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Taxation law review notes

- Atty. Francis J. Sababan -

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COVERAGE OF TAXATION LAW REVIEW

I. Basic Principles of ConstitutionalLimitations

a) Due process clause which

could be either substantivedue process andprocedural due processclause

b) Equal protection clauseRead:

• Ormoc Sugar Central vs.City Treasurer 22 SCRA603

• Tiu vs. CA 301 SCRA 178c) Article III sec. 1 of the

1987 Constitution – non-impairment clause

d) Article III sec. 5 – freedomof religion

e) Article III sec. 20 – non-payment of poll tax

f) Article VI sec. 28 par. 2 –flexible tariff clause

g) Article VI sec. 28 par. 3 –exemption from realproperty taxRead:

• Herrera vs. Quezon City 3SCRA 186

•Abra vs. Hernando 107 SCRA

104•Abra Valley vs. Aquino 52

SCRA 106•Philippine Lung Center vs.

Quezon City 433 SCRA 119h) Article VI sec. 28 par. 4 –

qualified majority in taxexemption

i) International doubletaxation

• CIR vs. Johnson 309 SCRA87

j) Doctrine of equitable recoupment

k) Doctrine of Set-off or compensation intaxation

• Republic vs. Mambulao 4 SCRA 622• Domingo vs. Garlitos 8 SCRA 443• Francia vs. IAC 162 SCRA 753• Caltex vs. COA 208 SCRA 726• Philex vs. CIR 294 SCRA 687

II. Income Tax Law

Section 22-26 of the National InternalRevenue Codea) Read in the commentaries or magicnotes the different kinds of:

1. Income Taxpayers2. Income Taxes3. Sources of Income sec. 42 of NIRC

- Income Taxpayersa) Individualsb) Corporationc) Estates and Trusts –-Individuals are classified• Resident Citizens sec. 23 (A), sec

24 (A) (a)• Non-Resident Citizens sec 23 (B),

24 (A) (b) 22 (E)• Overseas Contract Workers Sec.

23 (C), 24 (A) (b)• Resident Aliens Rev. Reg. sec 5,

23 (D), 24 (A) (c)• Non-Resident Aliens Engaged in

trade or business sections 25 (A)(1)

• Non-Resident Aliens Not Engagedin trade or business sec. 25 (B)

• Aliens Employed in Multi-National Corporations sec. 25 (C)and Rev. Reg. 12-2001

• Aliens Employed in OffshoreBanking Units sec 25 (D)

• Aliens Employed in petroleumService Contractors &Subcontractors sec. 25 (E)

-Corporate Income Taxpayers• Domestic Corporations sec. 23 (E),

and sec 27 of NIRC• Resident Foreign Corporations sec. 22

(H) and (28)A• Non-Resident Foreign Corporations

sec. 22 (1) and 28 (B)-Estates and Trusts sec. 60-66 of NIRC

Different Kinds of Income Tax1. Net Income Tax secs. 24 (A), 25

(A) (1), 26, 27 (A) (B) (C), 28 (A) upto 3rd par. 31 and 32 (A)

2. Gross Income Tax secs. 25 (B) firstpart and 28 (B) (1)

3. Final Income Taxes sec. 57 (A)4. Minimum Corporate Income Tax

of 2% of the Gross Income secs.27 (E), 28 (A) (2)

5. Improperly Accumulated EarningsTax of 10% of its taxable incomesec. 29 NIRC Rev. Reg. 2-2001





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• Optional Corporate Income Tax of 15% of its gross income sections27 (A) 4th to 10th par. And 28 A(1)but only up to the 4th paragraph

-Proceed to section 42 and 23 of theNIRC

• NDC vs. Comm 151 SCRA 472• Comm. Vs. IAC 127 SCRA 9-Then go to sec. 39 of NIRC• Calazans vs. Comm. 144 SCRA

664 RR 7-2003-Then proceed to sec. 24 (A), 25 (A)(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),28 (A) (6) and sec 51 (D)-Then continue to sec 24 B 1, 25B,C,D,E; 27 (D) (1)-Then go to se. 24 (B) (2) sec. 73• Comm. Vs. Manning 66 SCRA 14• Anscor vs. Comm. 301 SCRA 152

-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4);28 (A) (7) (D); 32 B (7) (a)

- Then you go to sec. 24 C, 25A (3); 25 B,C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5)(C) RA 7717 sec. 127 NIRC

- Then you go to sec. 24 D (1); 25 (A) (3);25 (B) last par. 27 (D) (5)

• China Bank vs. Court of Appeals 336SCRA ___; RR 7-2003

-Upon reading sec. 24 (D) (2) read RR 13-1999

-Upon reading sec. 27 (A) go to sec. 22 (B)• Batangas vs. Collector 102 Phil. 822• Evangelista vs. Collector 102 Phil 140• Reyes vs. Comm. 24 SCRA 198• Ona vs. Bautista 45 SCRA 74• Obillos vs. Comm 139 SCRA 436• Pascua vs. Comm. 166 SCRA 560• Afisco vs. Comm. 302 SCRA 1

-Upon reading sec. 27 (C) of NIRC see RA9337 then go to sec. 32 (B) (7) (b) of NIRC,sec. 133 par (o) of LGC, sec. 154 of the LGC.•Pagcor vs. Basco 197 SCRA 52•Mactan vs. Cebu 261 SCRA 667•LRT vs. City of Manila 342 SCRA 692

-Proceed to sections 27 (D) (1), 27 (D) (2),27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B)(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5)(b)• Marubeni vs. CIR 177 SCRA 500• Proctor & Gamble vs. Comm 160 SCRA

560

• Same case Proctor and Gamble on theMotion for Reconsideration 204 SCRA377

• Wonder vs. Comm 160 SCRA 573

-Proceed to sec. 27(D) (5)then sections 27 (E) and 28 (A) (2)

-Go to sec. 28 (A) (3) read RR 15-2002-Go to sec. 28 (A) (4) see RA 9337-Then see sec 28 (A) (5) see Marubeni vs.Comm 177 SCRA 500-Proceed to sec. 28(B) (5) (a) and sec 32 (B)(7) (a)

• Read Mitsubishi vs. Comm 181 SCRA214

-Then go to sec. 29 and Rev. Reg. 2-2001-Upon reading sec. 32 (B) 1 and 2, read sec.85 par (e), sec. 108A and sec. 123 of theNIRC-Proceed to sec. 33 read Rev. Reg. 3-98

-then go to sec. 34 (A) (1) (a) see Aguinaldovs. Comm. 112 SCRA 136, RR 10-2002-Under Sec. 34 (B) read RR 13-2000-Upon reading sec. 49 read Banas vs. CA325 SCRA 259 and Filipina vs. Comm. 316SCRA 480-Upon reading sec. 60-66, read Ona vs.Bautista 45 SCRA 74

III. Estate Tax-Sections 84-97 see sec. 104-Upon reading sec. 85 (B) read Vidalde Roces vs. Posadas 58 Phil. 108

Dizon vs. Posadas 57 Phil 465-Sec. 85 (G) compare with sec. 100-sec. 85 (H) compare with sec. 86 (C)-Upon reading sec. 86 see RR 2-2003-Upon reading sec. 94 see Marcos vs.Sandiganbayan 273 SCRA 47

IV. Donors Tax Law- Sections 98-104- G and Cumulative methods of filing

donor’s tax returns sections 99 (A), 103(A) (1) and RR 2-2003

- Sections 100 and 85 (9)

V. Value Added Tax- Sections 105-115-Read RA 9337-Read ABAKADA vs Comm.GR 168056, Sept. 1, 2005

VI. Remedies Under the Internal RevenueCode

-Sections 202-229





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-RR 12-99• Phoenix vs Comm 14 SCRA 52• Basilan vs. Comm. 21 SCRA 17• Yabut vs. Flojo 115 SCRA 278• Union Shipping vs. Comm 185 SCRA

547• Comm. vs. TMX 205 SCRA 184• Comm. vs. Philamlife 244 SCRA• Comm. vs. CA & BPI 301 SCRA 435• BPI vs. Comm. 363 SCRA 840-Prescription sections 203 and 222 of NIRC, sec. 194 of the LGC, sec. 270 of the LGC, sec. 1603 of Tariff andCustoms Code-Protest sec. 228 of NIRC and RR 12-99sec. 195 of LGC, 252 LGC, sec. 2313 of Tariff & Customs Code and RA 7651

VII. Local Taxation- Sections 128-196 of LGC

-Proceed 1st to sec. 186 read Bulacanvs. CA 299 SCRA 442

-Then proceed to 187-Then to 151-128-Under sec. 133 (e) read Palma vs.

Malangas 413 SCRA 572-Under 133 (h) read Pililia vs. Petron

198 SCRA 82-Under 133 (i) read First Holdings Co.

vs. batangas City 300 SCRA 661-Under 133 (l) read Butuan vs. LTO

322 SCRA 805

-Under 137 read sec. 193 of LGC• Misamis vs. Cagayan de Oro 181

SCRA 38• Reyes vs. San Pablo City 305

SCRA 353• Meralco vs. Laguna 306 SCRA

750• PLDT vs. Davao City 363 SCRA

522

- Co-relate sec. 139 and 147 of LGC- Under sec. 140 of the LGC see sec.125 of the Internal Revenue Code- Under sec. 150 of the LGC read thefollowing:

• Phil. Match vs. Cebu 81 SCRA 99• Allied Thread vs. Manila 133

SCRA 338• Sipocat vs. Shell 105 Phil. 1263• Iloilo Bottles vs. Iloilo City 164

SCRA 607

VIII. Real Property Tax

- Sections 197-294- Sec. 235• LRT vs. Manila 342 SCRA 692• Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code- Special Customs Duty sec. 301-304 of

TCC- Regukar Customs Duty sec. 104 of TCC- RA 7631

X. Court of Tax Appeals- RA 1125 as amended by RA 9282





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Rules in the Classroom:1. do not be absent

if you are absent, you have totranscribe what happened in class whenyou were out. The next meeting you attend class,consider yourself a resident of balic-balic,

babalikbalikan ka sa recit. Exception: if you get married.

2. read the assignment. Wag zapote angaral.3. holiday – make up class probably on aSunday4. allowed to glance at your notes, wag langpahalata/garapal5. materials:

codal commentaries (any author will do) magic notes (Sababan Lecture and

Q&A)

Book stand

Coverage of Taxation Law Review:1. Basic Principles including ConstitutionalProvisions2. Income Tax3. Estate Tax4. Donor’s Tax5. Remedies6. Local Tax7. Real Property Tax8. Tariff and Customs Code9. Court of Tax Appeals

10. VAT (although not part of the coverage of the Bar Exams, questions have been askedsince 1999)

Title 5,6 and 7 are always included in thecoverage

No computations in the bar There are only 1 or 2 questions in the Bar

about Basic Principles What are the favorite topics in the Bar?→ 12 questions on Income Tax→ 8-10 questions on remedies→ 8-10 questions allocated to the 7 topics

BASIC PRINCIPLES:

► Taxation is an inherent power of the

State.

Q: What do you mean by INHERENT?A: The power to tax is not provided for inthe law, statute or constitution; it depends onthe existence of the state. No law or

legislation for the exercise of the power totax by the national government.

Q: Do local governments exercise thisinherent power?A: No. Only the National Governmentexercises the inherent power to impose

taxes.

Q: The taxing power of local governments isa DELAGATED power. Delegated by whom?A: Delegated by Congress through law incase of autonomous regions, and delegatedby the constitution in case of LGUs notconsidered an autonomous region.

► Cities, provinces and municipalities →power granted under Art. X Sec. 5&6 of theConstitution

► Autonomous Regions → power conferredby Congress through law. Art. X Sec. 20 #2of the Constitution is a non-self-executingprovision. Thus the power is granted byCongress because said provision requires anenabling law.

► Article X, Section 5 is self-executing thus

the power is granted by the constitution.

CONSTITUTIONAL LIMITATIONS

Due Process Clause

Q: why is it a limitation to the power to tax?A: The due process clause as a limitation tothe power to tax refers both to substantiveand procedural due process. Substantive dueprocess requires that a tax statute must bewithin the constitutional authority of Congress to pass and that it be reasonable,fair and just.

Procedural due process, on the otherhand, requires notice and hearing or at leastthe opportunity to be heard.

Ex: On Substantive Due Process- when the

Congress passes a law exempting the 13th

month pay from tax but with the concurrenceonly of the majority of the quorum – lawwould be invalid because the Constitutionprovides that any grant of tax exemptionshall be passed with the concurrence of themajority of all the members of the Congress.

Q: Does it follow that the adverse party mustalways be notified?





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A: No. As a rule, notice and hearing or theopportunity to be heard is necessary onlywhen expressly required by law. Where thereis no such requirement, notice and theopportunity to be heard are dispensable.

Ex. Before Oct. 1, 1995, you can secure aTRO without notifying the adverse party. If

you are a suspect in a criminal case, you havethe right to have an opportunity to be heard(if there is a law).

Before July 1, 1998, no notice need begiven to a party declared in default. After theamendment, the party declared in default hasto be notified of subsequent proceedingsalbeit without the right to participate therein.

In the case of a search warrant, theperson to be searched was not notified. Theperson searched cannot claim that there wasa violation of due process because there is nolaw requiring that the person to be searched

should be notified.Regarding delinquent tax payers,

before levy, there must be notice.

REASON:No provision of law requires notice to the

adverse party. If the adverse party is notified,he may abscond. Thus, in adversarialproceedings, in connection with proceduraldue process, the adverse party need not benotified all the time.

Equal Protection Clause

► As a rule, taxpayers of the same footing

are treated alike, both as to privilegesconferred and liabilities imposed. Differencein treatment is allowed only when based onsubstantial distinction. Difference intreatment not based on substantialdistinction is frowned upon as “classlegislation.” This is violated when taxpayersbelonging to the same classification aretreated differently form one another; andtaxpayers belonging different classificationsare treated alike.

Requirements of Reasonable Classification:1) There must be substantial distinctions

that make a real difference.2) It must be germane or relevant to the

purpose of the law.3) The distinction or classification must

apply not only to the present but alsoto future situations.

4) The distinction must apply topersons, things and transactionsbelonging to the same class.

Ex: In one case, a tax ordinance wasassailed on the ground that the ordinancefailed to distinguish a worker form casual,

permanent or temporary. The SC said thatthe ordinance was invalid because of thefailure to state the said classification.

In PEOPLE v. CAYAT the Supreme Courtmandated the requisites for a validclassification.

TIU v. COURT OF APPEALS (301 SCRA 278) Q: what happened in the city of Olonggapo?A: The Congress, with the approval of the

President, passed RA 7227, an actcreating the conversion of the military

bases into other productive uses.Q: Who was the President at that time?A: President RamosQ: What were signed?A: RA 7227, EO 97 and EO 97-A

→ The first led to the creation of the

Subic Special Economic Zone (SSEZ). Thelatter set the limitations and boundariesof the application of the incentives (notaxes, local and national, shall beimposed within SSEZ. In lieu thereof, 3%of the Gross Income shall be remitted tothe national gov’t) to those operating

their businesses within the said area.Q: Who are the petitioners and what was

their contention?A: The petitioners are Filipino businessmen

who are operating their business outsidethe secured area. The petitionerscontended that the law in question wasviolative of their right to equal protectionof laws since they are also Filipinobusinessmen.

H: The Supreme Court ruled that therewas no violation since the classificationwas based on a substantial distinction.

The element invoked here is element#1 that there must be substantialdistinction in the classification of taxpayers on whom the tax will beimposed.

The Court observed that those foreignbusinessmen operating within thesecured area have to give a larger capitalto operate in the secured area (to spur





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economic growth and guaranteeemployment).

ORMOC SUGAR CENTRAL vs. CIR Q: What did the municipality of Ormoc do?A: The City Council of Ormoc passed a

Municipal Ordinance No.4 imposing upon

any and all centrifugal sugar milled at theOrmoc Sugar Central a municipal tax onthe net sale of the same to the UnitedStates and other foreign countries.

Q: Did the owner accept this imposition?A: No. the tax due was paid under protest,

then filed a complaint against the City of Ormoc.

H: The Supreme Court said there was aviolation of the equal protection clause.The element invoked here was element#3, that it must be applicable to bothpresent and future circumstances. The

Supreme Court said that one must go tothe provision itself, in the case at bar,there was a violation of element #3because the law was worded in such away that it only applies to Ormoc SugarCentral alone and to the exclusion of allother sugar centrals to be established inthe future.

TAKE NOTE: People vs. Cayat

Freedom of Religion

It Involves 3 Things:

1. freedom to choose religion2. freedom to exercise one’s religion3. prohibition upon the national

government to establish a national religion

Q: Which one limits the power to tax?A: Prohibition upon the national governmentto establish a national religion because thiswill require a special appropriation of moneycoming from the national treasury which isfunded by the taxes paid by the people.

Non-impairment Clause

Q: What are the sources of obligation in theCivil Code?A: Law, Contracts, Quasi-Contracts, Delict,Quasi-Delict.

Q: What is the obligation contemplated inthis limitation?A: Those obligations arising from contracts.

General Rule: The power to tax is pursuantto law, therefore, the obligation to pay taxesis imposed by law, thus the non-impairmentclause does not apply.

► You have to determine first the source of

obligation:

1. If the law merely provides for thefulfillment of the obligation then the law isnot the source of the obligation.

2. When the law merely recognizes oracknowledges the existence of an obligationcreated by an act which may constitute acontract, quasi-contract, delict, and quasi-delict, and its only purpose is to regulatesuch obligation, then the act itself is thesource of the obligation, not the law.

When the law establishes the obligationand also provides for its fulfillment, then thelaw itself is the source of the obligation

Q: So, in what instance does the non-impairment of contracts clause becomes alimitation to the power to tax?A: it is when the taxpayer enters into acompromise agreement with the government.In this instance, the obligation to pay the taxis now based on the contract between thetaxpayer and the government pursuant totheir compromise agreement.

Take Note: the requirement for itsapplication: the parties are the government

and private individual.

Poll Tax

Q: What is a poll tax?A: It is a tax of a fixed amount on individualsresiding within a particular territory, whethercitizens or not, without regard to theirproperty or to the occupation in which theymay be engaged.

It is a tax imposed on persons withoutany qualifications. persons may be allowed topay even if they are not qualified as to age or

property ownership.

Example of Poll Tax: Community TaxCertificate under Section 162 of the LocalGovernment Code.

Q: Why is it a limitation to the power to tax?A: It is a limitation to the power to taxbecause Congress is prohibited from passinga law penalizing with imprisonment a person





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who does not pay poll tax. (funds for sendinga person to jail is taken from the nationaltreasury which is funded by the taxes paid bythe people)

Exemption from payment of Real EstateTax

Q: What is the requirement for exemptionfrom payment of real property tax under the1935, 1973 and 1987 Constitution?A: Art. 6, Sec 22 (3), 1935 Constitution –Cemeteries, churches and parsonages orconvents appurtenant thereto, and all lands,buildings and improvements usedEXCLUSIVELY for RELIGIOUS, CHARITABLE orEDUCATIONAL purposes shall be exempt fortaxation.

Art. 8, Sec. 17 (3), 1973 Constitution –charitable institutions, churches, parsonages

or convents appurtenant thereto, mosque,and non-profit cemeteries, and all lands,buildings, and improvements ACTUALLY,DIRECTLY, and EXCLUSIVELY used forRELIGIOUS and CHARITABLE purposes shallbe exempt from taxation.

Art. 6, Sec. 28 (3), 1987 Constitution –charitable institutions, churches, andparsonages or convents appurtenant thereto,mosque, non-profit cemeteries, and all lands,buildings, and improvements ACTUALLY,DIRECTLY and EXCLUSIVELY used forRELIGIOUS, EDUCATIONAL and CHARITABLE

purposes shall be exempt from taxation.

HERRERA v. QC-BOARD OF ASSESSMENT (1935 Constitution)Q: What is involved in this case?A: A charitable institution, St.

Catherine’s Hospital. The hospital waspreviously exempt from taxation until itwas reclassified and subsequentlyassessed for the payment of real propertytax.

The contention of the respondent isthat the hospital was no longer a

charitable institution because it acceptspay-patients, it also operates a school formidwifery and nursing, and a dormitory.Since it is not exclusively used forcharitable purposes it is not exempt fromtaxation.

H: The Court ruled that petitioner is notliable for the payment of real estatetaxes. It is a charitable institution, thusexempt from the payment of such tax.

The hospital, schools and dormitoryare all exempt fro taxation because theyare incidental to the primary purpose of the hospital.

NOTE: this arose during the 1935Constitution.

“Exempted by virtue of incidental

purpose” was merely coined by the SupremeCourt. Thus, it does not apply to other taxesexcept Real Estate Tax.

PROVINCE OF ABRA v. HERNANDO Q: What is involved in this case?A A religious institution was involved in

this case, the Roman Catholic Bishop of Bangued, Inc. (bishop filed declaratoryrelief after assessed for payment of tax).The respondent judge granted theexemption from taxes of said churchbased only on the allegations of the

complaint without conducting ahearing/trial. The assistant prosecutorfiled a complaint contending thatpetitioner was deprived of its right to dueprocess.

SC: the Court ordered that the case beremanded to the lower court for furtherproceedings. The Court observed that thecause action arose under the 1973Constitution, not under the 1935Constitution (note the difference). Taxexemption is not presumed. It must be

strictly construed against the taxpayer andliberally construed in favor of thegovernment.

ABRA VALLEY COLLEGE INC. v. AQUINO Q: What is involved in this case?A: An educational institution is involved

in this case. The ground floor of theschool was leased to Northern MarketingCorp., a domestic corporation. The 2nd

floor thereof was used as the residence of the school director and his family.

The Province of Abra now contends

that since the school is not exclusivelyused for educational purposes, the schoolis now liable to pay real estate tax.

H: The Court held that the school isPARTIALLY liable for real estate tax.1. Residence – exempt by virtue of

incidental purpose; justified becauseit is necessary.

2. Commercial – not exempt because itis not pursuant to the primary





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purpose; not for educationalpurposes.

Q: is the doctrine in the case of Herrera thesame with this case?A: NO. in the Herrera case, the exemptionwas granted to all the real property (hospital,

school and dorm). But in this case, theSupreme Court made a qualification. TheSupreme Court said it depends.

NOTE: both cases arose under the 1935Constitution despite having been decided in1988.

Q: At present, do we still apply theexemption from tax by virtue of the Doctrineof Incidental Purpose?A: Not anymore. The cause of action in saidcase arose under the 1935 Constitution and

it does not apply to the provisions of the1987 Constitution.

PHILIPPINE LUNG CENTER v. QUEZON CITY Q: What is involved in this case?A: A charitable institution, a hospital. It

is provided in the charter of the LungCenter of the Philippines is a charitableinstitution. However, part of its buildingwas leased to private individuals and thevacant portion of its lot was rented out toElliptical Orchids. Respondent contendsthat since the hospital is not used

actually, directly, an d exclusively forcharitable purposes, it is liable to pay realestate taxes.

H: The Supreme Court held that thepetitioner is liable to pay tax for thoseparts leased to private individuals forcommercial purposes. For the part of thehospital used for charitable purposes(whether for pay or non-pay patients),petitioner is exempt from payment of realestate tax.

NOTE: petitioner contended that the profits

derived from the lease of its premises wereused for the operation of the hospital. TheCourt held that the use of the profits doesnot determine exemption, rather it is the useof the property that determines exemption.

The case of Herrera does not applybecause said case arose under the 1935Constitution and the present case aroseunder the 1987 Constitution. Therequirements for exemption are different. In

the 1935 Constitution, the property must beEXCLUSIVELY used for religious, educationalor charitable purposes. Under the 1987Constitution, the property must be usedACTUALLY, DIRECTLY, and EXCLUSIVELY forreligious, educational and charitablepurposes.

Q: Was the doctrine laid down in Abra Valleyaffirmed in the Lung Center case?A: Yes. The Supreme Court unconsciouslyapplied a doctrine laid down by the 1935Constitution. The Supreme Court reiteratedthe ruling in the Abra Valley case which aroseunder the 1935 Constitution. The SupremeCourt made a qualification, it held that itdepends on whether or not the use isincidental to the primary purpose of theinstitution.

NOTE: at present, “exemption from tax byvirtue of incidental purpose” is not applicableto all taxes including real estate tax.

COMM v. SC JOHNSON and SONS, INC.Important :

1. international double taxation2. importance of international tax treaty3. implication of most favored nation

clauseQ: What is the corporation involved in this

case?A: A domestic corporation (DC).

SC Johnson and Sons, Inc. enteredinto a license agreement with SC Johnsonand Sons U.S.A (Non-Resident ForeignCorp, NRFC) whereby the former wasallowed to use the latter’s trademark andfacilities to manufacture its products. Inreturn, the DC will pay the NRFC royaltiesas well as payment of withholding tax.

A case for refund of overpaidwithholding tax was filed. Apparently, theDC should have paid only 10% under themost favored nation clause.

H: The Supreme Court coined the term

International Double Taxation orInternational Juridical Double Taxation.

Q: What prompted the SC to coin suchterm?

A: Because a single income (tax royaltiespaid by a DC) was subjected to tax by twocountries, the Philippines income tax andthe U.S. tax.

International Juridical Double Taxationapplies only to countries where the tax





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liabilities of its nationals are imposed onincome derived from sources comingfrom within and without.

Q: Is there an instance whereinternational double taxation does notapply?

A: Yes. If it involves nationals of

countries wherein the tax liability isimposed only from income derive fromsources within and not including thosederived from sources without.(Ex: Switzerland)→ The controversy in the case at bar

involves the income tax paid in thePhilippines.

After paying 25%, the US firmdiscovered that they are entitled to 10%under the most favored nation clause.The question is: was the tax paid undersimilar circumstances with that of the RP-

West Germany Treaty?The CTA and Court of Appeals ruled

that it was paid under similarcircumstances. The phrase referred to theroyalties in payment of income tax. TheSupreme Court ruled that the lowercourts’ interpretation of the phrase waserroneous. Rather, the phrase applies tothe application of matching credit.

Q: What is matching tax credit?A: RP-Germany Treaty provides for that

20% of the tax paid in the Philippinesshall be credited to their tax due to be

paid in Germany.The 10% does not apply because there

is no matching credit. Thus, there is nosimilarity in the circumstances.

EQUITABLE RECOUPMENT AND DOCTRINEOF SET-OFF

Equitable Recoupment

This doctrine provides that a claim forrefund barred by prescription may be allowedto offset unsettled tax liabilities. This is not

allowed in this jurisdiction, because of common law origin. If allowed, both thecollecting agency and the taxpayer might betempted to delay and neglect the pursuit of their respective claims within the periodprescribed by law.

Q: What is the doctrine of EquitableRecoupment?

A: When the claim for refund is barred byprescription, the same is allowed to becredited to unsettled tax liabilities.

(Sir gives an illustration found in page 3 of magic notes)

Q: Is the rule absolute? ReasonA: Yes, the rule is absolute. The rationalebehind this is to prevent the taxpayer andgovernment official from being negligent inthe payment and collection of taxes.(furthermore, you have to be honest for thisto work, hence, the government is preventingcorruption)

There is no exception at all otherwise, theBIR would be flooded with so many claims.

Set-off

Presupposes mutual obligation betweenthe parties. In taxation, the concept of set-off arises where a taxpayer is liable to paytax but the government, for one reason oranother, is indebted to the said taxpayer.

Q: What do you mean by SET-OFF?A: This presupposes mutual obligationsbetween the parties, and that they are mutualcreditors and debtors of each other. Intaxation, the concept of taxation arises wherea taxpayer is liable to pay taxes but thegovernment, for one reason or another, is

INDEBTED to said taxpayer.

REPUBLIC v. MAMBULAO LUMBER CO.Q: What is the liability of Mambulao?A: They are liable to pay forest charges

(under the old tax code).NOTE: under our present tax code, the NIRC,

we do not have forest charges as thesame was abolished by President Aquino.

Q: What did the lumber company do?A: The lumber company claimed that

since the government did not use thereforestation charges it paid for

reforestation of the denuded land coveredby its license, the amount paid should bereimbursed to them or at leastcompensated or applied to their liabilityto pay forest charges.

H: The Court ruled that the reforestationcharges paid is in the nature of taxes.

The principle of compensation doesnot apply in this case because the partiesare not mutually creditors and debtors of





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each other. A claim for taxes is not adebt, demand, contract or judgment as isallowed to be set-off under the statute of set-off which is construed uniformly, inthe light of public policy, to exclude theremedy in connection or anyindebtedness of the State or any

municipality to one who is liable fortaxes. Neither are they a proper subjectfor recoupment since they do not ariseout of contract or the same transactionsued on.

General Rule: no set-off is admissible againstdemands for taxes levied in general or localgovernmental purposes.

Reason: Taxes are not in the nature of contracts or debts between the taxpayer andthe government, but arises out of a duty to,

and are positive acts of the government tothe making and enforcing of which, theconsent of the individual is not required.Taxes cannot be the subject matter of compensation.

DOMINGO v. GARLITOS Q: What is being collected in this case?A: Estate and inheritance taxes.NOTE: we do not have inheritance taxes

anymore because the same was abolishedby Lolo Macoy.

Q: Who is the administratrix?

A: The surviving spouse.Q: What did the surviving spouse do?A: The surviving spouse suggested that

the compensation to which the decedentwas entitled to as an employee of theBureau of Lands be set-off from the estateand inheritance taxes imposed upon theestate of the deceased.

H: Both the claim of the government forestate and inheritance taxes and theclaim of the (intestate) for the servicesrendered have already become overduehence demandable as well as fully

liquidated, compensation therefore takesplace by operation of law, in accordancewith Art. 1279 and 1290 of the Civil Codeand both debts are extinguished to theconcurrent amount.

Compelling Reason: Congress hasenacted RA 2700, allocating a certain sumof money to the estate of the deceased.

FRANCIA v. IAC Q: This happened in what city?A: Pasay CityQ: What is the tax being collected? Who is

collecting the same?A: Payment for real estate taxes for the

property of Francia. It appears that

petitioner was delinquent in the paymentof his real estate tax liability. The same isbeing collected by the Treasurer of Pasay.

Q: What is the suggestion of petitioner?A: Suggested that the just compensation

for the payment of his expropriatedproperty be set-off from his unpaid realestate taxes. (the other part of hisproperty was sold at a public auction)

H: The factual milieu of the case doesnot justify legal compensation.

The Court has consistently ruled thatthere can be no off-setting of taxes

against the claims that the taxpayer mayhave against the government. A taxpayercannot refuse to pay a tax on the groundthat the government owes him anamount.

Internal Revenue taxes cannot be thesubject of compensation because thegovernment and the taxpayer are notmutually creditors and debtors of eachother, and a claim for taxes is not a debt,demand, contract or judgment as isallowed to be compensated or set-off.

Furthermore, the payment of just

compensation was already deposited withPNB Pasay, and the taxes were collectedby a local government, the property wasexpropriated by the national government.(diff parties, not mutual creditors anddebtors of each other.)

CALTEX PHIL v. COAQ: What is being collected?A: Caltex’s contribution to the Oil Price

Stabilization Fund (OPSF).COA sent a letter to Caltex asking the

latter to settle its unremitted collection

stating that until the same is paid, itsclaim for reimbursement from the OPSFwill be held in abeyance.

Q: Why is Caltex entitled to reimbursement?A: Because of the fluctuation of the oil

prices in the Middle East and Europe.Caltex wanted to off-set its unremittedcollection from its reimbursements.

H: The Court did not allow the set-off,and reiterated its ruling in the case of





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Mambulao and Francia. Furthermore, RA6952 expressly prohibits set-off from thecollection of contributions to the OPSF.The Court likewise stated that Caltexmerely acted as agent of the governmentin collecting contributions for the OPSFbecause such is being shouldered by the

consumers when they purchasepetroleum products of oil companies,such as Caltex.

Taxation is no longer envisioned as ameasure merely to raise revenues tosupport the existence of the government.Taxes may be levied for regulatorypurposes such as to provide means forthe rehabilitation and stabilization of athreatened industry which is vested withpublic interest, a concern which is withinthe police power of the State to address.

PHILEX MINING CORP v. COMM The petitioner is liable for the payment of

excise taxes, which it wanted to be set-off from its pending claim for a VAT Inputcredit/refund.

The Court did not allow set-off. Taxescannot be the subject of compensation forthe simple reason that the government andtaxpayer are not mutual creditors anddebtors of each other. Taxes are not debts.

Furthermore, in the instant case, theclaim for VAT refund is still pending. Thecollection of a tax cannot await the results of

a lawsuit against the government.

DOUBLE TAXATION

Double taxation is allowed because thereis no prohibition in the Constitution orstatute.

Obnoxious double taxation is thesynonym of double taxation.

Elements of Double Taxation:1) Levied by the same taxing authority

2) For the same subject matter3) For the same taxing period and4) For the same purpose

There is no double taxation if the tax islevied by the LGU and another by the nationalgovernment. The two (2) are different taxingauthorities.

LGUs are expressly prohibited by theprovisions of RA 7160 or the LGC of 1991from levying tax upon: (1) the NationalGovernment; (2) its agencies andinstrumentalities; (3) LGUs (sec.113(o)).

The National Government, pursuant tothe provisions of RA 8424 of the Tax Reform

Act of 1997, can levy tax upon GOCCs,agencies and instrumentalities (Section 27c)), although income received by theGovernment form:

1) any public utility or2) the exercise of any essential

governmental functionis exempt from tax.

KINDS OF INCOME TAXPAYERS

Q: Generally, how many kinds of incometaxpayers are there?

A: Under section 22A of NIRC, there arethree (3), namely:

1. individual;2. corporate;3. estate and trust.

I. INDIVIDUAL TAXPAYER

Q: How many kinds of individual taxpayersare there?A: There are seven (7). Namely:

1. Resident Citizen (§23A and 24A);2. Nonresident Citizen (§23B and 24A);

3. OCW and Seaman (§23C and 24A);4. Resident Alien (§22F, 23D and 24A);5. Nonresident Alien Engaged in Trade

or Business (§22G, 23D and 25A)6. Nonresident Alien NOT Engaged in

Trade or Business (§22G, 23D and25B)

7. Aliens Engaged in MultinationalCompanies, Offshore Banking Units,Petroleum Service Contractors(§25C,D and E)

Resident Citizen (RC)

Q: How many types of RC?A: There are two (2), namely:

1. RC residing in the Philippines; and2. Filipino living abroad with no

intention to reside permanentlytherein.





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Q: If you are abroad, and you have theintention to permanently reside therein, canyou still be considered a RC?A: Yes. If such intention to permanentlyreside therein was not manifested to theCommissioner and the fact of your physicalpresence therein, you may still be considered

a RC.

OCW and Seamen

OCW was used and not OFW in the CTRP,because the classification shall cover onlythose Filipino citizens working abroad with acontract. TNTs are not covered.

A Filipino seaman is deemed to be anOCW for purposes of taxation if he receivescompensation for services rendered abroadas a member of the complement of a vessel

engaged exclusively in international trade.Consequently, if he is not a member of

the complement or even if he is but thevessel where he works is not exclusivelyengaged in international trade, said seamanis not deemed to be an OCW. He is either aRC or a NRC depending on where he staysmost of the time during the taxable year.

If he stays in the Philippines most of thetime during the taxable year, he isconsidered a RC, otherwise, a NCR.

If you are a seaman in the US Navy, you

are not the one being referred to.

The importance of ascertaining whetheror not a seaman is a RC or a NRC, is that if heis a RCm he is taxable on ALL income derivedfrom all sources within and without. If he is aNRC, he is taxable only on income derivedform sources within the Philippines.

Q: What is the significance of using OCW?A: It only covers Filipinos who works abroadwith a contract. It does not cover TNTs.

Q: What is the status of a TNT?A: Since they are not covered by thisclassification, they are considered RCbecause they work abroad without a contractand they have not manifested their intentionto permanently reside abroad. (distinguishfrom an immigrant)

Requirements for a seaman to be consideredan OCW:1. must be a member of the compliment of

a vessel;2. the vessel must be exclusively engaged in

international trade or commerce.

Resident Alien (RA)

An individual whose residence is withinthe Philippines and who is not a citizenthereof.

Intention to reside permanently in thePhilippines is not a requirement on the partof the alien.

The requirement under RR#2 is that he isactually present in the Philippines, neither asojourner, a traveler, not a tourist.

Whether he’s a transient or not isdetermined by his intent as to the nature andlength of his stay.

Q: Is the intention to permanently reside inthe Philippines necessary?A: No, so long as he is not a sojourner,tourist or a traveler.

Non-Resident Alien Engaged in Trade or Business (NRAETB)

A foreigner not residing in the Philippines

but who is engaged in trade or business here.

RR 2-98 has expanded the coverage of the term, “engaged in trade or business” toinclude the exercise of a profession.Furthermore, by the express provision of thelaw, a NRA who is neither a businessman nora professional but who come to and stays inthe Philippines for an aggregate period of more than 180 days during any calendar yearis deemed to a NRAETB in the Philippines.

Q: How many types?

A: There are three (3) types, namely:1. NRA engaged in trade or business

(25a1);2. NRA who practices a profession

(Revenue Regulation 2-98);3. foreigner who comes and stays in the

Philippines for an aggregate period of MORE THAN 180 days during anycalendar year.





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Q: What is the status of a Chinese who stayshere for 200 days in 2001?A: NRAETB

Q: Suppose he stayed here for 100 days in2000 and another 100 days in 2001?A: He is not a NRAETB. To be considered as

such, he must stay for an aggregate period of more than 180 days during a calendar year.

Q: What is the income tax applicable to saidtaxpayer?A: Net Income Tax (NIT) on all its incomederived form sources within the Philippines.

Non-Resident Alien Not Engaged inTrade or Business

Q: How many kinds?A: Only one.

The reason why the NRANETB areincluded in any income tax law is becausethey may be deriving income form sourceswithin the Philippines.

They are subject to tax based on theirGROSS INCOME received form all sourceswithin the Philippines.

Aliens Employed by Regional or Area Headquarters & Regional Operating Headquarters of Multinational Companies/ Aliens Employed by

Offshore Banking Units (Aliens Employed by MOP)

► Status: either a RA or NRA depending on

their stay here in the Philippines.

► Their status may either be RA or NRA

because Section 25 C and D does notdistinguish.

► Liable to pay 15% from Gross Income

received from their employer

► Income earned from all OTHER sourcesshall be subject to the pertinent income tax,as the case may be.

Aliens Employed in Multinational and Offshore Banking Units

Q: How are they classified?

A: If they derived income from other sourcesaside from their employer, you may classifythem either as RA, NRAETB, or NRANETB.

Aliens Employed in Petroleum ServiceContractors and Subcontractors

► Status: ALWAYS NRA. If they deriveincome from other sources, such incomeshall be subject to the pertinent income tax,as the case may be.

► Income derived or coming from their

employer shall be subject to a tax of 15% of the gross.

II. CORPORATE TAXPAYER

1. Domestic Corporation (DC) – createdor organized under Philippine laws.

2. Resident Foreign Corporation (RFC) –corporation created under foreignlaw, and engaged in trade orbusiness.

3. Nonresident Foreign Corporation(NRFC) – created under foreign law,and NOT engaged in trade orbusiness.

Q: What are deemed corporations under theNIRC?A: The term corporation shall includepartnerships, no matter how created or

organized, joint stock companies, jointaccounts, associations, or insurancecompanies, but DOES NOT includes generalprofessional partnerships and a joint ventureor consortium formed of the purpose of undertaking construction projects oroperations pursuant to or engaging inpetroleum, coal, geothermal or consortiumagreement under a service contract with theGovernment.

1. Partnerships and others no matter howcreated

2. Joint Stock Companies

3. Joint Accounts4. Associations5. Insurance Companies

CIR v. COURT OF APPEALS The phrase no “matter how created or

organized” was interpreted.





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Even if the partnership was pursuant tolaw or not, whether nonstick, nonprofit, it isstill deemed a corporation.

Reason: because of the possibility of earning profits form sources within thePhilippines.

Q: Are partnerships always consideredcorporations? Is there no exception?A: General Rule: a partnership is acorporation.

Exception: General Professional Partnerships(GPP)

Q: What is a GPP?A: It is a partnership formed by persons forthe sole purpose of exercising theirprofession, no part of the income of which inderived from any trade or business. (what if a

partner has other businesses not related tothe GPP? > read section 26 quoted hereunder)

Two (2) Kinds of GPP formed for:1) Exercise of a profession – not a

corporation; exempt from CorporateIncome Tax (CIT)

2) Exercise of a profession and engagedin trade or business – a corporation;subject to CIT

TAN v. DEL ROSARIO general rule: a partnership is a

corporationexception: GPPexception to the exception: if the GPP

derives income from other sources, it isconsidered a corporation, thus liable to paycorporate income tax.

Rule:1. if the income is derived from other

sources and such income is subject to NETINCOME TAX, it is not exempt and it isconsidered a corporation.

2. if the income is derived from other

sources and such income is subject to FINALINCOME TAX, it is still EXEMPT and it is notdeemed a corporation. ( separate return forthis. It will not reflect in the GPP’s ITR)» This is pursuant to the fact that FIT willnot reflect in the ITR of the GPP since thewithholding agent is liable for the payment of the FIT.

Q: What is the importance of knowingwhether the corporation is exempt or not?A: To determine their tax liability. This isimportant to determine the tax liability of theindividual partners of the GPP.

► Section 26 (1st paragraph) provides: “a

GPP as such shall not be subject to the NetIncome Tax…” however, “…persons engagingin business as partners in a GPP shall beliable for income tax only in their separateand individual capacities.”

In short, each partner will be paying NIT,and the distributive shares they will bereceiving from the net income of the GPP willbe included in the gross income of thepartner.

Q: If the GPP is deemed a corporation, will thepartners have to pay for the income tax?

A: No. as far as the share of the GPP isconcerned, it is considered a taxable dividendwhich is subject to FIT.

Q: Is a joint venture a corporation?A: Generally, yes, it is a corporation.

Q: Corporation X and Corporation Y joinedtogether. How many corporations do wehave?A: Three, namely Corporation X, Y, and X+Y.the joint venture has a separate and distinctpersonality from the two corporations.

Q: When is a joint venture not considered acorporation?A: It is not deemed a corporation when it isformed for the purpose of undertaking a(“construction?) project or engaging inpetroleum, gas, and other energy operationspursuant to “?” or consortium agreementunder a service contract with thegovernment.

Domestic Corporation

Is one created or organized in thePhilippines or under its laws.

Taxable on all income derived fromsources within or without the Philippines.

Resident Foreign Corporation

Foreign corporations engaged in trade orbusiness in the Philippines.





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Taxable for income derived within thePhilippines.

Non-Resident Foreign Corporation

Foreign corporations not engaged in

trade or business in the Philippines.

Taxable for income derived within thePhilippines.

Both DC and RFC are liable for thepayment of the following:

1) NIT – Net Income Tax2) FIT – Final Income Tax3) 10% income tax on corporations with

properly accumulated earnings.4) MCIT (Minimum Corporate Income

Tax) of 2% of the Gross Income

5) Optional Corporate Income Tax of 15% of the Gross Income

A NRFC is liable for payment of the ff:1) GIT- Gross Income Tax2) FIT – Final Income Tax

III. TRUST AND ESTATE

Q: How many for each?A: Seven (7) kinds for each because the trustor estate will be determined by the status of the trustor, grantor, or creator, or of the

decedent.

The status of the estate is determined bythe status of the decedent at the time of hisdeath; so an estate, as an income taxpayercan be a citizen or an alien.

When a person who owns property dies,the following taxes are payable under theprovision of income tax law:

1) Income Tax for Individuals – to coverthe period beginning January tothe time of death.

2) Estate Income Tax – if the property istransferred to the heirs.

3) If no partition is made, Individual orCorporate Income Tax, dependingon whether there is or there is nosettlement of the estate. If thereis, depending on whether thesettlement is judicial orextrajudicial.

Judicial Settlement

1) During the pendency of thesettlement, the estate through theexecutor, administrator, or heirs isliable for the payment of ESTATEINCOME TAX (Sex, 60 (3)).

2) If upon the termination of the judicialsettlement, when the decision of thecourt shall have become final andexecutory, the heirs still do not dividethe property, the followingpossibilities may arise:a) If the heirs contribute to the

estate money, property or industrywith the intention to divide theprofits between and amongthemselves, an UNREGISTEREDPARTNERSHIP is created and theestate becomes liable for payment

of CIT (Evangelista vs. Collector(102 Phil 140))

b) If the heirs without contributingmoney, property or industry toimprove the estate, simply dividethe fruits thereof between andamong themselves, a CO-OWNERSHIP is created andIndividual Income Tax (IIC) isimposed on the income derived byeach of the heirs, payable in theirseparate and individual capacity(Pascual vs. COMM (165 scra 560)

and Obillos vs. COMM (139 SCRA436))

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The incometax liability depends on whether or not theunregistered partnership or co-ownership iscreated.

Trust

Trusts can be created by will, by contract

or by agreement. The status of a trustdepends upon the status of the grantor ortrustor or creator of the trust. Hence, a trustcan also be a citizen or an alien.

Q: Where the trust earns income and suchincome is not passive, who among the partiesmentioned is liable for payment of incometax thereon?





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A: The TRUST itself, through the trustee orfiduciary but only if the trust is irrevocable.

If it is revocable, or for the benefit of thegrantor, the liability for the payment of income tax devolves upon the trustor himself in his capacity as individual taxpayer.

KINDS OF INCOME TAX

Q: How many kinds of income tax?A: There are Six (6), namely:

1. Net Income Tax (NIT);2. Gross Income Tax (GIT);3. Final Income Tax (FIT);4. Minimum Corporate Income Tax of

2% of the Gross Income (MCIT)5. Income Tax on Improperly

Accumulated Earnings subject to 10%of the Taxable Income;

6. Optional Corporate Income Tax of 15% on the Gross Income

I. NET INCOME TAX

Q: what is the formula?A: Gross Income – Deductions and PersonalExemptions = Taxable Income

Taxable Income x Tax Rate = NetIncome

Taxable Net Income – Tax Credit =

Taxable Net Income Due

Net Income means Gross Income lessdeductions and

Formula:GI- deductionsNet Incomex Tax RateIncome Tax Due

Q: What is the rate?A: Individual: 32%

Corporation: 35%

NOTE: the formula allows for deduction,personal exemptions and tax credit.

Q: What are the other terms for NIT?A: NIRC:

a. taxable incomeb. gross income (wlang kasunod)

→ only income tax from improperly

accumulated earnings does not use this term.

1. CFA: “to be included in the grossincome”

2. Revenue Regulations and Statutes:a. ordinary way of paying income

tax;b. normal way of paying income tax .

Characteristics:

Q: Who are not liable to pay NIT?A: 1. NRANETB (liable for GIT);

2. NRFC (GIT also);3. With certain modifications, AEMOP, if

they derive income from othersources;

Q: Is the taxable net income subject to

withholding tax?A: It is subject to withholding tax if the lawsays so.

Q: What if the law is silent?A: If the law is silent, it is not subject towithholding tax.

Q: What is another term for withholding tax?A: It is also known as the creditablewithholding tax system under the income taxlaw.

Q: Do we have to determine if there is anactual gain or loss?A: Yes because the formula for deductions,etc.

Q: If you fail to pay, will you be held liable?A: Yes, you will be held liable.

II. GROSS INCOME TAX (GIT)

Q: What is the formula?A: Gross Income x Rate

Q: How many taxpayers pay by way of thegross?A: There are two (2)

individual - NRANETBcorporation - NRFC

NOTE: the formula does not allow anydeduction, personal exemptions and taxcredit.





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Characteristics:

► NRANETB and NRFC, though not engaged

in trade or business, are liable to pay by wayof the gross for any income derived in thePhilippines. While not engaged in trade orbusiness, there is a possibility that they may

earn income in the Philippines.

Q: Is this subject to withholding tax?A: Yes, it is subject to withholding taxbecause the persons liable are foreigners.This rule is ABSOLUTE

NOTE: there are two (2) ways of paying taxesdepending on which side of the bench youare.

III. FINAL INCOME TAX (FIT)

Q: What is the formula?A: (Each Income) x (Particular Rate)

Unlike in the gross income tax where youadd all the income from all the sources andmultiply the sum thereof by the rate of 25%or 35%, as the case may be, in final incometax, you cannot join all the income in onegroup because each income has a particularrate.

Q: What is the rate?A: 35% as the case may be.

NOTE: like GIT, the formula does not allowdeductions, personal exemptions, and taxcredit.

Characteristics:

Q: Who are liable to pay FIT?A: All taxpayers are liable to pay FITprovided the requisites for its application arepresent.

Q: Do you still have to pay NIT?

A: No. if you are liable for FIT, no need topay NIT or else there will be double taxation.

NOTE: as time passed by, the number of FITincreased.

► before 1979 – proceeds from the sale of

real property not exempt, it is subject to NITor GIT, as the case may be.

after 1979 – capital gains tax. Proceedsfrom the sale of real property is exempt.

Q: If you fail to pay, will you be liable?A: No. the withholding agent is liable to payFIT.

► Case of Juday, Richard and Regine

► For one to be liable for the payment of

NIT, the income must be derived on the basisof an employer – employee relationship.

Employer – Employee Relationship(3 Cs):1. contract;2. control;3. compensation;

► However, in the case of celebrities, there

is no employer – employee relationship, theyare merely receiving royalties. Royalties aresubject to final withholding tax, thus theagent is liable to pay. (so, distinguish natureof income, whether royalty or compensation)

RULE:1. for NIT, whether or not subject to

Creditable Withholding Tax (CWT), thetaxpayer is always liable if he fails topay.

2. for GIT and FIT, absolute liability topay is upon the withholding agent.

Q: Why is it that the rate of withholding isalways lower, and why is it that the rate of GIT and FIT is always equal?A:

1. NIT allows deductions;2. GIT and FIT do not allow deductions.

Q: Do you have to determine whether thereis an actual loss or gain?A: No need to determine because theformula does not allow deductions. Gain ispresumed. No liability for final withholding

tax except for the sale of shares of stock. (?)

IV. MINIMUM CORPORATE INCOME TAX(MCIT)

Q : What is the formula?A: Gross Income x 2%

Q : Who pays this tax?A: DC and RFC only.





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Q: May it be applied simultaneous with NIT?A: No. there must be a computation of theNIT first then apply which ever is higher. TheMCIT is paid in lieu of the NIT.

Reason: to discourage corporations from

claiming too many deductions.

V. OPTIONAL CORPORATE INCOME TAX

Q: Under what section is this found?A: Section 27A 4th paragraph and Section 28A(1) 4th paragraph.

Q: Is this applicable now?A: No. this is not yet implemented.

Q: To what kind of taxpayer does this apply?A: To DC and RFC.

Q: What kind of taxes are applicable orimposed upon the 1st five individualtaxpayers?A: Only two (2) kinds are applicable out of the six (6) kinds of income taxes.

1. NIT;2. FIT;

Q: What kind of income tax will apply toAEMOP?A: Generally, only one kind, 15% FIT withrespect to income derived from their

employer.

Income from other sources:1. Determine the status of the AEMOP;

a. NITb. FIT

2. NRANETBa. GITb. FIT

Q: What kind of income tax applies to DC?A: Only four (4) kinds will apply out of thesix (6)

1. NIT2. FIT3. MCIT4. Improperly Accumulated Earnings

Q: May all of these be appliedsimultaneously?A: No. only the NIT, FIT and ImproperlyAccumulated Earnings be appliedsimultaneously. NIT and MCIT cannot be

applied simultaneously. Only one will apply,whichever is higher between the two.

Q: What kind of tax will apply to NRFC?

A: Out of the six (6) kinds, only two (2) willapply:

1. GIT2. FIT

Q: What is the significance of knowing theclassification of these taxpayers?A:

1. to determine the kind of income taxapplicable to them;

2. to determine their tax liability.

Q: Under Section 23, who are liable forincome within and income without?A: Only

1. RC2. DC

► The rest of the taxpayers will be liable for

income coming from sources within.

► Income from sources without, no liability,

therefore exempt.

NOTE: The income taxpayer is not a RC or aDC. Determine if the income came fromsources within or without to know thetaxpayer’s liability.

► If the facts are specific, do not qualify

your answer. Answers must be responsive tothe question.

Q: Is section 42 relevant to all the taxpayers?A: NO. SECTION 42 IS NOT MATERIAL TOALL taxpayers, particularly the RC and DCbecause these two are liable for both incomewithin and without.

► Section 42 is applicable only to taxpayers

who are liable for income within, the rest of

the taxpayers are otherwise exempt.

Q: Section 42(A)(1) provides for how manykinds of interests?A: It establishes two (2) kinds of interests,namely:

1. interest derived from sources withinthe Philippines.





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2. interest on bonds, notes or otherinterest bearing obligations of residents, corporate or otherwise.

Q: What is the determining factor in order toknow if the income is from within?

A:1. location if the bank is from within the

Philippines (pursuant to a RevenueReg.)

2. residence of the obligor (whether anindividual or a corp.) – contract of loan with respect to the interestearned thereon.

► For example the borrower is a NRAETB,

he borrowed money from a RA. The interestearned by the loan will be considered as anincome without. RA is not liable to pay tax

since RA is liable only for income within,therefore exempt from paying the tax.

NATIONAL DEVELOPMENT CO. v. CIR F: The National Development Company

(NDC) entered into a contract with several Japanese shipbuilding companies for theconstruction of 12 ocean-going vessels.The contract was made and executed inTokyo.

The payments were initially in cashand irrevocable letters of credit.Subsequently, four promissory notes were

signed by NDC guaranteed by theGovernment.

Later on, since no tax was withheldfrom the interest on the amount due, theBIR was collecting the amount from NDC.

The NDC contended that the incomewas not derived from sources within thePhilippines, and thus they are not liableto withhold anything. NDC said that sincethe contract was entered into and wasexecuted in Japan, it is an incomewithout.

H: The government’s right to levy and

collect income tax on interest received bya foreign corporation not engaged intrade or business within the Philippines isnot planted upon the condition that theactivity or labor and the sale from whichthe income flowed had its situs in thePhilippines. Nothing in the law (Section42(1)) speaks of the act or activity of nonresident corporations in thePhilippines, or place where the contract is

signed. The residence of the obligor whopays the interest rather than the physicallocation of the securities, bonds or notesor the place of payment is thedetermining factor of the source of theincome. Accordingly, if the obligor is aresident of the Philippines, the interest

paid by him can have no other sourcethan within the Philippines.

Q: Suppose a NRFC, an Indonesian firm,becomes a stockholder of two corporations, aDC and a RFC, and both corporationsdeclared dividends, what is the liability of theIndonesian firm if the same received thedividends?A:

1. Dividends received from DC: theIndonesian firm is liable to pay taxes.NRFC, under the law, is liable if the

income is derived from sourceswithin. (Sec 42a)

2. Dividends received from RFC: theIndonesian firm’s liability will dependon amount of gross income fromsources within the Philippines.

The NRFC will be liable to pay income tax if the following requisites are present:

1. at least 50% is income from sourceswithin;

2. the 1st requisite is for the three (3)preceding taxable years from the time

of declaration of the dividends.

► In the absence of any or both

requisites, the income will be consideredfrom sources without, thus exempting theIndonesian firm from payment of income tax.

Q: Same scenario, but this time the shares of stock of the two corporations were beingdisposed off. What is the tax liability of theIndonesian firm?A:

1. sale of shares of stock of DC: the

Indonesian firm will be liable for thepayment of taxes because the incomeis from sources within.

2. sale of shares of stock of RFC: theliability will depend on where theshares of stock were sold. (mejoMalabo sa notes, please be guidedaccordingly)





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Q: Filipino Executive, assigned to HongKong, receiving two salaries, one from thePhilippines, the other from HK. Theperformance of the job was in HK. Is he liablefor both salaries?A: No, he is not liable for the two incomes.His status is an OCW (note facts: working in

HK under contract). The compensation hereceived is not subject to tax pursuant toSection 42(c). Compensation for labor orpersonal services performed in thePhilippines is considered an income within.When it comes to services, it is the placewhere the same is rendered which iscontrolling. In the case at bar, the serviceswere rendered abroad, thus it is an incomederived from sources without, irrespective of the place of payment.

Q: Suppose a DC hired a NRFC to advertise

its products abroad. What is the liability of the NRFC? Will there be a withholding taximposed?A: The income is derived from sourceswithout since the services in this case wereperformed abroad. As such, the NRFC is notliable and therefore exempt from thepayment of tax. If the NRFC is not subject toNIT, then it is not also subject to withholdingtax.

Q: What is the controlling factor?A: The controlling factor is the place where

the services were performed and not wherethe compensation therefore was received.

RENTALS AND ROYALTIES►income from sources within

Q: Granted by who?A: NRFC

Q: Suppose you are the franchise holder, howmuch is the withholding?A: 35% (GIT)

Q: if the franchise is granted by RFC, how

much is the withholding?A: 10% (NIT) and in some cases 15%

Section 42(4) MEMORIZE FOR RECIT(CEKSTTM)

a. right of, or the right to usecopyright, patents, etc

b. industrial, commercial,scientific equipment

c. supply of knowledged. supply of services by

nonresidente. supply of technical assistancef. supply of technical adviceg. right to use: motion picture

films, etc.

Q: What is the rule as regards the sale of realproperty?A: Gains, profits, and income from the saleof real property located within the Philippinesconsidered income within.

Q: What about the sale of personal property,what is the rule?A: Determine first if the property isproduced or merely purchased.

1. it the property is manufactured in the

Philippines and sold abroad, or vice-versa, it is an income partly withinand partly without.

2. if the property is purchased,considered derived entirely from thesources within the country where it issold.

EXCEPTION: shares of stock of domesticcorporation, it is an income within whereverit is sold.

COMMISSIONER v. IAC

Q : What is the issue here?A: They cannot determine if the business

expense was incurred in the Philippines.Q: if you are the BIR, and the taxpayer is not

sure, will you disallow the deduction?A: No. determine it pro rata.Formula: GI from within

GI from without

Example: 100,0001,000,000= 10%

► Hence, 10% is the ratable share in the

deduction. If the deduction being asked is100,000 not all of it will be allowed. Only10,000 or 10% of 100,000 will be allowedas deduction.

CAPITAL GAINS AND LOSSESSection 39

Q: What is capital asset?





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A: Capital asset is an asset held by ataxpayer which is not an ordinary asset.

The following are ordinary assets:1. stock in trade of the taxpayer or other

property of a kind which wouldproperly be included in the inventory

of the taxpayer if on hand at the closeof the taxable year;

2. property held by the taxpayerprimarily for sale to customers in theordinary course of trade or business;

3. property used in trade or business of a character which is subject to theallowance for depreciation provided insubsection 1.

4. real property used in trade orbusiness of the taxpayer.

All other property not mentioned in the

foregoing are considered capital assets.

Q: What is a capital gain? What is a capitalloss?A: Capital gains are gains incurred orreceived from transactions involving propertywhich are capital assets. Capital losses arelosses incurred from transactions involvingcapital assets.

Q: What is ordinary gain? Ordinary loss?A: Ordinary gains are those received fromtransactions involving ordinary assets.

Capital losses are losses incurred intransactions involving ordinary assets.

Q: What is the relevance of making adistinction?A: It is relevant because Section 39B,C, andD apply to capital assets only.

1. time when property was held (39B)(holding period applies only toindividuals);

2. limitations on capital losses (39C);3. Net Capital Carry-Over (39D)

I. CAPITAL ASSETS

Q: What is the holding period?A: If capital asset is sold or exchanged by anindividual taxpayer, only a certain percentageof the gain is subject to income tax.

It is the length of time or the duration of the period by which the taxpayer held theasset.

Q: What is the requirement?A:

1. the taxpayer must be an individual.Section 39B states “in case of ataxpayer, other than a corporation..”

2. property is capital in nature.

Q: What is the term?A: 100% if the capital asset has been heldfor not more than 12 months; (short term)

50% if the capital asset has been held formore than 12 months. (long term)

NOTE: the holding period applies to bothgains and losses.

Q: Do you include capital gains in your ITR?A: General rule: yes, include in ITR.

EXCEPT:

1. gains in sales of shares of stock nottraded in stock exchange(section 24);

2. capital gains from sale of realproperty(section 24).

Q: When will the holding period not apply?A:

1. property is an ordinary asset2. taxpayer is a corporation3. sale of real property considered as

ordinary asset

II. LIMITATION ON CAPITAL LOSSES

►synonymous to 34D & loss capital rule► this applies to individual and corporate

taxpayerQ: What is the loss limitation rule?A: Pursuant to Section 39 C, losses fromsales or exchange of capital assets may bededucted only from capital gains, but lossesfrom the sale or exchange of ordinary assetsmay be deducted from capital or ordinarygains. (applies to individual and corporation)

Q: In connection with 34 D, Losses inAllowable Deduction, what is the rationale

behind this rule?A: If it is otherwise, it will run counter withthe rule that the loss should always beconnected with the trade or business, capitallosses are losses not connected to the tradeor business, thus it is not deductible

Q: what is your remedy?A: 39 D, net capital loss carry-over





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Q: What is the rationale in allowing ordinaryloss to be deducted from either thecapital gains or ordinary gains?

A: It is already included in ITR, the grossincome less deductions hence it alreadycarries with it the deduction

TAKE NOTE: Normally if the loss is anordinary loss there is no carry over.Except: a. 34D3

b. if the loss is more than GI

III. NET CAPITAL LOSS CARRY-OVER

Q: What are the requirements?A:

1. taxpayer is an individual;2. paid in the immediately succeeding

year;3. applies only to short term capital

gain;4. capital loss should not exceed net

income in the year that it wasincurred.

Q: How does net capital loss carry-over differfrom net operating loss carry-over underSection 34 D (3)?A: Under the net capital loss carry-over rule,the capital loss can be carried over in theimmediate succeeding year. In net operatingloss carry-over rule, capital loss can becarried over to the next three (3) succeeding

calendar year following the year when theloss was incurred.

NOTE: only 15% of the loss will be carriedover, if the loss is greater than the gains.

► In net operating loss carry-over there is

an exception to the 3 year carry-over period.In case of mines other than oil and gas wells,the period is up to 5 years.

Q: What is a short sale?A: Sale of property by which the taxpayer

cannot come into the possession of theproperty. EX: shares

CALAZANS v. CIR F: The taxpayer inherited the property

fro her father and at the tie of theinheritance it was considered a capitalasset. In order to liquidate theinheritance, the taxpayer decided to

develop the land to facilitate the sale of the lots.

I: Was the property converted toordinary asset?

H: The conversion from capital asset toordinary asset is allowed because Section39 is silent.

Q: Are you allowed to convert ordinary assetto capital asset?A: General rule: it is not allowed. ReadRevenue Regulation 7-2003

The case at bar still applies despite of theissuance of said Revenue Regulation.

Q: What is the conversion prohibited in theRevenue Regulation?A: Conversion of real estate property.

Q: What is the rationale?

A: Section 24 D – final income tax of 6% if the real estate is capital asset. If it is anordinary asset, it will be subject to incometax of 32% for individual taxpayer, and 35% if the taxpayer is a corporation.

Q: What are the properties involve in the RR7-2003?

A: 1. those property for sale by the realtors2. real property use in trade or businessnot necessary realtors

Q: That is the conversion allowed by the

Revenue Regulation? Is there an instancewhen an ordinary asset may be converted tocapital asset?A: Yes, provided that the property is anasset other the real property, and it has beenidle for two (2) years.

SECTION 24TAX ON INDIVIDUALS

Q: What is the tax mentioned in section 24?A: NIT

Q: What is taxable income?A: (memorize section 31) it is the pertinentitems of gross income specified in the NIRC,less the deductions and/or personal andadditional exemptions, if any, authorized forsuch types of income by the NIRC or otherlaws. It refers to NIT because it allowsdeductions.





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Q: What do you mean by the phrase “otherthan B, C, and D”?A: It means that if the elements of passiveincome are present, the taxpayer has to payFIT.

Q: Who are the taxpayers mentioned in

section 24?A:

1. RC2. NRC3. OCW4. RA

► Additionally, under Section 25, NRAETB

Q: What is the tax liability of NRAETB?A: Section 25(1) NRAETB is subject toincome tax in the same manner as thoseindividuals mentioned in Section 24.

Q: What about Domestic Corporations?A:

1. Sec. 27 A,B, and C2. Sec. 26- GPP is not subject to income

tax.

Q: What about Resident ForeignCorporations?A: Sec 28(l) it is subject to 35% Net IncomeTax

Q: What about Non Resident foreign

Corporation and Non Resident Alien notengaged in Trade or Business?A: Not Subject to Net Income Tax but theyare liable for Gross Income tax.

Q: Do legally married husband and wife needto file separately or jointly?A: It depends if:1. Pure compensation income- separate2. Not Pure compensation income- joint

Passive IncomeInterest, Royalties, prizes and Other winnings

Interest

Q: Bank Interest, what is the requirement?A: The bank must be located in the Phils.because the income must be derived fromsources w/in.

Q: Do you include this in your ITR?

A: No! because it is subject already to FIT.The bank is the one liable for the payment of this.

NOTE: Liability for NIT, GIT, and MCIT willdepend on the elements present.

Q: Who are liable for bank interest?A:

1. RC }2. NRC} Sec. 24 B13. RA }4. NRAETB5. NRANETB Sec. 25 (25%)6. AEMOP7. DC8. RFC9. NRFC

Q: What is the rate of interest?

A: FIT of 20%

Q: Is there a lower rate?A: 7 ½ % if under EFCDS

Q: What if the depositor is non residentalien?A:

-W/in – FIT- W/out- exempt

Q: What is the rule on pre- termination?A: If it is pre terminated before 5th year a FIT

shall be imposed on the entire income andshall be deducted and withheld by thedepositary bank from the proceeds of thelong term deposit based on the remainingmaturity thereof

a. 4 yrs to less than 5 yrs – 5%b. 3 yrs to less than 4 yrs- 12%c. Less than 3 yrs- 20%

Q: Does it apply to all individuals?A: No! It does not apply to 10 NRFC and NRAand NRAETB because they are liable to GIT.

NOTE: if the depositary is a Non resident it isexempt

► Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)

Q: If the money earns interest in abroad whois liable?





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A: RC and DC only by NIT, the rest areexempt. No FIT abroad because we do nothave withholding agent abroad.

Q: MCIT applies to DC and RFC in relation tobank interest?A: If the bank interest is derived abroad, RFC

is exempt but DC is liable.Impose NIT if it is higher than the MCIT,

otherwise apply MCIT if it’s higher than theNIT

Prizes

Requirements:1. Prizes must be derived from sources

w/in the Phils.2. it must be more than P 10,000

Q: Who are liable? (FIT)

A:1. RC2. NRC3. OCW4. RA5. NRAETB6. AEMOP (RC, NRAETB)

Not Liable1. NRANETB- liable for GIT at 25 %2. AEMPOP (NRANETB- GIT)3. DC- NIT 27 D is silent4. RFC NIT law is silent 28A7a

5. NRFC subject to GIT

Q: When can we apply NIT in Prizes?A: 1. When the taxpayer is RC, RFC and DC

2. For DC and RC it must be derivedfrom income abroad RFC it must bederived from income w/in

3. amount is more than P10,000

NOTE: If the prize is derived from sourcesw/in but it is below P 10,000 it is not subjectto tax. If derived from sources abroad, mostof them are exempt except for RC and DC

who are liable w/in and w/out.

Q; Is it possible for RC and DC to pay MCIT?A: Yes if MCIT is higher than NIT.

Winnings

Q: Do we apply the P10, 000 req.?

A: No, we do not apply it only applies toprizes. It must not pertain to illegalgambling.

► Thus, the only requirement is it must be

derived from income w/in.

Q: Who are liable? (FIT)A:

1. RC2. NRC3. OCW4. RA5. NRAETB6. AEMOP (RA, NRAETB)

Not liable to FIT?1 NRANETB- GIT2 AEMOP (NRANETB- GIT)3 DC- law is silent NIT

4 RFC- law is silent5 NRFC- GIT

Q: When does NIT apply to winnings?A:

1. If Taxpayer is DC or RC2. Income is derived abroad3. Taxpayer is RFC and income w/in.

NOTE: If income abroad, most TP are exemptexcept DC and RC

Q: MCIT applies when?

A: It is higher than the NIT

Royalties

Requirement:► The income is from w/in

► Rate? 20%. Lower rate? 10% on books,

literary works and musical compositions.

Q: You are a writer for Snoop Dogg are youliable for FIT? What if for April Boy?A: Liable for NIT if Income abroad like a

writer for Snoop. While FIT if for April Boy.

Q: Who are liable (FIT)?A:

1. RC2. NRC3. OCW4. RA5. NRAETB6. AEMOP (RC, NRAETB)





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Not Liable?1. NRANETB2. AEMOP3. DC4. RFC5. NRFC

NOTE: Lower rate of 10% applies to all exceptNRANETB

Q: When do we apply NIT to Royalties?A:

1. TP is RC or DC2. Income is from w/out3. TP is RF and income is w/in

► If income is from sources abroad all are

exempt except RC and DC

Dividends

► Confined with cash and/or property

dividends.

Q: What are dividends?A: Any distribution made by Corporation toits stockholders outside of its earnings orprofits and payable to its stockholderswhether in money or in property (Sec. 73)

COMM. vs. MANNING Q: Where did it come from?

A: shares come from another shareholderQ: What are the dividends included?A: Sec. 24 refers to cash or property

dividendH: For stock Dividends to be exempt it must

come from the profit of the corporation.

Stock Dividends → it is the transfer of the

surplus profit from the authorized capitalstocks.

Q: Assuming that there are 5 Incorporators,the Corporation has a P5 M Authorized

Capital stock. It distributed 1 M stockdividends, is it taxable?A: NO, the dividends did not go to the Stockholder but to the Auth Capital Stock. Onlycash and Prop Stock go to the Stock holder.

► Sec 24 B does not mention stock

dividends because it is not subject to FIT butit is subject to NIT under Section 73.

Q: Is there an exception when stockdividends are not taxable?A: YES, if the shares of stocks are cancelledand redeemed meaning it was reacquired bythe corp.

ANSCOR CASE

→the stockholders cannot escape thepayment of taxes

Requirement:Gen Rule- the dividends must be distributed

by a DC.Except- Regular operating- always a foreign

corp.

► What rate: 10% FIT

Q: Who are liable?A:

1. RC2. NRC3. OCW4. RA5. NRAETB6. AEMOP (RC, NRAETB)

Not liable?1. NRANETB2. AEMOP3. DC4. RFC5. NRFC

► Shares of association and partnership is

taxable

Q: Determine the tax liability of thefollowing?A:

1. DC a Stockholder of DC= Exempt2. RFC stockholder of DC= Exempt also3. DC stockholder of RF= Liable for NIT.

Capital Gains From Sale of Shares of Stock Not Traded (§24C)

1. Subj to FIT2. Determine whether there is a loss or a

gain because the tax is impose uponthe net capital gains realized from thesale, barter, or exchange or otherdisposition of the shares of stock in adomestic corp.

3. It is uniformly imposed on alltaxpayer





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4. not subj to w/holding tax.

Requirements:1. Shares of stock of a DC2. It must be capital asset3. must not be traded in the stock

market

► 25 R last part: Capital Gains realized by

NRANETB in the Phils. from the sale of sharesof stock in any DC and real prop shall besubj. to the income tax prescribed under Subsec (c) and (d) of Sec. 24.

► SEC. 24 B 1&2: If the elements are

present NRANETB and NRFC are liable to payGIT.

Except: under 24 C for NRANETB. What doyou mean by the phrase “ the provisions of

39 notwithstanding”?

► It refers to the holding period. When it

comes to capital gains from sale of shares of stock not traded and capital gains from thesale of real prop. The holding period doesnot apply because the basis will be thoseprovided in 24 C & D and not under 39B (GSPor FMV)

ELEMENT #1 The share is a share in DC

Q: What if the share is from foreign corp?

A: Determine the income considered. If income w/in read Sec. 42 (E)

► If the shares sold are that of a foreign

corp it is subj to the ff rules:a. sold in the Phils= its income w/inb. sold in abroad= w/outc. Shares of stock in a Dc is always

considered an income w/in regardless whereit was sold.

Q: Shares of Foreign Corp sold in Phils.Who’s liable? What tax?

A: Not subj to FIT because one of theelements is not present . Shares not beingthat of a DC.

Hence: a) RC, NRC, OCW, NRAETB, AEMOP(RA, NRAETB) will pay NIT. DC and RFC

b) NRANETB and NRFC will pay GIT

Q: Shares of Foreign Corporation soldabroad?A: It will be considered an income w/out.

Thus:most of them will be exemptexcept RC and DC liable to pay NIT

ELEMENT # 2 NOT TRADED OR SOLD INTHE STOCK MARKET

► if sold in the stock market- it is not subjto FIT

► if sold in the stock market, it will be subj

to percentage tax, in lieu of NIT.

ELEMENT # 3 It must be a capital asset.

Q: When is it considered an ordinary asset?A: 1. When the broker or dealer

a. used it in trade or businessb. held for sale in the ordinary

course of trade or business

2. to all other assets, it will beconsidered a capital asset

NOTE: if all elements are present it will besubj to FIT

If the shares are ordinary asset

1. Ordinary shares in DC- income w/ina. Most of the taxpayer will pay NIT

except NRFC and NRANETB2. Ordinary assets of foreign corporations

a. Income within if sold in the Phils:

most will pay except NRANETBand NRFC

b. Income w/out if sold abroad: mostwill be exempt except RC and DC

MCITQ: When is a RFC subj to NIT?A:

1. Sale of shares of stock of a Foreigncorp in the Phil.

2. sale of shares of stock of DC whichare ordinary asset

► DC and RFC are subj to MCIT which maybe imposed if the NIT is lower than theMCIT2% MCIT will be imposed if MCIT ishigher than NIT.

Capital Gains From Sale of Real Property (§24D)

► In 39 B the holding period does not apply

because the basis of income tax is the gross





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selling price (GSP) or the Fair market value(FMV) whichever is higher- 6% FIT

Requirements:1. The real prop must be sold w/in the

Phils and located in the Phils.2. It must be a capital asset

3. The seller must be an individual,estate or trust or a DC

► RFC not liable for FIT but liable to pay NIT

if all the elements are present.

► NRFC liable to pay GIT and not FIT

► NRANETB liable to pay FIT are all

elements are present.

ELEMENT # 3 The real prop must be acapital asset

Q: When considered a capital asset?A: Read R.R. 7- 2003

Q: Ordinary asset- shall refer to all realproperty specifically excluded from thedefinition of capital asset under Sec. 39A: Other property not mentioned are capitalasset.

Q: What if all the elements are not present?A:

most will be liable to pay NIT

Except NRANETB and NRFC liable for GIT

Q: May a RC be liable to pay NIT even if allthe elements are present?A: YES, disposition made to the Govt. Thus,the taxpayer has the option of paying 32%NIT or 6% FIT

Q: Which is more advantageous?A: It depends determine first if there’s a lossor a gain.

If there’s a gain choose to be taxed at 6%FIT. In this case the gain is always presumed.

If there’s a loss choose to be taxed at 32%because losses may be considered anallowable deduction .

Other transactions are covered:1. sale2. barter3. exchange4. other disposition

NOTE: If the prop is under mortgage contractand the mortgagee is a bank or financial inst,the FIT does not apply because the propertyis not yet transferred because there’s aperiod of redemption

If after a year the mortgagor failed toredeem the property that is the only time that

the FIT will apply because there’s now achange of ownership. If redeemed w/in 1 yrperiod FIT will not apply because there’s nochange of ownership.

If the mortgagee is an individual the FIT isimposed whether or not there is a transfer of ownership.

Exceptions (§24(D2))

Q: What if the prop being sold was a moviehouse, can he claim for the exception?A: the prop covered by the exemption is a

residential lot

Q: Who can claim the exemption?A: Only the taxpayer mentioned in Sec. 24

Requirements:1. The purpose of the seller is to acquire

new residential real prop2. the privilege must be availed of w/in

18 mos. From the sale3. Comm. must be informed w/in 30

days from the date of sale with theintention to avail of the exemption

4. the adjusted basis or historical cost of the residence sold shall be carriedover to the new residence.

5. the privilege must be availed onlyonce every 10 yrs

6. Certification of the brgy. Capt wherethe taxpayer resides that indeed theprop sold is the principal residence of the tax payer (RR 13- 99)

Q: What if the property is worth 10 M and itwas sold only for 2M, what will happen to theunused portion or profit?

A: If the proceeds are not fully utilized, theportions of the gain is subj to FIT

SEC. 27A RATES OF INCOME TAX

Q: How many income taxes are paid by aDC?A:

1. NIT2. MCIT





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3. FIT4. 10%Improperly Accumulated

Earnings5. Optional corporate income tax of 15%

of the gross

► DC liable for five, but the optional is not

yet applicable so only 4.

Q: How many can be applied simultaneously?A: ONLY 3

1. NIT, FIT and 10% IAE2. MCIT, FIT, 10% IAE

SEC. 27 (B) PROPRIETARY EDUCATIONALINST. & HOSP.

Who are the taxpayers?1. Non- Profit Proprietary Educl. Inst and2. Non Profit Proprietary Hospital

Q: What if the school or hospital is nonprofit only, is it exempt?A: No, subject to 10% on their taxableincome except those covered by subsection(D)

PROVIDED that gross income fromunrelated business, trade or activity must notexceed 50% of its total gross income derivedby such educational inst or hospital from allsources

Requirements:

1. It is a private school or hospital2. it is stock corp3. it is non profit4. that gross income from unrelated

business, trade or activity must notexceed50% of its total gross incomederived by such educational inst orhospital from all sources

5. has permit to operate from DECS,TESDA, or CHED

Q: What do you mean by unrelated tradebusiness or activity?

A: It means any trade, Business, or activitywhich is not substantially related to theexercise or performance by such entity of itsprimary purpose or performance

Q: May a school or hospital be exempt frompaying tax? What are the req?A:

1. It must be non- stock and non- profit

2. the assets property and revenuesmust be used actually, directly, andexclusively fro the primary purpose

Q: Under what law? Is it the constitution orthe NIRC which provides fro the exemption?A: It is under Sec. 30 of NIRC and not

under Sec.4 Art. 14 of the Constitution. Theprovision of the NIRC is the specific lawwhich prevails over the Constitution which isthe general law.

→ exempt from all taxes and custom

duties

Q: What about exemption from realproperty tax?A: Art. 6 Sec. 28 of the Constitution:charitable institution churches, ….and alllands buildings, actually directly andexclusively used for religious, charitable, and

educational purposes shall be exempt fromtaxation.

→ Not Sec. 4 of Art. 14 of the

Constitution.

Q: You donated a property to a school willyou be liable for donor’s tax?A: not liable if it falls under Sec. 101 (3) of the NIRC

REQ. FOR EXEMPTION TO DONORS TAX:1. it must be non-stock, non-profit

educational inst.

2. not more than 30% of the prop donatedshall be used by such donee for adminpurposes.

3. paying no dividends4. governed by trustees who don’t receive

any compensation5. devoting all its income to the

accomplishment and promotion of thepurposes stated in its Articles of Incorporation

Q: What about exemption from VAT?A: Sec. 109 (m) of R-VAT

Q: What about exemption fro Loc Gov Code?A: If its non-stock, non-profit educationalinst. It may be exempted from local taxation.

Q: Is Art 14 Sec. 4 of the Consti obsolete?A: NO, if the law is silent apply the Consti.





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SEC. 23: GOCC, AGENCIES, INST of theGOVT.

GEN RULE: Subj to tax.

EXCEPTIONS:1. GSIS

2. SSS3. PHIC4. PCSO

► PAGCOR no longer included.

Q: If the GOCC is not one of thoseenumerated does it follow all of its income isautomatically subject to tax?A: NO. Under Sec 32. B (7) income derivedfrom any public utility or from the exercise of essential government function accruing tothe Govt of the Phils or to any political subd.

Are therefore exempt from income tax.Therefore, even if the GOCC is one of

those enumerated under Sec. 27 it may stillbe exempt under Sec. 32 b7b if itsperforming governmental function

NOTE: Pagcor vs. Basco case

Q: What is the difference between Sec. 27 Cand 32 b7b?A:

1. Sec 27 C exempts those enumeratedwithout any qualification.

2. Sec. 32b7b qualification must concurbefore it may be exempted.

Q: Can the government impose tax on itself?A: It depends on who the taxing authority is.If the taxing authority is the National Govt. asa rule, YES.Exceptions1. those entities enumerated under §27 C2. those GOCC falling under §32b7b

If the taxing authority is the localgovernment units, as a rule NO. LGU’s are

expressly prohibited from levying taxagainst: (Sec 133(o)

1. National Govt.2. Its agencies and instrumentalities3. local government units

Exception: Sec 154 of LGC says that LGU’smay fix rate for the operation of publicutilities owned and maintained by the withintheir jurisdiction.

PAL CASE July 20 2006 H: The SC used 133 (o)an exception to

pay tax, real estate tax, imposed by Cityof PAranaque on NAIA. The SC said thatthe airport is not an agency or GOCC butmere instrumentality of the Govt.

This is Gross ignorance of the law Sec.

133 (o) is for local taxation not realproperty taxation which is the oneinvolved in the present case.

NOTE: Mactan- Cebu Airport case

SEC. 27 D(1)

Q: How many possible incomes werementioned?A: Two (2): bank interest and royalties

REQ:

1. Bank interest must be received by aDomestic Corp

2. Royalties derived from sources within

Q: When it comes to bank interest, what isthe difference if the taxpayer is an individualor corporation?A: If individual, they may be exempt fromthe payment of interest in case of long termdeposit except NRANETB

If DC, they are not exempt from long temdeposit.

Q: What about royalties?A: If individual, have a lower rate of 10%onbooks, other literary and musicalcompositions. DC have no lower preferentialrate.

SEC 27 D2: CAPITAL GAINS FROM SALE OF SHARES NOT TRADED

SEC 27 D3: EFCDS

Q: What is the expanded foreign currency?A: It is a bank authorized by the BSP to

transact business in the Philippine Currencyas well as acceptable foreign currency orboth.

Q: What is the tax to be paid?A: Normally it is NIT because it is subj underSec 27 D3 and 28 A

Q: Who is the income earner?A: Depositary banks





30

Q: Exempt from what kind of transaction?A: From foreign currency transaction. If itinvolves foreign currency transaction it is notexempt but subject to 35 % NIT

Q: Who are the other parties?

A:1. Off shore banking units2. branches of foreign banks3. local commercial bank4. Other depositary banks under EFCDS5. Non- residents

► if the above enumeration are the parties,

then depositary bank will be exempt frompaying the NIT

Foreign Currency Loan

Q: Who is the lender? Borrower?A: Lender- EFCDS

Borrower- RC

EXEMPTOffshore banking unitsOther depositary banks under EFCDS

► exemption of NR from EFCDS:

Q: Who is the income earner?A: Non Residents whether individual orCorporations

Q: Derived from whom?A: Depositary Bank under EFCDS

NOTE: Sec. 24 B Nonresident exempt frombank interest under EFCDS

Q: What is the difference between 24 b1from 27 D3A: In 24 B1, NR is exempt only from bankinterst derived from EFCDS while 27D3exempts NR from any income fromtransactions with depositary bank under

EFCDS

SEC. 27 D(4)- Inter-corporate dividends-exempt

27 D5 Capital Gains from sale of Real Prop.

Q: What is the tax?A: 6% FIT

Q: What is the difference if the seller is anindividual and a DC?A: Individual can sell all kinds of realproperty

DC can only dispose land and/orbuildings.

SEC 27 (E) MCIT

Q: Applicable to whom?A: DC and RFC

Q: Can it be applied simultaneously withNIT?A: NO, imposed in lieu of the NIT, whicheveris higher.

Q: What is the Rationale?A: to prevent corporations from claiming too

many deductions

Q: When will it be imposed?A:

1. On the 4th year immediately ff the yearin which such corp commenced itsbusiness.

2. When the MCIT is higher than the NIT

Q: What is the carry over rule?A: Sec 27 E2 states the carry over rule.

In order to avail: only in the year where

the MCIT is greater than the NIT.

Sec 28 A1

Q: What Kinds of taxes are paid by the RFC?A: NIT

MCIT

Sec. 28 B2 MCIT on RFC

same with Sec. 27

Sec. 28 A3- INTL CARRIER

Kind:1. Air carrier2. ships

► An intl. carrier doing business in the

Phils. shall pay 2 ½ % on its Gross Phil Billings(GPB)





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Q: Is 28 A3 the Gen. rule or the Exception?A: It is the general rule because it is under28 A3

► GPB is in the nature of FIT, applies only if

all the requirements are present.

► RFC will be liable for NIT, hence a RFCengaged in common carriage does not payGPB but NIT

► Income without: EXEMPT

International Carrier:

► GPB refers to the amount of revenue

derived from: carriage of persons, excessbaggage, cargo and mail originating from thePhils in a continuous and uninterruptedflight, irrespective of the place of sale or

issue and the place of payment of the ticketsor passage document.

REQ:1. Originating from the Phils.2. Continuous and uninterrupted flight;3. Irrespective of the place of sale or

issue and the place of the payment of tickets or passage document.

Q: Do you consider landing rights todetermine liability? (RR 15-2002)A:

1. If originates from the Phils and haslanding rights- ONLINE- RFC

2. No landing rights- OFFLINE- NRFC

Q: If there are stopovers, is it stilluninterrupted?A: YES, provided that the stopover does notexceed 48 hrs.

Q: When will the place of sale of ticketsmatter as to the taxpayers liability?A: The place of tickets is material only if thetwo other elements are not present to be able

to know if its subj to NIT or exempt.

Revalidated, exchanged or indorsed tickets

REQ:1. The passenger boards a plane in a

port or point in the Phils.2. The tickets must be revalidated,

exchanged, or indorsed to anotherairline.

Q: What if it’s the same airline but differentplane?A: GPB does not apply, it must be to anotherairline

Q: What if it did not originate from the

Phils.?A: Determine if its income within or without.

if ticket was purchased in the Phils. it isincome within hence apply NIT

if purchased outside, it is income without,hence exempt

Transshipment

REQ:flight originates from the Philstransshipment of passenger takes place

at any port outside the Phils.

the passenger transferred on anotherairline

Q: How do you apply GPB?A: Only the aliquot portion of the cost of theticket corresponding to the leg flown fromthe Phils to the point of transshipment shallfrom part of the GPB.

Q: Is it liable for the whole flight?A:

From the Phils to the point of transshipment, it is income w/in

From transshipment to final destination,its income w/out- EXEMPT

International Shipping

► GPB means gross revenue whether from

passenger, cargo, mail

REQ:it must originate from the Phils.up to final destination- regardless of the place of sale or

payments of passenger or freight documents

Sec28 A(4) OFF SHORE BANKING UNITS

OBU’s1. only acceptable foreign currencies2. always a foreign corporation (subj to

NIT) except #33. Exempt if income is derived by the

OBU from EFCDS





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4. Parties:a) local commercial banksb) Foreign bank branchc) Non Residentsd) OBU in the Phils.

Difference with EFCDS:

EFCDS1. Acceptable foreign currency, Phil.

Currency or both2. Can be a domestic or foreign

corporation3. Exempt if income derived by DC or

RFC from EFCDS4. Parties:

a) local commercial banksb) Foreign bank branchc) Non Residentsd) OBU in the Philse) Other banks under EFCDS

FOREIGN CURRENCY LOAN

► 10% FIT

If: Lender- OBUBorrower- Resident Citizen

EXCEPT:1. OBU2. Local Commercial Banks

Transactions of Non Residents:1. Income earner: Non- Residents2. Lender: OBU’s

NOTE: Non resident exempt fromtransactions with OBU’s and EFCDS

SEC. 28 A5 TAX ON BRANCH PROFITS,REMITTANCES► profits based on the total profits applied

or earmarked fro remittance remitted by abranch to its head office► Subj to 15% tax

Except: those activities which are registeredwith PEZA

NOTE: Interests, Dividends, Rents, Royaltiesincluding remuneration for technicalsevices, salaries, wages, premiums,annuities, emoluments, or casual gains,profits, income and capital gains receivedby a foreign corporation during eachtaxable year from all sources within shallnot be treated as branch profits UNLESS

the same are effectively connected withthe conduct of its trade or business.

Branch Profit Remittance

Two ways to receive income (FC)1. Branch

2. Subsidiaries

NOTE:1. When a FC establishes branch, it is

always a FC2. When a FC establishes DC, it is a RFC

Q; It is in addition to NIT- Why?A: NIT because it is RFC

Q; What kind of tax is imposed under 28 A5?A: 15% FIT

Q: How do you apply the rate?A: multiplied to the total profit applied orearmarked for remittance w/o deductions

It applies for branches that are:1. the profit remitted is effectively

connected with the conduct of itstrade or business in the Phils.

2. One not registered with PEZA

MARUBENI CASE F: A branch was established with AG&P,

there was investment with AG&P

Q: Did the petitioner participate with thenegotiation?

A: NOQ: What did the petitioner pay?A: 15% Branch Profit Remittance Tax (BPRT)

10% Intercorporate DividendsQ: What’s the issue?A: Petitioner maintains that there was

overpayment of taxes, thus the same wasasking for a refund of tax erroneouslypaid.

Q: Is is subj to FIT?

A: NO, exempt if petitioner is RFCH: -not correct to pay 15%

To be liable for BPRT1. It is a RFC2. Branch did not participate in negotiations





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SEC. 28 A6a► Regional or area headquarters (Sec. 22

DD) shall not be subject to tax exempt fromincome tax if the requisites are present.

Q: What are the requisites?A:

1. the HQ do not earn or derive incomefrom the Phils.

2. Acts only as supervisory,communications, coordinating centrefor their affiliates, subsidiary orbranches in the Asia- Pacific Regionand other foreign markets.

SEC. 28 A6b

Regional Operating HQ are taxable and

liable to pay 10% taxable income.

► Regional Operating HQ is a branchestablished in the Phils by a multinationalcompany engaged in any of the services:

1. Gen. Administration and Planning2. Business Planning and Coordination3. Sourcing and procurement of Raw

materials and components.4. Corporate Finance and Advisory

Services5. Marketing Control and sales

promotion6. Training and personal management7. logistic services

8. research and development servicesand product development

9. technical support and maintenance10. data processing and communication

and business development

Rationale: Why liable? Because the claim forexemption of resident airlines shall beminimized

SEC. 28A7a Interests and Royalties:

► 20%FIT

► Interests under EFCDS= 7 ½ %

Sec. 28A7b Income derived under EFCDS

1. Income derived from foreign currencytransactions with:a) Non Residentsb) OBUc) Local commercial bank

d) Foreign bank branchese) Other depository bank under the

EFCDS

► As a Gen Rule: the above transaction is

Exempt

EXCEPTION: Income from such transactionas may be specified by the secretary of Finance, upon recommendation by theMonetary Board to be subject to regularincome tax payable by any banks.

2. Interest income from foreign currencyloans

► granted by depository bank under said

EFCDS to others shall be subject to 10% FIT

Exempt if granted to:

1. Other OBU in the Phils, and2. Other depository bank under the

EFCDS» SEC. 28 A7c: Capital Gains from

Shares of Stocks not Traded in theStock exchange

» 5% or 10% as the case maybe

SEC 28A7d: INTERCORPORATE DIVIDENDS

► DC- RFC= EXEMPT, not subj to tax

SEC 28 B1

Q: What kind of tax?A: 35% GIT on the ff income

1. Interest2. Dividends3. Rents4. Royalties5. Salaries6. Premiums( except reinsurance

premiums)7. annuities8. emoluments9. Other fixed and determinable Gains,

profits and income.

SEC 28 B2 Non Resident Cinematographicfilm owner, lessor or distributor

► liable for 25% GIT

SEC 28 B3 Non Resident owner or lessor of Vessels chartered by Philippine Nationals.





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► liable for 4 ½ GIT

Elements:1. Chartered to Filipino Citizens or

Corporations2. Approved by MARINA

SEC. B(4) Non Resident Owner or Lessor of Aircraft, Machiniries, and otherEquipments.

► liable for 7 1/2 % GIT

SEC 28 b5a Interest on Foreign Loans

► Must be read with Sec. 32 B7a

Interest on Foreign Loans, if the lender is1. NRFC liable to 20% FIT2. Foreign Govt. Exempt because it is an

exclusion (Sec 32 b7a: income derivedby a foreign gov’t from investments inthe Phils on loans, stocks, bond, andother domestic securities or frominterest on deposits in banks by:a) Foreign govt.b) Financing inst owned controlled or

enjoying, refinancing from foreigngovt; and

c) Inter nation or Regional financialinst established by foreign govt.

COMMISIONER OF INTERNAL REV. vs.

MITSUBISHI METAL CORP. (180 SCRA 214) F: Atlas Mining entered into a Loan and Sales

Contract with Mitsubishi Metal Corp. ( A Japanese Corp.) for the purposes of projected expansion of the productivitycapacity of the former’s mines in Cebu.The contract provides that Mitsibushi willextend a loan to Atlas in the amount 20M dollar, so that Atlas will be able installa new concentrator for copperproduction.

-Mitsubishi to comply with itsobligation, applied for a loan from

Export- Import Bank of Japan (Exim Bank)and from consortium of Japanese banks.

Pursuant to the contract Atlas paidinterst to Mitsubishi where thecorresponding 15% tax thereon waswithheld and only remitted to the Govt.

Subsequently Mitsubishi filed a claimfor tax credit requesting that the same beused as payment for its existing liabilitiesdespite having executed a waiver and

disclaimer of its interest in favor of Atlasearlier on. It is the contention of Mitsubishi that it was the mere agent of Exim Bank which is a financing instowned and controlled by the JapaneseGovt.

The status of Eximbank as a

government controlled inst became thebasis of the claim fro exemption byMitsubishi for the payment of interest onloans.

I: WON Mitsubishi is a mere agent of Eximbank

H: NO. The contract between the parties doesnot contain any direct reference to EximBank, it is strictly between Mitsubishi ascreditor and Atlas as the seller of copper.The bank has nothing to do with the saleof copper to Mitsubishi. Atlas andMitsubishi had reciprocal obligations-

Mitsubishi in order to fulfill its obligationshad to obtain a loan, in its independentcapacity with Exim bank. Laws grantingexemption from tax are construed strictlyagainst the taxpayer and liberally in favorof the taxing authority.

SEC. 28 D5 b INTERCORPORATEDIVIDENDS:

► FIT 15% imposed on the amount of cash

and or prop dividends received from adomestic corporation.

SUBJ TO THE CONDITION: the country wherethe NRFC is domiciled allows a credit againstthe tax due from the NRFC taxes deemedpaid or deemed to have been paid in thePhils.

Gen rule: 35 % FITException: 15% under the “tax deemed paidrule/ reciprocity rule/ tax sparring rule”

JHONSONS CASE 2 Kinds of Categories:

1st : Japan, US, Germany, Phils liable forincome within and income without

2nd : countries liable only for income within.

MARUBENI Case: 2 Issues1. Is the payment of 10% FIT correct?- No because it was a branch and RFC butstill Marubeni was NRFC under the old law





35

which is liable to pay 35%, but SC said liableonly to 25% because of the tax treaty

► You cannot refund right away → 15%

BPRT and 10% Inter-corporate Dividends taxhas different basis

In P&G who are involved- DC (P&G Phil) and NRFC (P&G US)- DC declares dividends to NRFC- 35% was withheld and remitted to the BIR

What did they discover? (after paying)- they discovered that they are liable onlyfor 15% so they have a refund of 20%

Q: In the 1st case did the SC allowed therefund?A: NO, denial anchored on 2 grounds:

1. One claiming for refund was not the

proper party2. There was a showing or proof as to

the existence of the “tax deemedpaid” rule

Q: In 2nd case was there a refund?A: YES, the SC reversed itself

1. Income tax is FIT: the withholdingagent is the proper party because heis liable to pay said taxes

2. actual proof of payment notnecessary, what is necessary is the

law of the domicile of the countryproviding fro tax credit equal to 20%of the tax deemed paid.

Q: What is the rate if the law is silent?A: 35% FIT

► The rate will only be 15% if there’s a law

recognizing the same but this refers to thecase of those belonging to the first category.

WANDER CASE

Q: Who are the parties?A: DC(Wander) and FC (Glaxo)- they

belong to different categoriesThe BIR tried to collect 35% because

the law is totally silent about the taxcredit

H: The SC said that the tax should be 15%which applies 2 instances:1. Foreign law do not provide for tax

credit- 35%

2. law provides but the law is silent- 15%3. law is silent because there is no law-

15%4. law is silent because there’s no law

because the subj matter is nottaxable- 15%

SEC. 29 IAET

Q: What is the rate?A: 10% of the gross income (taxable income)

► It is imposed upon the improperly

accumulated taxable income of thecorporation

Q: Applies to what Corp?A: to DC only under RR 2- 2001( classified asclosely held corporations)

Q: Is it in the nature of sanction?A: Yes, it is imposed to compel thecorporation to declare dividends.

Q: Why?A: because if profits are distributed to theshareholders, they will be liable for thepayment of Dividends tax. Now, if the profitsare undistributed the shareholders will notincur liability on taxes with respect to theundistributed profits of the Corp.- In a way it is in the form of deterrent tothe avoidance of tax upon shareholders who

are supposed to pay dividends tax on theearnings distributed to them.

Q: What is taxable income?A: SEC. 31 defines taxable income as thepertinent items of gross income specified inthis Code, less the deductions and/orpersonal and additional exemptions, if any,authorized for such types of income by thisCode or other special law

Q: When not liable to pay IAET?A: There are 2 groups of DC exempt from

payment of IAET (RR2-2001)

A) Corporations failure to declare dividends because of reasonable needs of business

► reasonable needs means are construed to

mean immediate needs of the businessincluding reasonable anticipated needs





36

Q: What constitutes reasonable accumulationof the corporation’s earnings? Examples?A:

1. allowance for the increase in theaccumulation of earnings up to 100%of the paid- up capital of thecorporation.

2. earnings reserved for the definitecorporate expansion projects orprograms approved by the Board

3. Earnings reserved fro buildings,plants, or equipment, acquisitionapproved by the Board

4. Earnings reserved for compliance withany loan agreement or pre- existingobligations

5. Earnings required by law or otherapplicable statutes to be retained.

6. In case of subsidiaries of foreigncorporation, all undistributed

earnings or profits intended orreserved for investments

NOTE: the corporations belonging in the 1st

group are normally liable but they can showthat the accumulation of earnings is justifiedfor reasonable needs of business, they incurno liability and exempt from payments of thesame.

B) Corporations which are exempt whether or not it is for reasonable needs of the business:

1. Banks, and other non- bank financial

intermediaries.2. Insurance companies3. Publicly- held corporations4. Taxable partnerships5. General Professional Partnerships6. Non- taxable joint- ventures7. Enterprises registered with

a) PEZAb) Bases Conversion Devt Act of 1992(RA 9227)

c) Special Economic Zone declared bylaw

Q: What is a closely- held corporations?A: Those corporation at least 50% in value of the outstanding capital stock or at least 50%of the total combined voting power allclasses of stock entitled to vote is owneddirectly, or indirectly by or for not more than20 individuals

NOTE: Publicly held Corp. has more than 20shareholders

Q: What is the time for paying this tax?A: Calendar Year: Jan 25, 2005- Dec 31,2005. Today is 2006. You have 1 year todeclare after the close of the taxable year.2006 is the grace period. You will pay on January 2007.

Q: If you’re not mentioned to be exempted,will you still be liable?A: No, if you invoke adjustments

SEC 30. EXEEMPTIONS FROM TAX ONCORPORATIONS

► Determine the Corporations’ exemptions

under Sec. 30 27 C and 22B.1. Sec 30, the corporations shall not be

taxed under this title (tax on income)in respect to income receive by them

as such.2. Sec 27, the corporations enumerated

are always exempt. Thus exemption isunconditional

3. Sec 22B GPP, as a general rule is not acorporation

4. except if it earns income from otherbusiness

► Joint Venture w/ service contract w/

government not a corporation, otherwise, itis liable.

Assignment: Sec. 35

August 21, 2006 – Midterms

August 14, 2006

Q: What is the reason for not including thecorporations exempt under section 27C andSection 22B under Section 30?A: Because there is an exemption whichdoes not apply to all exempt corporation.

The exemption under Section 30 is notabsolute while the exemption under Section

27 C is absolute and without any conditions.In addition, Section 22B provides that a jointventure is generally taxable unless it has aservice contract with the government, agenerally taxable corporation cannot be joined with the group as generally nottaxable corporation. General ProfessionalPartnership is exempt but the exemption isnot the same as provided by Section 30.





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TAKE NOTE: Las Paragraph of Section 30.

► exemption to the exemption: income of

whatever kind and character of the foregoingorganizations from:

1. any of their properties, real orpersonal;

2. any activities conducted for profit

► regardless of the disposition of said

income, shall be subject to tax.

Q: Enumerate the exempt corporationsunder Section 30; What is the requirement?A:

1. Labor, agricultural or horticulturalorganization not organized principallyfor profit;

2. Mutual savings bank not having acapital stock represented by shares,

and cooperative bank without capitalstock organized and operated formutual purpose and without profit;

3. a beneficiary society, order orassociation, operating for theexclusive benefit of the memberssuch as fraternal organizationoperating under lodge system. (lodgesystem: operating world wide) or amutual old association or a non-stockcorporation:a. organized by employees;b. providing for the payment of life,

sickness, accident or other exclusivebenefits to its employees and theirdependents;

4. Cemetery (a) company owned and (b)operated exclusively for the benefit of its members;

5. Non-stock corporation or associationorganized and operated exclusivelyfor Religious, Charitable, Scientific,Artistic or Cultural purposes, or forthe Rehabilitation of Veterans(RCSACR), no part of its net income orasset shall belong ot or inure to the

benefit of any member, organizer,officer, or any specific person;

6. Business league, chamber of commerce, or Board of trade, (a) notorganized for profit and (b) no part of the net income of which inures to thebenefit of any stock holder orindividual;

7. Civil league or organization notorganized for profit but operated

exclusively for the promotion of socialwelfare.

CIR vs. YMCAQ: What is the basis of Manila BIR for the

imposition of the tax?A: last paragraph of Section 30, because

YMCA was conducting an activity forprofit.

F: the CTA and the CA invoked the doctrinelaid down in Herrera and Abra Valley casewhich involves an exemption from thepayment of Real property Tax.

H: The SC revised the ruling. YMCVA isliable to pay income tax applying the lastparagraph of Section 30.

YMCA Is exempt from the payment of property tax, but not to income tax onrentals from its property.

The tax code specifically mandates

that the income of exempt organizations(under section 30) from any of theirproperties, real or personal, shall besubject to tax, including the rent incomeof the YMCA from its real prop.

8. a non-stock and non profit educationalinstitution;

9. gov’t educational institution;10. Farmer’s or other mutual typhoon or

fire insurance company, mutual ditchor irrigation company, or likeorganization of a purely local

character, the income of whichconsists solely of assessment, duesand fees, collected from members forthe sole purpose of meeting itsexpenses;

11. Farmer’s, fruit grower’s or likeassociation organized and operatedas a sales agent for the purpose of marketing the products of itsmembers and turning back to themthe proceeds of sales, less thenecessary selling expenses on thebasis of the quantity of produce

finished by them.

TAKE NOTE: income of sales agent is exempt.

Section 31: TAXABLE INCOME





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CHAPTER VI: COMPUTATION OF GROSSINCOME

SECTION 32: GROSS INCOME

Q: What is the tax treatment? Are thesetaxable income? Are these included in the

gross income? Is it included in the ITR? Is itsubject to NIT?A: Sec. 32 A answers the questions.

Q: What is the income tax referred to here?A: NIT. The section refers only to thepayment of NIT. It speaks of the NIT.

Q: If the is mentioned under Section 32 A,does it follow that it is automatically includedin the GIT?A: No, Section 32 A states “Except whenotherwise provided in this title”

Q: What are the income that are notincluded, not subject to NIT?A:

1. Income that are subject to FIT.2. Income that are considered an

exclusion; and3. Income that are exempt.

Q: When do you not apply Sec. 32 A?A: it applies to all except:

1. NRANETB2. NRFC

» they do not pay NIT, they pay by waqy of GIT.

Q: What are included in the Gross income?A:

1. Compensation for services in whatever form paid including but nor limited to fees, salaries, wages, commissions, and similar items. [Sec. 32 A (1)]

Q: What is compensation?A: all remuneration for services performedby an employee for his employer under an

employer-employee relationship.

TAKE NOTE: compensation is included in theITR if the taxpayer is not liable for NIT. Thus,if subject to NIT, included in the ITR.

Q: Is there an instance where the salaries of a RC is not included in the ITR?

A: Yes, if the salary is subject to FIT, likewhen the RC is employed in Multinational,offshore banking, and petroleum companies.

2. Gross Income derived from theconduct of trade or business or theexercise of a profession; [Sec. 32 A (2)]

Q: What is the income tax here?A: NIT, included in the ITR.

3. Gains derived from dealings inproperty. [Sec. 32 A (3)]

Q: Did the law distinguished?A: No, the law did not distinguished betweenreal and personal property.

TAKE NOTE:1. Sale of real property

2. Sale of shares of stock (personal prop.)

► if the elements are present, subject to

FIT. Thus, it is not included in the ITR, thewithholding agent will be responsible for this.

Q: Income form the sale of property, do youinclude this in the ITR?A: it dependsa. if subject to FIT, not included.

Withholding agent accomplish the forms→ subject to FIT if the following elements

are present:

1. it is a capital asset;2. located in the Phil.: and3. sold by individual, trust, estate, DC.

b. if subject to NIT, included in the ITR.→ Elements are not present, like when

the real prop. is an ordinary asset or when itis capital asset if the taxpayer is RFC.

TAKE NOTE: R-R 17-2003

► Real property sale subject to FWT, the

buyer accomplishes the ITR.

4. interest; [Sec. 32 A (4)]

Q: What interest is being referred to here?A: interest which is included in thecomputation of gross income is interestearned from lending money and interest frombank deposit which does not constitutepassive income.

Bank interest from sources, without orabroad.





39

Q: Bank interest from Solid Bank, is itincluded in the ITR?A: No, because it is included or consideredan income within, thus subject to FIT. Thus,not included in the ITR.

5. Rents. [Sec. 32 A (5)]

► subject to NIT, included in the ITR.

6. Royalties; [Sec. 32 A (6)]

Q: What is being referred to here?A: royalties which does not constitutepassive income. Royalties derived fromincome without. – subject to NIT. Thus notincluded in the ITR.

Q: Who are the taxpayers?

A: Liable from income w/in and w/out andthe rest are exempt.

1. RC2. DC

7. Dividends. [Sec. 32 A (7)]

Q: What kind of dividends?A: one that does not constitute a passiveincome.

TAKE NOTE:1. DC individual taxpayer = FIT

2. DC – DC & RFC = EXEMPT3. DC – NRFC = FWT

► only dividends issued by a FC to an

individual taxpayer (RC OR RA) is included inthe computation of the gross income. Thus,included in the ITR.

8. Annuities. [Sec. 32 A (8)]

Q: What kind of annuities?A: annuities which are not exempt from taxare included in the computation of the gross

income. (included in the ITR)

9. Prizes and Winnings [Sec. 32 A (9)]

Q: What kind of prizes and winnings?A:

a. those that does not constitute passiveincome; and

b. those that are not considered as anexclusion. Thus, exempt.

Passive Income

1. Prizes – derived from sources withinand over 10,000.00

2. Winnings – derived from sourceswithin.

Exempt:a. winnings: PCSO and Lotto winnings.b. prizes:

► those primarily for recognition of

(1)religious, (2)charitable, (3)scientific,(4)educational, (5)artistic, (6)literary, (7)civicachievement are exempt PROVIDED:

1. the recipient was selected without anyaction on his part to enter the contest

or proceedings; and2. the recipient is not required to render

substantial future services as acondition to receiving the prize oraward.

► prizes and awards granted to athletes are

also exempted provided:1. local or international sports

competition or tournament;2. held in the Philippines or abroad; and3. sanctioned by the national sports

association.

Q: When is a prize subject to NIT?A: 1. when derived from income without;

2. when less than 10,000.00;3. when the income earner is a DC or RC.

Q: When is winning subject to NIT?A: 1. When derived from income without;

2. when the income earner is a DC orRC.

10. Pensions [Sec. 32 A (10)]

Q: What kind of pension?A: Included in the gross income if notexempt» never subject to fit (?)

11. Partner’s distributive share from thenet income of the general professional partnership (GPP).

Q: What is being referred to?





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A: GPP exempt from payment of corporateincome tax

► shares of partners subject to NIT – Sec.

26

SEC 32 B EXCLUSIONS FROM GROSS

INCOME

Q: What do you mean by exclusions? Arethese exempt from income tax?A: these are not included in the grossincome, THUS, exempt.

TAKE NOTE: Exemptions, exclusions,deductions, have the same characteristics →

all tax do not apply.

1. Life insurance [Sec. 31 B (1)]

Q: What is the requirement?A: only one requirement for exemption: thatthe proceeds of the life insurance be payableupon the death of the insured.

Q: Does it matter who the beneficiary is orpaid in a lump sun or single sum?A: No. it does not matter.

Exception: amounts held by the insurer underan agreement to pay interest thereon, theinterest payment shall be included in thegross income.

2. Amount received by insured as return of premium [Sec. 32 B (2)]

Q: if the insurance is payable within a certaintime, say 10 years and thereafter the insureddid not die, how much will be excluded?A: only the amount received by the insuredas a return of the premiums.

Ex. 1 M – 100 thousand = capitalIt is exempt (100K)

900K is taxable.

Q: Why is it excluded?A: because the amount received merelyrepresents a return of capital.

Q: is this subject to Estate Tax under Sec. 85E? do we have the same requirement?A: no, the requirement for exemption is notthe same under Section 85 E.

3. Proceeds of life insurance: decedent insured himself, inclusion or exclusionwill depend on who the beneficiary is.

a. the beneficiary is the estate.» subject to Estate tax, included in the

gross estate regardless of whether or notthe designation of the beneficiary isrevocable or irrevocable.

b. the beneficiary is a third person other thanthe estate.

b.1 Revocable Designation → subject to

estate tax, included in the gross estate.Reason: because of the insured’s powerto modify or change the beneficiary.b.2 Irrevocable Designation → not subject

to Estate tax, not included in the grossestate.Reason: the insured loses the power to

control, modify and change thebeneficiary.

Q: Is it subject to VAT?A: 1. Non-life insurance – yes, subject toVAT under 108 (A).

2. Life insurance – NO, subject topercentage tax under Sec. 123 of the TaxCode.

4. Gifts, Bequest and Devises [Sec. 32 B (3)]

Q: Why is the donee exempt from incometax?A: Because the law classify it as anexclusion, not important to know whetherproperty is real or personal.

What is exempted is the “value of property acquired by gift, bequest or devise”

TAKE NOTE:A. GIFTS are excluded because they aresubject to donor’s tax.B. BEQUEST and DEVISE are excludedbecause they are subject to ESTATE tax.

Q: what is included in the gross income?A: income from such property.

► gift, bequest, devise or descent of income

from any property in case of transfers of divided interest.

5. Compensation for injuries or sickness [Sec. 32 B (4)]





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Q: is this the same as those provided underthe workmen’s compensation act (wca)?A: YES. There are 3 groups:

a. Health or accident insurance or thoseunder workmen’s compensation.

b. personal injuries and sickness; and

c. Damages to prevent injuries andsickness.

Q: What does injury include?A: The term injury includes death, even if not injured, if the person dies this will beavailable.

Q: when will the damages recovered beexempt?A: General Rule: all damages awarded aretax exempt.

Exception: damages representing loss of

income.

Q: Why is it considered an exclusion?A: because this is just an indemnification forthe injuries or damages suffered.

6. Income exempt under a treaty [Sec.32 B (5)]

Q: What is excluded?A: income of any kind required by treatybinding upon the Phil. Government.

7. Retirement benefits, pensions,gratuities [Sec. 32 B (6)]

Q: Why do we need to distinguish retirementpay, separation pay and terminal leave pay?A: because they have different requirementsfor exemption.

Q: What is retirement pay?A: the sum of money received upon reachingthe maximum age of employment.

a. Under RA4917 (with Retirement Plan)

1. the private benefit plan is approvedby the BIR (RR2-98);

2. the retiring official or employee hasbeen in the service of the sameemployer for the last 10 years;

3. he is at least 50 years old at the timeof retirement; and

4. the official or employee availshimself/herself of the benefit onlyonce.

b. Under RA7641 (without retirement plan)1. the retiring official employee is at

least 60 years old but not more than65 years old;

2. the employee or official must haveserved the company for at least 5

years;» entitled to 15 days salary and ½ of the13th month pay for every year of service.

TAKE NOTE: the retirement benefits underRA4917 and RA7641 are exempt fromincome tax provided the requirements arepresent.

SEC. 32 B(6)(c)

► retirement benefits given by foreign

government, foreign corporation, public as

well as private to RC, NRC, RA residingpermanently in the Philippines - exemptwithout further qualifications – automaticexclusions.

SEC. 32 B(6)(d,e,f)

► retirement benefits given by the

Philippine Gov’t through the GSIS, SSS andPVAO are exempt without furtherqualifications = automatic exclusions.

August 21, 2006.

- midterms 6-8 pm until sec 32 B(6) NIRC.

August 28, 2006.

ANSWERS = MIDTERMS

► Gross Income include both capital and

ordinary gains, Sec. 31 says gross income-deductions, that which is ordinary loss.- may be deducted from capital gains andordinary gains.

Q: What is separation pay?

A: on given when one is terminated from theservice because of (1) illness, (2)death, (3)physical incapacity or injury, or (4) causesbeyond the control of the employee.

Q: Are there any requirement for separationpay granted by foreign gov’t or corp?A: None, the separation pay granted by theaforementioned institutions are exempt





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without further qualifications (“other similarbenefits”).

Q: is separation pay an exclusion, therefore,exempt?A: No.

GENERAL RULE: Separation pay not

exempt (?)Exception:

1. Automatic exclusions, thus exempt if dueto:a. illnessb. deathc. physical incapacity or injury.

2. Conditional exclusiona. causes beyond the control of the

employee- excludedb. within employee’s control – included.

Examples:1. registration – CBA provides separation

pay, within the control = included.2. installation of labor saving devises or

bankruptcy – beyond the control =excluded.

Q: What is terminal leave pay?A: the accumulated vacation leave and sickleave benefits converted to cash or money tobe given either every year or upon retirementor separation.

Terminal Leave Pay granted upon retirementor separation:

» uder PD220, TLP in the Gov’t or in thePrivate Sector shall be exempt fromincome tax if given or granted uponretirement or separation.

TLP granted on a yearly basis:1. employee in the private sector:

a. accumulated sick leave – subjectto income tax.

b. Accumulated vacation leave: if more than 10 days (meaning 11pataas) – subject to income tax;

»If 10 days or less – exempt.2. Gov’t Employee:

» governing law: EO 291 of Pres. Estrada,RMC 16-2000.

Rule: Gov’t workers (both officers or non-officers) granted TLP on a yearly basis →

exempt from income tax.→ there is no qualification as to vacation or

sick leave.

► Take Note of 3 cases.

» be reminded of EO 291, Sec. 2. 78.2par. 97, RR2-98, RR16-200 (3).

Case of Zialcita ► retired from DOJ, contention: TLP should

be exempt from income tax pursuant to theold law.SC: on a different ground – TLP is exemptbecause it is similar to Retirement pay, thusexempt but the ruling’s application is limitedonly to DOJ employees.

Borromeo case:► Same as the Zialcita case

Issues: WON the TLP is subject to income taxand WON COLA and RATA are included?SC: RULED TLP is Exempt!Modified: the rule applies not only to DOJ

officers but also to CSC commissioners.

COMMISSIONER v. CASTAÑEDA- Castañeda –DFA officer in Phil. Embassy inEngland.1. TLP is exempt.2. Ruling applies to DFA officers.

Q: Does the rule or decision applies to Gov’tofficials only?A: No. PD220: Exemption applies to bothprivate and public sectors(?)

it does not matter if TLP is vacation or

sick leave.

RR2-98, Sec. 2.78.1 par. (a)(7)» JAN, 1998 – the rule applies to bothprivate and public sectors.

EO291 (SEPT., 2000)» Officer in gov’t receiving TLP is alwaysexempt whether or not vacation or sick leaveis granted.

Modified RR2-98:» TLP will only apply to private sectors

» if granted on a yearly basis – may besubject to tax: VACATION LEAVE1. MORE THAN 10 DAYS = TAXABLE2. LESS THAN 10 DAYS = EXEMPT

8. Miscellaneous items (Sec. 32 B (7) (a) income derived by foreign Gov’t [Sec. 32 B (7) (a)]

Q: What kind of income?





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A:1. investments in:

a. loansb. stocksc. bondsd. other domestic securities

2. interest from deposits in Banks in the

Philippines.

Q: Who are income earners?A:

1. foreign government2. financing institutions owned,

controlled or enjoying re-financingfrom foreign gov’ts; and

3. int’l or regional financial institutionsestablished by foreign gov’ts(established in the Philippines)

TAKE NOTE: if plain foreign corp., subject to

FIT 20%.

EXAMPLES of exclusions:a. Brunei Gov’t earns interest by depositing

money in Makati Bank – Exclusion.b. SMC- Stock dividends to 3. Brunei Gov’t.

exclusionc. Income derived by the Gov’t or its

political subdivisions (Sec. 32 B (7) (b)a. exercise of public utilityb. exercise of any essential gov’t

function.» accruing to the gov’t.

d prizes and awards (Sec. 32 B 7 c)» primarily for religious, charitable,scientific, educational, artistic, literary orcivic achievements:1. recipient was selected without any

action on his part to enter the contestor proceedings;

2. the recipient was not required torender substantial future services as acondition to receive the prize oraward.

D. prizes and awards in sports (Sec. 32B 7 d)

1. granted to athletes;2. local or int’l competitions;3. held here or abroad;4. sanctioned by the nat’l sports associations.

E. 13th month pay and other benefits (Sec.32B 7 e)

Q: Do you include Christmas bonus in yourITR?

A: No, because the law says 13th month payand “other benefits”/”similar benefits” – xmasbonus is included in the category.

Q: Who can increase the 30,000 limit?A: The Sec. of Finance.

Q: Applicable to whom?A:

1. gov’t; and2. Private institutions.

F. GSIS, SSS, Medicare and other contributions(Sec. 32 B 7 f)► must be deducted from the GI not NIT

because it is an exclusion.-creditable withholding tax is an exclusion-must be deducted first from the GI beforeyou compute the NIT. Otherwise, you areincluding in the GI something that is

excluded from the same.

G. Gains from the Sale of bonds, debentures,or other Certificate of indebtedness. (Sec. 32B 7 g)

Q: Why 5 years?A: certificate of indebtedness is similar toBank Interest in a long term deposit.

- Sec. 32 B 7 g is similar or the same as 24 Bin long term deposit.

H. Gains from redemption of shares inmutual fund (Sec. 32 B 7 h)

1. Fiscal Year – means an accounting periodof 12 months ending on the last day of anymonth other than December.

2. Calendar year – a period of 12 monthsbeginning on January and ending onDecember.

Q: Business expense incurred in February2006, is it possible to include it for April

2006?A: yes, it is possible or it is possible if fiscalyear is employed, if it falls under the fiscalyear and all the elements are present.

- related to trade or business.REASON: Capital loss has no connection tothe trade or business.





44

TAKE NOTE:► for taxpayers liable for income within and

without (RC & DC)), they can claimdeduction for expenses incurred withinand without.

► for taxpayers who are liable only for

income within, they can claim a deduction

for expenses incurred within thePhilippines.

Sec. 34 A EXPENSES

1. For those business expenses notenumerated under A. You need to prove thatit is an ordinary and necessary expense.

2. For those enumerated under A, all youhave to prove is that it is incurred during thetaxable year.

Feb. 12, 2007 (Sec. 34 A, Expenses)

Q: Did the law define what is reasonable?A: No. for salaries and wages all that isrequired by law is for it to be reasonable.

- for other forms of compensation, theremust be services actually rendered.

AGUINLDO Case

F: involves a corporation engaged in sellingfish nets, and the corporation have a land

sold through a broker.►there was substantial profits gained from

the sale of a land which was sold by a broker.The profit was in turn given to the workers asspecial bonus.►the corporation claimed the bonus as a

deduction.

ISSUE: Should the deduction be allowed?

H: The SC did not allow the deduction, forother forms of compensation, it must bemade or given for services actually rendered.

►in this case, it was proven that the sale was

not made by the employees, no effort orservices actually rendered by them becausethe sale was made through a broker.►

Q: Reasonable Travel Expenses, What is therequirement?A:

1. Travel must be in pursuit of business,trade or profession.2. Travel expense while away from home.

Q: Is there a travel expense which was not inpursuit of business?A: yes, those which are considered as fringe

benefits (FB), expenses for foreign travel isconsidered a FB only if it is not in pursuit of the trade or business.

Q: can you claim it under Sec. 34 A (1)(a)(ii)?A: No, you can claim it under Sec. 34 A(1)(a)(i) last paragraph.

Q: Reasonable Allowances for rentals formeralco bills, requirements?A:

1. required as a condition for thecontinued use or possession, for the

purpose of the trade, business orpossession of the property.2. taxpayer has not taken any title or noequity other than a lessor.

Q: Reasonable allowance for entertainment,amusement and recreation expenses, what isthe requirement?A:

1. connected with the development,management, and operation of the trade(DOM);2. Does not exceed the limits or ceiling

set by the Secretary of Finance; and3. Not contrary to law, morals, goodcustoms, public policy or public order.

Q: How about bribe, kickbacks, and othersimilar paymentsA: even without this provisions, kickbacks willnot pass the requirement of (i) ordinary and(ii) necessary hence not deductible

EXPENSES ALLOWABLE TO PRIVATEEDUCATIONAL INSTITUTION

Q: Why only private educational institution ismentioned and no other taxpayers?A: it refers to section 27 for PrivateEducational Institution given to theeducational institution.

GENERAL RULE: 36 A (2) and 36 A (3)expenditures for capital outlays notdeductible as business expense





45

EXCEPTION: Private Educ. Institution canclaim it under Sec. 34 A (2)

BUSINESS EXPENSE vs. ALLOWANCE FORDEPRECIATION

BUSINESS EXPENSE

1. No carry-over2. can be claimed for one year only.3. if the amount of capital outlay issubstantial, it cannot accommodate all of theexpenses incurred.

ALLOWANCE FOR DEPRECIATION1. There is carry over2. you can claim it for a longer perioddepending on the life span of the property.3. it can accommodate all of the expensesincurred.

• taxpayer’s allowable deduction forinterest expense shall be deducted by anamount equal to 42% (RR 10-2000) of theinterest income subject to FIT.

Q: Who claims this deduction?A: the debtor claims this deduction.

Q: What kind of interest is this?A: interest on loan.

►interest on debt - when one borrows money

to finance his business interest in connection

with the taxpayer’s profession trade orbusiness.

REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)

►a borrower or taxpayer can claim the

interest paid in advance as itemizeddeduction when he filed his income taxreturn (ITR) depending on whether or not theprincipal obligation has been paid.

1. if the entire amount or entire principalobligation has been paid – the entire amount

of interest can be claimed as itemizeddeduction.

2. if only ½ of the obligation had been paid,then the entire amount of ½ of that interestcan be claimed as a deduction.

3. if no payment had been paid on theprincipal obligation, the advance interest paid

cannot be claimed as a deduction on theyears that it was paid.

REQUIREMENTS FOR REDISCOUNTING OFPAPERS:

1. incurred within the taxable year.

2. individual taxpayer reporting income on acash basis.

• No deduction shall be allowed in respectto the following interest:

1. if within the taxable year an individualtaxpayer reporting income on the cash basisincurs an indebtedness on which an interestis paid in advance or through discount orotherwise.

2. if both taxpayer and the person to whom

the payments has been made or is to bemade are persons specified under Sec. 36 (B):a. member of a familyb. bet. an individual and a corp., more than50% in advance of the outstanding stock of which is owned directly or indirectly by or forsuch individual;c. Bet. 2 corp., more than 50% in value of theoutstanding stock of each of which is owned,directly or indirectly, by or for the sameindividual.d. bet. the grantor and a fiduciary of anytrust;

e. bet. the fiduciary of a trust and thefiduciary of another trust if the same personis a grantor with respect to each trust; orf. bet. a fiduciary of trust and a beneficiary of such trust.

Q: Who are not allowed to claim interestunder sec 36 B?A: interest incurred between related parties.

Q: What if half-brother?A: not allowed to claim deduction for interest.

TAKE NOTE: interest incurred from theexploration of petroleum refers not just ininterest incurred on loan of money but alsointerest incurred for installment payments.

Q: Who are related parties?A: individuals and corporations.





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OPTIONAL TREATMENT OF INTERESTEXPENSE:1. interest incurred to acquire property usedin trade, business or exercise of professioncan be claimed a an itemize deduction…

a. on interest; orb. depreciation (as capital expenditure?)

Q: What is this interest income?A: the money borrowed was deposited in abank so that it will warn interest. (RR13-2000)

ILLUSTRATION:1. loan of 1M from a bank with an interest of 20%2. 20% of 1M is Php200,000 but you cannotclaim this whole amount as a deduction.3. when you deposited the 1M in the bank, itearned a bank interest subject to FIT worth

Php10,000.00.4. 42% (RR) of 10,000 = 4,200 (RR 9337)5. Php200K-4,200= Php195,800/ this is theamount you can claim as a deduction.

34 C TAXES:

REQUISITES:1. taxes must paid or incurred within thetaxable year2. it must be incurred in connection withtrade or business.3. can be claimed as:

a. a deduction; or 34 C 1&2b. tax credit 34 C 3&7

Q: Where should it be deducted?A:

1. if claimed as a deduction, it should bededucted from the gross income;2. if claimed as a tax credit, it should bededucted from the Net Income Tax due(bottom of the formula)

MERCURY DRUG CASE - Discount of senior citizens

SC: discount claimed by senior citizens shallcreate a tax credit and must be deducted atthe bottom of the formula.

Q: What is a tax deduction? Example?A: example is business tax.►tax deduction is allowed if the taxes were

paid or incurred within the taxable year and itmust be connected to the trade, business orprofession of the tax payer.

Q: Who are entitled to claim it?A: those liable to pay NIT. (Tax credit only forNIT)

Q: What is a tax credit?A: refers to the taxpayer’s right to deduct

from the income tax due the amount of tax the taxpayer paid to foreign country,subject to limitations.

Q: What is the tax credit being referred tounder 34 C (3)?A: credit against taxes for taxes of foreigncountry.

Q: What are the other tax credit under thecode?A:1. RA 6452 – selling goods and commodities

to senior citizens, the discount claimed istreated as a tax credit.2. income tax paid to foreign country.3. Input tax on Vat4. Creditable w/holding tax system under NIT5. Tax credit certificate.

Q: Who are allowed to claim it?A: RC and DC only.

Q: suppose you paid the 100K NIT to US, canyou claim as a deduction the whole 100K?what is the formula?

►same procedure for (1) income tax paid to

foreign country; (2) estate tax paid to foreigncountry; and (3) Donor’s tax paid to foreigncountry.

A: Formula:STEP 1

GI from sources w/inNIT: _____________________

GI from entire world

STEP 2

Quotient x RATE = amount w/c can beclaimed as a deduction

A: you cannot claim the whole 100K, you canonly claim the product of the quotient timesthe rate





47

TAKE NOTE: deduct at the bottom of theformula ( sa computation ng GI)

Q: Suppose you are a RC, you pay NIT to US,will you be able to claim it as a taxdeduction?

A: 1. generally, you can claim it as tax credit.2. you can claim under Sec. 34 C (1) b

►if the taxpayer did not signify in his return

his intention to avail himself of the benefit of tax credit for taxes paid to foreign country.►taxes incurred not related to the trade or

business, you have the option to:a. claim it as tax credit; orb. claim it as a deduction

►law gives you this privilege.

Q: When is taxes not allowed as a deduction?

A: Sec. 34 C (1)1. Income tax;2. Income tax imposed by authority of any foreign country;3. Estate and Donor’ tax; and4. taxes assessed against local benefits of a kind tending to increase the value of the property.

Q: Who are not allowed to claim deductions?A: Under 34 C (3) - NRC, NRA; and N/RFC

TAKE NOTE:1. NRAE and NFC – allowed deduction only if and to the extent that they are connectedwith income from sources within the Phils.2. Taxes that had been allowed as deductionbut are later in refunded should be treated aspart of the gross income during the year thatit is received (34 1 last paragraph)

Q: Which would you choose? Tax credit ordeduction?

A: tax credit because it is deducted from the

taxable income while deductions arededucted from the GI.

FORMULA: GI-DEDUCTION = NET INCOME xRATE = TAXABLE NET INCOME – TAX CREDIT)

34 D LOSSES

Q: Is always a requirement that it is incurredin pursuit of trade, bus. or profession?

A: No. Sec. 34 D(1) provides for 2 kinds of losses:

a. incurred in pursuit of trade, bus. orprofession;b. property connected with t,b,p, if theloss arises from fire, storms, shipwrecksor other casualties or from robbery, theft

or embezzlement (arising from naturalcalamity).

Q: What is the requirement?A:

1. Loss actually sustained during thetaxable year2. Not compensated for by insurance orother forms of indemnity.3. Not claimed as a deduction for estatetax purposes.

Q: This is your itemized deduction which canbe claimed as a deduction from?

A: Gross income

TAKE NOTE:► The itemized deduction of losses,

however, is not confined to section 34B. it isalso found under section 86A (1) (e) whichalso pertains to deductions available underthe estate tax law.►Losses within six (6) months after the death

of the decedent can be claimed as itemizeddeduction of losses under Section 34B.

However, may be claimed as deduction underestate tax return provided that the same arenot claimed as itemized deduction of lossesunder Section 34B.

Q: How many carry-overs do we have underthe Code?A: 3. Namely:

1. Section 27 E (32) Carry forward of excess minimum Tax2. Section 39 D Net Capital Loss Carry-over3. Section 39 D 3 Net Operating Loss

Carry-Over.

KINDS OF LOSSES AND THEIR CARRY-OVERS:

A. ORDINARY LOSS – NOLCO ( #3 above)

Q: Why is there a need for a carry over underSec. 34 D # when you can claim the loss fromboth capital and ordinary loss?





48

A: if the loss exceeds the income for thetaxable year, you cannot deduct the entireamount of loss from your income for thatyear so the excess may be deducted for thetaxable year following the loss.

B. CAPITAL LOSS – NET CAPITAL LOSS

CARRY OVER ( # 2 above)

NET CAPITAL LOSS CARRY-OVER

NET OPERATING LOSS CARRY-OVER

1. taxpayers is anindividual only notcorporation.

2. involves net capitalloss

3. carry-over as lossfrom sale of capitalasset in the nextsucceeding year

4. can only bededucted fromcapital gains.

1. taxpayer may bean individual orcorp;

2. losses incurredor connected with Tor B;

3. Business lossesnot previously off-set as a deductionfrom the GI carriedover as such for thenext 3 consecutiveyears;4. can be deductedfrom capital gainsand/or ordinarygains.

NET OPERATING LOSS CARRYREQUIREMENTS:1.Net operating loss of the business orenterprise incurred w/in the taxable year2. not previously off-set as a deduction fromthe GI3. carried over as a deduction from the GI forthe next 3 consecutive taxable yearsimmediately following the year of such loss.

Q: Can the period be extended?

A: yes, for mines other than oil and gas well.1. net operating loss w/out the benefitincentives provided by law;2. incurred in any of the first 10 years of operation.3. carried over as a deduction from the GIfor the next 5 years following such loss.4. no substantial change in the ownershipof the business or enterprise.

Q: What is the limit?

A: 75% of the nominal value of outstandingshares is held by or on behalf of the samepersons/ corporation

► individual no problem, problem lies with

corporations or enterprises.

ABANDONMENT LOSSES

1. contract area where petroleum operationsare undertaken is partially or whollyabandoned;► all (1) accumulated exploration and (2)

development expenditures pertaining theretoshall be allowed as a deduction.

2. a producing well is subsequentlyabandoned:►unamortized cost and undepreciated cost

of equipment directly used therein shall beallowed as a deduction in the years it wasabandoned.

TAKE NOTE:1. if abandoned well is reentered andproduction is resumed; or2. if equipment or facilities are restored intoservice in the year of resumption orrestoration and shall amortized ordepreciated.

Q: What is the Tax benefit rule?

A: Last Par. of Sec. 34 E (1): recovery of baddebts previously allowed as deduction in thepreceding year shall be included as part of the gross income in the year of recovery tothe extent of the income tax benefits of saiddeduction.

Q: What is a Bad Debt?A: Bad debts shall refer to those debtsresulting from the worthlessness orincollectibility in whole or in part of amountsdue the taxpayer by others, arising frommoney lent or from uncollectible amounts of

income from goods sold and servicesrendered.

CHINA BANK VS. CA► bad debts can only be claimed if pursuant

to a contract of loan- no bad debts for loss of instruments.

Q: Who claims it?A: a. creditor





49

b.money lender

Q: What year can it be claimed?A: can be claimed in the year it was actuallysit ascertained to be worthless and chargedoff, meaning cancelled in the books of account.

Q: Do you need to file an action before youcan claim?A: No, all you have to do is prove that you didexert effort to claim or recover the same.

Q: What cannot be deducted as bad debts?A:

1. debts not incurred in connection withthe trade, business and profession of taxpayer.2. transactions, mered into betweenparties mentioned under Section 36 (B)

namely.a) between members of the familyb) between an individual who ownsmore than 30% of outstandingcapital stock of a corporation andthat corporationc) between two (2) corporations morethat 50% of the outstanding capitalstock of which is owned by or for thesame individuald) between a grantor and fiduciary of any truste) between two (2) fiduciaries of two (2)

trusts who has the same grantorf) between a fiduciary of a trust andabove fiduciary of such trust

SECURITIES BECOMING WORTHLESS 1. ascertained to be worthless andcharged off within the taxable year2. capital asset3. taxpayer, other than a Bank or trustcompany incorporated under Phil. Laws4. substantial part of business is thereceipt of deposit5. considered as a loss from the sale of

capital assets on the last day of suchtaxable year

34 F DEPRECIATION

Q: What is depreciation?A: It is the gradual dimension in the serviceor useful value of tangible property due fromexhaustion, wear and tear and normalobsolescence.

Q: What kind of property is involved?A: 1. Real property except parcel of land

2. Personal Property

REQUISITES:

1. depreciation deduction must bereasonable2. for the exhaustion, wear and tear,including reasonable allowance forobsolescence3. property used in the trade of business

Q: What do you mean by “reasonableallowance”?A: it shall include, but not limited to, anallowance computed in accordance with rulesand regulations prescribed by the Secretaryof Finance, upon recommendation of the

Commissioner, under any of the followingmethods:

1.Straight-line method2.Declining balance method3.Sum-of-the-year-digital method; and4.any other method which may beprescribed by the Secretary of Financeupon recommendation of theCommissioner

DEPRECIATION OF PROPERTIES USED INPETROLEUM OPERATIONS

1. properties directly related to productionof petroleum

2. allowed under (1) straight line or (2)declining balance method

3. useful life of properties used or relatedto production of petroleum shall be ten(10) years or such shorter life asmay be permitted by theCommissioner.

4. for property not used directly in theproduction of petroleum (1) depreciatedunder the straight line method, anduseful life is only five (5) years

DEPRECIATION OF PROPERTIES USED INMINING OPERATIONS

ALLOWANCE FOR DEPRECIATION:1.all properties used in mining operationsother than petroleum operations shall becomputed as follows:

a. if the expected life is ten (10) years orless – normal rate of depreciation





50

b. if the expected life is more than ten (10)years – depreciated over any number of yearsbetween five (5) years and the expected life.

REQUIREMENTS:

1. depreciation is allowed as a deductionfrom 61; and

2. contractor notifies the Commissioner atthe beginning of the depreciation periodwhich depreciation rate shall be used.

DEPRECIATION DEDUCTIBLE BY NRAETB ORRFC► reasonable allowance for the deterioration

of property

1. arising out of its use or employment2. or non-use in the business, trade or

profession3. property is located in the Philippines

34 G DEPLETION OF OIL and GAS WELLSand MINES► only deduction which is a not self

executing deduction

Q: What is depletion?A: the exhaustion wear and tear of naturalresources as in mines, oil, and gas wells►the natural resources called “wasting

assets”

DEPRECIATION vs DEPLETION

1.involves property 1. involves naturalresources

2. ordinary wearand tear of equipments

2. ordinary wearand tear of naturalresources

TAKE NOTE:►Equipment used in mining operation is

deductible in depreciation

Q: Method for computing depletion?A: cost depletion method

Q: to whom allowed?A: only mining entities owning economicinterest in mineral deposits►Economic interest: capital investments in

mineral deposits

34H CHARITABLE & OTHERCONTRIBUTIONS

TAKE NOTE:1.unique because deducted from the taxablenet income and not from the gross income►second step of the formula deduction

Q: Who is claiming the deduction?A: the donor

Q: Who are the Donees?A: 1.Government of the Philippines or any of

its agencies or any political subdivisionthereof exclusively for public purpose2. Accredited Domestic corporation orassociation organized and operatedexclusively for religions, lion, charitable,scientific, youth and sports development,cultural or educational purposes or for

the rehabilitation of veterans, orto social welfare institution, or to nongovernment organization and no part of its net income inures to the benefit of any private stock holder or individual

Q: How many kinds of deduction?A: Two (2) kinds:

1.partial deduction►10% of taxable income in case of an

individual►5% of taxable income in case of

corporations

2. full /total deduction

Q: Which of the two kinds is the GeneralRule?

A: General Rule: Partial deductionException: Total /Full deduction

Q: Suppose Mr. A made a cash donation of P1M. How much can he claim as adeduction?A: First determine the taxable income of Mr Asince he is an individual, he can only deduct10% of his taxable income.

Q: What if the Donee is not one of thosementioned under the law, can he claim adeduction?A: No.

TAKE NOTE: Donee is never an individual.





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Q: If the Donor is a pure compensationincome earner and he donates P100,000 tothe church, can he claim it as a deduction?A: No. pure compensation income earner canonly claim a deduction under Sec 34 M

Q: If Donee is the Philippine Government,

what is the requirement?A: it must be made exclusively for publicpurposes

Q: What if the Donee is a province?A: there must be a qualification that it is forpublic purpose

Q: If the Donee is a Domestic Corporation,what is the requirement?

A: no part of its income inures to the benefitof any private shareholder or individual

Q: What are those contributions which can bedeductible in full?A: 1.Donations to the Government – no

conflict with partial (differentrequirement)►Partial donated for exclusively public

purposes►Full, used in undertaking priority

activities of NEDA

2.Donations to certain ForeignInstitutions or International Organizations►in compliance with agreement, treaties

or commitment entered into by thePhilippine Government and such donees

3.Donations to Accredited Nongovernment organizations Nongovernment organization, non profitdomestic corporation

REQUIREMENTS:1. organized and operated exclusively forscientific, research, educational, characterbuilding and youth and sport development,health, social welfare, cultural or charitable

purposes or a combination thereof 2. no part of the net income of which inuresto the benefit of any private individual3. uses the contributions directly for theactive conduct of the activities constitutingthe purpose or function for which it isorganized and operated

4. annual administrative expense does notexceed 30% of the total expenses and

5. in case of dissolution, the assets of whichwould be distributed to:

a) another non profit domesticcorporation organized for similar purposeor purposes

b) to the state for public purposec) distributed by the court to anotherorganization to be used in such a mannerwhich would accomplish the generalpurpose for within the dissolveorganization was organized

34I RESEARCH AND DEVELOPMENT

►In the old law, this is not allowed as a

deduction. To remedy this, they felt thatthose should be a separate deduction forresearch and development.

REQUISITES:►tax payer may treat research and

development expenditures as ordinary andnecessary expenses provided:1. it is paid or incurred during the taxableyear2. incurred in connection with trade, businessor profession; and3. not chargeable to capital account.

Q: Treated as such when?A: during the taxable year it is paid or

incurred

AMORTIZATION OF CERTAIN RESEARCH AND DEVELOPMENT EXPENDITURES

►at the election of the taxpayer, the

following shall or may be treated as deferredexpenses:

a. paid or incurred by the taxpayer inconnection with his trade, business orprofession;b. not treated as expenses under par 1 andc. chargeable to capital account but not

chargeable to property of a character whichis subject to depreciation or depletion

Q: How to compute taxable income:A: deferred expenses shall be allowed asdeduction ratably distributed over a period of not less than 10 months as may be elected bythe taxpayer (beginning with the month the





52

taxpayer first realizes benefits fromexpenditures.)

►the election or option may be exercised for

any taxable year after the effectivity of thecode but not later than the time prescribedby law for filing the return for such taxable

year.

LIMITATION ON DEDUCTIONQ: When not deductible?A: 1.Any expenditure for the

(1) acquisition or improvement of land or(2) for the improvement of property to beused in connection with research anddevelopment of a character which issubject to depreciation and depletion andoffice site

2. Any expenditure paid or incurred for

the purpose of undermining theexistence, location, extent or quality of any deposit of one or other mineralincluding oil or gas.► not for mineral exploration

34 J PENSION TRUST

Q: Claimed by Whom?A: the employer

Q; What is a Pension Trust contribution?A: a deduction applicable only to employer on

account of its contribution to a privatepension plan for the benefit of its employeededuction is purely business in character.

Q: Requisites?A:1.the employer must have established apension or retirement plan to provide for thepayment or reasonable pension of hisemployees2. pension plan must be reasonable andactually sound;3. it must be funded by the employer

4. the amount contributed must no longer besubject to his control or disposition5. the amount has not yet been allowed as adeduction and6. the amount has or is apportioned in equalparts over a period of 10 consecutive yearsbeginning with the year in which the transferor payment is made.

34 K ADDITIONAL REQUIREMENTS FORDEDUCTIBILITY OF CERTAIN PAYMENTS

►allowed as a deduction only if shown that

the tax required to be deducted and withheldthere from has been paid to the BIR inaccordance with Section 58 and Section 81

34 L OPTIONAL STANDARD DEDUCTION

KINDS OF DEDUCTIONS:1.Itemized deduction2.Optional Standard Deduction3.Personal /Additional Deduction

OPTIONAL STANDARD DEDUCTION:►can be availed of by an individual who may

elect a standard deduction in an amount notexceeding 10% of his gross income► may apply in lieu of the other deductions

under Section 34►the taxpayer must signify in his return his

intention to elect the optional standarddeduction, otherwise, he shall be consideredas having availed of the itemized deduction.

Q: Who can claim this deduction?A: all individual taxpayers except nonresident alien not engaged in trade orbusiness (NRANETB)Reason: he is not liable to pay by way of theNIT, thus, follows he cannot claim thisdeduction because he is liable to pay by way

of GIT.

TAKE NOTE:►can co-exist with personal and / or

additional exemption

34 M PREMIUM PAYMENTS ON HEALTHAND /OR HOSPITALIZATION INSURANCEOF AN INDIVIDUAL TAXPAYER► for (1) Health and /insurance

(2) Hospitalization

REQUIREMENTS:

1. amount of premiums, paid by taxpayerfor himself and members of his family,

2. amount of premiums should not exceed(1) P2,400 per family or (2) P200 amonth

3. gross income of the family for thetaxable year is not more than P250,000





53

Q: Who can avail of this deduction?A: 1.individual taxpayer earning purely

compensation income during the year;2. individual taxpayer availing itemized oroptional standard deduction; and3. individual taxpayer earning bothcompensation income and income from

business

SECTION 35 ALLOWANCE FOR PERSONALEXEMPTION FOR INDIVIDUAL TAXPAYER

Q: When do we apply this?A: apply if individual taxpayer is paying byway of NIT

Q; Who are taxpayer?A: those mentioned under Section 24 (A)

1. RC2. NRC

3. OCW4. RA►all can claim both personal and additional

exemption

Q: Why not include NRAETB? Can the latterclaim any exemption?A: NRAETB is not included because Section 35A refers to Section 24 A►NRAETB can claim personal deductions but

not additional exemptions pursuant to Sec 35D

REQUIREMENTS:1.NRAETB should file a true and accuratereturn2. the amount to be claimed as personalexemptions should not exceed the amountprovided for under Philippine Laws

TAKE NOTE:AEMOP: can be a RA or NRAETB

BASIC PERSONAL EXEMPTIONS:

1. Single individual; or individual judicially

decreed as legally separated with no qualifieddependents.► 20, 000

2. For head of the family – can be single orlegally separated with qualified dependents.► 25, 000

3. For each married individual – if only oneof the spouse, earns or derives gross income,

only such spouse can claim the personalexemption.►32, 000

Q: Who is the “head of the family”?A: 1.unmarried or legally separated man or

woman

2. With (1) one or both parties or(2) With one or more brothers andsisters

(3) with one or more legitimate,recognized, natural or legally adoptedchildren

3. living with and dependents upon himfor their chief support

4. whose such brother or sisters orchildren are

(1) not more than 11 years old and(2) not gainfully employed,(3) unmarried

5. OR, regardless of age, the same areincapable of self support because of mental or physical defect.

Q: Why do we have to determine who thehead of the family is?

A: only legally separated individuals canclaim additional exemptions if they havequalified dependents.

TAKE NOTE:►R.A. 7432 and RR 2-98: a senior citizen can

also be a dependent.

Q: Can a widower claim exemptions?A: exemptions must be strictly construed,

widower not included in the list underSection 35 A – but can claim under sec35B

►widower, married or used to be married

MARRIED INDIVIDUALS►each legally married individuals can claim

the personal exemption. Husband and wife =P64,000

Q: Who are allowed to claim?A: Normally , it is the husband who claims

unless he executes a waiver that the wifewill claim the same (RR2-98)

Additional Exemptions: (35B)

-additional exemption of P8,000 for eachdependent not execeeding four (4)





54

Q: Who can claim the same?A: 1.Married couples: only one of the

spouses can claim it;2.legally separated individuals: can beclaimed by the spouse who has custodyof the child or children

►the additional exemption claimed by both

shall not exceed the maximum additionalexemption herein allowed.

Q: Define “dependents”A: legitimate, illegitimate or legally adopted

child chiefly dependent upon and livingwith the taxpayer if such dependent is (1)not more than 21 years of age, (2)unmarried, and (3) not gainfully employedor (4) if such dependent, regardless of ageis incapable of self support because of mental or physical defect.

Q: What if widower has illegitimate children,can claim additional exemption?

A: can claim, can be considered as head of the family w/ dependent

Q: What if the children are temporarily awayfrom the parents?

A: still considered living with parents, canclaim exemption

CHANGE OF STATUS: (SEC 35 C) Q: Reckoning Period?A: end of the year or close of such year when

such change of status occurred.

TAKE NOTE:►always choose the higher amount of

exemption if you are filing a return coveringthe period within which the change of statusoccurred

1. if the taxpayer should (1) marry or (2) haveadditional dependents during the taxableyear, he may claim the correspondingexemption in full for the year.

Illustration:1.Single Jan 1, 20052.Married June 1, 2005 – on April 15, 2006 –status: legally married can claim P 32,000

2. if the taxpayer should die during thetaxable year, estate can claim personalexemption.

Illustration

1.Jan. 25, 2005 taxpayer married w/ onechildcan claim on April 15, 2006P32,000+P8,000

► In this case, as if the change of status

occurred at the close of taxable year. If taxpayer’s spouse or child dies within thetaxable year or the dependent’s became (1)gainfully employed (2) got married or (3)became 21 as if the change as statusoccurred at the close of taxable year.Illustration:1. Taxpayer’s tragic story wife died Jan. 25,2005 and child died the next day thenanother child eloped and get married.2. Taxpayer despite the tragedy can claim tonof money on April 15, 2006.

P 32,000

P 16,000 (8,000 per child)48,000

Section 36. Items not Deductible

36 A. General Rule: In computing net income,no deduction shall be allowed:(1) Personal, living or family expenses – not

related to trade or business(2) Section 36 A (2) and Section 36 A (3)General Rule: No deductions allowed for

1. Any amount paid out for new buildingsor for permanent improvements, or

betterments, made to increase the value of any property or estate2. Any amount expanded in restoringproperty or in making good the exhaustionthereof for which an allowance is or hasbeen made.

Exceptions:1. Option granted to Private Educational

Institution to deduct the same ascapital outlays.

TAKE NOTE:►Amount paid for new buildings, can be

deducted if it involves intangible drilling and

development cost incurred in petroleumoperations (Sec 34 6 (A)

PREMIUMS PAID ON LIFE INSURANCEPOLICY :

1. covering the life of any officer oremployee or any person financiallyinvested in any trade of businesscarried on by the taxpayer.

} P40,000





55

2. taxpayer is directly or indirectly thebeneficiary under such policy.

LOSSES FROM SALES OR EXCHANGES OFPROPERTY (between related parties)

1) between family members

Q: Who is considered the “family of thetaxpayer?”A: a. brothers and sister (whole is ½ blood)

b. spousesc. ancestorsd. lineal descendants

Q: are uncles or nieces included?A: no

IN DONOR’S TAX

►Relatives includes relatives byconsanguinity within the 4th civil code.Nephew is a stranger and relative angnephew.

2) individual and corporationsGen. Rule: NO DEDUCTION

Except: distribution in liquidation orless than 50% of the outstandingcapital stock

3) Two corporations4) Grantor or Fiduciary

5) Two fiduciaries of two trust6) Fiduciary and beneficiary of trust

Sec. 37 Special provisions regardingdeductions of insurance companies.

Codal ProvisionsSection 38: Losses From Wash Sales of Stockor Securities

Q: What is a wash sale?A: It is a sales or other disposition of stocksecurities where substantially identical

securities are purchased within 61 days,beginning 30 days before the sale and ending30 days after the sale.

Q: What period?A: 61 day period beginning 30 days before

and ending 30 days after the saleQ: Jan 20 you purchased share of stock, and

disposed of the same on Feb 5, 2005. Isthis a wash sale?

A: No

Q: If it is a loss in wash sale, happens?A: General Rule: (Sec 131 RR No. 2)gains from wash sale are taxable butlosses are non-deductibleException:

►unless claim is made by a dealer in stock orsecurities and with respect to a transactionmade in the ordinary course of the businessof such dealer

Q: Reason why losses in wash sale cannot bededucted?

A: 1. to avoid too much speculationin the market2. taxpayer not telling the truth,because he may say he incurred

a loss instead of a gain

Section 40. Determination of Amount andRecognition of Gain or Loss

GENERAL RULE: This is totally irrelevantif the income is subject to fit. In fit gain ispresumed.

EXCEPT: sale of shares of stock whereyou have to determine actual gain or loss

Q: When is there a gain?A: excess of the amount realized over the

basis or adjusted basis for determining

gain. (amount realized from the sale orother disposition of property)

Q: When is there a loss?A: the amount realized is not in excess of Bor AB

Illustration: 1987 Bar (Juan dela Cruzsold jewelry for 300,000 ) contract of sale►amount realized is 300,000

Q: What will be the basis of the gain?A: Sec. 40 B (1), property was acquired by

purchase

►Cost: purchase price + expensesQ: If there is a gain, is the whole gain subject

to income tax?A: it depends

►if ordinary asset = 100% is subject to

income tax►if capital assets

a. short term(less than 12 months) :100% taxable





56

b. long term (more than 12 months):50% taxable

Q: suppose property sold is a parcel of landwill the rule be the same?

A: No, and it depends►ordinary asset: apply the cost

►capital asset: 6% FMV or selling pricewhich ever is higher

Q: Do we apply the holding period?A: No, holding period does not apply to the

sale of real property. This is an absoluterule:

►If realty is ordinary – holding period

does not apply.►If realty is capital asset – 6% FMV or

selling price applies.

►Holding period applies only to sale of personal property which is a capital assetexcept sale of shares of stocks.

►Holding period also do not apply to

corporations.

Q: If the property is acquired throughinheritance, what is the basis?

A: Sec 40 B (2) fair market value or price asof the date of acquisition.

Q: Suppose it was a sale of personal property,do we apply the same principles?

A: No.Q: What if it involves a sale of real property?A: Apply the same principles

Suppose it was a result of swindling, theft,robbery or estafa, do we apply thesame principles?

A: Law is silent, take note of the old CIAruling on this one

Q: Feb 14, 2006, your GG gave you a jewelry

in Sept your GG breaks up with you. GGrequest the jewelry be returned but youalready sold it for P200,000. Will theentire P200,000 be included in grossincome?

A: Basis: (1) same as if it would be in thehands of the Donor (FMV as of date of acquisition); or (2) last owner who did notacquire the same by gift (cost)

Q: If it involves a parcel of land?A: apply the same rules Section 40 B (4)

what is the basis?1. Property was acquired for less

than an adequate consideration inmoney or moneys worth: the basis

would be the amount paid by thetransferee for the property.

Q: Section 40 B (5) what is the basis? A: 40 C(5)► if the property was acquired in a

transaction where gain or loss is notrecognized (pursuant to a merger orconsolidation plan)

a. corporation, party to a merger orconsolidation, exchanges propertysolely for stocks in anothercorporation, also a party to the

merger or consolidationb. is a party to the merger or

consolidation, solely for the stocks of another corporation also a party tothe merger or consolidation, or

c. Security holder of a corporation,party to a merger or consolidation,exchanges his securities solely forstock or security in anothercorporation, also a party to themerger or consolidation. – persontransfers property to corporation togain control

40 C EXCHANGE OF PROPERTY

GENERAL RULE: In sale or exchange of property, the control amount of gain or lossshall be recognized.

1. gain is taxable2. losses are deductibleException: If permanent to a merger orconsolidation plan, no gain or loss shallbe recognized

1. gain is exempt2. losses are not deductible

REQUISITES:1. the transaction involves a contract of

exchange2. the parties are members of the

merger or consolidation

3. the subject matter is only limited orconfined with the one provided for bylaw





57

►Merger and Consolidation in corporation

code and tax code are not the same.►Sec 40 (2) (a)►a corporation which is a party to a

merger or consolidation, exchanges property solely for stock in a corporationwhich is a party to the merger or

consolidation

Illustration:Transferor gives 1MTransferee gives 700,000 = nottaxble gain P300,000

►If other property received by transferee (40

C (3) (a) TRANSFEREE ►if the party receives not just the subject

matter permitted to be received: lie if theparty receives money and /or property,the gain, if any, but not the loss, shall be

recognized (meaning taxable) but in anamount not in excess of the sum of themoney and the FMV of such otherproperty received.

(40 C (3) (b) TRANSFEROR

1.Transferor corporation receives money and/ or property, distributes it pursuant to themerger or consolidation plan►no gain to the corporation shall be

recognized2. Transferor corporation receives money and

/ or property, does not distribute it pursuantto the merger or consolidation plan►the gain shall be recognized but in an

amount not in excess of the sum of suchmoney and the FMV of such other property soreceived.

Q: What is the rule?A: 40 C (3) (a)

1. gain taxable2. loss not deductible

►40 C (3) (b)

It depends on how distributed:

1. pursuant to the merger orconsolidation plan:►gain exempt►loss not deductible

2. not pursuant to merger orconsolidation plan:►gain taxable►loss not deductible.

Sec 40 C (1) (b)

►a shareholder exchanges stock in a

corporation which is a party to a mergeror consolidation, solely for the stock of another corporation which is a party tothe merger or consolidation

Sec 40 C (2) (c)

► a security holder of a corporationwhich is a party to the merger orconsolidation, exchanges his securities insuch corporation, solely for stock securities in another corporation.

►The rule is similar in 40 C (3), (a), (b) and

(c) although different property are involve,that is why the last paragraph of 40 C is aseparate paragraph.

►Therefore, Sec 40 C (3) (a,b,c) the rule is

1. gain exempt

2. loss not deductible

40c last paragraph► the transferee becomes a stockholder,

parties are not members of the merger

►the individual wants to be a shareholder

but does not want to purchase shares butwilling to give up property as a result of the exchange , the person gains controlof the corporation

►The rule is:a. gain is exemptb. loss not deductibleRequisites:

1. There is A contract of exchangewhere property was transferred bythe person in exchange of stockor unit of participation in acorporation.

2. As a result, the person alone ortogether with others (notexceeding of 4 persons) gainscontrol of the corporation.

Q: What is control?A: ownership of stocks in a corporation

possessing at least 51% of total votingpower.

Sec 40 B (5)►non applicability of income tax is only

temporary





58

Reason : Basis will be 40 C (5)1. 40 C (5) (a) Transferor►basis of stock or securities received by

the transferor: same as the basis of theproperty, stock or securities exchanged:►decreased by the (1) money and (2) FMV

of the property received; and

►increased by (a) amount treated asdividend and (b) amount of gainrecognized

2. 40 C (5) (b) Transferee►as it would be in the hands of

transferor increased by the amount of gain recognized.

Sec 40 (c) (4) Assumption of Liability1. Taxpayer, in connection with the

exchanges described – receivessecurities or stocks permitted (no

gains recognized) – it is soleconsideration of the same – the otherparty assumes liability of the same –the acquisition of liability not treatedas money and / or other property –the exchange still falls within theexceptions.

2. If amount of liabilities assumed +amount of liabilities to whichproperty is subjected to exceeds -adjusted basis of the propertytransferred – the excess shall beconsidered a gain from the sale of a

capital asset or of property which isnot a capital asset, as the case maybe.

SECTION 41 INVENTORIES

Purpose: Change of inventory to determineclearly the income of any taxpayer/ to reflectthe true income.

Limitation:1. once every 3 years2. approval of the secretary of finance

Section 43 Accounting Periods1. Fiscal year2. use of calendar yeara. no annual accountingb. does not keep books of accountc. individuals

►Use of method as in the opinion of the

commissioner clearly reflects the income:

1. no accounting method has beenemployed

2. the method does not clearly reflectthe income

Sec 44 Period in which items of GrossIncome included and Sec 45 Period for

which Deductions and Credit Taken►Under Sec 44 amount of all items of

gross income shall be included in thegross income for the taxable year inwhich they are received by the taxpayer►Under Sec 45 deductions shall be taken

for the taxable year in which “paid oraccrued” or “paid or incurred.”

►Sec 44 and Sec 45 are mentioned in the

code because of the death of the person.

Illustration:

Facts: taxpayer dies in the middle of theyear January 1, 2006 – June 15, 2006► June 26, 2006 to Dec 31, 2006 the

estate is the taxpayer►So the income and deductions from Jan

1 to June 25,, included in thecomputation

Section 46 Change of Accounting PeriodQ: Who is the taxpayer?A: corporation (taxpayer other thanindividual)

Q: What kinds of accounting period?A: 1.fiscal year

2. calendar year

Q: Changes contemplated?

A: 1. fiscal to calendar2. calendar to fiscal3. fiscal to another fiscal

►with the approval of the Commissioner,

net income shall be computed on the

basis of the new accounting period.

Q: Calendar to calendar, correct?A: not correct statement

Section 47 (A)Taxpayer: Corporation

1. Fiscal to calendar► separate final or adjusted return shall

be made for the period between the so





59

close of the last fiscal year for which thereturn was made and (2) the followingDec 31.

2. Calendar to Fiscal►separate final or adjusted return shall

be made for the period between the close

of the last calendar year and the datedesignated as the close of the fiscal year.

3. Fiscal to fiscal►separate final or adjusted return shall

be made for the period between the closeof the former fiscal year and the datedesignated as the close of the new fiscalyear.►File return indicating the change in

accounting method

Section 48 Accounting for Long Term

Contracts

Q: Who are the professionals involved?A: applies to architects and engineers

Q: What is a long term contract?A: it means building, installation orconstruction contracts covering a period inexcess of one (1) year.

Q: Basis of income?A: a. persons whose gross income is derived

in whole or in part from such contract

shall report such income upon the basisof percentage of consumption.

b. the return shall be accompanied by acertificate of architects or engineersshowing the percentage of completion

c. deduction of expenditures made duringthe taxable year, on account of thecontract is allowed

Section 49 Installment Basis►contemplates a seller of the property

Q: Is it important to know if the property ispersonal or real?

A: Yes

Q: Sale of Real Property is it important toknow if it is a casual sale or regular sale?

A: No

Requirement: The initial payments do notexceed 25% of the selling price.

Q: If the initial payment exceeds 25% what doyou call it?

A: called deferred sale

Q: Consequence?A: you must pay the whole amount of the tax

Q: Sale of Personal Property, is it important toknow if it is a casual or regular sale?

A: Yes

Casual Sale has Requirements:1. selling price exceeds P1,0002. initial payment not exceeding 25%

selling price

►Regular sale no requirements

Case of Bañas 1. subject matter2. sold by way3. agreement4. cash deposit5. post dated promissory notes

(installments)3. 1st installment promissory note was

disconnected4. 2nd installment exchanged with cash -

these two exceeds the selling price5. you only compute cash

H: Initial payment exceeds 25% installmentbasis is not applicable

RR 2; Section 175 : In payment by way of installment promissory note, bills of exchange and checks will not be consideredin computing the 25% initial downpayment.

Section 50 Allocation of Income andDeductions

►tremendous power of the

Commissioner to allocate the income and

deduction of several corporations havingthe same interest.

Q: Same interest?A: stockholders substantially the same

Q: Limitations?A: None►That is why it is a great source of

corruption





60

Section 51 Individual ReturnsWho are required to file? (ITR)

1. RC2. NRC3. RA4. NRAETB – sources within

Q: Who is not mentioned in Sec 51 but liableto pay by way of NIT?

A: OCW/ seaman

Exception:RC OR ALIENS: engaged in trade or practiceof profession in Phil. Shall file ITR regardlessof the amount of gross income.

Q: If OFW is exempt from filing a return, whatis he required to file?

A: Information Return

Q: who are not required to file a return?A:

a. an individual whose gross incomedoes not exceed his total personaland additional exemptions fordependents

b. worker (compensation incomeearners) regardless of the amount of compensation shall not required tofile ITR because the management filesit. (RR 3-2002)

c. individuals whose sole income issubject to FIT

d. individuals who are exempt fromincome tax

Exception: IT1. the management files an incorrect

return2. the employee has two or more

employer

51 A (3)

A: not required to file ITR may be required tofile information return

51 B - Where to file?1. authorized agent bank2. revenue district officer3. collection agent4. duly authorized treasurer of the city ormunicipality where taxpayer resides orhas principal place of business5. office of commissioner – if no legalresidence or place of business in Phil

51 CQ: When to file?A: filed on or before the 15th day of April

each year

51 C (1) – NIT Payers using CY

►two days provided (calendar)1. on April 15; or2. before April 15 (January, Feb or March)

► not December because the calendar year is

not yet over

Fiscal year: 15th day of the 4th monthfollowing the close of the fiscal year.

51 C (2) individuals subject to tax oncapital gainsException: General Rules Sec 581. Sale of shares of stocks

►return filed within 30 days after eachtransaction and►Final consolidated return on or before

April 152.Sale of Real Property►return filed within 30 days following each

sale

51 D Husband and Wife1. Pure compensation income earner –separate return RR 3-2000 – purecompensation income earner regardless of amount of income not file ITR.

2. Not pure compensation: joint return

51 E. Return of Parent to Include Income of Children

► unmarried minor receives income from

property received from living parent –included in the parent’s ITR.Exception:

1.Donor’s tax has been paid2.Property exempt from donor’s tax

51 F. Persons Under Disability

Q: Who makes the return?A:

1.duly authorized agent2. duly authorized representatives3. guardians4.other persons charged with the care of his person or property►both incapacitated taxpayer and agent

will be liable for:





61

1.erroneous return2. false or fraudulent return

51 G Signature Presumed Correct► prima facie evidence the return was

actually signed by the taxpayer

Section 52 Corporation Return►go back to Sec 51 A (2)

General Rule: Sec 58 Final IncomeTax

►return and creditable withholding tax

return is filed monthly

Exception: Sale of Shares of Stocks(Sec 51 A (2)) Sale of Real Property

►RR -17-2003: Sale of Real Property

subject to final withholding tax, the buyeris deemed the agent.

Sale of Shares of Stocks Q: Reasons for filing Final Income tax or Final

Consolidated Return?A: Reasons:

1. FIT whose actual determination of gain or loss

2. in connection with Sec 24 C thebasis of the tax is not the grossincome but the net capital gainsrealized.

In connection with Sec 40:

►actual determination of loss or gain►file a return within 30 days from date of

transaction

TAKE NOTE: In all other income subject toFIT, the gains are presumed

INCOME OF MINORSQ: Minor below 18: Will it be included in theMinor’s ITR?A: it depends

1. income from property received fromparents ► included in parent’s ITR

Except:a.Donor’s tax paidb.Property exempt from donor’s tax

2. income from minor’s own industry►Minor’s ITR accomplished by guardian

or parents

Q: if the individual is exempt from incometax, can be required to file a return?

A: General Rule: NoExceptions:

1.engaged in trade or business; or2.exercise of profession – Sec 51 A (2)

SEC 52 CORPORATION RETURNSA.Requirements

Taxpayer: DC or RFC (except NRFC)ITR Filed: 1. TRUE AND ACCURATE

a. quarterly income tax returnb. final or adjusted income tax return

Filed by:1.President;2.Vice President

3. Other principal officer►ITR must be sworn by such officer and the

treasurer or assistant treasurer

B. Taxable Year

1. fiscal; or 2. calendar► corporation cannot change accounting

method employed without the approval orprior approval of the commissioner (Sec 47)

C. Return of Corporation Contemplatory Dissolution or Recognition1.Within 30 days after:

a. the adoption by the corporation of aresolution or plan for its dissolution; orb. liquidation of the whole or any part of its capital stock, including a corporationwhich has been notified of possible

involuntary dissolution by the SEC; orc. for its reorganization

2.Render a correct return verified under oathsetting form:

a. forms of the resolution or plan;b. such other information prescribed

3.Secure a tax clearance from the BIR and fileit with the SEC

4.Thereafter, SEC issued a Certificate of

Dissolution or Reorganization.

D. Sale of Stocks – ITR look at the previous notes about it

Section 53 Extension of Time to FileReturns

Q: To whom granted?A: Corporations





62

Grounds: Meritorious case►subject to the provisions of Sec 56

Time Extension

Section 54 Returns or Receivers, Trusteesin Bankruptcy or Assignees

►the aforementioned persons shall make

returns of net income as and for suchcorporation in the same manner and formas such organization is required to make.

Section 55 Returns of General ProfessionalPartnership► file a return of its income setting forth

1. items of gross income and of deductions allowed by this title (TitleII – Tax on Income)

2. Names of partners3. Taxpayer identification number (TIN)4. address of partners

5. shares of each partners

►GPP is exempt from corporate income tax

Q: Why is the GPP obliged to file a return?A: to determine the shares of each partners

Section 56 Payment and Assessment of Income Tax for Individuals andCorporations

A. Payment of Tax

Q: Who pays the tax of tramp vessels?A: 1.the shipping agents and or the

husbanding agent2.in their absence, the captains thereof

►those people are required to file a return

and pay the tax due before departure

Q: What is the effect of failure to file thereturn and pay the tax due?A: 1.Bureau of Customs may hold the vessel

and prevent its departure until:a. proof of payment of tax is presented;or

b. a sufficient bond is filed to answerfor the tax due.

Installment Payments Tax due: more than P2,000Taxpayer: individuals only (other than

corporation)Elect to pay the tax in two (2) equal

installments

a. 1st installment: paid at the time thereturn is filed

b. 2nd installment on or before July 15following the close of the calendaryear

Q: What is the effect of non payment on the

date fixed?A: The whole amount of tax unpaid becomes

due and demandable together with thedelinquency penalties.

Payment of capital gains tax :Q : Paid when?A: on the date the return is filed

Avail exemption for capital gains:a.no payments shall be required;b. if you fail to qualify for exemption –

tax due shall immediately becomedue and payable and subject to

penaltiesc.seller pays tax – submit intention or

proof of intent within six (6) monthsfrom the registration of documenttransferring

Q: when is the real property entitled torefund?

A: upon verification of compliance withthe requirements for exemption.

►Report gains on installments under Sec

49 – tax due from each installmentpayment shall be paid within 30 days

from the receipt of such payments.►No registration of document

transferring real property1. without a certification from

commissioner or his duly authorizerepresentative that

a. transfer has been reportedb. tax has been paid

B. Assessment and Payment of Deficiency Tax ► Return is filed, the commissioner examiner

and assess the correct amount of tax►tax deficiency discovered shall be paid

upon notice and demand from thecommissioner.

3 INSTANCES CONTEMPLATED 1. file the return and pay the tax2. file the return but not pay the tax3. not file the return and not pay the tax

Section 57 Withholding of Tax at Source





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A. Withholding of Taxes ►subject to the Rules and Regulations the

Section of Finance may promulgate, uponrecommendation of commissioner: Requirethe filing up of certain income tax return bycertain income payees.

Q: Enumeration is all about what?A; Enumer ation about Final Income TaxExcept: Gross Income Tax

1. 25 B (NRANETB)2. 28 B (NRFC)

B. Withholding of Creditable Tax at Source►The Sec. of Finance, upon

recommendation of the commissionerrequire the withholding of a tax on theitems of income payable to natural or juridical persons, residing in the Phil, bypayor-corporation/ person… the same

shall be credited against the income taxliability of the taxpayer for the taxableyear. At the rate of not less than 1% butnot more than 32% thereof.

Q: What is the maximum?A: Maximum: now 35% pursuant to RA 9337Q: When will you allow withholding beyond

15%?A:

For NIT 15% is the maximum1. FIT – the amount of withholding is

totally

2. GIT - equal to the amount of tax

Tax Free Covenant Bond ►the bonds, mortgages, deeds of trust or

other similar obligations of

DC or RFC►contains a contract or provision where the

obligor (debtor) agrees to pay the taximposed herein►normally between the creditor and debtor

Q: Who pays the tax?

A: Creditor pays the tax by virtue of anagreement the debtor assumes the liabilityand the creditor is now free from payment of tax before it can transfer the property to thebuyer.

Section 58 Returns and Payment of TaxesWithheld at Source

A. Quarterly Returns and Payment of Taxes Withheld at Source1. covered by a return and paid to:

a. authorized agent bankb. revenue district officerc. collection agentd. duly authorized treasurer of city or

municipality where withholding agenthas:

1. his legal residence; or2. principal place of business; or3. if corporation , where principal

office is located

2.Tax deducted and withheld►held as a special fund in trust for the

government until paid to the collectingofficers.

3.Return for final withholding tax

►filed and paid within 25 days from theclose of each calendar quarter

4.Return for Creditable withholding taxes►filed and paid not later than last day of the

month following the close of the quarterduring which withholding was made

5. Commissioner, with approval of SecFinance► require withholding agents to pay or

deposit taxes at more frequent intervalswhere necessary to protect the interest of the

government

B. Statement of Income Payments Made and Taxes Withheld

►Withholding agent shall furnish payee a

written statement showing:1. income or other payments made byWHA during such quarter or year and2. amount of tax deducted and withheld

► statement given simultaneously upon

payment at the request of the payee.

Creditable withholding taxes

1. corporate payee – not later than the20th day following the close of thequarter

2. individuals payee – not later thanMarch 1 of the following year

Final Withholding taxes ►the statement should be given to the

payee on or before January 31 of thesucceeding year.





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C. Annual Information Return►Withholding agent shall submit to the

commissioner an annual information returncontaining :

1. the list of payees and income required2. amount of taxes withheld from each

payees3. other pertinent information required

Final Withholding Tax: AIR

►filed on or before January 31 of the

succeeding year

Creditable withholding tax: AIR ►not later than March 1 of the year following

the year for which the annual report is beingsubmitted

►Commissioner may grant WHA reasonableextension of time to furnish and submit thereturn required herein.

D. Income of Recipient 1. Income upon which any creditable tax

is required to be withheld at sourceshall be included in the return of itsrecipient.

2. the excess of the amount of tax sowithheld over the tax due on hisreturn shall be refunded

3. income tax collected at source is less

than the tax due on his return –difference shall be paid

4. all taxes withheld1. considered trust fund2. maintained in separate account3. not commingled with other funds

of WHA

E. Registration with Register of Deeds ►No registration of any document

transferring real property shall beeffected by the Register of Deeds unlessthe commissioner or his duly authorize

representative has certified that thetransfer (1) has been reported and (2) taxdue has been paid►Register of Deeds requires payment of

tax before transfer of property

Section 59 Tax on Profits Collectible fromOwner of other Persons

►Tax imposed under this title upon gains,

profits and income not falling under theforegoing and not returned and paid byvirtue of the foregoingshall be assessed by personal return

Intent and Purpose of this Title

1. All gains, profits and income of ataxable class shall be charged andassessed with the corresponding tax.

2. Said tax be paid by the owner of thegains, profit or income or the personhaving the receipt, custody, control ordisposal of the same

Determination of Ownership:►determined as of the year for which a

return is required to be filed

CHAPTER X: ESTATES AND TRUSTS

Section 60: Imposition of Tax1. Estate ► property of the decedent

created by an agreement, trust or bylast will and testament

2. Trust ►agreement, contract or last

will and testament

Status:1. Estate: same status as decedent2. Trust: same status as the grantor

Income taxpayer is the Estate:

►income of the estate pending partitionor no partition at all:

Three kinds of partition:1. judicial2. extra judicial partition3. or no partition at all

During partition Estate earns income:1. individual – income tax2. corporation – corporate income

tax3. estate (Taxpayer = TP)

a.Impose Income as if TP is individual

b.Impose income as if TP is corporationc.Impose income as if estate itself

►depends whether there is a (1) judicial

(2)extra judicial partition or (3) no partition atall

When there is a judicial settlement which isfinal and executory but no partition:Two possibilities: 1.Creation of unregistered partnership





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►Income of the Estate: corporate income tax

2.Creation of Co-ownership►Income of the Estate: Income tax on

individual-co-owner liable in their individual company

Ponce Case: H: After finality heirs did not divide theproperty, the applicable income tax iscorporate income tax because theycontributed money to engage in real estate.

SECTION 61 TAXABLE INCOME (Important)“Taxable income of the estate or trust shall be computed in the same manner and on thesame basis as ill the use of an individual.”

Section 62: Applies during Pendency of Extra Judicial Settlement

Personal Exemption (P20,000)Individual ► it will depend whether

he/she is classified as single, head of the family or married

Estate ►regardless

Special deductions:Income distributed to theheirs

►if you distribute nothing you cannot

claim this special deductions►if there is a distribution, the heir shall

be liable to pay whether individualcapacity

►if there is no distribution, heirs are notliable to pay anything

►Special deduction not apply if individual tax

is paid by the Estate itself.

Payment: made by executor, administrator,to creditor to preserve the estate

Sec. 61 and Sec 62►does not apply if estate is subject to

income or corporate income tax►it applies if the estate pays itself during

the pendency of the judicial settlement

Basis: Sec 60 C“during the period of administration orsettlement of the estate.”

Taxpayer is a Trust:Q; When liable to pay income tax?A: If the trust is revocable (if revocable, Sec61 and 62 also apply)

Parties:1.Grantor /creator /trustor2.fiduciary / trustee3.beneficiary / Les Qui trust

Q: Who is liable to pay tax:

A: If trust revocable:► obligation of the trustee►liability of trust itself and not personal

Liability of trustee:If trust irrevocable►obligation of the grantor►personal liability of the grantor as an

individual

TWO WAYS OF REPORTING INCOME:PURSUANT TO RR2 – (1949)

1. report only once

(building paid once)2. after the span of 25 years(payment of building divided per year)

ESTATE TAX:1.Sec 602.Real Estate Tax3. Estate Tax►transfer tax impose on the Net Estate

for the transfer of property to the heirs orbeneficiary whether real, personal,tangible or intangible

3 KINDS OF TRANSFER TAX:1.Estate Tax2. Donor’s Tax3. Sec 135 of LGU Transfer of RealProperty

Q: We don’t have inheritance tax and doneestax, why?A: 1973 Marcos issued P.D. 69Explain: Sec 84, rate is max of 20% of netbefore the rate is 60% plus additionalamount.►resulted to many gimiks through tax

avoidance scheme, like creating a familycorporation (only taxable is the stockholderswhich is exempt)►Congress enacted RA 7449 decreased 60%

to 35% and then RA 8424 – 35% to 20%Q: Now is it safe to create a family

corporation?A: No more.





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Q: Now: Iba na ang scheme – which is bettersale or donation?A:

1.Sale of RP considered capital assets►6% to 1.5% doc. Tax 7.5 % better

2.Sale of RP considered ordinary asset►5% to 52% as per use may be

3.Donation if given to all compulsory heir► relative lower than 20% which is 15%► stranger: 30% so go with 20%

Q: Who are the taxpayers?A: Sec 104 Estate and Donors1.Estate

a. RCb.NRCc. RAd. NRA

2. Donor’s Taxa. RC

b.NRCc. RAd. NRAe. DCf. FC

►A corporation cannot die of a natural death.

Q: What is the reason for classifying thetaxpayers?A:

1. NRA and Estate2. NRA and FC Donors = property

outside Phil exempt

3. all, other than these 3 – taxable w inand w/out

Q: Is Section 104 relevant to all taxpayers?A: No, material only to NRA and FCSection 104 speaks of intangible personal property located in the Philippines.

1.Franchise which must be exercised inthe Philippines;2.S.O.B. issued by a Domesticcorporation;3.S.O.B. issued by foreign corporation atleast 85% of the business of which islocated in the Philippines. – do not

confuse with 42 (2nd par)4.S.O.B. of foreign corporation whichacquired a business situs in Phil5.S.R. in business, partnership or industryestablished in the Phils

Q: NRA, German donates SOS of FG toFilipina gf, is it subject to donor’s tax?

A: it depends (you must qualify)1.Subject to donor’s tax if:

1.S.O.B. FG at least 85% of businesslocated in the Phil

2.S.O.B. FG which acquired a businesssitus in Phil

2.Exempt1.personal property outside of Phil; or2.intangible personal property net taxable

if following requisites concern:

A decedent at the time of his death or thedonor at the time of donation was a citizenand resident.

1.of a foreign country which at the time of his death or donation did not impose atransfer tax of any manner, in respect of intangible personal property of citizens of Philippines not residing in that foreigncountry; or

2. the laws of the foreign country allows

a similar exemption from transfer ordeath taxes of every character ordescription in respect of intangiblepersonal property owned by citizens of the Philippines not residing in thatforeign country.

Q: What if citizen of one country and residentof another country will the exemptionapply?

A: No, law requires that he must be a citizenand resident of the foreign country.

Campos Rueda Case: F: NRA died – married to Moroccan man, so

she was a Moroccan resident.

Donated SS in DC – administrator claimsexemption, ground: In Morocco,intangible personal property of Filipinosnot residing therein is exempt fromtransfer tax.BIR contends: Morocco is not a countrybut a colony of Spain.

H: claim granted – even if it is not a fullpledged state, or it’s a mere colony, what

matter is that the foreign law provides foran exception.

SECTION 84 RATES OF ESTATE TAX

Q: What is the formula for Estate tax?A: Gross Estate (Sec 85)

- Deductions (Sec 86)--------------Net Estate





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x Rate-------------Taxable net income- Tax credit---------------------

Tax dueGross estate (define) – Sec 104

►gross estate include real and personalproperty, whether tangible or intangible,or mixed, wherever situatedNRA: Decedent / Donor – property situated outside of Philippines not included on the gross estate

Section 85 Gross Estate (inclusion)A.Decedent’s interest

►includes property (1) owned at the time of

death and (2) property not owned at the timeof death

Classic example: Usufruct

Q: if terminated by the death of usufructuary,is it subject to estate tax?

A: Not subject to estate tax

Reason: Exempt Transmission underSec 87 (a)►merger of the usufruct in the owner of

the naked title

Q: is there a conflict between Sec 88 a andSec 87 a? How do you reconcile?

A: No conflict1.Section 87 a contemplates a situationwhere the usufruct is terminated.2.Section 88a contemplates a usufruct fora fixed period. Ex contract of lease

Q: How do you determine the value of usufruct?

A: Sec. 88 a provides to determine the valueof the right of usufruct, take into accountthe probable life of the beneficiary.

Q: Why definition of gross estate is longer

than definition of gross gift?A: transfer occurring after death. estate tax

absolute

Transfer during the life time►Normally Donor’s tax

However there are exceptions:1.transfer in contemplation of death (85B)2.revocable transfer (85 C)3.transfer for insufficient consideration

B. Transfer in contemplation of deathRoces case:

F: during lifetime, the following documentwere instituted or executed simultaneously1.will and 2. donationThe heirs insisted to pay Donor’s tax,

Posados the collector tried to collectinheritance tax.unique thing: Donees were also the heirs inthe last will and testamentDonees wanted to pay donor’s tax becauseit is always lower than the estate tax exceptwhen the donee is a stranger

H: this is a transfer in contemplation of death

Dizon Case: F: Deed of Donation was executed

Dizon died several days thereafterson claims Donor’s tax

H:Transfers in contemplation of death

Q: What are transfers deemed incontemplation of death?

A: 1.Property was transferred during thelifetime but the decedent:

a. retains possession or receive incomeor fruits of property; orb.retains the right to designate personswho will possess the property or theright to receive fruits or incomec.Revocable Transfers

1.revocable transfers are included in the

gross estateReason: the decedent retains tremendouspower and control over the property

2.Irrevocable transfers are not included inthe gross estate: exempt

Reason: the decedent losses control overthe property

Notice Not Required because the person has the control over the property

D. Property passing under general power of appointment

► same with fidel commissary substitution3 parties:1.testator / decedent2.1st heir3.2nd heir

TAKE NOTE: To determine whether includedin Estate or not, know who has the choice todesignate the 2nd heir:





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►if decedent instructs the 1st heir that he can

transfer the property to whomever he wantsincluded in gross estate►1st heir choice – included in gross estate

E. Proceed of Life Insurance1.Beneficiary is the estate

►included in gross estate whetherdesignation is revocable or not

2.Beneficiary is 3rd person► revocable included►irrevocable not included

F. Prior Interest ►important only due to the codification of

the tax code B,C,E, included whether beforeor after the effectivity of the code

G. Transfer for insufficient consideration

Q: Similar provision in Sec 100 (Donor’s tax)can you apply the two (2) provisionssimultaneously?

A: No, alternative application, one or theother but not both.The application will depend on the time of transfer or motive:

1.If transferred because of impendingdeath► estate tax

2.If transfer because of generosity►Donor’s tax

Q: Parcel of land was sold for less thanadequate consideration (adequate) torelative for P600,000 when FMV is 1million pesos. Is this subject to transfertax? Is it subject to Donor’s tax?

A: No, Sec 100 provides the property shouldbe other than real property referred to inSection 24 (D)►Not subject to Donor’s tax, the

applicable tax is 6% FIT

Q: Will your answer be the same if SOS are

sold?A: No, answer not the same, SOS not property

contemplated in Sec 24 D (1)►in this case, the amount by which the

FMV of prop exceeds the value of theconsideration shall be deemed a gift andincluded in the computation of the grossgift: subject to Donor’s Tax

Q: What is the subject matter in 85 G?

A: paragraphs 85 B, 85 C, 85 DSale in good faith as a defense:1.under Section 100 is not a defense

2. under Section 85 G, it is a defense

H. Capital of Surviving Spouse

►correlate with Sec 86 C►both speak of legally married individual►pertains to the separate property of

spouse who survived►capital used in its generic sense►surviving spouse may be man or woman

Section 86 (c)►to determine the limitations of

1. Funeral Expense2. Whether written notice is required3. to determine whether gross value isat least P200,000 (Sec 90)

4.to determine if gross value is at least42 M

Q: Who are the taxpayers under 86 A?A: 1.RC

2.NRC3.RA

Q: Who is the taxpayer under 86 B?A: NRA

Q: Why do we need to know this?A: NRA cannot avail of the following

deductions:1.family income2.standard deduction3.hospitalization4.retirement pay under RA 4917

A. Deductions Allowed to the Estate of a Citizen or Resident

1.ELIT (expenses, losses, indebtedness andtaxes)

a) 1.Actual Funeral Expenses; or2.amount equal to 5% of gross estate

►apply whichever is lowerLimitation:

a)amount equal to 5% of gross estateshould not exceed P200,000 (basis isthe gross value)b) Judicial Expenses►no limitation





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Pajonar vs Commissioner I: Whether or not extra-judicial expenses

may be allowed as a deductionH: This law has been copied from U.S. In US,

expenses to be claimed as a deductionboth judicial and extra judicial expenses.

Claims against the estate►Estate is the debtor

Requirements:1.at the time the indebtedness wasincurred the debt instrument was dulynotarized;2.loan contracted within 3 days beforedeath;3.the administrator or executor shallsubmit a statement showing thedisposition of the proceeds of the loan

Claims of the deceased against insolvent person►Estate is the creditor

Requirement:►the only requirement is that the (only)

amount of loan is included in the grossestate►notarization and certification not required

Unpaid Mortgage, taxes and losses Q: In unpaid mortgage who is the

mortgagor?

►decedent mortgagor1. Unpaid mortgage

1.value of the decedent’s interest in theproperty is undiminished by suchmortgage;2.included in the value of the grossestate;

Illustration:1 million FMV but mortgage is only600,000 you include 1 million

2.Estate tax3.Losses

Requirements:1.losses incurred during the settlement of the estate;2.arising from fire, storms, shipwreck orother casualties, or from robbery, theft orunbezzlement3.losses not compensated by insurance4.losses not been claimed as a deductionfor income as purpose

5. losses incurred not better than the lastday for the payment of the estate tax

Property Previously Taxed ►Vanishing Deduction Return

Requirement:1.person acquires the property by virtue of

donation or inheritanceQ: What if acquired through purchase?A: Not apply, the property must be acquiredby inheritance or donation

2.Estate tax or Donor’s tax already paid bythe Estate of the Decedent (1st par)3.Any person who died within five (5) yearsprior to the death of the decedent

Q: What are the amounts?A: Prior Decedent died within:

1.5years – 20%2.4years – 40%

3.3 years -60%4. 2years – 80%5. 1 year -100%

Q: Suppose the person died within 1 year andit was inherited by son, suppose the sonalso died within 1 year or may be 2 years,should we apply the vanishingdeductions?

A: No more (last par Sec 86 A2)

Transfer for Public Use►amount of all bequest, legacies, devises

or transfersRecipient:government or any political

subdivision►exclusively for public purpose

Take Note: 30% of which not used foradministrative purpose is not arequirement

FAMILY HOME ►amount equivalent to the current FMV of

the Family Home of decedent.Limit: FMV should not exceeds 1 million

otherwise the excess will be subject toestate tax.Requirements: (RR 2-2003) 1.Person is legally marriedGR: if single not allowed to claimExcept: if head of the family2.Family Home actual residence of thedecedent3.Certification of Barangay Captain of locality





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STANDARD DEDUCTIONS ►automatic: RR 2-2003 no requirement

provided the decedent is the one in 86 (A)(RC, NRC, RA)

MEDICAL EXPENSES

Requirements:1.amount not exceeding P500,0002.medical expenses incurred by thedecedent within one (1) year prior to hisdeath.

►must be duly substantiated with receipt

RETIREMENT PAY UNDER RA 4917 (RETIREMENT PAY WITH PRIVATE PLAN)

Requirements:1.plan duly approved by the BIR2.person at least 50 years old3. 10 years in service

4. avail only once

TAKE NOTE: This is a deduction in the natureof exemption, all other retirement plan isexcluded

B. Deductions Allowed to Non resident Estates

1.ELIT2.Property Previously taxed3.Transfers for public use

C. Shares in the Conjugal Property

D. Miscellaneous Provisions For NRA: No deduction allowed unlessinclude in the return the value at the timeof his death that part of his gross estatenot situated in the Philippines. For properdeduction must include E. below

E. Tax Credit for Estate Tax Paid to Foreign Country

SECTION 87 EXEMPTION OF CERTAIN

ACQUISITION AND TRANSMISSIONS1. Merger of usufruct in the owner of the

naked title;2. transmission or delivery of the

inheritance or legacy by the fiduciary heiror legatee to the fideicommissary;

3. transmission from the first heir, legateeor legacy donee in favor of anotherbeneficiary, in accordance with the desireof the predecessor;

4. All bequest, devises, legacies or transfersto (1) social welfare (2) cultural and (3)charitable institution

Requirements:1.no part of the net income insures to thebenefit of any individual;

2.not more than 30% of donation (BDL)shall be used by such institutions foradministration purposes.

SECTION 88 DETERMINATION OF THEVALUE OF THE ESTATEA.Usufruct 1.Determine value of right of usufruct:►consider the probable life of the

beneficiary based on the latest BasicStandard Mortality Table

B.Properties ►fair market value of the Estate at the time

of death1.FMV determined by Commissioner2.FMV schedule of values fixed by theProvincial or City Assessors

SECTION 89 NOTICE OF DEATH TO BEFILED

Q: What is the Basis?A: the gross estate of the person

Q:When is the notice required to be filed?A: 1.all cases of transfer subject to tax

2.although exempt, when gross values of the estate exceeds P200,000

Q: When filed?A: within two (2) months

1. after decedent’s death2.same period after qualifying as executoror administrator►give a written notice

Q: If the Net Estate is at least P16,000 willyou in form the commissioner?

A: yes, the gross is at least 3-4 million

SECTION 90 ESTATES TAX RETURNSQ: When required to file return?A: 1.all cases of transfer subject to tax

2.even though exempt, gross valueof the estate exceeds P200,0003.regardless of gross value of theestate, when the same consists of registered or registrable prop such as:

a.real property





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b.motor vehiclec. shares of stocksd. other similar property whereclearance from BIR necessary fortransfer of ownership in the name of the transferee

►return must set forth the following:1.value of the gross estate at time of death2.deductions allowed3.information necessary to establish correcttaxes

Q: What if Estate is exempt, is it required tofile a return?

A: General Rule: NoException:

a. gross value exceeds P200,000b.estate contains registrable property

Q: if the estate or gross estate exceeds 2million, what is the requirement?

A: return must be duly certified by a CPA

B. Time of Filing

►filed within 6 months from decedent’s

death►within 30 days for filing the return►within 30 days after promulgation of such

order1.certified copy of the schedule of partition

and2.order of court approving the same

C. Extension of TimeTime: 30 daysGrounds: meritorious casesWho grants: Commissioner

D. Place of filing:►return shall be filed with:

1.authorized agent bank2.revenue district officer3. collection officer

4. duly authorized treasurer►city or municipality in which decedent

was domiciled at the time of his deathQ: What if non resident?A: NR with no legal residence here, with the

office of the commissioner.

Q: Let us say there are 3 compulsory heirs,namely A, B, and C. A renounces hisinheritance coming from the parents, but A

renounces his inheritance in favor of his 2siblings, brother and sister B and C. Is thissubject to donor’s tax?A: NO. It is exempt.

Q: But if in the given example, A said “I amrenouncing my inheritance, but I am giving it

to my sister B”, is this subject to donor’s tax?A: YES. Renunciation is to the disadvantageof the brother.

TAXATION UNDER THE LOCAL GOVERNMENTCODE:

1. Local Tax2. Real Property Tax

LOCAL TAXATION (§186, 187, then go to §151, 128 down)

Q: Mayor Binay of Makati ordered the

collection of elevator tax (for elevator in thecity hall). Is the order of Mayor Binay legallytenable?A: NO. There should always be a tax ordinance after conducting a public hearing .(§186)

tax ordinance

Q: Can BIR collect the tax even in theabsence of a revenue regulation?A: YES.

Q: Can a province, city, municipality orbarangay collect the tax if there is no taxordinance?A: NO.

Q: Why is it that there should be a taxordinance as required by §186?A: The rationale is not mentioned in §186,but if you read the other provisions of theLGC, you will come to set of conclusions of the reason why there must be a taxordinance.

» In most of these provisions, it always say:one-half if the town or municipality shall collect a tax of not exceeding 1% of the gross receipt.TAKE NOTE: There is no exact amount;hence, it is the tax ordinance which will fixthe exact amount.





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public hearing

In Congress, the requirement is notabsolute (by discretion only). Under localtaxation (last phrase of §186), therequirement is ABSOLUTE.

REYES vs. SECRETARY (320 SCRA 486) F: In the municipality of San Juan (just

beside Mandaluyong) there was a taxordinance passed. Reyes, a resident,claims that there was no public hearingconducted, he maintains that under §186last phrase, there should always be apublic hearing.

H: The SC said: “yes, that requirement is anabsolute one, but since the petitionerfailed to produce evidence to support hisallegation, if there is no proof presented

other than his own statement, we herebyrule that the ordinance was passed inaccordance to the procedure mandatedby law”. While it is true that a publichearing is an absolute requirement, hewho alleges, must prove the same.

Q: If you don’t agree with the validity or theconstitutionality of the tax ordinance, whatwill be your remedy?A: Within 30 days from the effectivity of theordinance, the taxpayer should file an appealwith the office of the Secretary of the DOJ

(§187)

REYES vs. SECRETARY (320 SCRA 486) F: Reyes asserted the validity and

constitutionality of the tax ordinance onlyafter the lapse of thirty (30) days (perhapshis lawyer was thinking that an ordinarystatute may be contested anytime withthe RTC, CA or SC).

H: With regard to a tax ordinance, w have aspecific rule, failure to assail the validitywith the specific period of time, is fatal tothe taxpayer. Since it was filed beyond

the 30day period, we do not disturb thevalidity of the ordinance.

Q: Within what period should the Sec. of Justice decide?A: Within 60 days from the time the appealwas filed. Failure to decide within this time,the taxpayer has the remedy to file an actionwith the regular courts.

» If the decision was made within the 60day period, and receives the decision, hisremedy is to file an appeal within 30daysform the receipt of the decision to court of competent jurisdiction → RTC.

» Beginning April 23, 2004, from the ruling

of the RTC, pursuant to RA 9282 (the lawuplifting the standards of the CTA), theruling of RTC on local tax cases, isappealable to the CTA en banc.

TWO APPEALS DECIDED BY THE CTA EN BANC:1. decisions of RTC involving local tax

cases2. decision of the Central Board of

Assessment Appeals.

» From CTA en banc, the appeal must befile with the SC within 15days.

» Go to §151:The city could impose the tax already

imposed by the province of by themunicipality.

Q: What are the numerous taxes imposableby the province which a city now allowed toimpose?A: Those enumerated in §135 to §141 of theLGC

Reasons why a municipality wanted to be

converted into a city:1. §1512. §233 (real estate tax)

» In addition, the law says that the citycould increase the rate of the tax by not morethan 50% of the maximum EXCEPT thoseenumerated in §139:

a) professional taxb) amusement tax

A. General Principles (§128-130)

► reiteration of the constitutional tax

provisions

► notice that the constitutional limitations

on taxation do not only apply to the nationalgovernment but also to local governmentunits.

B. Definitions (§132)





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Local Taxing Authority (§132) for a province, it is the provincial

board or the provincial council(sangguniang panlalawigan)

for a city, we have the city council(sangguniang panlusod)

for the municipality, we have the

municipal council (sangguniangpangbayan)

for the barangay or barrio, we havethe barangay council.

C. Common limitations on the taxingpower of the LGU’s (§133)

» Under the old law this was §5 of the LocalTax Code.

Q: Why common?A: Because the limitations or prohibitions

apply to all LGUs, the provinces, cities,municipalities and barangays.

Two Common Crimes (under §133) 1. absolute prohibition2. relative prohibition

It shall be unlawful for the LGUs to collect:I. Income Tax EXCEPT when levied on banks and other financing institutions (§133(A))

» the term “other financing institutionshall include money changer, lendinginvestor, pawnshop (§131(E))

» rate of tax:does not mention rate of tax, so long as it is “fair, just andreasonable”» It cannot be “prohibited taxation,because the element of “imposed by thesame taxing power” is not present. One isimposed by the national government andthe other is by the LGU.

II. Documentary Stamp Tax (§133(B)) » absolute prohibition

III. Estate tax, inheritance, donations inter vivos, donations mortis causa EXCEPT in§135 (§133(C))

» transfer tax on the transfer of realtyto be imposed by provinces and cities(§135)

NOTE: this is not a real estate tax,this is a local tax.

IV. Custom duties, charges or fees for theregistration of vessels or ships, wharfages fees and wharage dues EXCEPT if the wharf had been established, maintained and operated by the locality (§133(D))

» wharfage due – is a custom feeimposed on the weight of the cargoes.» wharf – a pier» special levy on public works (§240)» allows provinces cities andmunicipalities to impose a special realestate tax known as “special levy or

public works”» let us say the municipality establisheda pier for a minimal value of P10M; outof P10M, under §240, 60% of this may berecovered; the other 40% may berecovered by warfage due.

v. Tax, fee or charge for goods or commodities coming out or passing throughthe territorial jurisdiction even if in the guiseof a toll or a fee (§133(E))

» an absolute prohibition» commodities marketed in a publicmarket, let’s say in the city of Pasig,

where the commodities came fromLaguna then to Tanay, Cainta, Taytay; justimagine if each of the towns will impse1peso for every head of a chicken or50cents for every bundle of vegetable.

PALMA DEV’T CORP v. MALANGAS ZAMBOANGA DEL SUR (113 SCRA 572) F: Municipal council passed a tax ordinance

entitled “police surveillance fee” whichprovide that ALL motor vehicle passingthrough a particular street in the townproper of Malangas which will lead to thepier or wharf will pay a certain sum of

money whether it is camote, copra,palay,or rice. One of the owners of themotor vehicle is Palma Dev’t Corp.carrying copra, banana and coconut to beloaded in a ship docked at pier of Malangas. The lawyer of petitionerassailed the validity of the ordinancestating that it is a clear violation of §133(E).

H: It is not the title of the ordinance which iscontrolling but it is the essence of thesubstance of the tax ordinance. The taxordinance clearly violated §133(E),

therefore, the SC had no option but todeclare the tax ordinance null and voidfor being in violation of the law.

VI. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen (§133(F))

Q: Don Antonio Florendo, a personcoming from Pampanga who settled inDavao City, employed thousands of workers in the different banana





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plantation. Can the LGU impose tax onthe agricultural product which is abanana?A: YES. The LGU can impose becauseDon Antonio is not a marginal farmer. Itis only prohibited if it is sold by amarginal farmer.

» Marginal Farmer – a farmer or afisherman for subsistence only, whoseimmediate members are the immediatemembers of the family (§131(P))

VII. Tax, fee or charge on pioneer and non- pioneer enterprise duly registered with theboard of investments for a period of 6yrs and 4yrs respectively (133(G))

» relative prohibition because after theperiod, the LGU concerned may nowimpose the tax.

VIII. Excise tax on articles and tax, fees and charges on petroleum products (§133(G))

» relative prohibition since under§143(H), it says there that taxes whichare prohibited such as excise tax,percentage tax and value added taxnonetheless, the LGU may impose a taxnot exceeding 2% of the gross receipt (forcities 3%).» My former student an assistant in thecity legal attorney in a city in MetroManila, received a summon from the RTC(on complaint of a supermarket in MetroManila) questioning the validity of the taxordinance under §143(H) since the rate

imposed was 3%I said, “ineng, una file kayo ng motion

to dismiss. Nak ng puta, absent ka nanaman ata eh, you invoke §151 statingthat a city can impose a tax higher thanthe rate provided for by law not morethan 50% of the maximum (50% of themaximum of 2% is 1, therefore, 2+1 is3%)”

BULACAN v. CA (299 SCRA 442) *first case decide by the SC which interpretedboth the LGC and the NIRC.F: The then governor, Obet Panganiban

together with his provincial councilpassed an ordinance imposing tax onquarrying under the provision of §138 of the LGC. The problem is that theordinance applies to ALL entitiesquarrying in the province. One of thetaxpayers, Republic Cement obliged topay the tax, argued that under §138 of the LGC, the tax on quarrying on whichthe province may be allowed shall only be

with regard to quarrying private land, andnot only that but under §133(H), there isa prohibition to impose excise tax andtax on quarrying under the IRC is anexcise tax.

H: The tax on quarrying allowed toprovincial governments shall only be with

regard to lands which are public lands,and since this is a private tax onquarrying refers to a lot without anydistinction. Hence, if the LGC made aqualification as to the kind of land (whereit says it should be public land), byimplication, it should refer to private landunder §151 (although the law did notdistinguish); and since it is a tax by thenational government, it should becollected by the BIR (not the LGU), andalso the SC agreed that it is an excise taxwhere LGU’s are prohibited from

collecting; thus, the SC declared the taxordinance null and void for being contraryto law.» Sir, why is it a problem when the lawis clear that under §138, it shall onlyapply to public land?

Perhaps the provincial council thoughtthat the subject matter of the taxordinance may be a subject matterprovided in any book including the IRC,or worse, that it may impose a tax on asubject matter not mentioned in anybook.

Moral lesson: although a taxordinance may be passed even if thesubject matter is not provided for in anylaw, it has to comply with the limitations.

PETRON v. PENILLA (198 SCRA 86) * The facts here arose under the old lawunder §5 (now §133) of the local tax code(PD 231)F: Petron has a factory/plant in Penilla

where the raw materials petroleumproducts are being converted into refinedpetroleum products. The municipalcouncil of Penilla imposed a tax by way of

a tax ordinance saying that they areinvoking the old §19 (now §143(A))stating that municipalities are authorizedto impose tax of the manufacture of anycommodity, hence, since it ismanufacture of a petroleum product, theLGU must e authorized. However, Petronobjected since under §5 (now §133(H)),the prohibition includes the prohibition toimpose excise tax and not only that,





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under this par., the tax on petroleumproducts is an excise tax. Under this par.,the law is clear it does not only prohibitthe imposition of tax, fee or charge overpetroleum products.

H: The controlling provision here the old§19 (now §143(A)) that LGUs are

authorized to impose the business tax forthe manufacturing over any kind of commodity by and petroleum product is“any kind of commodity”.Q: What do you think?A: I don’t agree with this ruling becausebetween §133(H) and §143(A), it is theformer which is more specific.

IX. Value added tax and percentage (§133(I) EXCEPT §143(H)

» Relative prohibition.X. Tax, fee or charge on common carriers whether by land, water or air (§133(J))

FIRST HOLDING CO. v.BATANGAS CITY (300 SCRA 661) * 2nd SC ruling discussing both the IRC andLGC.F: This revealed to the public the existence

of 2 very big oil pipelines coming formBatangas City with a distance of morethan 100km, one going to Pandacan OilDepot and the other one is going to Brgy.Bicutan, Taguig. The Batangas Citycouncil deemed it necessary to impose atax on the gross receipt of the 1st holdingcompany for the operation of the oil

pipeline, but the operator argued that theoil pipeline is not a common carrier.

H: The SC reasoned out like in the case of Pajunar v. Comm (328SCRA666) , sayingthat “we have copied the code of carrierlaw form the US where the definition of acommon carrier is one habitually carryingnot only individuals or passengers butalso goods or commodities, and since theoil pipelines is habitually carryingpetroleum products which is acommodity, we rule this as a commoncarrier which is under §133(J), LGU is

prohibited from imposing tax on commoncarriers, and not only that but under§170 of the LGC, the law is very explicit,that ALL LGUs are prohibited to imposepercentage tax on common carriers”. Withthat, the tax ordinance passed wasdeclared null and void for being contraryto law.

XI. Premiums on re-insurance (§133(K)) » absolute prohibition.

XII. Tax, fee or charge on registration of motor vehicles and for the issuance of licenseand permit for driving thereof EXCEPT tricycles. (§133(L)) BATUAN CITY v. LTO (322 SCRA 805) I: Which function was delegated to the LGU?

The LTO registering motor vehicles “or”

the LTFRB granting franchise andregulation of common carriers?

H: Under §133(L), the function of the LTO isprohibited, an therefore what may bedelegated to the LGU is the function of LTFRB.

XIII. Tax, fee or charge on exportation of products and is actually exported EXCEPT under §143(C) where the LGU is authorized to impose business tax on exportation (§133(M)) XIV. Tax, fee or charge on cooperatives duly registered under the cooperative cod (RA6938) and Business Kalakalan (RA 6810)

(§133(N)) » A cooperative is exempt from localtax, provided it is duly registered with thecooperative code and the cooperativedevelopment authority “or” BusinessKalakalan (not kalkalan)

XV. Tax, fee or charge over the national government, political subdivisions and agencies and instrumentalities of thegovernment (§133(O))

» Relative prohibition since it admits of an exception under §154 of the LGCwhere it says that a LGU may be

authorized to impose a fee or charge forthe operation of a public utility providedit is owned, maintained and operated bysuch LGU.

NAIA v. PARANAQUE (JULY 2006) H: SC ruled in favor of the airport. Paranaque

being a LGU can’t impose tax on agovernment instrumentality. Airportowned by the government is not anagency, it being an instrumentality.Q: May the government tax itself it thetaxing power is the local government?A: NO. The local government cannot

impose tax on the national government,and with more reason that it cannotimpose a tax with equal LGU.

D. Taxes that can either be imposed byProvinces or Cities

I. tax on transfer of realty (§135)





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► Note that this is not a real estate tax, this

is a local tax for the simple reason that it isnot provide for under the topic of real estatetax (§198-280)

► Law says “it should not exceed ½ of 1% of

the consideration” (NOTE: do not use zonal

value since this is used only under the IRC,not the LGC.

Q: Since all the provinces and cities mustfollow the limitation of the rate (notexceeding ½ of 1%), is it violative of the equalprotection clause?A: NO, because the sangguninan had todetermine the actual rate considering thestatus of the province.

Q: Why is that Makati fix the rate of 75% or3/4 of 1%?

A: Because cities are authorized to increasethe rate of 50% of the maximum, that is 50%of ½ is 25% (50+25 is 75%).

NOTE: Do not apply transfer of realtypursuant to RA 6657 (CARP) → this is theComprehensive Agrarian Reform Program →

this is exempt.

II. tax on printing an publication (§136)

► Normally, a province cannot impose this

because the tax on business can only be

imposed by a city or municipality EXCEPT thisone, on printing and publication of magazines and periodicals.

III. franchise tax (§137)

► The old national franchise tax under the

old tax code was already abolished.

► We still have franchise tax other than thisone, known as national franchise tax →

provided for in the republic act grantingfranchise.

Two kinds of Franchise Tax:1. local franchise tax (under LGC §137)2. national franchise tax (provided for in

the statute or republic act authorizingthe franchise)

Q: May LGUs impose local franchise tax?A: We have to consider here many supremecourt decisions and also §193 of the LGC.

Under §193, it says there “unlessespecially provided for in this code,exemptions granted to natural juridicalpersons are hereby withdrawn (abolished)EXCEPT:

1. local water districts2. cooperatives registered under the

cooperative code (RA 6938)3. non-profit and non-stock educational

institution.

BASCO v. PAGCOR (197 SCRA 52) F: The city council passed a tax ordinance

imposing tax on PAGCOR, an agency of the government. PAGCOR objected sayingthat the local city is prohibited under theold local authority act to impose tax onan agency of the government.

H: The SC declared null and void the taxordinance saying Manila cannot do that.

CEBU v. MACTAN (261 SCRA 667) F: Cebu government was trying to collect

real estate tax from the Mactan airport(note: real property tax is a territorial tax,meaning it should only be collectedwithin its territorial jurisdiction). Lawyersof Mactan airport argued that under§13(O), Cebu, a LGU, cannot impose taxon an agency of the government, andthey also invoked the ruling in BASCO.

H: The lawyer of Mactan airport is devoid of any merit at all, it is 100% erroneous

since the real estate tax is not a local tax,hence, why invoke a SC ruling and codalprovision which can only be applied tolocal tax. Therefore, Mactan airportshould pay Real Property Tax.

► Before the codification in 1991 (to take

effect January 1, 1992), local taxation wasembodied in a separate book known as LocalTax Code (PD 231) while real property taxwas provided for in a separate book knownas Real Property Tax Code (PD 464)

LRT v. CITY OF MANILA (342 SCRA 692) F: The Manila city government tried to

collect real property tax but themanagement of the LRT said “no youcannot do that to us since it is exclusivelyfor public use”.

H: NO, you are not exclusively for public usesince every time a person wants to usethe LRT he has to pay.





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Q: Why not use the defense that it is ownedby the government?A: Because in real estate tax, the defensethat it is owned by the government is not adefense.

The LGC in §199(B) and in §217, bothprovisions says that the basis for the

imposition of real estate tax is the ACTUALUSE of anybody who is using that (maybe inthe concept of usufructuary or in the conceptof a lessee, or in the concept of an owner);the basis is not ownership.

► in §134, the taxes here must not only be

imposed by provinces, it may also beimposed by cities in line with §151 → those

enumerated in §135 to 141.

CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS OCCIDENTAL (181 SCRA 38)

* This was the prevailing rule for more than10years from 1988H: In the franchise or the republic act, there

are only two (2) kinds of franchise, one isa franchise which provide for a conditionthat this tax (referring to the franchisetax) shall be in lieu of all other taxes, andthe other franchise is the one which donot provide for such provision; theprovince or the city can impose localfranchise tax if the franchise belong tothe second example.

REYES v. SAN PABLO CITY (305 SCRA 353) * Here the SC uniformly ruledH: A provision on exemption under §193

don’t only refer to exemptions providedfor by different statutes, but it includesthose which claim exemptions by virtueof the case of Cagayan de Oro (becauseSC decisions are also laws).

PLDT v. DAVAO (363 SCRA 750) F: The franchise holders of Smart and Globe

are claiming exemptions from the localfranchise tax because they are saying that

they are holding a franchise which saysthat it is a franchise enacted by the houseof Congress in 1995 which carries with itan exemption form local franchise tax.

H: By the very explicit provision of §193, theremoval of exemptions granted bydifferent statutes and also by SCdecisions applies only to statutes anddecided by the SC on or before Jan. 1,1992, because §193 says “upon

effectivity of this law”. For exemptionscovered by §193 therefore, Smart andGlobe are authorized to claim exemptionsbecause the statue (RA 7082) was enactedon 1995.

IV. tax on sand, gravel and other quarry

resources (§138)

► We are through with that in the case of

Bulacan

V. professional tax (§139) ► this must be correlated with the tax under

§147.

► NOTE that this is an exemption to the rulethat a city may increase the rate of the tax →

under §151 of the LGC, the increase is notallowed.

► both §139 and §147 are taxes imposed

on persons exercising professional calling.

Section 139 Section 147are to be imposedby provinces andcities

are to be imposedby municipalitiesand cities

are applicable toworkers who mustpass a governmentexamination (e.g.engineers,

physicians, etc)

are applicable topersons who areworking but arenot required totake government

examinationsthere is amaximum (P300)NOTE: it is notalways 300, sincethe exact amtmust be fixed bythe ordinance.

It does not providefor any amount,the onlyrequirement is thatit must bereasonable

VI. amusement tax (§140)

► under the IRC, there is also amusement

tax under §125.

PBA v. QUEZON CITY (137 SCRA 358) F: The city government enacted a tax

ordinance trying to collect amusementtax including amusement tax on the PBA(in Araneta, Cubao); but PBA and “no, weare already paying amusement tax to thenational government through the BIRbecause of §125 of the IRC”





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H: QC government can no longer collect onthe ground that it is already beingcollected by the national government andsecondly, in the enumerations of amusement under §140, you will neversee professional basketball. Most of all, itis the intention of the author that it is

only the national government.*nak ng putang katangahan yan.. the localtax code PD 231 was enacted in 1974 whenwe don’t have any professional basketball..since professional basketball was born May1975.* ano ba dapt tama diyan? → both the

national government and the QC governmentcan collect. There is no violation of theprohibited double taxation, because thetaxing powers are different, and not only that§140 speaks of amusement tax on admissionfee but under §125, it is abut gross receipts.

VII. delivery van (§141)

Q: What if not a delivery van, but “sako”lang?

A: The applicable tax is under §143(G)(peddler’s tax, one imposed by municipalitiesand cities.

If may dalang sasakyan, yari siya ngprovince sa tax.

NOTE: §135-141, these are taxes that can beimposed by PROVINCES and CITIES.

§143-150 are taxes to be imposed byMUNICIPALITIES, which can also be imposedby CITIES.

E. Taxes that can either be imposed byMunicipalities or Cities

I. Business Tax (§143(A-H)) a. manufacturing, repacking,

processing, including the

manufacturer of permitted liquor andalso its dealer

b. wholesalingc. exportationd. retailinge. contractor’s taxf. tax on banking institution and

financing institutiong. peddler’s taxh. the exemption under §133(i)

Q: If you have two branches, how manybusiness taxes do you have to pay?A: You pay only one business tax (§146)

ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA607)

F: Ilo-ilo Bottlers was already paying abusiness tax on manufacturing under§143(A) to the city government by virtueof a tax ordinance. Later on, they areobliged to pay by virtue of another taxordinance imposing business tax onwholesaling. Naturally, Ilo-ilo Bottlersargued, “how could it be, if youmanufacture, it necessary follows thatyou sell the commodity so, with thepayment of the business tax onmanufacturing, it carries with it thebusiness of wholesaling”.

H: NO, you have to determine the marketingsystem of the company. If wholesaling isalso being done in the place of manufacture, the business tax onwholesaling should no longer be paid itshould only be the business tax onmanufacturing. But if the marketingsystem of the company provides thatwholesaling shall be done in a separateplace (maybe several kilometers away),the manufacturer must still pay thebusiness tax on wholesale because now itcould be argued that they have the

separate business of wholesaling.

Q: On the business of retailing, should thebusiness tax of retailing be imposed by thecity or by the municipality “OR” by thebarangay in the city or the barrio in themunicipality?A: §143(D) must be correlated with §152,the tax to be imposed by the barangay.

It depends:a. city

» if the gross receipt of the retailerexceeds P50T in a minimum of

one year, it is the right andprivilege of a city to impose thebusiness tax on retailing.

b. barangay» if the gross receipt of the retailer

did not exceed P50T, it is thebarangay council where thebusiness of retailing is located.

c. municipality





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» if the gross receipt of the retailerdid not exceed P30T within aperiod of one year.

d. barrio» if the gross receipt of the retailer

did not exceed P30T within aperiod of one year.

NOTE: These distinctions do not apply inwholesaling. These are only for retailing.

► Paragraph H: for the imposition of

excise tax, percentage tax and value addedtax, the municipality may impose a tax notexceeding 2% of the gross receipt (withregard to a city, it may go as far as 3%)

II. Municipalities in Metro Manila who canincrease their rate (§144)

► Right now there are only two

municipalities:1. San Juan2. Pateros

III. Professional Tax (§147)

► we are through with that

IV. Fees for sealing and licensing of weights and measures (§148)

V. Fishery rentals, fees and charges (§149)

F. Situs of Tax (§150)

► The tax referred to in here is the business

tax on wholesaling and retailing.

Q: RFM is manufacturing commodities, oneof them is Swift hotdogs, this is being soldnot only in Mandaluyong, Metro Manila, butalso to the inter country from Batanes toTawi-tawi. Where should the business tax of wholesaling or the business tax of retailingbe paid? Should it be in the principal office(Mandaluyong) “or” the place where the

commodities are sold?A: It will be paid in the place where it hadbeen sold PROVIDED there is a branch officeor a sales outlet (§150(A)).

► If it so happens that the company has a

factory different from the place where theprincipal office is located → 30% should be

pain in the principal office and 70% in the

municipality or city where the branch islocated.

PHIL MATCHES v. CEBU (81 SCRA 99) F: Phil Matches were produced in Nagtahan,

Manila. In Cebu city, there was awarehouse where the matches were

stored. Many of the customers, by way of wholesale in the warehouse in Cebu City,they came from different towns of theVisayan Region. May the business taxordinance of Cebu be imposed on thosetransactions even if the buyers did notcome from the territorial jurisdiction of Cebu?

H: Since in this case the contract booked andpaid, meaning, it was negotiatedperfected and consummated in thewarehouse where it was located in CebuCity, the Cebu City government has the

right to collect business tax.

Q: What if there is an agreement thatcommodities would be delivered and that thebuyer would be waiting in some other town,is the answer still the same?A: YES, the answer is still the same becausedelivery to the carrier is delivery to the buyerwhere delivery has been termed within theterritorial jurisdiction of Cebu.

SHELL v. CEBUCOT, CAMARINES SUR (105 PHIL 1063)

F: The petroleum products were purchasedat the motor vehicle traversing theneighboring towns of Cebucot like Bason,Dimalaon, all towns in Camarines Norte.The contract of sale was negotiated andperfected in different municipalitieswhere the motor vehicle of Shell wastraveling.

H: Although the oil depot was located inCebucot, the said municipality cannotimpose tax on that because the contractof sale was negotiated and perfected inthe different nearby towns of Camarines.

Q: Is there a conflict with the case of Shell and Phil Matches ?A: NONE. As a matter of fact, these twodecisions complement each other.

G. Taxing Powers of the Barangay (§152)

► Only a minimal sum (fair and reasonable)





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Power to impose tax:1. On commercial breeding of fightingcocks, cockfights and cockpits

» must be for commercial purposes2. On places of recreation which chargeadministration fee3. On billboards, signboards, neon signs

and outdoor advertisements» especially for the barrios and

barangays along the highway4. For barangay clearance

» if you want to engage in the businessof retailing or wholesaling → if

barangay captain will not approve that→ within 7days go to the municipal

hall or city hall for approval5. For the use of barangay property

» for instance the barangay has a plaza.

H. Common Revenue Raising Powers

(§153-155)

Q: Why common?A: All the LGU could impose the same. But itdoes not follow that all the provinces, cities,municipalities could impose the same. Onlythe LGU which operate, establish, maintainthe entity

If established by the province, it shouldonly be the province.

These are:1. service fee and charges

» for services rendered2. public utility charges

» provided owned, operate andmaintained by them

3. toll fees and charges» tax or toll for the use of a bridge or a

street

► Padua filed a civil action in the MakatI

RTC trying to stop the government formcollecting a toll free in the South Expressincluding the North expressway alleging thathe is affected as a taxpayer because he is

from Paranaque. He argued that if you usethe property of the government like a streetor a public plaza, you do not pay. He madethe analogy, that if you go to Luneta, you donot pay the city government of Manila.

The Makati RTC, the CA and SC had auniform ruling that the operator should beprohibited from collecting further toll fessbecause if the operator had already recoveredhis investment and earned an income

already, he should be stopped. As argue bythe SC, it copied the argument of the lawyer(re: Luneta).

» NOTE: that Res Judicata do not applyhere.

When the ruling became final anexecutory in 1993, the North and South

Express were totally dismantled and totallydestroyed by the DPWH to give way to thefinal and executory ruling of the Court, that Itshould no longer be collected.

After several months, the governmentannounced in the radio that the party in thecase of Padua, mutually agreed that thecollection shall be resumed in order to havemoney for the maintenance and repair of thehighway.

Exceptions to §155 (collection of toll fees)1. members of AFP

2. members of the PMP3. post office personnel delivering mail4. physically handicapped5. disabled citizens 65 years and older.

I. Community Tax (§156)

► In the old days, known as “residence tax

certificate.

Q: If the Filipino is a resident of a foreigncountry (NRC), is he liable to pay thecommunity tax certificate?

A: NO, because the basis of imposition of this tax is whether or not you are aninhabitant of the Philippines. Meaning youare a resident of the Philippines.

Q: What about a foreigner residing in thePhilippines (RA)?A: YES. You have to pay unless the foreigneris a trans-investor for not more than3months.

► This is applied to both natural and

juridical persons.

Requirements:1. for a natural person → at least 18

years of age2. for corporations → upon registration

with the SEC

Q: What if you become 18 in the month of January or November or December?A: For those who celebrated their birthday





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before July 1 (that is up to June 30), they areliable to pay the tax, for this year.

For those who celebrated their birthdayon or after July 1, they are not yet liable topay this year, but have to wait until next year.

Q: Is there a difference for those who

reached 18 in the months of Jan-Feb-Marchand those who reached 18 in the months of April-May-June?A: YES. For those who celebrated birthdaysin the months of Jan-Feb-March, they have agrace period of 20days within which to pay.Those who celebrated their 18th birthday inthe month of April-May-June, they do nothave any grace period at all, they have to paythe tax immediately.

Q: If you have a community tax certificatefor this year (2006), can it be used only until

December 31, 2006?A: NO. It shall be valid up to April 15, 2007.(§163(C))

J. Accrual of the Tax (§166)

► January 1

Q: What if the tax was only approved in themonth of May 2006, do you have to wait until January 2007?A: NO. You have the right to collect that in July 1, because the law is saying that “it

should be collected in the next succeedingquarter” (§167)

► Mayor Binay had a tax ordinance in May,

sabi ng mga bata niya: “bosing, collect natayo ng June”.

Binay: “hindi nga pupwede, maghintay patayo ng July 1”.

Q: What if the tax ordinance had beenexisting for several years already?A: The time of accrual will always be January1.

REMEDIES UNDER THE INTERNAL REVENUECODE

1. Remedies of the Government2. Remedies of the Taxpayer

Remedies of the government:

1. Assessment

2. Collection

Under the NIRC, assessment and collectionhave 2 kinds:

1. Normal/Ordinary assessment andcollection – Sec. 203, NIRC

2. Abnormal/Extraordinary assessmentand collection – Sec. 222, NIRC

I. Normal/Ordinary assessment and collection

► There was a return filed and it

is not fraudulent and not false

II. Abnormal/Extraordinary assessment and collection

► There was:

1. an omission or failure to filethe return;

2. if there was a return filed, itwas fraudulent, or;

3. the return was false

Q: Is a false and fraudulent returnpresumed?A: NO, false and fraudulent return is notpresumed. The burden of proof to prove thatthe return was false and fraudulent liesagainst the government through the BIR.

The mere fact that the return is erroneouswill not make the return fraudulent, it mustbe proven by the BIR.

Q: Why is it important to know whether theassessment is under normal or abnormalcondition?A: It is important to know because theprescriptive period between normal andabnormal assessment differ.

Prescriptive Period for Assessment 1. Normal/Ordinary Assessment – 3 years

from the time the return has been filed (not the payment of the tax) (Sec. 203,NIRC)

► 3 Ways of filing the return under Sec.203, NIRC:

1. filed before the deadline (for any taxunder NIRC)

2. filed on the date of deadline3. filed after the deadline

► 2 Ways of counting the 3 year period of

Assessment:1. if return is filed before or on the day

of the deadline, the prescriptive





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period starts on the date of thedeadline;

2. if return is filed after the deadline, theprescriptive period starts on the datethe return has been filed.

» For the calendar year of 2004, a returnmust be filed and paid for Net Income Tax on

or before April 15, 2005. Since he was notable to meet the deadline, the taxpayer isnow being assessed for tax due for 2004. Tominimize interest and surcharges, it has beensuggested by the BIR that the taxpayer file alate return. Supposed he filed his returncovering 2004 on April 1, 2006. In thisexample, the reckoning point is the deadlineof April 15, 2005. The starting point of thecounting the 3 yr. period is on the date thereturn is filed which is April 1, 2006.» Suppose it is not a late filing of return,the counting of the period is on the date of

the deadline which is April 15.

2. Abnormal/Extraordinary Assessment ► the government has 2 options:

a. Assess and Collect» the prescriptive period for“assessment” shall be 10 years fromthe discovery of none filing or false orfraudulent return (Sec. 222, par. o,NIRC)» the prescriptive period for“collection” shall be 5 years from the

date of final assessment (Sec. 222,par c, NIRC)

b. Collect Without Assessment through Judicial Action» since there is “no assessment”there is no prescriptive period forassessment» prescriptive period for “collection”shall be 10 years from the date of discovery of none filing of return orfalse or fraudulent return.

► These options are available only if theAssessment is under theAbnormal/Extraordinary Conditions.

These are not available underNormal/Ordinary Assessment

Prescriptive Period for Collection1. Normal/Ordinary Collection – Sec. 203

did not provide for the prescriptive periodfor the collection

- Intention of the author: 5 yearsfrom the date of final assessment

Reasons: (Sababan agrees with the 5 yearprescriptive period)

Prescriptive period of collection under1st option on Abnormal Assessment is5 years from final assessment (Sec.

222, par c, NIRC)1. under the old code of 1939, 1977,

and 1985, if the prescriptiveperiod for collection underabnormal is 3 years, then theprescriptive period for collectionunder normal is also 3 years. If now a days, it is 5 years inabnormal, the prescriptive periodfor normal should also be 5 years.

2. to say that there is a prescriptiveperiod for collection underAbnormal and there is none under

Normal is too abnormal. It shouldbe the other way around.

2. Abnormal/Extraordinary Collectiona. assess and collect – 5 years from

the final assessmentb. collect without assessment

through judicial action – 10 yearsfrom date of discovery of nonefiling, or false, or fraudulentreturn.

Q: How to apply these periods?

A: Annual net income tax return filed byindividual using a calendar year. The returnshould be filed on or before April 15, 2000.It was filed on April 15, 2000.

Q Without stating the date of finalassessment, can it be collected in 2007?A: Under normal condition, first determinethe date of final assessment. If the BIR finallyassessed the tax in November 2001, then2007 is way beyond the 5year period tocollect. Count the prescriptive period forcollection from the date of final assessment.

Q: (same facts) Supposed it was finally assedon March 2003, can it be collected in 2007?A: Yes, because it is within the prescriptiveperiod of 5years.

BASILAN v. COMMISSIONER (21 SCRA 17) F: Supposed the notice of assessment was

given within the period but it was





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received by the taxpayer outside theperiod.

I: Whether or not the assessment is withinthe period of 3 years.

H: Yes. It is within the period. If the notice issent through registered mail, the runningof the prescriptive period is “stopped”.

What matters is the sending of the noticeis made within the period of prescription.

► It is the sending of the notice and not the

receipt that tolls the prescriptive period.

Q: What if the return has been amended,how would you compute the period of assessment?A: NIRC is silent.

PHOENIX v. COMMISIONER (14 SCRA 52) If the amendment of the return is

substantial as distinguished from superficial,the counting of the prescriptive period is alsoamended. The prescriptive period shall bereckoned on the date the substantialamendment was made. If the amendment issuperficial, the counting of the prescriptiveperiod is still the original period.

Procedure for Assessment (Sec. 228, NIRC;RR 12-99)

Steps of assessment1. Sec. 228, NIRC (2 steps)

2. RR 12-99 (3 steps)

2 Steps under Sec. 228, NIRC1. Pre-assessment notice2. Final assessment notice

3 Steps under RR 12-991. Notice of Informal Conference2. Preliminary Assessment Notice3. Formal Letter of Demand and Notice

to Pay the Tax

PROCEDURE (Sec. 228, NIRC; RR 12-99)

1. Upon receipt of the notice of informalconference, file a reply within 15 daysfrom receipt of notice;

2. Failure to file a reply, 2 things mayhappen:a. BIR will send again the Notice of

Informal Conference orb. BIR will send a Preliminary Notice

of Assessment

3. Upon receipt of PreliminaryAssessment Notice (PAN), file a replywithin 15 days from receipt

4. Failure to file a reply will result ineither:a. BIR will repeat PANb. Declare the taxpayer in default,

and send you a Final AssessmentNotice (FAN)

5. Upon receipt of FAN, taxpayer mayfile a protest within 30 days.

Q: Is FAN the one appealable to the Court of Tax Appeals (CTA)?A: NO. This is because §228, NIRC and RR12-99 requires the exhaustion of administrative remedy of protest. After thereceipt of FAN or formal demand within30days must file a protest before the officeof the commissioner of internal revenue.

FORMS OF PROTEST1. Local Tax (Sec. 125, Local

Government Code (LGC))2. Real Property Tax (Sec. 252, LGC)3. Tariff and Customs Code (Sec. 2313,

RA 7651)

► In all protest under the different codes,

payment under protest is only necessaryunder the “Real Estate Tax”.

RR 12-99

► If the taxpayer receives 2 finalassessments, one under the Net Income Tax(NIT) and the other in VAT. If the taxpayerdon’t want to file protest under VAT but wantto file a protest under NIT. The taxpayer inorder to be allowed to file a protest under theNIT must first pay the VAT where he does notintend to file a protest.

► This is not “payment under protest”

because, payment under protest is the onementioned in Real Property Tax under Sec.252, LGC.

Under NIRC, Protest is referred to as:1. disputing of final assessment or2. file a motion for reconsideration or

reinvestigation

Q: What should be done after filing aprotest?





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A: Count 60days is the period to file thenecessary documents and receipts in supportof the protest.

Q: What is the effect of failure to file thesupporting documents?A: Failure to file the necessary and

supporting documents within the 60dayperiod, to be counted on the day the protestis filed, the final assessment shall becomefinal and executory.

On the 51st day you filed the necessary

document, you have to count another period,which is 180 days from the day you filed thenecessary documents.

Relevance of the 180 Days: 180 days isthe time given to the BIR to decide the case

Q: Supposed it did not decide the casewithin 180days?A: Do not invoke the Lascano case becauseit was rejected by RA 9282

In the Lascano case, before you file anappeal although the 180 days have lapsed,you have to wait for the BIR to take positiveaction.

The case was ruled only by the CTA,hence it is not a law. The jurisdiction of theCTA has been amended by RA 9282.

RA 9282 provides that in case of inactionof the commissioner after the lapse of

180days, remedy is to file an appeal.RR 12-99 says that after lapse of 180days

but within 30days after 180days, that is thetime to file an appeal.

Q: Supposed the BIR rule within 180?A: Within 30days from receipt of thedecision file an appeal to the CTA sitting indivision.

Q: Supposed the CTA decided not in yourfavor?A: File a motion for reconsideration within

15days to the same division deciding thecase.

Q: Supposed the CTA, in division decidednot in you favor?A: File an appeal to the CTA sitting en banc.

Q: Supposed the CTA en banc decided not inyour favor?

A: File an appeal within 15days from receiptof decision to Supreme Court.

Q: During the pendency of the protest in theoffice of the Commissioner, supposed youreceive a notice of collection, levy and/ ordistraint, what is your remedy?

A:1. YABES v. COMMISSIONER (150 SCRA

278) 2. UNION SHIPPING LINES v.

COMMISSIONER (185 SCRA 547)

YABES v. COMMISSIONER (150 SCRA 278) F: The taxpayer receives a notice of

collection while waiting for the decisionof his protest. He then filed an “appeal”with the CTA contending his protest hasbeen denied because he did not receive adecision but receive a notice of collection.

Simultaneously, the BIR filed before theCFI an “ordinary civil action” for thecollection of sum of money. When the judge of the CFI, was about to conductthe hearing of the case, the taxpayer filedan injunction with the SC to prohibit the judge of the CFI contending that a singlecause of action is pending in two courts,one in the CTA and another in CFI.

H: Injunction was granted prohibiting the Judge of the CFI and requiring the Judgeto transfer the records to the CTA sayingthat the remedy made by the taxpayer

was the correct remedy.

Q: Was the appeal made on time?A: Yes, when the BIR filed an ordinary action,the protest is deemed denied. Hence anappeal is a proper remedy.

UNION SHIPPING LINES v. COMMISSIONER F: The taxpayer was waiting for the decision

of his protest. But instead, he received anotice of collection. Immediately, he fileda Motion for Reconsideration andClarification asking whether his protest

has been denied. The BIR did not reply oranswer but instead filed an Ordinary CivilAction before the CFI. When the taxpayerreceived summons, he did not answer butinstead filed an Appeal before the CTA.

I: Whether or not the remedy of Appeal wasthe correct remedy and Whether or not itwas filed on time.

H: Yes. The remedy of appeal is the correctremedy and the appeal was filed on time.





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The reckoning period within which to filean appeal is the time the taxpayerreceived the summons.

While an Appeal is pending before the CTA,the CTA will determine:

1. If the decision was made within 180

days, whether the appeal was madewithin 30 days from the receipt of thesaid decision, or

2. if there was no decision after thelapse of 180 days, whether the appealwas made within 30 days upon theexpiration or the lapse of the 180-dayperiod.

Q: Pending appeal with the CTA, can the BIRamend the final assessment?A: 2 SCHOOLS OF THOUGHT:

1. GUERRERO v. COMMISSIONER (19

SCRA 25) 2. BATANGAS v. COLLECTOR (102

PHIL 822)

GUERRERO v. COMMISSIONER (19 SCRA 25) H: No. Because it is no longer the disputed

assessment.

BATANGAS v. COLLECTOR (102 PHIL 822) H: Yes. In order to avoid multiplicity of suits

► ACCORDING TO JUSTICE VITUG:

BATANGAS v. COLLECTOR (102 PHIL 822) is

the better ruling

PROTEST UNDER LOCAL TAX (Sec. 195,LGC)► Under NIRC, protest is filed in the Office

of the Commissioner► Under LGC, protest is filed with the same

City or Provincial or Municipal Treasurer whoissued the assessment

Period to file Protest• 60 days from receipt of assessment

Q: If the treasurer did not decide within a60day period, remedy?A: Go to the court of competent jurisdiction(RTC)

Q: If the RTC decided not in you favor?A: File an appeal with CTA en banc(beginning April 23, 2004)

Q: If the CTA decided not in your favor?A: Appeal to the SC.

NOTE:Pursuant to RA 9282, direct appeal to CTA enbanc can be made from:

1. Decision of the RTC involving local

taxation exercising appellate jurisdiction

2. Decision of the Central Board of Assessment Appeal exercisingappellate jurisdiction.

PROTEST UNDER REAL PROPERTY TAX(Secs. 226, 230, and 252)

• Remedy shall be the same

Sec. 252, LGC• If the taxpayer receives a Notice of

Assessment from municipal, city, or

provincial treasurer, the remedy is tofile a protest but there must be firstPayment Under Protest.- This is the only instance where

payment under protest isnecessary

Q: How is payment under protest made?A: At the back of the receipt there will be anannotation that there was a payment underprotest within 60days from receipt of thenotice of assessment within the sametreasurer who issued the assessment.

Q: If the treasurer rules against the taxpayer,remedy?A: The remedy is to file an appeal to theLocal Board of Assessment within 30daysfrom the receipt of the decision.

Q: From the decision of the Local Board of Assessment?A: Appeal should be made to the CentralBoard of Assessment Appeal.

► Beginning April 23, 2004, the ruling of

the Central Board of Assessment Appeal is nolonger final. It can now be appealed to theCTA, sitting en banc.

PROTEST UNDER THE TARIFF ANDCUSTOMS CODE (TCC) (Sec. 2313, asamended by RA 7651)

► Formerly, the automatic appeal under the

TCC applied only to protest; but now a days,





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the automatic appeal applies to both protestand forfeiture.

For Forfeiture Under the Tariff and CustomsCode► Refers to the Order of the Collector

confiscating the imported goods or

commodities

Doctrine of Primary JurisdictionIf the Collector ordered the forfeiture of

the imported commodities the order of theCollector shall be to the exclusion of allgovernment offices and authority.

Importer of Chemical, under the TCC, thecustom duties is only P27 but the collectorsays it should be P52. The importer will thenfile a protest with the Office of the Collector.

In the old days, there is an automatic

appeal from the decision of the collectorunder protest. But under RA 7651, theremedy of automatic appeal is applicable toboth protest and forfeiture.

I. In both cases of protest and forfeiture, if the importer lose the case and thegovernment wins, the remedy is to file anappeal within 15 days before the Office of theCommissioner.

• From the ruling of the Commissioner,the importer should file an appealwithin 30 days before the CTA, sitting

in division.• From the ruling of the CTA in division,

the importer should file an MR within15 days before the same divisionhearing the case.

• From the ruling of the CTA in division,deciding on the MR, the importershould file an appeal within 15 daysbefore the CTA sitting en banc.

• From the CTA en banc, appeal to SCwithin 15 days.

II. If the importer-taxpayer wins the case, the

government lose the case, Sec. 2313 of TCC as amended by RA 7651, there shall be anautomatic review within 15 days.

Q: Where should the automatic review bemade?A: It depends. Publish the value of thecommodity.

1. IF P5 MILLION OR MORE – AUTOMATICREVIEW SHALL BE BEFORE THE

SECRETARY OF THE DEPT. OFFINANCE.

2. IF LESS THAN P5 MILLION –AUTOMATIC REVIEW SHALL BE BEFORETHE OFFICE OF THE COMMISSIONER

Q: Suppose the commissioner decide or did

not decide within 30days, what happens?A: If the commissioner reverses the ruling of the collector, the ruling is final andexecutory.

If the commissioner affirms or did notdecide within 30days, there shall be anautomatic appeal before the sec. of finance.

Q: Between the two which will be appealedto the CTA?A: The decision of the secretary whichpasses through the office of thecommissioner (RA 9282)

But not all the decision of the secretarywhich passes the office of the commissioneraffirms or did not decide within 30days andappealed before the secretary of finance willappeal to the CTA be allowed.

There are 3 instances when the Secretary of Finance renders a decision appealable to theCTA:

1. decision of the Secretary by virtue of automatic review passing through theCommissioner

2. cases of anti-dumping duty, where the

anti-dumping duty was ordered by theSecretary

3. decision of the Secretary of Financeon countervening duty.

COMPROMISE (Sec. 204, NIRC)

3 Questions asked in 2004 BAR:1. May the Government compromise

criminal cases and civil cases?2. Supposed the corporation is already

dissolved, can the stockholder beobliged to pay?

3. Suppose the civil case filed by the BIRis final and executor, can it be subjectto compromise?

CAN THERE BE COMPROMISE IN:1. CIVIL CASES?

- YES, IN ANY STAGE OF THEPROCEEDING

- EXCEPT WHEN THE CIVIL CASE ISALREADY FINAL AND EXECUTORY





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BECAUSE IT WILL BE VIOLATIVE OFTHE SEPARATION OF POWERS

2. CRIMINAL CASES?- YES, EXCEPT:

a. IF ALREADY FILED IN COURT(RTC) OR;

b. IF IT INVOLVES FRAUD

3. IF THE CORPORATION IS ALREADYDISSOLVED, CAN THE STOCKHOLDER BEHELD LIABLE TO PAY TAX?

- GENERAL RULE: NO- EXCEPT:

a. IF IT IS PROVEN THAT THEASSETS OF THE COPORATIONIS TAKEN BY ONESTOCKHOLDER OR;

b. IF THE STOCKHOLDER DIDNOT PAY HIS UNPAIDSUBSCRIPTION

Minimum Amount to be Compromised (Sec.204)

1. If the ground is financial incapacity of the taxpayer, the minimum shall notbe less than 10% of the originalassessment.

2. If based on other grounds, theminimum amount shall not be lowerthan 40% of the original assessment.

Q: Can it be lower than that prescribed bylaw?

A: As a rule, no. EXCEPT, if allowed by theevaluation board consisting of the:

a) commissioner; andb) deputy commissioner.

Instances when the Final Assessmentbecomes final and executor:

1. If the taxpayer did not file the proteston time

2. Failure to submit the supportingdocuments within the 60-day period

3. After the lapse of the 180-day period,you did not file an appeal within the

30-day period to the CTA4. An appeal was filed but made beyond

the reglementary period to appeal

METHODS OF COLLECTION (SEC. 205)1. Judicial Action

a. Civilb. Criminal

2. Administrative Actiona. Distraint

b. Levyc. Tax lien

Q: Why is it important to know whether thefinal assessment is under normal orabnormal conditions?A: It is important because of the

requirement under §222. If the finalassessment becomes final and executory, thegovernment (BIR) can exercise the remediesunder §205 in any order or simultaneously(§207). But it is not always the case, becausethe right of the government to collect islimited in case of abnormalassessment/collection under §222. Underthe second option, the right of thegovernment is limited to judicial action eithercivil or criminal. Administrative remediessuch as distraint, levy, or tax lien is notavailable under such condition.

Q: In distraint, levy or tax lien, is the 10 yearperiod of collection applicable?A: No, only the 5year period should apply.

Distraint

Kinds:1. Constructive (Sec. 206)2. Distraint of Intangible (Sec. 208)3. Actual (Sec. 207, par. a, and Sec. 209)

1. Constructive Distraint

► The distraining officer shall make a list of

the personal property of the property to bedistraint in the presence of the owner of theproperty or the person in possession of theproperty.► The owner shall be requested to sign the

receipt.

Q: What if the owner refuses to sign thereceipt?A: Sec. 206: The distraining officer shallrequire 2 individuals within the neighborhood

with the warning that they should not allowthe taxpayer to dispose, transfer, or sell theproperty subject of distraint.

Grounds for Constructive Distraint (Sec. 206):1. The taxpayer intends to leave the

Philippines2. The taxpayer leaves the Philippines3. The taxpayer ceases or retires from

business





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4. The taxpayer obstructs the collectionof the tax.

► THESE GROUNDS ALSO ANSWER THE

QUESTION: WHAT ARE THE TAXABLE PERIODLESSER THAN 12 MONTHS?

2. Distraint of Intangible Property

Limited to 3 Intangible Properties:1. Shares of stocks2. Bank accounts3. Credits and debits

Share of stocks ► Warrant of distraint furnished to the

taxpayer or the officer of the corporationwith the warning that the property issubject of distraint and it should not

dispose of it.

Bank Accounts ► Warrant of distraint furnished to the

taxpayer or the officer of the bank withthe warning that the taxpayer should notbe allowed to withdraw.

Debits and Credits ► Warrant of distraint furnished to the

debtor and creditor

3. Actual Distraint

► Personal property shall be physically

taken by the distraining officer.► Within 10 days from the receipt of the

warrant, a report of the distraint shall besubmitted to the BIR (Sec. 207, par a lastpar.)► The property subject of distraint shall

be sold at a public auction EXCEPT bankaccounts and debits and credits.

» Notice of sale shall be by postingin 2 conspicuous place, stating the

date and the place of the sale (Nopublication requirement)

► Sec. 211: after the sale and within 2

days, a report shall be made to the BIR

Q: If the property sold is a personalproperty, is there a right of redemption?A: NO. The rule is absolute.

Q: If the property is a personal property, isthere a right of preemption?A: SEC. 210: Before the scheduled sale, thetaxpayer is allowed to recover the propertyby paying all the property by paying all theproper charges as well as the interest, costand penalties.

During the Scheduled Auction Sale, 2 Thingsmay happen:

1. There is bidder and the bid is enough2. There is no bidder or there is a bidder

but the bid is not enough

Q: What is the relevance of knowing thedifference?A: 1. If there is a bidder and the bid is enough

» In case of insufficiency, there shall befurther distraint to cover the liability.

(§217)» In case of excess, the excess shall bereturned to the taxpayer.2. If there is no bidder or the bid is not

enough.» It will be purchase by the governmentand the later sold in a public auctionagain (§212)» In case of insufficiency, no furtherdistraint, §217 applies only if there was abidder.» In case of excess, the excess shall notbe returned to the taxpayer but shall be

remitted to the national treasury.

Levy

► Other than the delinquent taxpayer,

warrant of levy is served to the register of deeds having jurisdiction over the realproperty (Sec. 213)► Within 10 days from the receipt of the

warrant, a report of the levy shall besubmitted to the BIR (Sec. 207 (b) lastpar)

Notice of Sale in Public Auction:1. Posting in 2 conspicuous places2. Publication in newspaper of general

circulation once a week for 3consecutive weeks.

Q: Is there a right of pre emption?A: Yes, §213.





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Q: Is there a right of redemption?A: Yes.

2 Things may happen in a Public Auction:1. There is a bidder and the bid is

enough2. There is no bidder or the bid is not

enough

Q: What if there is no bidder or the bid is notenough?A: Forfeiture shall be made (§215)

3 Definitions of Forfeiture under the InternalRevenue Code

1. Violation of Excise Tax Law (Sec. 224)2. If there is no bidder or the bid is not

enough (Sec. 215)3. The order of the Collector to

confiscate imported commodities

(Sec. 2313, TCC)

Relevance of the Choice of Words:► Under sec. 212, the law says

“purchase”► Under sec. 215, the law says

“forfeiture”» under 215: the real property shallbe automatically registered in thename of the Government (forfeiture)» under 212: the real property isnot automatically registered in thename of the Government (purchase)

Q: If sold at a private sale, what is therequirement?A: There must be an approval of theSecretary of Finance (§216)

Q: After sale, if there was deficiency?A: There shall be no further levy, because§215 says that it shall be to the totalsatisfaction of the taxpayer.

Q: After sale, if there was an excess?A: It shall not be returned to the taxpayer

but shall be remitted to the national treasury.

Sec. 217: this is only true if there was nobidder or the bid was not enough because of the provisions of the Secs. 212, 215, and 216

Sec. 218: no court shall issue an injunctionto restrain the collection of tax under thiscode

Determine what kind of injunction is referredto here:

1. Prohibitory – referred in Sec. 218because it restrains the collection of tax.

2. Mandatory

Q: Is the provision limited to “tax under thiscode”?A: Limited to internal revenue taxes.EXCEPT: CTA (Regular Court) → RA 1125 and

9282: CTA is authorized to issue injunctionto restrain the collection of taxes or feescollected under other code.

Q: Is the rule of distraint or levy the sameunder local taxation?A: Yes, local tax.

» §175 for DISTRAINT» §176 for LEVY

Q: How about real property tax?A: No, distraint is not authorized (§256,LGC), because the remedy is only Judicial Action and Levy .

Tax Lien

► Non payment of tax, the government has

the right to claim a lien over the property of the taxpayer

1. NIRC – Sec. 219, NIRC2. Local Tax – Sec. 173, NIRC

3. Real Property Tax – Sec. 257, NIRC

Q: Supposed a parcel of land is about to belevied by the government, but the same isbeing foreclosed by the mortgagee, which of the 2 obligee, the government or themortgagee shall be preferred?A: §219, last portion: The government isthe preferred one if the lien is annotated andrecorded in the registry of deed. In theabsence of annotation in the registry of deeds, the mortgagee is preferred.

Q: Do we have the same rule under LocalTax and Real Property Tax?A: NO. Both §173 and §257, the governmentis always the preferred one. The lien can onlybe removed by payment of tax, interest andpenalty.

Sec. 220: approving of filing an ordinary civilaction for violation of the internal revenuecode





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► The approval must be made by the

Commissioner of Internal Revenue

HIZON v. REPUBLIC (320 SCRA 574) F: An ordinary civil action for violation of the

tax code was filed in the city of San

Fernando. But the filing was onlyapproved by the Revenue RegionalDirector of Central Luzon. The plaintiff opposed the filing in the court on theground that it should be approved by theCommissioner and the Revenue RD.

H: Sec. 220 should be read with Sec. 7 of theNIRC

» General Rule: powers andfunctions of the Commissioner maybe delegated but not to a positionlower than a Division Chief » Under Sec. 7, there are powers

which can not be delegateda) Power to recommend to the

Secretary of Finance to issuerules and regulation

b) Power to decide a case of fistimpression

c) Power to enter into acompromise agreement

d) Power to assign BIR officer inthe place of productionsubject to income tax

» Since the case does not fall underthe prohibited delegation, the filing of

the case is legal and tenable.

► Decision of the Commissioner of Internal

Revenue (CIR) is appealable to CTA.

Q: When is a decision of the cir appealableto the Secretary of Finance?A: §4, on matters of interpretation of taxlaws.

SEC. 223: SUSPENSION OF THE RUNNINGOF PRESCRIPTIVE PERIOD

Q: A Filipino taxpayer went to Canada, after15years he went back, he is being assessedby the BIR under normal assessment. Has theright of the government to asses the taxalready prescribed?A: NO. When he went to Canada, the runningof the prescribed period is suspended.

Q: What if the change of address is withinthe Philippines, say only from manila to Pasay

City, is the running of the prescriptive periodsuspended?A: In order that the running of theprescriptive period will not be suspended,especially if the change is district office,§223 provides that the taxpayer must send awritten notice of change of address to the

BIR.In the absence of the written notice, the

period will be suspended.

Q: Change of address is from Philippines toabroad?A: The period will be suspended.

Other Grounds for Suspension:1. During collection if there is no

property found, the period is

suspended2. If the BIR is prohibited from making

assessment such when the subjectproperty is under litigation

3. In distraint of levy, the BIR officercan’t locate the property

CLAIM FOR REFUND (SEC 229)

Written claim for refund:1. Sec. 229, NIRC2. Sec. 112, VAT3. Sec. 136, Local Tax

4. Sec. 253, Real Property Tax5. None except sec. 1603, Tariff and

Custom

Written claim for refund under the inputtax (Sec. 112) Period is also 2 years from the close of

the taxable quarter when the transaction wasmade

Q: Can we apply §229 to VAT?A: Yes, because there is no conflict. §112 isrefund under input tax system.

§229 is refund for:1. errors in payment or;2. collected without authority; or3. assessment without authority.

The period to claim refund is 2years.

Doctrine of Equitable Recoupment► If a taxpayer is entitled to a written claim

for refund but the prescriptive period to





claim has lapsed, the taxpayer is allowed tocredit his written claim for refund which hefailed to recover to his existing tax liability.

Computed from;a. Individual – counted on the day the

tax has been paid

1. paying by way of withholding taxsystem, the reckoning point is theend of the taxable year.

2. paying by way of installment,reckoning point is the date thelast installment is paid.

3. if sold to public auction throughdistraint or levy, the date theproceeds is applied to thesatisfaction of the tax liability.

b. Corporation1. Existing

- 1992, *** v. Commissioner (205SCRA 184)

- 1995, Commissioner v. Philam life(244 SCRA 446)

- 1998, Commissioner v. CTA (301SCRA 435)

2. Non-existing- 2001, BPI v. Commissioner (363

SCRA 840)

1. Existing – the counting of theprescriptive period is 2 years on theday the annual adjusted return is

filed, because it is at that day that thetax liability is known.

2. Non-existing – the counting of theprescriptive period should also bereckoned on the day the annual returnis filed. But the corporation is nolonger required to wait till the taxableperiod is over to file the return. Uponreceipt of a notice from the SEC todissolve the corporation, within 30

A: Remedy is to file an appeal before theCTA (deemed a denial)

Q: Suppose the BIR decided within 2 yearsagainst the refund?A: Appeal within 30days from the decision,provided it is still within the 2 year period.

Q: Suppose there is only 21days remainingafter receiving the decision, when to file anappeal?A: Within 21days before the end of the 2year period.

► A written claim for refund should be filed

within 2 years

► Sec 204 (c) last phrase: in case of over

payment a written claim is not necessarybecause a return constitutes a written claim

for refund.

Q: May the commissioner of internal revenueopen the bank account of a taxpayer?A: General Rule: NO. EXCEPT:

1. To determine the gross value of theestate; and

2. To enter into a compromiseagreement. (under §204(A))

► The written claim for refund to determine

the gross value of the estate because thetaxpayer is already dead

In case of compromise, there must beconsent.

sababan notes.pdf

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