate

separate reports on grosssales/receipts IF subject toDIFFERENT tax rates

Yamane vs. Lepanto Condo Corp. (Oct.23, 1995): Condominium corporations are not

business entities, thus not subjectto local business tax. Even thoughthe corporation is empowered to levyassessments or dues from the unitowners, these amounts are notintended for the incurrence of profitby the corporation, but to shoulderthe multitude of necessaryexpenses for maintenance of thecondominium.

Ericsson Telecoms vs. City of Pasig. (Nov2007): The issue in this case is whether the

local business tax on contractorsshould be based on gross receipts orgross revenue. Pasig City assesseddeficiency business taxes onEricsson based on its gross revenue,arguing that gross receipts issynonymous with the latter. TheCourt ruled that business tax mustbe based on gross receipts, it beingdifferent from gross revenue. Theright to receive income, and notthe actual receipt determineswhen to include the amount ingross income.

Franchise Taxes

Smart Telecommunications vs. City ofDavao (September 2008, Nachura): Smart was held liable for franchise

taxes because there's expressprovision in its Charter granting theexemption.

Exemptions are never presumed andare strictly construed against thetaxpayer and liberally in favor of thetaxing authority.

The term "exemption" in its Charterdoes not mean tax exemption butexemption from certain regulationsand requirements imposed by theNTC.

The City of Davao must however

comply with Sections 137 and 151of R.A. No. 7160. Thus, the localfranchise tax that may be imposedby the City must not exceed 50% of1% of the gross annual receipts forthe preceding calendar year basedon the income realized within theterritorial jurisdiction of Davao

SITUS of Taxation

a. According to the Jurisprudence

EXCISE TAX: Allied Thread Co., Inc.v. City Mayor of Manila, L-40296 Taxis imposed on the performance of anact or occupation, enjoyment of aprivilege.

The power to levy such taxdepends on the place in which theact is performed or the occupation isengaged in; not upon the location ofthe office.

SALES TAX: Shell Co., Inc. v.Municipality of Sipocot, CamarinesSur with respect to sale, it is theplace of the consummation of thesale, associated with the delivery ofthe things which are the subjectmatter of the contract thatdetermines the situs of the contractfor purposes of taxation, and notmerely the place of the perfection ofthe contract.

b. According to Sec. 150 of the LGC,situs shall be determined by the ff.RULES:

RULE 1: In case of personsmaintaining/operating a branch orsales outlet making the sale ortransaction, the tax shall berecorded in said branch or salesoutlet and paid to themunicipality/city where the branchor sales outlet is located.

RULE 2: Where there is NO branchor sales outlet in thecity/municipality where the sale ismade, sale shall be recorded in theprincipal office and the tax shall bepaid to such city/municipality.

RULE 3: In the case ofmanufacturers, contractors,producers, and exporters havingfactories, project offices, plants, andplantations, proceeds shall beallocated as follows:


Page 172 of 198

TA

XA

TIO

NLA

W2

30% of sales recorded in theprincipal office shall be madetaxable by the city/municipalitywhere the principal office islocated

70% shall be taxable by thecity/municipality where thefactory, project office, plant, orplantation is located

Illustration of Rules 1 to 3:A company has a principal office inMandaluyong, while its sales officeand factory are in Sta Rosa: sales made in Sta Rosa, will be

recorded in Sta Rosa sales made in Los Baños,

Calamba or Cabuyao (iedelivered to customers located inthose places), will be recorded inMandaluyong

aside from sales made in StaRosa, Sta Rosa also gets 70% ofsales recorded in Mandaluyong,pursuant to Rule 3

RULE 4: In case the plantation islocated in a place other than theplace where the factory is located,the 70% in Rule 3 will be dividedas follows: 60% to the city/municipality

where the factory is located 40% to the city/municipality

where the plantation is located

RULE 5: In case of 2 or morefactories, plantations, etc in differentlocalities, the 70% shall beprorated among the localitieswhere the factories, plantations, etcare located in proportion to theirrespective volume of production.

Illustration:A company has a principal office inValenzuela and has its factory inBulacan. It also has branchesselling merchandise in Muntinlupa,Bacolod, Cebu. sales made in Muntinlupa,

Bacolod and Cebu will go to thesaid cities

sales in all other places whichdo not have a sales branch shallbe distributed as follows: 30% toValenzuela and 70% to Bulacan

IRR: Where manufacturers employ anindependent contractor, the factory/plant/ warehouse of the contractor is

considered thefactory/plant/warehouse of themanufacturer.

IRR: The city or municipality where theport of loading is located shall not levyfees unless the exporter maintains insaid city or municipality its principaloffice, a branch, sales office, orwarehouse, factory, plant or plantationin which case the rules above apply.

Tax Rates Within Metro Manila

Not 50% more than the maximumrates prescribed in Sec 143. (SEC.144, LGC)

Retirement of Business

Upon termination of a businesssubject to tax under Sec.143 asworn statement of its gross salesor receipts for the current year shallbe submitted. If the tax paid is lessthan the tax due, the differenceshall be paid before the business isconsidered officially retired. (Sec145)

Fees and Charges

General: As a condition to theconduct of business or profession,the municipality may imposereasonable fees and charges not yetimposed by the province,commensurate with the cost ofregulation, inspection andlicensing,. (Sec.147)

Specific:1. Municipality has power to

impose reasonable rates forsealing and licensing of weightsand measures

2. The Municipality has exclusiveauthority to grant fisheryprivileges in municipal waters.The sangguniang bayan may:a) Grant fishery privileges to

erect fish corrals, oysters,mussels or other aquaticbeds or bangus fry areas,within a definite zone of themunicipal waters, as

b) Grant marginal fishermenthe privilege to gather, takeor catch bangus fry, prawnfry or kawag-kawag or fry ofother species and fish fromthe municipal waters by


Page 173 of 198

TA

XA

TIO

NLA

W2

nets, traps or other fishinggears free of rental, fee,charge or imposition.

c) Issue licenses for theoperation of fishing vessels ofthree (3) tons or less

3. The Sanggunian may penalizethe use of explosives, noxious orpoisonous substances,electricity, muro-ami, and otherdeleterious methods of fishingand prescribe a criminal penaltytherefor (Sec. 149, LGC)

C. Cities

Scope The City may levy taxes, fees, charges

which the province or municipality mayimpose.

Those levied and collected by highlyurbanized and independent componentcities shall accrue to them anddistributed in accordance with theprovisions of LGC.

Rates on levy made by the city mayexceed the maximum rates allowed forthe province or municipality by notmore than 50%

Exception: Rates of professional andamusement taxes. (Sec. 151, LGC)

Cities have the broadest taxingpowers, embracing both specific andgeneral powers as provinces andmunicipalities may impose (Vitug)

D. Barangays

Scope The following shall exclusively accrue to

the barangays:

1. Taxes on Stores or Retailers withFixed Business Establishments.a) RATE: not > 1%b) BASE:

In case of cities: gross salesor receipts of the precedingcalendar year of P50,000.00or less

In case of municipalities:gross sales or receipts ofP30,000.00 or less

2. Service Fees or Charges. Forservices rendered in connection withthe regulations or the use ofbarangay-owned properties orfacilities such as palay, copra, ortobacco dryers.

3. Barangay Clearance. A city ormunicipality cannot issue a permitfor business without a clearancefrom the barangay concerned. Thesangguniang barangay may imposea reasonable fee on the clearance.

4. Other Charges Allowed. (Sec. 152,LGC)a) charges on commercial breeding

of fighting cocks, cockfights andcockpits;

b) charges on places of recreationwhich charge admission fees;and

"places of recreation" – includeplaces of amusement where oneseeks admission to entertain himselfby seeing or viewing the show orperformance or those where oneamuses himself by directparticipation.

c) charges on billboards,signboards, neon signs, andoutdoor advertisements.


Page 174 of 198

TA

XA

TIO

NLA

W2

Checklist of Taxes Imposed by Different LGUs

TYPE OF TAX PROVINCE MUNICIPALITY CITY BARANGAYTransfer of Real Property Ownership Tax on Business of Printing and Publication Franchise Tax Tax on Sand, Gravel and Other QuarryResources Professional Tax Amusement Tax Annual Fixed Tax For Every Delivery Truck orVan of Manufacturers or Producers,Wholesalers of, Dealers, or Retailers in,Certain Products Tax on Business Fees and charges on regulation/licensing ofbusiness and occupation Fees for Sealing and Licensing of Weights andMeasures Fishery Rentals, Fees and Charges Community Tax – Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers Sec. 152(b) – Service Fees on the use ofBarangay-owned properties Sec. 152(c) – Barangay Clearance Sec. 152(d) – Other Fees and Charges (oncommercial breeding of fighting cocks,cockfights, cockpits; places of recreation whichcharge admission fees; outside ads) Sec. 153 – Service Fees and Charges Sec. 154 – Public Utility Charges Sec. 155 – Toll Fees or Charges Sec. 232 – Real Property Tax

Legend: Authorized to impose the tax Only if the municipality is within the Metro Manila Area

Common Revenue-Raising Powers(SPT)1. Service Fees and Charges – for

services rendered2. Public Utility Charges – for public

utilities owned, operated andmaintained by them within theirjurisdiction. (Sec. 154, LGC)

3. Toll fees or charges – for theimposition of toll fees or charges forthe use of any public road, pier, orwharf, waterway, bridge, ferry ortelecommunication system fundedand constructed by the LGU.

The ff. are exempt from toll fees:a. officers and enlisted men of

AFP and members of PNP onmission

b. post office personneldelivering mail

c. physically-handicapped, anddisabled citizens who are 65years or older.

When public safety and welfare sorequires, the sanggunian concerned maydiscontinue the collection of the tolls,and thereafter the said facility shall befree and open for public use. (Sec. 155,LGC)

E. Community Tax

Who May Levy (Sec. 156, LGC): Citiesor municipalities without need forpublic hearing.

Persons Liable (Sec. 157 &158, LGC)

2. Individuals who are:a) Inhabitants of the Philippinesb) Eighteen years of age or overc) Regularly employed on a wage or

salary basis for at least 30consecutive working days duringany calendar year

d) Either:

Engaged in business oroccupation


Page 175 of 198

TA

XA

TIO

NLA

W2

Owns real property with anaggregate assessed value ofP1,000 or more OR

Is required by law to file anincome tax return

3. Juridical Personsa) Every corporation no matter

how created or organized,b) Whether domestic or resident

foreign,c) Engaged in or doing business

in the Philippines

Rates

2. Individualsa) Annual community tax of P5.00

PLUS annual additional tax ofP1.00 per P1,000.00 of incomeregardless whether frombusiness, exercise of professionor property

b) Never to exceed P5000c) Husband and wife shall pay a

basic tax of P5.00 each PLUSadditional tax based on totalproperty owned by them and thetotal gross receipts or earningsderived therefrom.

3. Juridical Personsa) Annual community tax of

P500.00 PLUS annual additionaltax of not more thanP10,000.00 according to the ff.schedule:

P2.00 for every P5,000 worthof real property in thePhilippines owned during thepreceding year based

P2.00 for every P5,000.00 ofgross receipts derived frombusiness in the Philippinesduring the preceding year.

b) Dividends received by acorporation from anothercorporation shall be deemed partof the gross receipts or earningsfor purposes of computingadditional tax.

Persons Exempt (Sec. 159, LGC)

Diplomatic and consularrepresentatives

Transient visitors who stay in thePhilippines for not more than 3months

Time and Place of Payment

a) Place. where individual resides, orwhere the principal office of thejuridical entity is located. (Sec. 160,LGC)

b) Time. accrues on the 1st day ofJanuary of each year to be paid notlater than the last day of Februaryof each year

c) Penalty. If unpaid within theprescribed period, an interest of24% shall be added per annum fromthe due date until payment. (Sec.161, LGC)

III.COLLECTION OF TAXES

Tax Period: Based on calendar year,unless otherwise provided. (Sec. 165,LGC)

Manner of Payment: May be paid inquarterly installments. (Sec. 165, LGC)

Accrual of Tax: 1st day of January ofeach year.

Except: New taxes, fees or charges,or changes in the rates thereofwhich shall accrue on the 1st day ofthe quarter next following theeffectivity of the ordinance imposingsuch new levies or rates. (Sec. 166,LGC)

Manner of Payment: Within the 20days of January or of each subsequentquarter. (i.e. Jan 20, Apr 20, July 20,and Oct 20). It may be extended by thesanggunian for justifiable reasons,without surcharges or penalties.Extension cannot exceed 6 months.(Sec. 167, LGC)

Surcharge and Penalties2. Surcharge. 25% on taxes, fees or

charges NOT paid on time3. Interest. Not exceeding 2% per

month of the unpaid taxes, fees orcharges INCLUDING surcharges,until the amount is fully paid

In no case shall the totalinterest exceed 36 months. (Sec.168, LGC)

Collecting Authority Provincial, city, municipal, or

barangay treasurer, or their dulyauthorized deputies. (Sec. 170, LGC)

Examination of Books

The local treasurer or his deputyduly authorized in writing, may


Page 176 of 198

TA

XA

TIO

NLA

W2

examine the books, accounts andother pertinent records of anyperson, or association to ascertainand collect the correct amount oftax.

Examination shall be made duringthe regular business hours, ONLYONCE for every tax period, andshall be certified to by theexamining official. (Sec. 171, LGC)

IV.LOCAL TAX REMEDIES

Remedies of LGUs

1. Tax lien

Non-payment of a tax, fee or chargecreates a lien superior to all liens orencumbrances in favor of any otherperson, enforceable byadministrative or judicial actiona) By Distraint - personal

propertyb) By Levy - real property

Exempt Properties: (ToB-CUPLA)

Tools and implementsnecessarily used by the taxpayerin his trade or employment

one horse, cow, carabao, orother Beast of burden, such asthe delinquent taxpayer mayselect and necessarily used byhim in his ordinary occupation

his necessary Clothing, and thatof all his family

household furniture andutensils necessary forhousekeeping and used for thatpurpose by the delinquenttaxpayer, such as he may select,of a value not exceeding P10,000

Provisions, including crops,actually provided for individualor family use sufficient for 4months

the professional Libraries ofdoctors, engineers, one fishingboat and net, not exceeding thetotal value of P10,000 by thelawful use of which a fishermanearns his livelihood

any material or Article formingpart of a house or improvementof any real property (Sec. 185,LGC)

2. Judicial Action

The local government may institutean ordinary civil action with regular

courts of proper jurisdiction for thecollection of delinquent taxes,charges, etc. (Sec. 183, LGC)

Valley Trading Co. vs. CFI of Isabela,(1989) LGC does not contain aprovision prohibiting courts fromenjoining the collection of localtaxes. Such lapse may have allowedpreliminary injunction under Rule58, ROC where local taxes areinvolved.

Remedies of Taxpayers (See flowchartbelow)

1. Prior To Assessmenta) Pre-assessment Remediesb) Appeal to Secretary of Justice

2. After An Assessment or Paymenta) Written protest of assessmentb) Claim for refund

Requires a written claim forrefund or credit to be filed withlocal treasurer before protest isentertained

Must be brought within 2 yearsfrom payment of tax or from thedate the taxpayer becameentitled to refund or credit (Sec.196, LGC)

3. Original Court Action

Periods of Assessment and Collection ofLocal Taxes

2. Assessment. Within 5 years from thedate they become due

3. In case of Fraud or Intent to EvadeTax. Within 10 years from discovery offraud or intent to evade payment. (Sec.194, LGC)

4. Collection. 5 years from the date ofassessment by administrative or judicialaction.

Instances When Running of PrescriptionPeriods is Suspended

1. When the treasurer is legally preventedfrom making the assessment orcollection

2. When taxpayer requests forreinvestigation and executes a waiver inwriting before lapse of the period forassessment or collection.

3. When the taxpayer is out of the countryor otherwise cannot be located (Sec. 194(d), LGC)


Page 177 of 198

TA

XA

TIO

NLA

W2

Remedy for Illegal or UnconstitutionalTax Ordinance

STEP 1: Appeal to the Secretary ofJustice. Within 30 days from the effectivityof the contested ordinance

STEP 2: Decision by the Sec of Justicewithin 60 days from the date of receiptof the appeal. Appeal shall not have theeffect of suspending the effectivity of theordinance and the accrual and payment ofthe tax levied therein.

STEP 3: Appropriate proceedings withcompetent court. Within 30 days afterreceipt of adverse decision or the lapse ofthe 60-day period when Sec has failed toact upon it. (Sec 187, LGC)


Page 178 of 198

TA

XA

TIO

NLA

W2

REVIEWER IN TAXATION LAW Part VIII. Real Property Taxation

Page 179 of 198

TA

XA

TIO

NLA

W2

Part VIII.Real Property Taxation

I. BASIC CONCEPTSII. PROPERTIES SUBJECT TO TAXIII. TAXES AND RATES IMPOSED

A. BASIC REAL PROPERTY TAXB. SPECIAL LEVIES

IV. EXEMPT PROPERTIESV. APPRAISAL AND ASSESSMENT OF REAL

PROPERTYA. CLASSES OF REAL PROPERTY FOR

ASSESSMENT PURPOSESB. BASIS OF ASSESSMENT AND

APPRAISALC. PAYMENT AND COLLECTION

VI. REMEDIES IN REAL PROPERTYTAXATIONA. REMEDIES AVAILABLE TO LOCAL

GOVERNMENTB. REMEDIES AVAILABLE TO TAXPAYER

VII.SPECIAL PROVISIONS

I. BASIC CONCEPTS

Governing Law: LGC 1991

Definitions1. Real Property taxation. A direct

tax on ownership of lands andbuildings or other improvementsthereon payable regardless ofwhether property is used or not,although value may vary inaccordance with such factor

Real property tax is a fixedproportion of the assessed valueof the property being taxed

2. Real Property. Subject to thedefinition given by Art. 415 of theCivil Code.

3. Improvement. A valuable additionmade to a property or ameliorationin its condition amounting to morethan a mere replacement of partsinvolving capital expenditures andlabor.

Nature/Characteristics1. It is a direct tax on the ownership or

use of real property2. It is an ad valorem tax. Value is the

tax base3. It is proportionate because the tax is

calculated on the basis of a certainpercentage of the value assessed.

4. It creates a single, indivisibleobligation

5. It attaches on the property (i.e., alien) and is enforceable against it.

6. With respect to LGUs, it is leviedthru a delegated power

Fundamental Principles (CAPUE)1. Current fair market value is the

basis for assessment2. Actual use shall be the basis of

classification for assessment3. Private persons cannot be left to the

appraisal, assessment, levy andcollection of real property tax.

4. Uniform classification within eachlocal government unit shall beobserved.

5. Equitable appraisal and assessmentis required. [Section 197, LocalGovernment Code]

II. PROPERTIES SUBJECT TO TAX

1. Land2. Buildings3. Machinery4. Other improvements not otherwise

exempted under the LGC

The LGC contains no definition of “realproperty”; but defines the following:

1) Improvement. A valuable addition to aproperty or amelioration in itscondition; more than a repair of partsinvolving capital expenditure and labor,intended to enhance its value, beauty,or utility or to adopt it for new orfurther purposes. [Section 199(m), LGC]

2) Machinery Machines, equipment, mechanical

contrivances, instruments,appliances or apparatus, which mayor may not be attached,permanently or temporarily, to realproperty.

Includes physical facilities forproduction, the installations andappurtenant service facilities, thosewhich are mobile, self-powered orself-propelled

Those not attached to real propertybut are actually, directly, andexclusively used for the particularindustry's needs and which by theirvery nature are necessary to theindustry's purposes. [Section 199(o),Local Government Code]

The definition above is so broadsuch that everything used forthe needs of an industry can beclassified as machinery, subjectto RPT;

This was solved by Sec 290Paragraph (o) of the LGC's IRR


Page 180 of 198

TA

XA

TIO

NLA

W2

General Purpose Rule

An object used indirectly for thegeneral purpose of the businessshall NOT be treated as realproperty.

Mindanao Bus Co. v City Assessor ofCagayan de Oro (1997), Board ofAssessment Appeals v Meralco, Meralco vBoard of Assessment Appeals.

The SC has generally held in these casesthat Art 415 CC provides an exclusiveenumeration of what constitutes realproperty. FOR TAX PURPOSES however, itis common for otherwise personalproperties under the CC to be classified asreal property.

Lesson: the NIRC and the LGC code prevailin classifying property for tax purposes.

III.TAXES AND RATES IMPOSED

A. Basic Real Property Tax. Annual advalorem ax that may be levied by LGUson real property and improvementsthereon

LGU RATE OF BASICTAX

1. Province not exceeding 1% ofassessed value

2. City not exceeding 2%

3. Municipality withinMetro Manila

not exceeding 2%.

* Proceeds above are shared withmunicipalities and barangays.

B. Special Levies such as:

1) Additional 1% tax for the SpecialEducation Fund

2) Additional as valorem tax of 5% on idlelands

3) Tax imposed on property especiallybenefited by structures or developmentsundertaken by the local government.

Idle Lands (Sec. 237, LGC)

(a) Agricultural Lands. More than 1 hectarein area, suitable for cultivation,dairying, inland fishery, and otheragricultural use, 1/2 of which isuncultivated or unimproved

NOT Idle Lands:

Agricultural lands planted withat least 50 trees to a hectare

Lands actually used for grazingpurposes

(b) Non-agricultural lands. Located in a cityor municipality, more than 1,000 sq.m,1/2 of which remains unutilized by theowner or person with legal interest.

(c) Grounds for EXEMPTION from idlelands tax:a. force majeure;b. civil disturbance;c. natural calamity; ord. any cause or circumstance which

physically or legally prevents theowner or person having legalinterest from improving, utilizing orcultivating the same.

Special Education Fund

Paid in addition to Basic Property Tax

Proceeds from 1% tax on real propertyare automatically released to schoolboards. In case of provinces, proceedswill be divided equally betweenprovincial and municipal school boards

For the maintenance, construction andrepair of public schools; facilities,equipment, research, sportsdevelopment

Special Levy

Levied on lands within an LGU'sjurisdiction, benefited by government-sponsored works or projects based onassessed value thereof

Rates shall not exceed 60% of actualcost of projects and improvements

Does not apply to lands exempt frombasic property tax nor on portionsdonated to LGU

Requirements:1. Public hearing2. Notification to owners3. Ordinance

IV.EXEMPT PROPERTIES (RCW- CPE)

1. Owned by the Republic of thePhilippines or any of its politicalsubdivisions except when beneficial useis granted for a consideration or to ataxable person.

2. Charitable institutions, churches,parsonages, or convents appurtenantthereto, mosques, non-profit or religiouscemeteries, and all lands, buildings,and improvements actually, directly and


Page 181 of 198

TA

XA

TIO

NLA

W2

exclusively used for religious,charitable, or educational purposes.

3. Machinery and equipment actually,directly and exclusively used by localWater utilities and GOCCs engaged inthe supply and distribution of waterand/or generation and transmission ofelectric power.

4. Real property owned by duly registeredCooperatives as provided for underRepublic Act No. 6938 (CooperativeCode of the Philippines).

5. Machinery and equipment used forPollution control and Environmentalprotection. [Section 234, LocalGovernment Code]

Proof of Exemption

1. Documentary evidence such asaffidavits, by-laws, contract, articles ofincorporation

2. Given to local assessor

3. Within 30 days from date of declaration

4. Failure to file, will be listed as inAssessment Rolls as taxable

GOCCs

Philippine Ports Authority vs. City of Iloilo(2003): GOCCs are NOT covered by theexemption since the exemption onlyrefers to instrumentalities withoutpersonalities distinct from thegovernment.

Mactan Airport V. MIAA

Provisioninvolved

SC Ruling

MactanAirportAuthorityvs.Marcos(1996)

Sec 133 (o),LGC. LGUs notallowed to levy…(o)taxes/fees/charges of any kind onthe nationalgov’t, itsagencies,instrumentalitiesand LGUs.

Sec 234 (a),LGC. Propertiesexempt fromRPT: (a) realproperties ownedby the Republicor any of itspoliticalsubdivisions…

Mactan AirportAuthority is aGOCC, notexempt fromRPT. Legislaturein amending thelaw specificallydeleted GOCCSfrom theenumeration inSec 234(a).

ManilaAirportAuthorityvs. CA(2006)

Sec 133 (o), LGC

Sec 234 (a), LGC

MIAA fallsunder the term“instrumentality” outside thescope of LGS’slocal taxingpowers underSec 133(o).

Charitable Institutions

LUNG CENTER of the PHILS vs. QUEZONCITY (June 2004): A charitableinstitution doesn't lose its character andits exemption simply because it derivesincome from paying patients so long asthe money received is devoted to thecharitable object it was intended toachieve, and no money inures to thebenefit of persons managing theinstitution.

Property leased to private entities isNOT exempt from RPT, as it is notactually, directly and exclusively usedfor charitable purposes. Portions of theland occupied by the hospital andportions used for its patients, whetherpaying or non-paying, are EXEMPTfrom real property taxes.

V. APPRAISAL AND ASSESSMENT OFREAL PROPERTY

A. Classes of Real Property forAssessment Purposes

1. Commercial2. Agricultural3. Residential4. Timberland5. Industrial6. Mineral7. Special

B. Basis of Assessment and Appraisal

1. Assessment. Actual use, regardlessof location, owner, or actual user

2. Appraisal. Current FMV prevailingin the locality where property issituated

C. Payment and Collection

a. Accrual of Tax: January 1st ofevery year; shall constitute asuperior lien. (Sec. 246)

b. Time and Manner of Payment:(Sec. 250) 1. basic real property tax


Page 182 of 198

TA

XA

TIO

NLA

W2

in 4 equal installments (March 31,June 30, September 30, December30) 2. special levy – governed byordinance

c. Interest for Late Payment (Sec.255)1. two percent (2%) for each

month on unpaid amount untilthe delinquent amount is paid

2. provided in no case shall thetotal interest exceed thirty-six(36) months.

d. For Advance and Prompt Payment1. Advance payment – discount not

exceeding 20% of annual tax(Sec. 251, LCG)

2. Prompt payment – discount notexceeding 10% of annual tax due(Art 342 IRR)

e. Collecting Officer (SEC. 247): Cityor municipal treasurer or deputizedbarangay treasurer provided bind isgiven.

f. Collection Period (Sec 270, LGC)

within five (5) years from thedate they become due

within ten (10) years fromdiscovery of fraud, in case thereis fraud or intent to evade

Instances for suspension ofprescription periods

1. local treasurer is legally preventedto collect tax.

2. the owner or property requests forreinvestigation and writes a waiverbefore expiration of period to collect.

3. the owner of property is out of thecountry or cannot be located

VI.REMEDIES IN REAL PROPERTYTAXATION

A. Remedies Available to LocalGovernment

a. Administrative/Extrajudiciali. Lienii. Levyiii. Distraint. Notice posted and

published prior to distraint ofpersonal property

iv. Purchase by local treasurer ofproperty in case there is no bidderor bid is insufficient

b. Judicial

LGU may enforce collection throughfiling of civil action within periodsprescribed in Sec.270

Levy

Imposable only on property subject totax, personal liability rests on taxpayer

NOTICE OF DELINQUENCYposted at the main entrance of

provincial/city hall and published for 2consecutive weeks

WARRANT OF LEVYwith duly authenticated certificate stating

the taxpayer's name, amount anddescription of property

ADVERTISEMENT30 days after service of warrant

sale at a public auction will be advertised

REDEMPTIONwithin 1 year

ISSUANCE OF FINAL DEEDIn case of failure to redeem

* After sale and before redemption, orbefore expiration of 1 year term, realproperty shall remain in the possessionof delinquent taxpayer (usufruct)

B. Remedies Available to Taxpayer

1. On Assessments

a. Administrativei. Protest – payment under protest

is required within 30 days toprovincial, city, or municipaltreasurer. No protest shall beentertained unless the tax isfirst paid. (Sec. 252 LGC)

ii. Claim for Tax Refund or Credit(Sec. 253)

the taxpayer may file awritten claim for refund orcredit with the provincial orcity treasurer within twoyears from the date thetaxpayer is entitled to suchreduction or adjustment.

in case of denial of refund orcredit, appeal to LBAA as inprotest case.

Ramie Textiles vs Mathay(1997) Protest is not aprerequisite to a claim forrefund on payment made


Page 183 of 198

TA

XA

TIO

NLA

W2

under the mistaken beliefthat it is required by law topay.

b. Judicial Action

Appeal Suit assailing validity of tax Suit to declare invalidity of tax

due to irregularity in assessmentand collection

Suit assailing validity of local taxsale

2. After Sale

a. Redemption of real property 1 yearfrom the date of sale (Sec. 261 LGC)

Amount of delinquent tax Expenses of sale from date of

delinquency to date of sale

Interest of not more than 2% permonth on purchase price fromdate of sale to date ofredemption (not more than 36months). Certificate of redemption to

be issued, certificate of saleinvalidated

b. Court action assailing validity ofsale No such action shall be

entertained without a depositwith the court of sales price +2% per month interest

Appeals Process

PAYMENT UNDER PROTEST

WRITTEN PROTEST WITH LOCALTREASURER

30 days from payment of tax

TREASURER DECIDESWithin 60 days from payment of tax

If protest is approved by treasurer, apply forrefund or credit

APPEAL WITH LBAAIf protest is denied or in case of treasurer's

inaction after lapse of 60 days

APPEAL WITH CBAAWithin 30 days from receipt of adverse

decision by LBAA

APPEAL TO CTAWithin 30 days from receipt of adverse

decision by CBAA

SUPREME COURTWithin 15 days from receipt of adverse

decision by CBAA

* An Appeal DOES NOT suspend thecollection of tax as assessed

VII. SPECIAL PROVISIONS

Condonation/Remission

1. By the Sanggunian Grounds:

a. Failure of crops;b. Substantial decrease in the price

of agricultural or agri-basedproducts; or

c. Calamity in the LGU

2. By the President of the Philippines when public interest so requires.


Page 184 of 198

TA

XA

TIO

NLA

W2


Page 185 of 198

TA

XA

TIO

NLA

W2


Page 186 of 198

TA

XA

TIO

NLA

W2

REVIEWER IN TAXATION LAW Part IX. Tariff and Customs Code

Page 187 of 198

TA

XA

TIO

NLA

W2

Part IX. Tariff and Customs Code

I. ARTICLES SUBJECT TO DUTYA. EXPORT AND IMPORT DUTIESB. MEANING OF IMPORTATIONC. CLASSES OF IMPORTATIOND. CLASSIFICATION OF CUSTOM DUTIESE. SPECIAL DUTIES

II. RATES OF DUTYA. GENERAL RULESB. BASIS OF DUTYC. SPECIAL DUTIESD. FLEXIBLE TARIFF RATES

III. IMPOSITION OF DUTIESA. PERSONS LIABLEB. DECLARATIONC. EXAMINATION, APPRAISAL AND

CLASSIFICATIOND. ASSESSMENT AND TAXESE. LIQUIDATION

IV. REMEDIES OF THE GOVERNMENTC. EXTRAJUDICIALD. JUDICIAL

V. REMEDIES OF THE TAXPAYERD. REFUNDE. PROTESTF. ABANDONMENT

VI. PERTINENT AMENDMENTS BY RA 9135

Provisions cited are that of the Tariffand Customs Code.

I. ARTICLES SUBJECT TO DUTY

A. Export (suspended except on logs)and Import Duties

B. Meaning of Importation

Sec. 1201

All articles imported into the Philippines,whether subject to duty or not, shall beentered through the customhouse at a portof entry

Sec. 1202

Importation BEGINS: When vessel or aircraft enters the

jurisdiction of Philippines with intentionto unload.

Terminated:1) payment of duties, taxes and other

charges2) secured to be paid and legal permit for

withdrawal has been granted3) articles have legally left the jurisdiction

of customs

C. Classes of Importation

1. Dutiable Importation

All articles, when imported from anyforeign country into the Philippines,shall be subject to duty upon eachimportation, even though previouslyexported from the Philippines,except as otherwise specificallyprovided for in this Code or in otherlaws. (§100)

2. Prohibited Importations (POPP-LAW-DING) Sec. 101

a. Dynamite, gunpowder, ammunitionsand other explosives, firearm andweapons of war, and detached partsthereof, except when authorized bylaw.

b. Written or printed article in anyform containing:1) any matter advocating or

inciting treason, rebellion,insurrection or sedition againstthe Government of thePhilippines

2) forcible resistance to any law ofthe Philippines

3) containing any threat to take thelife of or inflict bodily harm uponany person in the Philippines.

c. Written or printed articles,photographs, engravings,lithographs, objects, paintings,drawings or other representation ofan obscene or Immoral character.

d. Articles, instruments, drugs andsubstances designed, intended oradapted for Preventing humanconception or producing unlawfulabortion, or any printed matterwhich advertises or describes orgives directly or indirectlyinformation where, how or by whomhuman conception is prevented orunlawful abortion produced.

e. Roulette wheels, Gambling outfits,loaded dice, marked cards,machines, apparatus or mechanicaldevices used in gambling, or in thedistribution of money, cigars,cigarettes or other articles whensuch distribution is dependent uponchance, including jackpot andpinball machines or similarcontrivances.


Page 188 of 198

TA

XA

TIO

NLA

W2

f. Lottery and sweepstakes tickets,advertisements thereof and lists ofdrawings therein. except those authorized by the

Philippine Government

g. Any article manufactured in wholeor in part of gold silver or otherPrecious metal, or alloys thereof, thestamps brands or marks of which donot indicate the actual fineness orquality of said metals or alloys.

h. Any Adulterated or misbrandedarticle of food or any adulterated ormisbranded drug in violation of theprovisions of the "Food and DrugsAct."

i. Marijuana, opium poppies, cocaleaves, or any other Narcotics orsynthetic drugs which are or mayhereafter be declared habit formingby the President of the Philippines,any compound, manufactured salt,derivative, or preparation thereof, Except when imported by the

Government of the Philippines orany person duly authorized bythe Collector of Internal Revenuefor medicinal purposes only.

j. Opium pipes and parts thereof, ofwhatever material.

k. All other articles the importation ofwhich is Prohibited by law.

Sec. 1207

It is the duty of the Collector to exercisejurisdiction to prevent importation (prohibited

importation) or

secure compliance with legalrequirements (articles that may beimported subject to conditions)

D. Classification of Custom Duties

1. Ordinary/Regular

2. Ad Valorem Tax rates are based n the cost (FMV)

or price of the imported articles In wholesale quantities in the

principal market of the exportingcountry

Includes expenses connected withimportation i.e. insurance, freight,packaging, etc.

3. Specific Rates are based on unit of weight

number or measurement

E. Special Duties(see page 105 for a detailed discussion)

1. Dumping duties2. Countervailing Duties3. Marking Duties4. Discriminatory Duties5. Duties imposed under flexible tariff6. Imposition of safeguard measures.

II. RATES OF DUTY

A. General Rules

Sec. 104

There shall be levied, collected and paidupon all imported articles the rates ofduty indicated.

Max rate: NOT exceed 100% ad valorem Rates of duty shall apply to ALL

products whether imported directly orindirectly of all foreign products whichdo not discriminate against Philippineproducts

If foreign country discriminateso additional 100% across-the-

board duty on their products Rates of duty shall be subject to

periodic investigation by TariffCommission and may be revised byPresident upon recommendation ofNEDA.

Sec 106

Drawbacks - in the nature of refund ortax credit:

a) Fuel used for Propulsion of Vesselsengaged in trade with foreigncountries or coastwide trade

refund or credit not exceeding99% of duty imposed by law onsuch fuel

b) Petroleum oils and oils frombituminous minerals, crude oilsimported by non electric utilitiesand then sold to electric utilities forgeneration of electric power

refund or credit not exceeding50% of duty imposed by law

c) Exportation of articlesmanufactured or produced in Phil(including packing + covering +marking/labeling) of importedmaterials for which duties havebeen paid


Page 189 of 198

TA

XA

TIO

NLA

W2

Conditions:

1. Imported material was actually usedin the production of article to beexported.

2. Refund or credit shall not exceed100% of duties paid on the importedmaterial.

3. No determination by NEDA of therequirement for certification on non-availability of locally produced ormanufactured competitivesubstitutes for the importedmaterial (This means there are nolocal substitutes for the material.).

4. Exportation must be made 1 yearafter importation of material claimfor refund or credit must be made 6months from exportation.

5. When 2 or more result from theused of same imported material,apportionment shall be made.

Every application for drawbackmust pay P500 for filing, processingand supervision fees.

Claims shall be paid by Bureau ofCustoms within 60 days afterreceipt of properly accomplishedclaims.

B. Basis of Duty (Sec. 202 Bases ofDutiable Weight)

a) gross weight: weight of article + weightof all containers, packages, holders andpacking where articles were containedduring importation

b) legal weight: weight of article + weightof immediate containers, holders wheresuch articles are usually contained atthe time of their sale to the public inretail quantities

c) net weight: only the actual weight ofarticle

d) articles affixed to cardboard, cards,paper, wood shall be dutiable togetherwith weight of such holders

e) when a single package containsarticles dutiable according to differentweights, the common exterior of thereceptacle shall be prorated.

Sec. 203 Rate of Exchange

Value quoted in foreign currency shallbe converted into Phil currency at theexchange rate published by CentralBank

Sec. 204 Effective Date of Rates of ImportDuty

Imported articles shall be subject torates of import duty existing at the timeof entry or withdrawal from warehouse

For articles abandoned, forfeited orseized by government and sold at publicauction, the rate of duty shall be therates in force at the time of auction

Duty based on weight, volume andquantity shall be levied and collected onthe weight, volume and quantity at timeof entry into warehouse or date ofabandonment/forfeiture/seizure.

Sec. 205

Imported article deemed “entered” inPhil for consumption when:

entry form is properly filed andaccepted together with relateddocuments

duties, taxes, fees and other chargesare paid or secured to be paidimported article

Deemed to be “withdrawn” fromwarehouse in the Phil for consumptionwhen:

entry form is properly filed andaccepted together with relateddocuments

duties, taxes, fees and other chargesare paid or secured to be paid

Sec. 1309 Certificate of Invoice

Commercial invoice must be presentedto the consular officer of the Phil forcertification at the time or before orimmediately after the shipment ofarticle

Consular invoice shall be certified inconsular district where articles weremanufactured or purchased orshippers.

In the absence of Phil consul, theinvoice may be certified by consularofficer in the district nearest theplace of exportation or persondesignated by DFA

Sec. 1310

All importations exceeding P10, 000 inDV shall be entered only1. upon presentation of consular

invoice under penalties offalsification, perjury. Allimportations exceeding P10, 000 inDV shall be entered only upon


Page 190 of 198

TA

XA

TIO

NLA

W2

presentation of consular invoiceunder penalties of falsification,perjury OR

2. Affidavit showing cause why it is notpossible to produce invoice + bond

Exempt from consular invoicerequirement:a. conditionally free importationsb. tax free importationsc. importations of government

agencies and instrumentalitiesd. importations on consignment basis

under RA 3137 and RA 6135 for reexport

Sec. 1313 Information Furnished onClassification and Value

Classification: When article not specifically classified

in the Code, the interested party,importer or foreign exporter may submita sample with full description ofcomponent materials in a writtenrequest.

Value: Upon written application, Collector shall

furnish importer within 30 days thelatest information as to the DV ofarticles to be imported.

Importer must present all pertinentpapers and documents, act in good faithand unable to obtain information due tounusual conditions

Information given is not an appraisalnor is it binding upon the Collector’sright of appraisal.

Customs Administrative Order #2-99(effective Jan 1, 1999)

Determination of Dutiable Value

Dutiable Value (DV) shall be determinedusing one of the 6 methods of valuation.

These methods must be applied insequence. However, method 4 and 5may be reversed at request ofimporter(unless there shall be difficultyin using method 5 in which caseCommissioner shall reject request)

Method # 1: TRANSACTION VALUE

Price actually paid or payable for goodswhen sold for export to Phil

commissions & brokerage fees cost of containers cost of packing (labor, materials)

assists (value of goods and servicessupplied by the buyer free of chargeor at a reduced price for use inconnection with the production andsale for export of the good)

royalties & license fees value of any part of the proceeds of

subsequent resale, disposal or useof imported goods that accruedirectly or indirectly to seller

cost of transport loading, unloading, handling insurance

DV must NOT include:

charges for construction, erection,assembly maintenance or technicalassistance undertaken afterimportation

cost of transport after importation

duties and taxes of Phil other permissible deduction under

WTO Valuation Agreement

CONDITIONS so the Transaction Valueshall be the DV (CREPD)

1. sale for Export to Phil

2. no restrictions as to the Dispositionor use of goods by buyer except:

those imposed by law or Philauthorities

limit the geographical areawhere goods may be resold

do not substantially affect thevalue of the goods

3. not be subject to some Condition orconsideration for which valuecannot be determined

4. no part of the Proceeds of anysubsequent disposal shall accrue tothe seller

5. buyer and seller are not Related orif they are, relationship did notaffect the price

DEEMED RELATED IF:

1. They are officers or directors of oneanother’s business;

2. They are legally recognized partnersin business;

3. There exists in an er-ee relationshipbetween them;

4. Any person directly or indirectlyowns, contrl or hold 5% or more of


Page 191 of 198

TA

XA

TIO

NLA

W2

the outstanding voting stock orshares of bother seller and buyer;

5. One of them directly or indirectlycontrols the other;

6. Both of them are directly orindirectly controlled by a 3rd person;

7. Together they directly or indirectlycontrol a 3rd person; or

8. Related by affinity or consanguinityup to 4th civil degree.

IF RELATED, USE OF TV ACCEPTABLEIF:

1. circumstances surroundingtransaction show that relationshipdid not influence the price

2. TV closely approximates:

TV of unrelated buyers ofidentical or similar goods

Deductive value of identical orsimilar goods determinedaccording to method #4

Computed value of identical orsimilar goods determinedaccording to method #5

Method # 2: TRANSACTION VALUE OFIDENTICAL GOODS

The DV shall be the transaction value ofidentical goods sold for export to thePhil and exported at or about the sametime as the goods being valued.

Identical goods must be samecommercial level and substantiallysame quantity as the goods beingvalued.

Identical goods

Same in all respects (physicalcharacteristics, quality and reputation)

Produced in the same country as thegoods being valued

Produced by producer of the goodsbeing valued

excludes imported goods for whichengineering, development, artwork,design work, plans and sketches isundertaken in the Phil and provided bythe buyer to the producer free of chargeor at a reduced rate

When no identical goods produced bythe same person:

identical goods produced bydifferent producer in the samecountry

If NO identical goods at samecommercial level and same quantity,

TV of identical goods at a differentcommercial level and differentquantity may be utilized

TV shall be adjusted upward ordownward to account for thedifference

Method #3: TRANSACTION VALUE OFSIMILAR GOODS

The DV shall be the transaction value ofsimilar goods sold for export to the Philand exported at or about the same timeas the goods being valued.

Similar goods must be same commerciallevel and substantially same quantity asthe goods being valued.

Similar goods

like characteristics and like componentmaterials

capable of performing same functions commercially interchangeable produced in same country produced by dame producer

excludes imported goods for whichengineering, development, artwork,design work, plans and sketches isundertaken in the Phil and provided bythe buyer to the producer free of chargeor at a reduced rate

When no similar goods produced by thesame person:

similar goods produced by differentproducer in the same country

If NO similar goods at same commerciallevel and same quantity,

TV of similar goods at a differentcommercial level and differentquantity may be utilized

TV shall be adjusted upward ordownward to account for thedifference

Method # 4: THE DEDUCTIVE VALUE

DV is determined on the basis of salesin the Phil of goods being valued ofidentical or similar imported goods lesscertain expenses resulting fromimportation and sale of goods.


Page 192 of 198

TA

XA

TIO

NLA

W2

Deductive Value is determined bymaking a deduction from theestablished price per unit for theaggregate of the ff elements:a. Commissions ORb. additions made in connection with

profit and general expenses ANDc. transport, insurance and associated

costsd. customs duties and other national

taxes

PRICELess: COMMISSIONS/ADDITIONSLess: COSTSLess: DUTIES/TAXES

DEDUCTIVE VALUE

CONDITIONS:

1. sold in the Phil in the samecondition as imported

2. sales taken place at or about thesame time of importation of goodbeing valued

3. if no sale took place at or about thetime of importation use sales at the earliest date

after importation (of the similaror identical good) but beforeexpiration of 90 days

4. if no sale meet the above conditions,importer may choose the use ofsales of goods being valued afterfurther processing

“At or about the same time”

45 days prior to and 45 days afterimportation

Method # 5: THE COMPUTED VALUE

DV is determined on the basis of cost ofproduction + profit + general expensesreflected in sales from exporting countryto the Phil of goods of same class orkind

DV is calculated by:

determining aggregate of relevantcosts, charges and expenses orvalue of (1) materials and (2)production or processing costs

costs (containers, packing,assists, engineering, artwork,plans and sketches undertakenin Phil and charged to producer

profits and general expenses

cost of transport, insuranceand charges to the port or placeof importation

Method # 6: THE FALLBACK VALUE

DV cannot be determined using any ofthe above methods

Use other reasonable means consistentwith principles and general provisionsof GATT

C. Special Duties

Sec. 301 Dumping Duty

When Sec of Finance receives a petitionor has reason to believe that1. a specific foreign article is being

imported into, or sold/ likely to besold in Phil,

2. at a price less than its normal value

within 20 days, must determineprima facie case for dumping

Sec. 302: Countervailing Duty

When an article is granted any bounty,subsidy or subvention upon itsproduction, manufacture or exportationin the country of origin and importationof which is likely to injure anestablished industry or retard theestablishment of industry in Phil

Countervailing Duty: ascertained orestimated amount of bounty,subsidy or subvention

Injury criterion shall be applied only onimports from countries which adhere toGATT

If article was allowed a drawback, onlythe excess of the amount of drawbackover the total duties and taxes shallconstitute bounty, subsidy, subvention

When the conditions which necessitatedthe imposition of countervailing dutieshave ceased: must discontinueimposition

Sec. 303: Marking

a. Marking of articles:

Marked in official language of Philand in conspicuous places toindicate to the ultimate purchaserthe name of country of origin.

b. Marking of containers:

Failure to mark 5% ad valorem


Page 193 of 198

TA

XA

TIO

NLA

W2

o Failure or refusal to mark within30 days from date of notice shallconstitute act o abandonment.

o No imported article shall bedelivered until it has beeninspected, examined orappraised

Sec. 304: Discrimination by ForeignCountries

The president may proclaim new andadditional duties in an amount notexceeding 100% ad valorem on articlesfrom country where:1. imposes an unreasonable charge,

exaction not equally enforceable inother laws

2. discriminate against the commerceof Phil in such a way that it placesPhil commerce at a disadvantage

D. Flexible Tariff Rates

Sec.401

The President is empowered to:1. increase, reduce or remove existing

rates2. establish quota or ban import of any

commodity3. impose an additional duty not

exceeding 10% ad valorem

The President’s power to increase ordecrease rates of import duty shallinclude authority to modify the form ofduty.

Any order of the President shall takeeffect 30 days after promulgation.

Except if the imposition ofadditional duty is less than 10%, itshall take effect upon the discretionof the President.

III. IMPOSITION OF DUTIES

A. Persons Liable

Deemed Owner of Imported Articles:1. consignee2. holder of bill of lading3. if consigned to order, the consignor4. underwriters of abandoned articles

and salvors of articles saved at awreck

The liability of importer for the duties,taxes, fees and other charges constitutea personal debt due to the governmentwhich may be discharged only upon fullpayment.

It also constitutes a lien upon thearticles imported while articles are incustody or subject to control ofgovernment.

All importations by the government, itsbranches, instrumentalities, GOCCs,agencies or instrumentalities owned orcontrolled by government are subject tosimilar duties, taxes and fees except forthose provided in Sec. 105 (conditionallyfree imports)

B. Declaration

Imported articles must be entered incustomhouse at the port of entry within30 days from date of discharge by:1. importer, being holder of Bill of

Lading2. customs broker3. agent

Import entries:

1. Informal entry

articles of commercial natureintended for sale, barter or hirethe DV is P2,000 or less

personal and household effects,not in commercial quantity, forpersonal use

2. Formal entry

may be for immediateconsumption, or underirrevocable domestic letter ofcredit, bank guarantee or bondfor:a. placing article in customs

bonded warehouseb. constructive warehousing

and immediatetransportation to other Philports upon properexamination and appraisal

c. constructive warehousingand immediate exportation

Written Declaration of Import Entrymust contain statements that declare:1. full account of value or price2. the invoice and entry contains just

and faithful account of the value orprice of articles; nothing has beenomitted or concealed

3. to the best of knowledge ofdeclaring, all the invoices and B of Lare the only ones in exiting inrelation to the importation inquestion


Page 194 of 198

TA

XA

TIO

NLA

W2

4. the invoices, entries and B of L aregenuine and true

signed by importer, consignee or holderof bill, manager of corporation, firm orassociation, licensed customs broker

Form of Import Entry:

shall be signed by person makingentries

shall have required # of copies asprescribed by RR

Contents:

name of importing vessel or aircraft # and marks of packages, quantity description of article value set in the invoice

C. Examination, Appraisal andClassification (§1405-08)

Procedure:

1. Appraisers shall ascertain, estimate,determine the value or price ofarticleso file action within 1 year

2. Examiners shall render a report

3. Appraisers shall describe all articleson the face of entry in tariffo 15 days

An appraisal, fully passed upon andapproved by Collector, may not bealtered or modified except upon a:1. statement of error2. request for reappraisal and/or

classification

if duty assessed amount is lower thanthe entered value

D. Assessment of Taxes

E. Liquidation (§1601-03)

Liquidation shall be made on the face ofentry showing the particulars.

Daily record of entries liquidated shallbe posted on the public corridor ofcustoms house.

Tentative Liquidation: If to determinethe exact amount due some futureaction is required, liquidation is deemedtentative as to items affected and shallbe subject to future and finaladjustment and settlement within 6months.

Finality of Liquidation: After expirationof 1 year from date of final payment ofduties

In the absence of protest, final andconclusive between the parties unlessliquidation was tentative

IV. REMEDIES OF THEGOVERNMENT

A. Extrajudicial

1. Enforcement of Tax Lien

Sec. 1508

When an importer has anoutstanding and demandableaccount with the Bureau ofCustoms,

Collector shall hold the deliveryof the article.

Upon notice, he may sell suchimportation or a portion of it tosatisfy the obligation.

Importer may settle his obligationanytime before the sale.

2. Seizure and Forfeiture

Sec 2205

WHO: customs official; FisheriesCommissions; Philippine CoastGuard

to make seizure of any vessel,aircraft, cargo, animal or anymovable property when the sameis subject to forfeiture or liablefor any fine under the tariff andcustoms law

Administrative Proceedings(Secs 2301 – 2316)

When seizure is made:

1. Collector shall issue a warrant forthe detention of the property

Cash bond if importer wishes to secure

release of article for legitimateuse

amount fixed by Collector conditioned on payment of

appraised value of article and/orfine, expenses, costs

Article will NOT be released if:

prima facie evidence of fraudin the importation]

article is prohibited by law


Page 195 of 198

TA

XA

TIO

NLA

W2

2. Report to Commissioner andChairman of Commission of Audit

3. written notice to owner or importer

He shall he given opportunity tobe heard;

Notification to an unknownowner

posting for 15 days in thepublic corridor ofcustomhouse

publication in newspaper other means Collector

considers desirable

4. Collector shall make a list andparticular description andclassification of the seized property,appraisal based on local wholesalevalues by

at least 2 appraising officials absent such, 2 competent

disinterested citizens

If within 15 days from notification, noowner or agent is found or appearsbefore Collector

property forfeited to Governmentand sold at auction

SETTLEMENT

While case is pending, Collector mayaccept settlement of any seizurecaseo Upon approval of Commissionero Payment of fine ( 25% - 80% of

the landed cost of the article)o In case of forfeiture, should pay

the domestic market value of theseized article

Settlement NOT allowed:o Fraud in importationo Importation prohibited by lawo Release would be contrary to law

PROTEST

written protest

payment before protest is necessary(amount due + docket fee)

When: at the time payment of theamount claimed to be due is madewithin 15 days thereafter

Form: filed according to RR; pointout the particular decision or rulinggrounds used as basis for theprotest

Scope: limited to the subject matterof a single adjustment (refers to theentire content of one liquidationincluding duties, fees, surchargesand fines) or other independenttransaction

Failure to protest will render theaction of the Collector final andconclusive except for manifest error

Upon demand of Collector, theimporter shall furnish samples ofthe articles which are the subject ofthe protest

See flowchart for procedure

COMPROMISE

Commissioner may compromise anycase subject to approval bySecretary

B. Judicial (see flowchart IX)

V. REMEDIES OF THE TAXPAYER

A. Refund (§1707-08)

When:1. manifest clerical error made in

invoice or entry2. error in return of weight,

measure and gauge

certified, under penalties offalsification or perjury, byexamining official

3. error in the distribution ofcharges on invoices

not involving any question oflaw

certified, under penalties offalsification or perjury, byexamining official

Conditions1. errors discovered before

payment OR discovered within 1year after the final liquidation

2. written request and notice fromimporter OR statement of errorcertified by the Collector

How:1. Claim made in writing2. Collector shall verify with the

records in his office3. Certify claim to Commissioner

with his recommendation andnecessary papers


Page 196 of 198

TA

XA

TIO

NLA

W2

4. Commissioner shall then causethe claim to be paid if foundcorrect

If the result of the refund wouldresult to a corresponding refund ofthe internal revenue taxes on thesame importation, Collector shallcertify to Commissioner who shallcause the said excess to be paid,refunded or credited in favor of theimporter

B. Protest (§2308-09. 2312)

written protest

payment before protest is necessary(amount due + docket fee)

When: at the time payment of theamount claimed to be due is madewithin 15 days thereafter

Form: filed according to RR point outthe particular decision or ruling groundused as basis for the protest

Scope: limited to the subject matter ofa single adjustment (refers to the entirecontent of one liquidation includingduties, fees, surcharges and fines) orother independent transaction

Failure to protest will render the actionof the Collector final and conclusiveexcept for manifest error

Upon demand of Collector, the importershall furnish samples of the articleswhich are the subject of the protest

C. Abandonment (§1801-03)

Article is deemed abandoned when:1. owner, importer or consignee

expressly signifies in writing toCollector his intention to abandon

2. after due notice, fails to file an entrywithin 30 days from date ofdischarge of last package fromvessel or aircraft

3. after filing entry, fails to claim hisimportation 15 days from date ofposting of the notice to claim suchimportation

Effect:

deemed to have renounced hisinterest and property rights

ipso facto deemed property of theGovernment

Any official or employee who:

had knowledge of the existence ofabandoned article

custody or charge of such article fails to report within 24 hours from

time article deemed abandonedshall be punished accdg to sec.3604 (fine: P5000 – P50,000;imprisonment: 1 yr – 10 yrs,perpetual disqualification to holdpublic office, vote and participate inelection)

VI. PERTINENT AMENDMENTS BYRA 9135

1. Post-entry Audit & Examination

Sec. 3513. Importers are required tokeep at their principal place ofbusiness for a period three (3) yearsfrom importation, all records of theirimportations and/or books ofaccounts, business and computersystems. Brokers are likewiserequired to do so with respect totransactions they handle.

Sec 3515. Customs Officersauthorized by the Bureau ofCustoms may enter during officehours premises where records arekept by importers/customs brokersto conduct audit of books, recordsor documents for the purpose ofcollecting the proper duties andtaxes.

2. Acquisition of grossly undervaluedgoods

Sec 2317. In order to preventundervaluation of goods subject toad valorem duty, the Commissionerof Customs may acquire importedgoods for a price equal to theirdeclared customs value plus anyduties already paid on the goods,payment for which shall be madewithin ten (10) working days fromissuance of a warrant signed by theCommissioner of Customs for theacquisition of such goods.


Page 197 of 198

TA

XA

TIO

NLA

W2


Page 198 of 198

TA

XA

TIO

NLA

W2

START

Collector determinesprobable cause

(illegal importation)

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs andCustoms Code

Collector conductshearing

Amountinvolved less

than 5M?

Importer may securerelease of goods byfiling of cash bond

(Sec. 2301)

Collector’sdecision favorable

to taxpayer/adverse to gov’t?

Taxpayer appealsto Customs

Commissioner 15days from receipt

of notice

DoesCommissionerdecide w/n 30

days? IsCommissioner’s

decisionfavorable to

taxpayer/adverse to

gov’t?

Appeal to theCourt of Tax

Appeals within 30days from notice

of decision

Automatic Review* bythe Secretary of

Finance (SOF) (Sec.2313, CMO 3-2002)

MR within 15 daysfrom receipt of

decision

Appeal to CTA enbanc 15 days fromreceipt of decision

denying MR

Appeal to theSupreme Court

END

Yes

No

Yes

NoNo

Yes

Automatic review* by CustomsCommisioner (Sec. 2313)

Doescommissionerdecide w/in 30

days?

IsCommissioner’s

decision favorableto taxpayer/

adverse to gov’t?

No

Yes

Yes

Yes

No, amount is at least5M

Does SOFdecide within

30 days?

Decision becomesfinal &

unappealable

Is SOF’sdecision

favorable totaxpayer/adverse

to gov’t?

NoYes

Inaction construed asaffirmation of

commissioner’s decision(or of collector’s decision

in case of inaction bycommissioner)

No

END

Inaction construed as affirmationof Collector’s decision

NoAppealto CTA

Inaction construedas affirmation of

Collector’sdecision

Yes

Collector seizes goodsand reports it to the

Commissioner and toCOA. Owner is notified

of seizure

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not knowabout the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appealthe decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591

- end of Taxation Law 2 -

- end of Taxation Law -