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Pay the tax under protest TAXATION LAW BA R REVIEW ER FACULTY ADVISERS ATTY. MICHAEL DANA MONTERO ATTY. FRANCISCO GONZALES PIERRE MARTIN REYES SHERYL CHRISTINE ACADEMICS HEAD SUBJECT A TE N EO CENT RA L B A R OPER A TIONS 2 0 12 A CADEM I CS CO M M I TT E E Academics Head: Pierre Martin Reyes; Understudy: Clariesse Jami REVIEW COMMITTEE Head: Yla Gloria Marie Paras; Understudy: Ken Koga; TAXATION LAW COMMITTEE Heads: Sheryl Christine Lagrosas; Ellie Chris Navarra Understudies: Abigail Bernandino; Philip Marion Ortal; TAXATION LAW I. GENERAL PRINCIPLES OF TAXATION......................... 5 A. Definition and concept of Taxation ...................5 B. Nature and Characteristics of Taxation ..............5 D. Purpose of Taxation...........................................6 E. Principles of Sound Tax System (FAT) ................6 F. Theory and Basis of Taxation (JBL) .....................7 G. Doctrines in Taxation .........................................7 1. Prospectivity of tax laws................................. 7 2. Imprescriptibility ............................................ 7 3. Double Taxation (DT)...................................... 7 4. Escape from Taxation ..................................... 8 12. Exclude Non-resident Aliens Not Engaged in Trade or Business ...............................................54 13. Individual Taxpayers Exempt from Income Tax54 16. Taxation of Non- resident Foreig n Corporations............................................ ...........59 17 . 18 . 19 Improperly Accumulated Earnings Tax ....60 Exemption from Tax on Corporations ......61 Taxatio n of Gener al Profession al Partnership (GPP) ...............................................61 21 . 22 Taxation of Estates and Trusts.................62 Withholding Tax B. Estate Tax..........................................................6 8 C. Donor’s Tax .......................................................74 D. Value-Added Tax ..............................................78 1. NATURE AND CHARACTERISTIC ..................... 78 2. IMPACT OF TAX ............................................. 78 a . b. c. Must be for a public purpose........................14 It should be uniform and equitable ..............14 within the jurisdiction of the taxing authority ...14 d. That it complies with the requirements of due process ................................................... ............14 e. That it does not 7. ZERO-RATED SALES OF GOODS O R PROPERTIES, AND EFFECTIVELY ZERO RATED SALES OF GOODS OR PROPERTIES..................... 80 8. TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO 12% VAT) ....................................... 81 9. CHANGES IN OR CESSATION OF STATUS OF A VAT ................................................................ .... 82 10. VAT ON IMPORTATION OF GOODS (Sec. 107) ................................................................ ........... 82 11. VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES............................................. ..... 83 L. Tax as distinguished from other forms of exactions ................................................... ............14 M. Kinds of Taxes .................................................15 II. NATIONAL INTERNAL REVENUE CODE ................... 17 A. Income Taxation ...............................................17 1. Income Tax Systems .................................... 17 2. Features of the Philippine Income Tax Law.. 17 3. Criteria in Imposing Philippine Tax Law.........18 4. Types of Philippine Income Tax .................... 18 5. Taxable Period ............................................. 18 18. SUBSTANTIATION REQUIREMENTS OF INPUT TAX CREDITS TAXATION LAW REVIEWER Page 3 of 165 19 . CLAIM S FO R REFUND/T AX CREDI T D. Flexible Tariff ..................................................138 E. Requirements for Importation ........................138 F. Importation in Violation of TCC.......................139 G. Goods Conditionally-free from Tariff and Customs Duties ...................................................139 H. Classification of Duties ...................................143 1. Ordinary/ Regular Duties............................. 143 2. Special Duties .............................................. 144 I. Drawback .........................................................145 J. Tax Remedies under the TCC ...........................145 1. Government ................................................ 145 2. Taxpayer ...................................................... 145 CERTIFICATE OF INPUT TAX ............................... 90 20. INVOICING REQUIREMENTS ........................ 90 21. FILING OF RETURN AND PAYMENT ............. 91 22. WITHHOLDING OF VAT ................................ 91 E. Percentage Tax..................................................95 F. Compliance Requirements ................................98 G. Tax remedies under the NIRC .........................108 III. LOCAL GOVERNMENT CODE OF 1991, as amended ............................................................ ................... 121 1. Fundamental Principles ............................... 121 2. Nature and Source of Taxing Power (CITE LAW) 121 3. Local Taxing Authority ................................. 122 4. Residual Taxing Powers of the LGU (Sec. 186 LGC) ........................................................ ......... 122 5. Specific Taxing Power of Local Government Unit (LGU) ........................................................ 123 6. Common Limitations on the Taxing Powers of LGUs and common revenue ............................ 128 7. Collection of Business Taxes........................ 128 8. Taxpayer’s Remedies ................................... 129 a) Periods ............................................................ ........ 133 Rem e d i e s o f LGUs for t h e Co l l e c t ion P rop e r t y T ax ............................................... 134 6. Claim for Tax Refund or Credit (LGC Sec 253) .................................................... .........135 7. Taxpayer’s Remedies ...............................135 IV. TARIFF AND CUSTOMS CODE OF 1978, as amended ............................................................ ................... 137 TAXATION LAW REVIEWER Page 4 of 165 I. GENERAL PRINCIPLES OF TAXATION =========================== =========== TOPICS UNDER THE SYLLABUS: I. GENERAL PRINCIPLES A. Definition and concept of Taxation B. Nature and Characteristics of Taxation C. Power of Taxation Compared with Other Powers D. Purpose of Taxation E. Principles of Sound Tax System (FAT) F. Theory and Basis of Taxation (JBL) ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES B. Nature and Characteristics of Taxation The power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of independent government. The right to tax exists apart from Constitutions and without being expressly conferred by the people. It is legislative in character. i. To LGUs in respect to matters of local concern to be exercised by the LG bodies thereof L. Tax as distinguished exactions M. Kinds of Taxes fro m oth er form s o f X , 1987 C on st i t u t i o n ] ; ii. When allowed by the Constitution [ S ec. 28[2 ] , A r t . V I, 1987 Co n s t i tu t i o n ] ; iii. When the delegation relates merely to admin implementation that may call for some degree of discretionary powers under a set of suficient standards ====================== ================ ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES A. Definition and concept of Taxation G e n era l , [ 91 P h i l . 359 ] , or implied from the policy and purpose of the Act Mac e d a v . Macar a i g , [ 197 S C R A 771 ]. It is subject to constitutional and inherent limitations. It must be used for public purposes – It has been held that tax has been utilized for public purpose if the welfare of the nation or the greater portion of its population has Power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions. Power by which an Independent State, through its lawmaking body, raises and accumulates revenue from its inhabitants to pay the necessary expenses of the [ 25 S C R A 8 2 7]; P h i l Gu ara n t y C o ., I n c. v . C o m m i ss ion e r , [ 13 S C R A 7 75 ] . It is the strongest of all the inherent powers of the government Si so n v. A n c h e t a , [ 130 S C R A It is territorial in operation – The power to tax can only be exercised within the territorial jurisdiction of a taxing authority [ 51 Am Process or act of imposing a charge by governmental authority on property, individuals or transactions to raise money for public exists privity of relationship between the taxing State and the object of tax. It is an enforced charge and contribution. Generally pecuniary in Dic t i o n a r y ] Taxation is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. [ 71 AM Taxation is described as a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of D e v e l o p me n t C o r po r a t io n v . C A, [ 2004] TAXATION LAW REVIEWER Page 5 of 165 TAXATION LAW =========================== =========== TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES C. Power of Taxation Compared with Other Powers DOMAI N private property with just to take private public use ======================= =============== TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES D. Purpose of 1 . Revenue- raising Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of government. It is to provide funds or property with which to promote the general welfare and protection of the whole citizenry. It is raised to serve as a means to provide public improvements designed for the enjoyment of the citizenry within the State’s 2 . Non-revenue/special or regulatory Taxation is also used for regulatory purposes; it is used to attain non-revenue objectives and pursue policy decisions. ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES E. Principles of Sound Tax System (FAT) 1. F i s cal A d e qu acy - the sources of tax revenue should coincide with and approximate the needs of the government expenditures TAXATION LAW REVIEWER Page 6 of 165 TA X POLICE POWER (in the form of a EMINENT Conce pt Power to enforce contribution to raise government funds Power to make and implement laws for the general welfare Power to take for public use Scop e Plenary, comprehens ive and supreme Broader in application General power to make and implement Merely a power property for Exercising Authority Government or political subdivisions Government or political subdivisions Maybe granted to public service companies or public utilities Purpo se Raise revenue Exercise to promote public welfare through The taking of property for public use Amount of Imposition No limit Limited to the cost of regulation, issuance of license, or surveillanc e No limit imposed, but the amount should be based on the market value of the Effec Becomes part of public funds Restraint on the injurious use of property Transfer of right to the property Persons Applies to all persons, property and excises that may be subject Applies to all persons, property and excises that may be subject Only particular property is comprehend ed Superiority of Contracts Contracts may be impaired unless (a) government is party to Contracts may be impaired TA X POLICE POWER (in the form of a EMINENT DOMAIN granting exemption; or (b) involves franchise Benefits Received Protection and general benefits from the government No direct or immediate benefit but only such as may arise from the maintenance of a healthy economic Market Value of the property Relationship to Constitution Subject to certain constitutional limitations Relatively free from constitution al limitations Subject to certain constitutional limitations 2. A d m i n i s tr a t i v e F e a s i b ility - the tax system should be Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such prescriptive period will only be applicable to those taxes that were returnable. The prescriptive period shall start from the time the taxpayer files capable of being properly and eficiently administered by the government and enforced with the least inconvenience to the taxpayer 3. T h e or e tical J u s ti c e - the tax system the average taxpayer and based upon the ability to pay Tra n sp o r t a t i o n C o ., [ 1958] As to IAET, the court held that there is no time limit on the right of the BIR Commissioner to assess this type of tax [ S ec. 25, NI R C ] . ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES F. Theory and Basis of Taxation (JBL) The law on prescription being a remedial measure should be interpreted liberally in order to protect the 1. 2. J u ri s d iction o ve r s ub j e ct & ob j e cts 3 . Double Taxation (DT) B e n ef i t s- Pr o t e ction T h e ory (Symbiotic relationship) – The basis of taxation is found in the reciprocal duties of protection and support between the state and its inhabitants. In return for this contribution, the taxpayer receives the general advantages and protection which the government afords the taxpayer and his a. Direct Duplicate Taxation (Strict sense) – To constitute double taxation in the objectionable or prohibited The same property must be taxed twice when it should be taxed once; Both taxes must be imposed: 3. proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its i. On the same property or subject matter; ii . iii . iv. v. For the same purpose; By the same State Government or taxing authority; Within the same jurisdiction or taxing district; during the same period; and they must be the same kind or character of tax means it has the right to compel all citizens property within its limits to contribute. an d ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES G. Doctrines in b. Indirect Duplicate Taxation (Broad sense) – It means indirect duplicate taxation. It extends to all cases in w/c there are two or more pecuniary impositions. The Constitution does not prohibit the 1 . Prospectivity of tax laws This principle provides that a tax bill must only be applicable and operative after becoming a law. As a general rule, taxing authorities must be applied prospectively, except by express provision of the law. Ex post facto is not applicable for tax purposes. However when it comes to civil penalties like fines and forfeiture (except interest), tax laws may be applied c. Constitutionality of DT – The SC held that there is no constitutional prohibition against double taxation in the therefore it is not a valid defense against the validity of a tax measure Pep s i Co l a v . T a n a u a n , [ 69 i. i. There is no double taxation in the following cases: By taxing corporate income and stockholders’ dividends from the same corporation Tax imposed by the State and the local government upon the same occupation, calling or activity Real estate tax and income tax ii. F er n a n d e z , [ 99 P h il . 934]; C o m mi ss i o n er v . F i l i p i n as Cia d e Se g u r o s , [ 107 P h il . 10 55 ] . iii. 2 . Imprescripti bility Unless otherwise provided by the tax law itself, taxes in general are not cancelable 578] Taxes are imposed on taxpayer’s final product and the storage of raw materials iv. S ec u r i ti es C o r p o ra t io n , [ 101 S C R A 231 ] . TAXATION LAW REVIEWER Page 7 of 165 production of the final product. Pr o c t er a n d G a m b l e P hi l i p p i n es v s . M u ni c ip a l i t y o f J a n a, [ 9 4 It connotes the integration of three factors: S C R A 894] End to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; Accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and d. Modes of eliminating DT (1) Provide for exemptions or allowance of deduction or tax credit for foreign taxes (2) Enter into treaties with other states [like the former Phil-Am Military Bases Agreements as to income tax] (3) Application of the Principle of Reciprocity March 2 6 , 199 0 ] 4. Escape from Taxation a. Shifting of tax burden – The imposition of tax is transferred from the statutory taxpayer to another without violating the law. (1 ) i. Ways of shifting the tax burden (FBO) F or w a r d s h i ft i n g – the transfer of burden from the producer to distributor until it finally reaches the ultimate purchasers or consumers B a c k w a r d s h i ft i n g – the reverse of 5 . Exemption from taxation ii. e.g. the manufacturer has agreed to buy the supplier’s product only if the price is reduced by the amount of tax. a . Meaning – The grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. i. It is an immunity or privilege; it is freedom from a financial charge or burden iii. more either forward or backward (2 ) i. ii. iii . Taxes that can be shifted VAT Percentage tax Excise tax on excisable articles Ad valorem taxes that oil companies pay to BIR b . Natu re Exemption from taxes is personal in nature and covers only taxes for which the taxpayer- grantee is directly liable. In any case, it cannot be transferred or assigned by the person to whom it is given without the consent of the State. Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law Manila Electric Company v. Vera, [67 SCRA 351 ]. Exemptions are not presumed, but when upon removal of petroleum products from refinery its (3 ) i. Meaning of impact and incidence of taxation Im p a c t o f T axa t ion – point on which originally imposed or the one on whom the tax is formally assessed. I n c i d e n c e o f T axa t ion – point on ii. burden fnally rests or settles down. Example: VAT is originally assessed against the seller who is required to pay the said burden is actually buyer. shifted or passed on to the b. Tax avoidance – also called Tax Minimization; tax c . Kinds (ICE) saving device that is legally permissible (1 ) E xp r e ss (or affirmative) – when certain persons, property or transactions are, by express provision, exempted from all or certain taxes, either entirely or in part. c. Tax evasion – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat TAXATION LAW REVIEWER Page 8 of 165 TAX EVASION TAX AVOIDANCE Other Name Tax Dodging Tax Minimization Means Use illegal means Use legal means Penalty Punishable by law Not punishable by law Object To entirely escape payment of taxes To merely minimize payment of taxes each other R e p u bl i c v . Ma m b u l ao L u m b er C o ., [ 6 S C R A Examples of Statutory Tax Exemptions: 622]; C a lt ex P h il s . V . C O A , [ 208 SC R A 726 ] . i. Inter-corporate dividends by a domestic corporati on fro m anoth er domest ic Not subject to set-of or compensation for the following reasons: corporation [ S ec. 27 D [ 4], NI R C] ii. iii. iv. Section 105 of the Tariff and Customs Code Section 234 of the Local Government Code Other special laws such as Omnibus Investment Code of 1987, i. Taxes are of distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations; The applicable laws and principles governing each are peculiar, not necessarily common, to each; and Public ii. (2 ) I m p l ie d (or by omission) – when a tax is levied on certain classes of person, properties or transactions without mentioning the other classes. Every tax statute makes exemptions since all those not mentioned are deemed exempted. The omission may either be accidental or intentional. C on t r a ct u al – those lawfully entered into by the government in contracts under existing laws. These exemptions must not be confused with the tax exemptions granted under iii. Ma m b ul a o L u m b er C o ., [ 6 S C R A 622 ] . A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. P h i l ex (3 ) [ 1998]; Fra n c i a v . I n t er m e di a t e C ou r t , [ 162 S C R A 753] An exception to the rule is where both the claims of the government and the taxpayer against each other have already become due, demandable and fully liquidated. In this case, compensation takes place by operation of law and both obligations are d . Rationale/grounds for exemption A presumption that the public interest will be subserved by the exemption allowed. Grant of exemption rests upon that such will benefit the body of the people and not upon any idea of lessening the burden of the individual owners of property. Purpose is some public benefit or interest, which the law-making body considers suficient to ofset the monetary loss 443 ] 7 . Comprom ise Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. The law allows the ff: persons to do lessen the rigors of the international multiple taxation. Equity is not a ground for tax doubl e or i. BIR Commissioner as expressly authorized by the NIRC subject to certain conditions [ S ec. e . Revocati on ii. Collector of Customs with respect to customs duties limited to cases where the legitimate authority is specifically granted such as in the remission of duties [ S ec. 709, Tax exemption is generally revocable. The congressional power to exempti on necessarily carries with it the consequent power to revoke the same. In order to be irrevocable, the tax exemption must be founded on a contract or granted by the Constitution. Revocations are constitutional even though the corporate do not have to perform a iii. Customs Commissioner subject to the approval of the Secretary of Finance, in cases involving the imposition of fines, surcharges, and 8 . Tax Amnesty a . Meaning – It is the general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver of 6 . Compensation and Set-off This doctrine states that taxes are not subject to set-off or legal compensation because the government and the taxpayer are not TAXATION LAW REVIEWER Page 9 of 165 not a suficient justification for exemption from the payment of surcharges imposed by the law for failing to pay tax within the period required. A tax statute should be construed to It is a way to give tax evaders, who wish to relent & b . Distinguished from tax exemption: b . Tax Exemption and Exclusion (1) General rule: Exemptions are not favored and are construed strictissimi juris [by the most strict right or law] against the taxpayer. An exemption from the common burden cannot be permitted to exist upon vague implication or inference The fundamental theory is that all taxable property should bear its share of the cost and expense of government. Applying the rule of strict construction to statutory provisions granting tax exemptions [or deductions] would minimize differential treatment and foster fairness and equality of treatment among taxpayers. Taxation is the rule and exemption, the exception. Therefore, whoever claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly mentioned by law, it must at least be within its purview by clear legislative intent. Claims for 9 . Construction and Interpretation of: a . Tax Laws (1) General rule: No person or property is subject to taxation unless within the terms or plain import of a taxing statute. In case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer. Taxes being burdens, they are not to be presumed beyond what the statute expressly and clearly declares. Tax statutes offering rewards are (2) Exceptio n: When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption When the exemption is in favor of the government itself or its agencies because the gen. rule is that they are exempt from tax. When the exemption refers to religious, charitable and educational institutions. If there is an express mention or if the taxpayer falls within the purview of the (2) Exception: The rule of strict construction as against the government is not applicable where the language of the tax statute is plain and there is no doubt as to the legislative intent. In such case, the words employed are to be given their ordinary meaning. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent. They should not be construed as c . Tax Rules and Regulations (1 ) Ge n e r al ru le o n ly – The construction placed by the ofice charged with implementing and enforcing the provisions of a Code should be given controlling weight unless such interpretation is clearly erroneous. TAXATION LAW REVIEWER Page 10 of 165 AMNESTY EXEMPTION Scope of immuni ty Immunity from all criminal, civil and administrative liabilities from non- payment Immunity from civil liability only To whom granted General pardon given to all taxpayers A freedom from a charge or burden to which others are subjected Application Applies only to past tax periods hence retroactive application Generally, prospective in application Presence of Actual Reven ue Loss Yes, there is revenue loss since there was actually taxes due but collection was waived by the government None, because there was no actual taxes due as the person or transaction is protected by tax exemption d . Penal provisions of tax laws time of its enactment. Pa s c u al v. S ecret a r y o f Strict construction so as not to extend the plain terms thereof that might create ofenses by mere implication not so intended by the legislative body R P v . M a r t i n , [ G . R . P u b li c W o rk s , [ G . R . N o . L -1 0 405, D e cem b er 2 9 , 196 0] Legislature is not required to adopt a policy of “all or none” for the Congress has the power to select the object of e . Non-retroactive application to taxpayers 7859, D e cem b er 2 2, 1955] The (tax) law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. A special benefit to specific individual does not diminish the nature of tax being for public purpose as long as it is incidental. N o . 1599 9 1, N ov e m b er 16, 2 00 6] b . Inherently Legislative (1) Ge n e r al ru le – power of taxation cannot be A tax law should not be given application when it retroacti ve harsh delegated. Contemplates the power to determine kind, object, extent, amount, coverage, and oppressive, for in such case, the constitutional limitation of due process would be violated. Sec. 246 of the NIRC provides that any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with Secs. 244 and 255 or any of the rulings or circulars promulgated by the Commissioner shall (2) E x c e p t io n s: (a ) Delegation to local governments – It is in line with the principle that the power to create municipal corporations for purposes of local self- government carries with it the power to confer the power to tax on such local governments. Delegation to the President – Certain aspects of the taxing process that are not legislative in character may be vested to him. Delegation to administrative agencies – (b ) (1 ) E x c e p t io n s: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. For instance: the universal practice of increasing taxes on income already earned. The rules and regulations promulgated by the CIR shall be retroactive in the following cases: (c ) c. Territorial (1) Situs of Taxation (a) Meaning – place of taxation; power to tax is limited to the territorial jurisdiction of the taxing state. i. ii. Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or iii. Where the taxpayer acted in bad faith. E XCEPT where privity of relationship exists, the State can exercise its taxing powers over its citizen outside its (b) Situs of Income Tax (1 ) From sources within the Philippines Interests derived from sources within the Philippin es Dividends from domestic and foreign corporations Compensation for services performed within the Philippines Rentals and royalties from properties =========================== =========== TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES H. Scope and Limitation of Taxation =========================== =========== 1. Inherent Limitations a. Public Purpose Test: whether the proceeds will be used for use of or for the privilege of using within the Th e p ub l i c p ur p o se o f t h e t ax l aw m u st e x i st at t h e P h i l i pp i n e s, p a te n t s, TAXATION LAW REVIEWER Page 11 of 165 propertie s. Sale of Real property located in the Philippines Sale of Personal property – Gains, profit, and income derived from the purchase within and its sale without the Phil, or from the purchase without and its sale within shall be treated as derived entirely from sources within the country in which the personal property is sold. Except: the gain from the sale of shares of stock in a domestic corporation shall be treated as SUMMA RY: (2 ) From sources without the Philippines Interest other than those derived from sources within the Philippines Dividends other than those derived from sources within the Philippines Compensation for services performed without the Philippines Rentals and royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using d . International Comity Property of a foreign State of government may not be taxed by another. e . Exemption of Government Entities, Agencies, and Instrumentalities (3 ) Income partly within and partly without the Philippin es Items other than those specified above in i. and ii. shall be Taking money from one pocket to the other. Applies only to entities exercising sovereign functions (acta jure imperii). However, it can tax itself if there is a statutory authority to do so and no express provision against such act. (c) Situs of Property Taxes (1) Taxes on Real Property – Location property (2) Taxes on Personal Property i. Tangible – Location of the property ii. Intangible – of th e 2. Constitutional Limitations a. Provisions Directly Affecting Taxation (1) Prohibition against imprisonment of non-payment of poll tax [ S ec. 20, Ar t . I II] Can still be made to pay fines and penalties for non- payment. Taxpayer may be imprisoned for non- payment of other kinds of taxes where (d) Situs of Excise Tax (1) Estate Tax – Domicile of the decedent at the time of his death (2) Donor’s Tax – Domicile of the donor at the time of the transfer (2 ) Uniformity and equality of taxation [ S ec. 28 ( 1 ) , Art V I] (e) Situs of Business Tax – Place where the taxpayer is registered or required to register Uniform: all articles or properties of the same class taxed at the same rate Equity: apportionment must be more or less just in the light of taxpayer’s ability to (1 ) (2 ) Sale of Real Property Sale of Personal Property VAT TAXATION LAW REVIEWER Page 12 of 165 OBJECT SITUS RULE Person Residenc e, Domicile , Real Property Location of the property Tangibl e Person al Physical location although the owner resides in another jurisdiction Intangib le Persona l Domicile of the owner (mobilia sequntur personam) Income Citizenship Residence Source of Income Transfer of property Citizenship Residence Location of Property Business or Occupation Where the act/business/occupation is performed/exercised treatment in like circumstances The uniformity and equity clause refers to the proper relative treatment for tax purposes of persons in unlike (6 ) Majority vote of Congress for grant of tax exemption [ S ec. 28 ( 4 ) , Ar t . V I] Includes amnesties, condonations and refunds Involves majority of all members voting separately Relative majority (majority of quorum) is suficient to withdraw (3 ) Grant by Congress of authority to the President to impose tariff rates/Flexible tariff clause ( 2 ) , Ar t . V I] Includes import and export quotas, tonnage and wharfage dues aside from tariff rates Delegated by Congress Through a law; the Tariff and Customs Code has provided for what has been (7 ) Prohibition on use of tax levied for special purpose [ S ec. 29 ( 3 ) , Ar t . V I] Revenues derived for a special fund shall be administered for the purpose intended only. Once the purpose is achieved, the balance, if any, is to be transferred to Subject to Congressional limits and restrictions Within the framework of national development program (8 ) President’s veto power on appropriation, revenue, and tariff bills [ S ec. 27 ( 2 ) , Ar t . V I] (9 ) Non impairment of jurisdiction of the SC [ S ec. 5 ( 2 )( b ) , Ar t . V II I ] (4 ) Prohibition against taxation of religious, charitable and educational entities/Exemption from real (10) Grant of power to the local government units to create its own sources of revenue C on s t i t u t i on ] Covers charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY USED for charitable, religious and educational purposes Pertains only to real estate tax (11) No appropriation or use of public money for religious purposes [ S ec. 29 ( 2 ) , Ar t . b . Provisions Indirectly Affecting Taxation (1 ) Due process [ S ec. 1, Ar t . III] (5 ) Prohibition against taxation of non- stock, non- profit [educational] institutions [ S ec. X I V] Exempts from taxes all revenues and assets of non- stock, non-profit educational institutions used ACTUALLY, DIRECTLY AND EXCLUSIVELY for educational purposes Exemption covers income, real estate, donor’s tax, and customs duties It can also be invoked by the government. Pr o vi n ce o f A b r a v. H e r n a n d o , [G . R . N o . L- 493 3 6 A u gu s t 3 1 , 198 1] Income exempt provided it maintenance or improvement (indispensable or essential). The exemption is is of used for instituti (2) Equal protection [ S ec. 1, Ar t . I I I ] All persons subject to legislation shall be treated alike, under like circumstances and conditions both in privileges conferred and liabilities imposed. Si s o n , Jr. v . person al. (non - 198 4] i. Proprieta ry education al institutio ns (Preferential Tax of 10%); Government educational institutions (exempt, ex. UP) ii. TAXATION LAW REVIEWER Page 13 of 165 SUBSTANTIVE PROCEDURAL Should not be harsh, oppressive, or confiscatory (reasonableness) No arbitrariness in assessment and collection By authority of valid law Right to notice and hearing Must be for a public purpose Imposed within territorial jurisdiction No violation of equal protection when there is ========================== ============ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES J. Definition, Nature, and Characteristics of Taxes proper classifcation made; classifcation valid must: to be i. ii. iii . iv. Rest on substantial distinctions Be germane to the purpose of the law Not be limited to existing conditions only; and A burden, charge, exaction, imposition or contribution assessed in accordance with some reasonable rule of apportionment by authority of the sovereign state upon the persons or property within its jurisdiction, to provide public revenue for the support of the government, the administration of the law, (3) Religious freedom [ S ec. 5, A r t I I I] The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. N D Any payment exacted by the State or its municipal subdivisions as a contribution toward the cost of maintaining governmental functions, where the special benefits derived from the performance is merged in the general benefit. Taxes operate in INVITUM and are in no way dependent upon the will or contractual assent, express or implied, of the person taxed. (1) Enforced (2) proportional and (3) pecuniary contributions (4) from persons and property (5) levied by law-making body of Ma n i l a, [ G . R . N o . L - 9637, A p r i l 30, 1957 ] . Activities simply and purely for propagation faith are exempt. of Tax is unconstitutional if it operates as a prior restraint on exercise of religion or favors a certain religion (non-establishment of religion) Income of religious organizations from any activity conducted for profit or from any of their property, real or personal, (4) Non-impairment of obligations [ S ec. 10, Ar t . I II] Applies only when government contract granting is party to the ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES K. Requisites of a valid tax ====================== E XCEPT if Franchise tax-exemption The Constitution provides that franchise is ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES I. Stages of Taxation (LAPR) ====================== a . b. c. Must be for a public purpose It should be uniform and equitable That either the person or property taxed is within the jurisdiction of the taxing authority d. That it complies with the requirements of due process e. That it does not infringe any constitutional L evy – Refers to the enactment of a law by Congress, imposing a tax. 1 . 2 . A ssessment – implementat The act of administration and of the tax law by the ======================= =============== TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES L. Tax as distinguished from other forms of exactions ======================= department through the administrative agencies P ayment – Act of compliance by the taxpayer, including such options, schemes or remedies as may be legally available to him. R efund – Recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, 3 . 4 . 1 . Customs Duty/Tariff TAXATION LAW REVIEWER Page 14 of 165 TA X CUSTOMS DUTY Coverag e More comprehensive than customs duty Kind of tax Object Persons, prop, etc Goods imported or exported 2. Toll of property ====================== ================ TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLES M. Kinds of Taxes 3. License Fee 1 . As to subject matter or object a . Personal, poll, capitation tax – Fixed amount Individuals residing within specified territory Without regard to their property, occupation or business Ex. Community Tax (Cedula) Distinction lies in the primary purpose: b . Property tax – Imposed on property, real or personal In proportion to its value or other reasonable method of apportionment Ex. Real estate tax License fee primary purpose is to regu l a t e and the excess of the amount collected from the cost to carry out the regulation is minimal and incidental. Tax’s primary purpose, or at least one of the real and If amount is too high for regulation, it would be a tax; c . Excise/Privilege tax - (different from the excise tax of Title VI of the NIRC) Imposed upon performance of an act, the enjoyment of a privilege or the engaging in an occupation, profession or unless imposed on non-useful businesses. Purpose of distinction: occupations or and exemptions apply only to one and not to the other (ex. Exemption from taxation does not include exemption 2 . As to who bears the burden or incidence a. Direct – the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate 4 . Special Assessment b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs 3 . As to tax rates or determination of amount a . Specific – tax imposed and based on a physical unit of measurement, as by head, number, weight, 5 . Deb t Ex. Tax on distilled spirits, fermented liquors, f the value of property with respect to which the tax is or. TAXATION LAW REVIEWER Page 15 of 165 TA X DEB T Ex. Tax on distilled spirits, ferment cigars b. Ad Valorem - tax of a fixed proportion o of property with respect to which assessed; requires intervention of assess Source Law; legal obligation Based on contract Nature Personal Assignable Right to set- of Generally not subject to compensation/ May be the subject of compensation/ TA X SPECIAL ASSESSMENT Impose d on Persons, properties, etc. Only on land Why impose d Regardless of public improvement Public improvement that benefits the Purpose Support of governme Contribution to cost of public improvement When impose d Regular exaction Exceptional as to time and locality Basis Necessity Benefits obtained TA LICENSE FEE Source Exercise of Taxing power Emanate from the police power of the State Purpos e Raise revenue Regulation Object Persons, property and privilege Right to exercise a privilege Amoun t no limit only necessary to carry out regulation TA X TOL L Kind of deman d Demand of sovereig Demand of ownership Purpose support of governme nt Collection for the use Amount No limit – depends on need of the government Fair return of the cost of the property or improvement of Efect Imprisonment is sanction for non- payment No imprisonment for non-payment Ex. Real estate tax, excise tax on cars, non- essential goods c. Mixed 4 . As to purposes a. General, fiscal or revenue - imposed for the general purpose of supporting the government Ex. Income tax, percentage tax b. Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives Ex. Protective tariffs or customs duties 5 . As to scope or authority to impose a. National - imposed by the national government Ex. National internal revenue taxes, b. Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax 6 . As to graduation of rate (Three systems of taxation) a . Proportionate - based on a fixed percentage of the amount of the property, income or other basis to be taxed b . Progressive or graduated - tax rate increases as the tax base or bracket increases Ex. Income tax, estate tax, donor’s tax c . Regressive - tax rate decreases as the tax base increases TAXATION LAW REVIEWER Page 16 of 165 of graduated tax rates for an individual or normal corporate income tax rate for corporations. II.NATIONAL INTERNAL REVENUE CODE =========================== =========== TOPICS UNDER THE SYLLABUS: A. Income Taxation B. Estate Tax C. Donor’s Tax With respect to the income, the computation of income is global while the scheduler tax system applied to the capital gains and passive income subject to final tax at preferential tax NOTE: Philippine income taxation is a combination of both system but is more schedular for individual while more global for corporation. E. Compliance Requirements Taxes) F. Tax Remedies under (Inter nal Reven ue G. Organization and Function of the Bureau of Internal Revenue ============================= ====================== ================ TOPIC UNDER THE SYLLABUS: A. Income Taxation ======================== 1 . a Income Tax Systems Global (unitary) Tax System – the total allowable deductions, as well as personal and additional exemptions, in the case of qualifed individuals, or the total allowable deductions only, in the case of corporations, are deducted from the gross income (i.e. sum of all items of taxable income, profit and gain) to arrive at the net taxable income subject to the graduated income tax rates, All items of gross income, deductions, personal and additional exemptions are reported in one income tax return and a single tax is imposed on all income received or earned activiti es whic h produce d th e incom e (i.e . compensation income, net income from business, trade or profession). 2 . a Features of the Philippine Income Tax Law Direct tax – tax burden us borne by the income tax b . Schedular Tax System – different types of incomes are subjected to different sets of graduated or flat income tax rates. The applicable tax rates will depend on the classifcation of the taxable income and the basis could be gross b . Progressive tax – tax rate increases as the tax base increases; direct taxes are to be preferred and as much as possible, indirect taxes should be minimized. T ol e nt i n o v . O c t ob er 3 0 , 1995] c . Semi-Schedular or Semi-Global Tax System – the compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income and after deducting the sum of c . Comprehensive system – adopts the citizenship principle, residence principle and the source d . Semi-schedular or semi-global tax system – certain passive incomes and capital gains are subject to final taxes at preferential rates TAXATION LAW REVIEWER Page 17 of 165 GLOBAL SYSTEM SCHEDULAR SYSTEM A system which imposes a personal tax upon the total income of the A system which imposes various types of tax on income producing activities Emphasizes the burden allocation aspects Emphasizes on revenue and Most equitable in distributing tax burden, as burden of an individual is closely related to his resources and his ability to pay Because of its multiple rates, the tax burden of a person does not respond to his income but rather fall fortuitously on the type of It serves as a means for redistributing income and wealth This function is alien to schedular system where in times of plenty or in times of need, people pay the same fixed tax It serves as a supplementary devise to accomplish non- fiscal goals of the government Schedular system cannot perform these functions Administration is not quite as easy as schedular because one has to consider all income from whatever sources Administration is simple being confined to each transaction or activity added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates for an individual or normal corporate income tax rate for c . Short Period – a taxpayer may have a taxable period of less than twelve (12) months when: Taxpayer dies Corporation is newly organized Corporation changes its accounting period Corporation is dissolved. 3 . a Criteria in Imposing Philippine Tax Law Citizenship principle – a citizen taxpayer is subject to income tax: (a) on his worldwide income if he resides in the Philippines; or (b) only on his income from sources within the Philippines, if he qualifes as non-resident 6 . Kinds of Taxpayers b . Residence principle – a resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his c . Source principle – a non-resident alien is subject to Philippine income tax because he derives income from sources within the Philippines such as dividend, interest, 4 . Types of Philippine Income Tax a . Net Income Tax/Taxable Income (GI – Deductions – Exemptio ns) Gross Income Tax Final Income Tax (On passive income and capital gains) Fringe Benefits Tax (amount of benefits to Managerial and Supervisory Employee paid by Employer; employee is taxed but burden is on employer) Capital Gains Tax (Real property and stocks not traded in stock market) Optional Corporate b . c . e . f . g . h . 5 . Taxable Period G E N E R A L R U L E : The accounting period of a taxpayer is a period of twelve (12) months. a . Individual Taxpayers (1) Citizens a . Calendar Year – accounting period from January 1 to December 31 which is allowed if the: (a ) Resident Citizen – citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Taxpayer is an individual Taxpayer is a partnership Accounting period is other than a fscal year Taxpayer has no accounting period Taxpayer does not keep books. (b ) Nonresident Citizen – citizen of the Philippines who are taxable only on his income from sources within the Philippines if he: Establishes the fact of his physical presence abroad with a definite i. b . Fiscal Year – accounting period of twelve (12) months ending on the last day of any month other than TAXATION LAW REVIEWER Page 18 of 165 TAXPAYER TAX BASE TAXABLE ON INCOME Resident Citizen Taxable Income Within and without the Philippines Nonresident Citizen Taxable Income Within the Philippines Resident Alien Taxable Income Within the Philippines Nonresident Alien engaged in trade or business Taxable Income Within the Philippines Nonresident Alien not engaged in trade or business (180 Gross Income Within the Philippines General Profession al Partnershi p Taxable Income GPP itself not taxable, however, individual partners will be taxed depending on classifcation Estate and Trust Taxable Income Same basis as an individual (depending on classifcation of decedent, if estate, trustor, if Domestic Corporation Taxable Income Within and Without the Philippines Resident Foreign Corporation Taxable Income Within the Philippines Non-resident Foreign corporati on Gross Income Within the Philippines ii. Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis. Works & derives income from abroad & whose employment requires him to be physically present abroad most of the time (i.e. not less than 183 days) during the taxable year. Was previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to Length of stay is indicative of intention An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not suficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the iii. iv. v. a. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured Permanent employee – one who leaves the Philippines on a more or less permanent basis Contract Worker – one who leaves the Philippines on account of a contract of employment which is renewed from time to time b. c. Loss of Residence by alien An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the Philippines A mere intention to change his residence does not change hid status. An alien who has acquired a residence is taxable as a resident for the remainder of his stay in NOTE: The taxpayer shall submit proof to the CIR to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may Non-resident citizens who are exempt from tax with respect to income derived from sources Philippines shall no longer be required to information returns from sources outside fil e th (b ) Nonresident Alien – an individual whose residence is not within the Philippines and who is not a citizen thereof but dong business therein is taxable only For Overseas Contract Worker, the time spent abroad is not material for tax exemption purposes. All that is required is for the worker’s employment contract to pass through and be registered with the POEA [ B IR R u li n g (1 ) Engaged in trade or business – an alien who comes and stays in the Philippines for an aggregate period of more than 180 days dur i n g a n y c al e nd ar (2 ) Not engaged in trade or business – an alien whose stay in the Philippines is 180 days or (2) Aliens (a) Resident Alien – an individual whose residence is within the Philippines and who is not a citizen thereof is taxable only on income derived from sources within the (3) Special Class of Individual Employees (a ) Alien s employ ed by regional regiona or are a headquart ers an d operati ng One who comes to the Philippines for a definite purposes which in its nature would require an extended stay, and makes his home temporarily in the country becomes a headquarters of multinational companies in the Philippines. Aliens employed by ofshore banking units. Aliens employed by petroleum (b ) (c TAXATION LAW REVIEWER Page 19 of 165 (d) Minimum Wage Earner may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not A worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector (b) Nonresident foreign corporation – foreign corporation not engaged in trade or business within the Philippines His earnings (i.e. SMW, holiday, overtime, night shift differential and hazard pay) are exempt from income tax pursuant c . d provisions of this general or Cod e an d othe r laws , Partnerships. Taxed as a corporation. General Professional Established solely for purpose of exercising common profession and no part of income derived from engaging in trade or business. As an entity, it is not subject to income tax. Partners are liable for income tax on their distributive share (computed by dividing net income of GPP). Each partner shall report his distributive share as part of his gross b . Corporati ons A corporation shall include partnerships, no matter how created or organized. Joint stock companies, joint accounts, associations, and insurance companies i. But does not include, for the purpose of imposing ordinary 30% (starting 2009; 35% 2006 - 2008) corporate income tax: i. General professional partnerships ii. Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an ii. iii. Taxable/Business/Ordinary/General Partnership All other partnerships no matter how created or organized. Includes unregistered joint ventures and business partnerships. Taxable as an entity ordinary corporate income tax. Joint ventures are not taxable as i. ii. iii. (1 ) Domestic Corporation – created or organized in the Philippines or under its laws and is liable for income derived from sources iv. (2 ) Foreign Corporation – a organized and existing foreign country, under the includes: laws of v. Partners are considered stockholders; therefore, their distributive share is taxed as dividends, thus subject to final income tax on their gross distributive share. (a ) Reside nt forei gn corporat ion – foreign corporation engaged in trade or business within the Philippines and is liable from In the case of CIR v . B r i ti s h Ov er s eas A i rwa y s e . Estate and Trusts C o r p , [ G. R . N o . L - 6 5773-7 4 , A p r i l 30, 1 987 ] , the Estate: property, rights and obligations of a person which are not extinguished by his death and those that accrues thereto; taxed in the same way as an individual provided it is irrevocable and earns income; what is taxed is not the property that constitutes the trust (this was already Court held that there is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and Trust: arrangement created by agreement under which title to property is passed to another for conservation or investment with the income and the corpus/principal distributed in accordance with the TAXATION LAW REVIEWER Page 20 of 165 separate entity, grantor must have absolutely and irrevocably given up control and benefit over the trust. c . General Principles f. Co- ownership Exists whenever the ownership of an undivided thing or right belongs to different persons. For income tax purposes, the individual co- owners are liable for the taxes due on their respective shares and the co- There is co-ownership in the following instances: i. Two or more heirs inherit an undivided property from a decedent; ii. A donor makes a gift of an undivided property in It is not taxable when the activities are limited merely to preservation of the co-owned property but the co-owners are liable for income tax in their separate and It is taxable when the income of the co- ownership is invested by the co-owners in business creating a partnership. 7 . a Income Taxation Definition – A tax on all yearly profits arising from property, professions, trades, or ofices, or as a tax on a person’s income, emoluments, profits and the life. Income tax b . Nature (same as Features of Philippine Income Tax Law) 8 . a Income Definition and Nature (1 ) Direct Tax – tax burden us borne by the income tax recipient upon whom the tax is imposed. Progressive Tax – tax rate increases as the tax base increases; direct taxes are to be preferred and as much as possible, indirect taxes should be Income, in the broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Income cannot be determined merely by reckoning cash receipts, for the statute recognizes as income determining factor other items, among which are (2 ) N o . 1154 5 5, O c t ob er 3 0 , 1995] (3 ) Comprehensive System – adopts the citizenship principle, residence principle and the source principle (4 ) Semi- Schedular certain or Semi-Global Tax System – incomes and capital subject to final taxes at preferential rates while all other income are added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates for an individual or 40 d a t e d 10 Feb r u a r y 1940] b . When income is taxable (1 ) Existence of income For a taxable income to exist, gain or profit is necessary – where there is an exchange of value received in the form of TAXATION LAW REVIEWER Page 21 of 165 TAXPAYER TAX BASE TAXABLE ON INCOME Resident Citizen Taxable Income Within and without the Philippines Nonresident Citizen Taxable Income Within the Philippines Resident Alien Taxable Income Within the Philippines Nonresident Alien engaged in trade or business (more than Taxable Income Within the Philippines Nonresident Alien not engaged in trade or business (180 days or less) Gross Income Within the Philippines General Professional Partnership Taxable Income GPP itself not taxable, however, individual partners will be taxed depending on classifcation Estate and Trust Taxable Income Same basis as an individual (depending on classifcation of decedent, if estate, trustor, if Domestic Corporation Taxable Income Within and Without the Philippines Resident Foreign Corporation Taxable Income Within the Philippines Non-resident Foreign corporation Gross Income Within the Philippines earnings in excess of capital invested. B I R R u li n g [ D A - (C -335) 8 1 5 -09] for the sale, and you recognize the expense when you actually pay cash for the 22, 2009 ACCRUAL METHOD – method under which income, gains and profits are included in gross income when earned whether received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the (2) Realization of income (a) Tests of Under the REALIZATION PRINCIPLE, revenue is generally recognized when following conditions are bot h of th e The earning is complete or virtually complete; and An exchange has taken place. (b) Installment payment v. Deferred payment v. Percentage of completion This principle requires that revenues must be earned before they are received. Amounts received in advance are not treated as revenue of the period in which they are received, but as revenue of the future period or period or periods in which they are earned. These amounts are carried as unearned revenue, that is, INSTALLMENT METHOD – the taxpayer may report income over the several taxable years in which collections are made Generally, the income derived on installment sale is the proportion of installment collection actually received during the year in relation to the gross profit earnin g proces s is complet e. M a n i l a Ma nd a r i n H ot e l s v . C o m mi ssio n er, [ CTA Ca s e DEFERRED PAYMENT METHOD – where the initial payments on installment sale exceed 25% of the selling price but they may only be realized in the subsequent year, the taxpayer is allowed to defer reporting income for accounting purposes but such sale is to be considered as the equivalent of N o . 504 6 , Mar c h. 24, 1 9 97] (b) Actual v. Constructive Receipt ACTUAL RECEIPT occurs when there is a physical transfer of the money consideration or its equivalent to a CONSTRUCTIVE RECEIPT occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. For example: Deposit in banks which are made available to the seller of service without restrictions; Issuance by the debtor of a notice to ofset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and N o . 263 - 92 d a t ed S e p t e m b er 16, 1992] PERCENTAGE OF COMPLETION METHOD – a method of recognizing the earnings derived from long-term construction contracts. This method requires recognition of income based on the i. ii. c . Tests in determining whether income is earned for tax purposes iii . (1 ) Under the REALIZATION PRINCIPLE, revenue is generally recognized when both of the following conditions are met: (a) the earning is complete or virtually complete; (3) Recognition of income (4) Methods of accounting (a) Cash method v. Accrual method This principle requires that revenues must be earned before they are received. Amounts received in advance are not treated as revenue of the period in which they are received, but as revenue of the CASH METHOD – recognition of income and expense dependent on inflow or outflow of cash (meaning, you recognize the TAXATION LAW REVIEWER Page 22 of 165 in which they are earned. These amounts are carried as unearned revenue, that is, liabilities to transfer goods or render services in the future — until the earning process is complete. Ma n il a Ma nd a r i n 5046, Mar ch 24, 1 997] = collectio n x Incom e Contra ct (2 ) The "CLAIM-OF-RIGHT" DOCTRINE provides that if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income even though one may claim he is not entitled to the money. Should it later appear that the taxpayer was not entitled to keep the money, the taxpayer R u li n g DA - (C -168) 519- 0 8 d a t ed D e cem b er 1 2 , 2008] (3 ) The ECONOMIC BENEFIT THEORY provides that anything which benefits a person materially or economically in whatever way is taxable under the law. [ B IR R u l i n g N o . 1 2 3 -97 Ge n e r al Ru l e : in this jurisdiction, mere increase in the value of property without actual realization, either through sale or other disposition, is not taxable, the only exception being that even without sale or other disposition, if by reason of appraisal, the cost basis of property is increased and the resultant basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable 9. Gross Income a . Definition All income derived (but not limited to from whatever source, including the following items) (GRIP (4 ) Under the SEVERANCE TEST THEORY, income is recognized when there is a separation of something which is of exchangeable value. G ross income derived from the conduct of trade or business or the exercise of a profession R ent Income Interest Income [ 252 U S 189] The annual increase in value of an asset is not taxable income because such increase has not yet been realized. The increase in value i.e., the gain, could only be taxed when a disposition of the property occurred which was of such a nature as to constitute a realization of such gain, that is, a severance of the gain from the original capital invested in the property. The same conclusion obtains as to losses. The annual decline in the value of property is not normally allowable P rizes & winnings C ompensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions & similar items A nnuities R oyalties D ividend Income G ains derived from dealings in property P ensio ns P artner’s distributive share from the net pp . 42 2 -4, as c it e d i n [ B IR R ul i n g N o . 20 6 -90 d a t ed O c t ob er 3 0 , 1990] TAXATION LAW REVIEWER Page 23 of 165 To compute the reportable income: Gross Reportable Installment proft received Price W he n I n s ta l lm e n t M e t h o d A ll o w e d (a) Installment sale of personal property Personal property is regularly sold on an installment basis by a dealer; Sec. 49(A) Casual sale if personal property on installment basis where the selling price exceeds P1,000 and the initial payments do not exceed 25% of the selling price; Sec. 49(B) NOTE: if the initial payment exceeds 25% of selling price, the transaction is considered cash sales; considered as initial payments are the down payments and all other payments received by the seller during the year of sale, including excess mortgage assumed by the buyer over the c . Gross income v. net income v. taxable income GROSS INCOME is described as income from whatever source, including compensation for services; the conduct of trade or business or the exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner's as c it ed i n C o m m i ssi on er o f I nt er n al R e v e n u e v . PA L , I n c., G . R . N o . 18 0 066, J u l y 7, 2009] NET INCOME means gross income less statutory deductions and exemptions. It is referred to as TAXABLE INCOME means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized o f t h e T a x C od e as c it e d i n C o m m i ss ion er o f I nt e r n al R e v e n u e v . PA L , I n c . , G . R . N o . 18 0 06 6 , J u l y 7, 2009] d . Classification of Income as to Source (1 ) Gross income and taxable income from sources within the Philippines (a ) G R OS S I n c o me f r o m S ou r ces w it h i n th e P h i li p p i n es b. Concept of income from whatever source derived Inc o of all income not expressly exempted within the class of taxable income under the laws irrespective of the vol u producing the gains, and whether derived from legal or illegal sources. TAXATION LAW REVIEWER Page 24 of 165 me from whatever sources derived means inclusion ntary or involuntary action of the taxpayer in INCOME TEST OF SOURCE OF INCOME Interests Residence of Debtor Dividends a) From domestic corporation – income within b) From foreign corporation: I n c o me w i t h in if more than 50% of the gross income of such foreign corp. for the 3-yr. period ending with the close of the taxable year prior to the declaration of BIR Ruling No. 017-2003 The transfer of land made by a person to another in payment of services rendered in the form of attorneys fees shall be considered as part of the gross income of the latter valued at either the fair market value or the zonal valuation, whichever is higher, in the taxable year received Doctrine of Involuntary Conversion of Property This is a doctrine provided for in US Jurisprudence (i.e., Herver vs. Helvering) and was adopted by the BIR in several of its rulings. This doctrine states that if property (as a result of its destruction, in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar to the property so converted, or into money, which is forthwith in good faith expended in the acquisition of other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain shall be recognized, but in an amount not in excess of the money so expended. EXAMPLES OF INCOME EXAMPLES OF INCOME Employee’s salary, bonus; and commissions/rebates Gambling, kidnapping, extortion, smuggling, Recovery of damages (compensation for injury; from tortuous acts) Not taxab le Recovery of damages pertaining to recovery or return of loss income or profit Taxable Recovery of items previously deducted from gross income (tax benefit rule) Taxable Forgiveness of indebtedness (if efect of entire transaction is a reduction of purchase price of property acquired in prior year) Not Taxable Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Taxable Forgiveness of indebtedness in exchange of a service performed Taxable Income derived from illegal business (gain) Taxable Recovery of lost earnings Taxable (d ) Supply of any assistance that is ancillary & subsidiary to, & is furnished as a means of enabling the application or enjoyment of, any such property/right in (a) above, such equipment in (b) above or knowledge/info in (c) above Supply of services by a nonresident person/his employees in connection with the use of prop./rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person Technical advice, assistance or services rendered in connection with technical mgt./admin. of (e ) (f) (g ) i. ii. motion picture flms films or video tapes for use in connection with TV tapes for use in connection with radio broadcasting iii. Most favored nation clause – Royalty income paid by a domestic corporation to a non-resident foreign corporation which is a resident of a Contracting State with which the Philippines has an efective tax treaty is generally subject to 15% final withholding tax, but the rate may be reduced to 10% for certain royalty payments or under the most- i. The purpose of the clause in a tax treaty is to grant to the other Contracting State a tax treatment that is no less favorable than that which is granted to the “most favored” among other countries. It means each party to the treaty pledges that any tax concession given to any other treaty country will also be extended to ii. (b ) TA X AB L E I n c o me fr o m S ou rces w it h i n th e P h i li p p i n es General Rule: Gross Income (within the Philippines) ( - ) Deductions (attributable to GI within) Taxable Income NOTE: ROYALTIES (from property or use of property located in (a ) Use of/the right/privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right Use of/the right to use in the Philippines any industrial, commercial or scientific equipment Supply of By “attributable” is meant that the expense can be identified as the expense that generated the incom e. For instance, if ABC Corp. (b ) (c ) TAXATION LAW REVIEWER Page 25 of 165 INCOME TEST OF SOURCE OF INCOME Philippines Extent: P h il G I x Dividend = Income within Total GI I n c o me w i t hou t , if less than 50% of the gross income of such foreign corp. for the 3-yr. period ending with the close of the taxable year prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore, Services (Compensation for labor/personal services) Place of performance of service Rentals Location of the property/interest in such property Royalties Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royalties Gain on sale of Real property Location of property Gain on sale of personal property other than shares of stock in a domestic corporation purchased in one country and Place of Sale Gain on sale of shares of stock in a domestic Philippines regardless of where sold attributable to the income generated from selling the clothes. Since the income from the sale of clothes is income within, then the expense for manufacturing them must be deducted from gross income within. However, the cost of selling the shoes may not be deducted from income within since it is not attributable to income within. Rather, it is specifically v. Gains, profits & income from the sale of real property located without the Tip: The foregoing enumeration is merely the reverse of the enumeration of gross income from sources within the Philippines. Hence, so long as you know which income are (b ) TA X AB L E I n c o me f r o m S o u rces W ith o u t t h e P h i li p p i n es Deductio ns: Expenses, losses & other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions efectively connected with the business conducted exclusively within the Philippines which cannot General Rule Gross Income (without the Philippines) ( - ) Deductions (attributable to GI without Deductio ns: Expenses, losses & other deductions properly apportioned/ allocated thereto and a ratable part of expenses, interests, losses and other deductions which cannot definitely be allocated to Such deductions shall be allowed only if fully substantiat ed calculation b y al l inf o necessa ry fo r it s E x c e p t io n s: No deduction for interest paid/incurred abroa d shall be allowed unless: Indebtedness was actually incurred Indebtedness must be that of the (3 ) Income partly within or partly without the Philippines a . b. c. Intere st writin g must be legally due and stipulated in These are: i. Income from services rendered partly within and partly without; Income from sale of personal property produced (in whole or in part) within and sold without the Philippines; Income from sale of personal property d. must be paid or incurred during th e taxable year Indebtedness must be ii. e. in connection w/ th e th conduct or operation of trade/business in Philippines iii. (2 ) Gross income and taxable income from sources without the Philippines (a ) G R OS S I n c o me f r o m s ou r ces w it h o u t t h e P h i li p p i n es i. Interests (other than those derived from sources within the Philippines) ii. Dividends (other than those derived from sources within the Philippines) iii.Compensation for labor or personal services performed without the Philippines iv.Rentals or royalties from property located without the Philippines or from any interest in such property including rentals/royalties for the use of or for the privilege of using w/o the Philippines, patents, copyrights, secret TAXATION LAW REVIEWER Page 26 of 165 PERSONAL PROPERTY INCOM E Manufacturing Business Produced here and sold without Income partly within, partly without Produced here and sold here Income within Produced abroad and sold here Income partly within, partly without Trading Business Purchased without and sold within Income within Purchased within and sold without Income without Purchased within and sold within Income within Taxpayer sells it abroad through a sales ofice Income partly within, partly without Final tax of 32% imposed on the grossed-up monetary value I n c o me w i t hou t Deduction s from Worldwid e = Expen se Inc o I n c o me Worl d Inco e . So u (1) (2 ) business or profession of the employer; or or advantage of the employer. employees not exceeding 10 days during the year to government oficials and employees not exceeding P750 per semester or P125 per month to not more than P1,500 per year (g ) Laundry allowance of P300 per month safety achievement in the form of tangible personal annual monetary value not exceeding P10,000 received which does not discriminate in favor of highly paid TAXATION LAW REVIEWER Page 27 of 165 As for unallocated expenses, meaning those which are not entirely attributable to either income within or without, such expenses shall be allocated using the following formula: x Unallocated me Without w i t h in Deductions wide x Unallocated Expense = from Income me Within rces of income subject to tax Compensation Income In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer- employee relationship, unless specifically excluded by the Code. Included only when the taxpayer is subject to Net Income Tax. Fringe Benefits Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) such as, but not limited to the following: (1) Housing (2) Expense account (3) Vehicle of any kind (4) Household personnel (such as maid, driver & others ) (5) Interest on loan at less than market rate to the extent of the Sp ec i a l R ul es o n Fr in g e Be n ef i t Tax 12. Nature of FBT of fringe benefit furnished/granted to the Employee by the Employer, whether an individual or corp. Fringe benefit is an income of the employee subject to FBT but is payable by the Employer. Employer can deduct FBT from its taxable income. Fringe benefits are only for corporate oficers / management. For rank and file, it is called an allowance. Allowances (benefits to rank and file) are not subject to FBT but rather compensation subject to income tax. 13. Fringe Benefits not subject to FBT (a) Fringe benefit authorized & exempted from tax under special laws (b) Contributions of employer for the benefit of the employee to retirement, insurance & hospitalizations benefit plan (c) Benefits given to the rank & file employees, whether granted under a CBA or not (d) De minimis benefits (e) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, (f) If the grant of the fringe benefit is for the convenience 14. De Minimis Benefits (Last amended by RR No. 5-2011) (a) Monetized unused vacation leave credits of private (b) Monetized value of vacation and sick leave credits paid (c) Medical cash allowance to dependents of employees (d) Rice subsidy of P1,500 or 1 sack of 50 kg rice amounting (e) Uniform and clothing allowance not exceeding P4,000 (f) Actual yearly medical benefits not i. Ordinary assets – assets that are used primarily in the ordinary course of trade or business, such as Stock in trade of taxpayer Property which would properly be included in an inventory of the taxpayer, if Depreciable asset s use d in th e Real property used in ii. Capital Assets – properties of a taxpayer other than ordinary assets, such as Stock and securities held by taxpayers other than dealers in securities Interest in partnership and joint venture Goodwill (b) Types of Gains from Dealings in Property i. Ordinary gain (loss) v. Capital gain (loss) Ordinary gain is derived from the sale or exchange of ordinary assets including gains from performance of services and business; included (3) Professional Income Income earned from the practice of profession Ordinary loss is the excess of business expenses and losses over the business income of the taxpayer derived from the sale or exchange of ordinary assets; deductible from provide d ther e is no employer- employee relationship between him and his clients. Profession is primarily any endeavor requiring specialized or work field learning, art, or science engaged in as a means of livelihood or profit of an individual or group of individuals. Capital gain is the excess of value received over the determined cost from the sale or exchange of capital asset. The following are the rules on the taxability of capital gains: o Sale of Stocks of a domestic corporation – subject to CGT o Gain derived from sale of real property in the Philippines – subject to CGT (4 ) Income from Business In the case of manufacturing, merchandising, or mining business, “gross income” means the total sales, less cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining gross income, deductions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. In the case of sellers of services, their gross income is computed by deducting Capital Loss is the excess of the losses from sales or exchanges of other capital assets over the gains from such sales or exchanges; deductible only from (5) Income from Dealings in Property (a) Types of Properties TAXATION LAW REVIEWER Page 28 of 165 (j) Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis 15. Convenience of the Employee Rule When a fringe benefit is given solely for the convenience of the employer, the fringe benefit is exempt from FBT because the employee does not recognize income from the benefit. Ex. Expenditure on housing of engineer within factory premises is not subject to FBT Ge n e r al R u l e : If housing is located outside, it is subject to FBT . E x c e p t io n : If the nature of the employer’s business is hazardous to health of employee, housing can be located outside the factory without being subject to FBT. Ex. If employee is given housing allowance in ii. Actual gain v. Presumed gain Actual gain is the amount realized from the sale of the asset in excess of the cost to the taxpayer. [1 ] Cost or basis of property sold: Presumed gain is the presumption of the law of the existence of a gain from sale of real property which subjects the said sale to CGT of 6% based on the iii . Long term capital gain v. Short term capital gain In case of individuals, the percentages of gain or loss to be taken into account shall be: 100% if the capital asset has been held for 12 months or less; and In case of a corporation, the holding period is not applicable; the capital gain and loss are to be reported in full amount regardless of the number of years the iv . Net capital gain, net capital loss Net capital gain is added to Net capital loss is not deductible from v. Computation of the amount of gain or loss GAIN = excess of the amount realized over the basis/adjusted basis (selling LOSS = excess of the basis/adjusted basis over amount realized (cost > AMOUNT REALIZED = money received + fair market value of the property (other than [2 ] Cost or basis of the property exchanged in corporate readjustment Non-recognition of gain or loss if exchange of property is solely in [a ] A corporation exchanges property solely for stocks in a corp. (both parties to merger/consolidation), or A shareholder exchanges stock in a corp. for the stock of another corp. (both corps. are parties to the [b ] [c ] TAXATION LAW REVIEWER Page 29 of 165 MODE OF ACQUISITI ON BASIS FOR DETERMINING GAIN/LOSS FROM SALE/DISPOSITION OF Purchase Cost of property acquired on/after 3/1/1913 Inheritance Fair market value as of the date of acquisition (at the time of death) Gift the cost to the donor or to the previous owner who did not acquire it by gift; BUT, if such basis > FMV at the time of the gift, the basis shall be such FMV for the purpose of determining the loss Acquired for less than adequate consideration Amount paid by the transferee Property acquired where gain or loss is not recognized (tax-free exchanges) Basis of stock or securities received by transferor: Same as the basis of property, stock/ securities exchanged (1) increased by: dividends amount of any gain recognized by the exchange (2) decreased by: money received fair market value of the other property received liability assumed by the transferee his securities in such corp. solely for stock or securities in another corp. (both corps. are parties to the merger/consolidation) If property is transferred to a corporation by a person in exchange for stock/unit of participation in such corporation of which as a result of such exchange such person, alone/together with others, not incom e; applicab le to both corporations and individuals. [b ] E x c e p t io n : Losses from such sale incurred by a domestic bank/trust company substantial part of business is receipt of deposits, sell any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation, with interest coupons or in registered form (including one [d ] [3 ] Recognition of gain or loss in exchange of property [a ] Ge n e r al R u l e : the entire amount of the [2] Net Capital Loss Carry-over gain or loss shall be recognized upon the sale or exchange of Corporations c a n n o t carry over a net capital loss If net capital loss is sustained in any taxable year, such loss is treated in the succeeding taxable year as a loss from the sale/exchange of a capital asset held for not more than 12 mos. (100% deduction) Such net capital loss that should be carried over should not exceed the net income for the year Incurred (prior year’s net income) [b ] E x c e p t io n : no gain or loss is recognized (tax-free exchanges) If in pursuance to a plan of merger or a corporation exchanges property solely for stocks in a corp. (both parties to merger/consolidation), or A shareholder exchanges stock in a corp. for the stock of another corp. (both corps. are parties to the merger/consolidation), or A security holder of a corp. o Amount deductible in 2012 is P6,000 only since it should not exceed the net income of the taxable year where the loss was incurred. Note that the allowable capital loss to be deducted in 2012 (i.e. P6,000) is only to the extent of the capital gain another corp. (both corp s. ar e th partie s to merger/consolidat ion) If property is transferred to a corporation by a person in exchange for stock/unit of participation in such corporation of which as a result of such exchange such person, alone/together with others, not vii. Dealings in Real Property situated in the Philippines Involves the sale or other disposition of real property classifed as capital asset located in the Philippines by a non-dealer in real estate. Control is ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled If the sale is made by a dealer in securities or if the real property is an ordinary asset, the resulting gain or loss will be considered as ordinary income. vi. Income tax treatment of capital loss [1] Limitation on Capital Loss [a] Ge n e r al ru l e : Allowed only extent of the gains from such sales or exchanges, hence, the net capital loss is not TAXATION LAW REVIEWER Page 30 of 165 Tax Base: the higher between o Gross selling price o Prescribed zonal value of real properties determined by the Commissioner o Fair Market Value as determined by the NOT E: The capital losses realized from the sale or disposition of stocks not listed and traded during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the shares is an individual, the rule on holding period and capital loss carry-over will not apply. Non-deductibility of losses on wash sales and short sales Gains from sale of shares of stock in a foreign corporation are not subject to capital gains tax but to graduated rates either as capital gain or ordinary income NOTE: Gain or loss is immaterial since there is a conclusive presumption of gain. An individual taxpayer has the option to treat the capital gain as subject to 6% CGT or 5-32% the Government or subdivision, or an y of its politic al Tax Rate: 6% viii. Dealings in shares Corporati of stock of Philippine ix. Sale of principal residence [1 ] Listed and traded in the stock exchange (Stock Transaction Tax) The term "Principal Residence" shall refer to the dwelling house, including the land on which it is situated, where the husband and wife or an unmarried individual, whether or not qualifed as head of family, and members of his family Tax Rate — one-half of one percent (1/2 of 1%) Tax Base — Gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the no t be considered interrupt ed or abandoned by reason of the individual's temporary absence therefrom due to travel or studies or work simila r circumstanc es. Suc h princip al residence must be characterized by permanency in that it must be the dwelling house in which, whenever absent, [2 ] Not listed and not traded in exchange (Capital Gains th e stoc k Amount of Capital Gain: Not over Php100,000 On any amount in excess of Php100,000 Tax Rate 5% 10% Ge n e r al R u l e : The address shown in the ITR is conclusively presumed as the principal residence. E x c e p t io n : If the taxpayer is not required to file a return, certification from Barangay Chairman or Building Administrator shall sufice. Tax Base – net capital gains realized during the taxable year from the sale, barter, exchange or disposition of not listed and not traded in the exchange. stoc k Requisites: i. Sale or disposition of the old actual principal residence ii. By a citizen or resident alien iii. Proceeds of which is utilized in acquiring or constructing a new principal [3 ] Dealer in securities (Ordinary Income) The gain on this type of transaction shall be considered as ordinary income subject to 5%-32% for individuals and TAXATION LAW REVIEWER Page 31 of 165 iv. Notify the Commissioner within 30 days from the date of sale or disposition through a prescribed return of his intention to avail tax exemption Can be availed of only once every 10 years The historical cost or adjusted basis of his old principal residence shall be v. vi . vii. If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to capital gains tax, and viii.The 6% capital gains tax due shall be deposited with an authorized agent bank (6 ) Passive Investment Income As a rule, passive income subjected to final tax is (a) Interest Income no longer included in annual taxable th e computati on of th e Interest income – earned on currency bank deposits & yield or any other monetary benefit from deposit substitutes & from trust funds & Final Tax Rate Interest Income received by an individual (except a nonresident individual) from a depositary bank under the i. Final Tax Rate – 7.5% (RC, RA) Interest income from long term deposit or investment in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts & other investments evidenced by ii. Final Tax Rate: For RC, NRC, RA, NRA-ETB For NRA-NETB – 25% TAXATION LAW REVIEWER Page 32 of 165 Held for 5 years or more Exempt 4 years to less than 5 years 5% 3 years to less than 4 years 12% less than 3 years 20% RC, NRC, RA, NRA- ETB 20% NRA-NETB 25% TAX RATE ON CERTAIN PASSIVE INCOME ON CITIZ E NS AND R ES ID E NT FINAL TAX 1. Interest under the expanded foreign currency deposit system [Nonresident citizens: Exempt] 7.5% [Exempt for nonresident aliens engaged in trade or business] 2. Royalty from books, literary works, & musical compositions 10 % 3. Royalty other than above 20 % 4. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 20 % 5. Prize exceeding P10,000 20 % 6. Other winnings, except Phil Charity Sweepstakes & Lotto 20 % 7. Dividend from a domestic corporation, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax of a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation Note: Dividends from foreign corporation Citizens - computed under Sec. 24 (a) tax table Resident aliens – not taxable 10% [20% for non- resident aliens engaged in trade or business] TAX RATE ON INTEREST INCOME FROM FOREIGN CURRENCY DEPOSIT [RR No. 10- 1. Interest income actually received by a resident citizen or resident alien from FCD 7.5% fnal withholdi ng tax 2. If deposited by an OCW or seaman or nonresident citizen Exempt 3. If in a bank account in the joint names of an OCW and spouse (resident) 50% exempt/ 50% fnal withholdi ng tax of 4. Interest income actually received by a domestic corporation or resident foreign corporation from FCD 7.5% fnal withholdi ng tax 8. Interest on long-term deposit or investment in banks (with maturity of 5 years or more) Exempt (b ) Dividend Income Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Types of Dividends: Cash Dividend – valued and taxable to the extent of amount of money received by the stockholder. Stock Dividend – generally, pure stock dividends are tax-exempt except if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in NOTE: Tax Sparing Credit Tax reduced by the Philippines should be fully applied or credited to the tax on dividend income received by the non- resident foreign corporation imposed by the country of its domicile. This serves as an incentive by reducing their tax i. ii. Ex. Domestic corporation paid cash dividend to non-resident foreign corporation (NRFC) organized in Brazil. This shall form part of NRFC’s income therefore taxable also in Brazil. The dividend received shall only be taxed at 15% in the Phils (instead of 35%) IF Brazil will reduce/credit at least 20% of the tax imposed in the Phils. from part , essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. Property Dividend – property of an issuing corporation distributed as a dividend; valued and taxable to the extent of fair market value (c ) Royalty income A payment or a portion of proceeds paid to the owner of a right for the use of such right. iii. From books, literary sources works and musical i. Liquidating Dividend stockholders – return of in the form iv. RC, NRC, RA, NRA- ETB NRA-NETB 10 % 25 asse t distribution upon corporate dissolution; generally, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. Script ii. Other royalties RC, NRC, RA, NRA- ETB NRA-NETB 20 % 25 v. notes; taxable to the extent of its fai r th market value and in warrant was th e yea r whe n (d) Rental income Amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated time for the use of property. Tax Treatment: Income from Leasehold Improvements – when the lessee erected or built permanent improvements on the leased property, which will become the property of the Tax Rules: i. Tax Exempt: Receiv fro m a Domest ic Corporati on Another domestic corporation Resident Foreign Corporation Pure Stock Dividend [1 ] ii. Subject to Final Tax (if received Domestic Corporation) fro m a Outright method – the income shall o be recogniz ed whe n th e TAXATION LAW REVIEWER Page 33 of 165 RC, NRC, RA 10% NRA-ETB 20% NRA-NETB 25% Non-resident Foreign 15% subject to the rule on Corporation tax credit for tax actually paid and tax deemed paid. Otherwise, subject to regular income tax rate of improvement is completed at its fair market value. Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured; If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be ii. o Spread-out method – the estimated book value of the leasehold improvement at the end of the lease is spread out over the term of the lease and is reported as income for each year of the lease, an iii. NOTE: The insured must die to avail of total exemption. If he survives, there/s only partial exemption to the extent that the proceeds constitute return of capital (total amount of premiums previously [2] V A T a d d e d t o r e n t al /p a i d b y th e l e ss e e All forms of property for lease, whether If advance payments are (8 ) Prizes and Awards Amount in cash or in kind received by chance or through luck are generally taxable unless otherwise provided. faithf ul performan ce of certai n obligations of the lessee, it is not subject to VAT. A security deposit that is applied to rental shall be subject to VAT at the time of its If the prizes are derived from Winnin gs [3] A dv a n c e P a y m e n t / Lo n g te r m l e ase If the advance payment is a prepaid rental without restriction as to use, the entire amount is taxable in the year it is received. If the prizes are derived from sources without – the said amount is included in the gross income for taxpayers who are taxable within and If the advance payment is a security deposit which restricts the lessor as to its use, such amount shall be Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, If the advance payment is a loan deposit, or option money for the property or a security deposit to insure the faithful performance of certain obligations of the lessee, such amount shall not be taxable to Recipient was selected without any action on his part Recipient not required to render substantial future services as a condition of receiving the prize/award Example: Nobel prize award Construed strictly, take note of 7 categories. It does not include athletic achievement. Contemplates i. ii. iii. iv. (7) Annuities, Proceeds from Life Insurance or Other Types of Insurance Annuity – installment payments for life, or for a guaranteed fixed period of time, whichever is v. Prizes, awards in sports competition sanctioned by national sports associations whether held in Amounts Excluded from Gross Income: i. Amount received by insured as return of premium received either during the term or at the maturity of the terms or upon surrender of the contract Contemplates a particular competition, not a cumulative achievement (Ex. Sportsman of the year award does vi. TAXATION LAW REVIEWER Page 34 of 165 Taxpayer P10,000 or less More than P10,000 PCSO and Lott o RC, NRC, RA, NRA- ETB 5-32% 20 % Exempt NRA-NETB 25 % 25 % Exempt Corporatio n 30 % 30 % Exempt (9) Pensions, retirement benefit or separation pay Pension – lump sum payment or on a staggered basis in consideration of Income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign countries) Estate & donor’s taxes Taxes assessed against local benefits of a kind tending to increase the value of the property assessed ii. after an individual retirement. reach es th e ag e of iii. iv. Amounts Excluded from Gross Income (for further discussion, please see Exclusions from Gross v. Retirement benefits received under RA 7641 (Labor Code of the Philippines) i. vi. Retirement benefits received Reasonable Private Benefit unde r a ii. (d) Income from any source whatever “Income from whatever sources derived” means inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the Amount received as a consequence of iii. separation for any cause beyond control (death, sickness or other physical disability) Benefits received from a foreign government by resident of nonresident citizens or aliens who reside permanently in the Philippines Veterans benefits Benefits under SSS iv. v. vi . vii (a ) (b ) Gains from expropriation of property Income derived from illegal Compensati on for damag es if it represents payment for loss of expected profits (10) Income from any source whatever (a) Forgiveness of f. Source rules in determining income from within and without income within I n c o me w i t h in if more than (b) Recovery of amounts previously written off Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of gross income in the year of recovery to the extent of (c) Receipt of Tax Refund or Tax Credit Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of income tax The following are non-taxable tax refunds: (non-deductible taxes) i. Philippine income tax (but FBT can be deducted from gross income as provided for in RR 8-98)) TAXATION LAW REVIEWER Page 35 of 165 INCOME TEST OF SOURCE OF INCOME Interests Residence of Debtor Dividends c) From domestic corporation – d) From foreign corporation: 50% of the gross income of such foreign corp. for the 3- yr. period ending with the close of the taxable year prior to the declaration of dividends (or for such part of such period as the corporation has been in existence) was derived from sources w/in the Philippines Extent: P h il G I x Dividend = Income within Total GI A GIFT – if efect of entire transaction is a reduction of purchase price of property acquired in prior year) Not Taxabl e A CAPITAL TRANSACTION – if the forgiveness of a stockholder is equivalent to dividend distribution Taxable A TAXABLE INCOME – in exchange of a service performed Taxable shall be treated as derived entirely from sources within the Phils regardless where the said shares are sold. (2 ) From sources without the Philippines Interest other than those derived from sources within the Philippines Dividends other than those derived from sources within the Philippines Compensation for services performed without the Philippin es Rentals and royalties from property located without the Philippines or from any interest in such property including (3 ) Income partly within and partly without the Philippines Items other than those specified above in 1) and 2) shall be allocated or apportioned to h . Exclusions from Gross Income (1) Rationale: it refers to items that are not included in the determination of gross income either (a ) They represent return of capital or are not income, gain or profit. They are subject to another kind of internal revenue tax. They are income, gain or profit that is expressly (b ) (c ) (2 ) Exclusions v. Deductions v. Tax Credit g. Situs of Income Taxation (See page 9 under Inherent Limitations, Territorial) (a ) Deduction: included in the gross income but later deducted Exclusion: not included in the computation of gross income. Refers to income received or earned but is not taxable as income because of (1 ) From sources within the Philippines Interests derived from sources within the Philippin es Dividends from domestic and foreign corporations Compensation for services performed within the Philippin es Rentals and royalties from properties located in the Philippines or any interest in such property including rentals or royalties for the use of or for the privilege of using within the Philippines, patents, copyrights and other like properties. Sale of Real property located in the (b ) (c ) (3 ) Under the Constitution Sec. 4(3) Art. XIV of the 1987 Constitution provides that all assets and revenues of a non- stock, non- profit educational institution used directly, actually and exclusively for private educational purposes shall be exempt from taxation. TAXATION LAW REVIEWER Page 36 of 165 INCOME TEST OF SOURCE OF INCOME close of the taxable year prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore, nothing of such dividends forms part of Services (Compensation for labor/personal services) Place of performance of service Rentals Location of the property/interest in such property Royalties Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royalties Gain on sale of Real property Location of property Gain on sale of personal property other than shares of stock in a domestic corporation purchased in one country and sold in Place of Sale Gain on sale of shares of stock in a domestic corporation Philippines regardless of where sold only if claim includes compensation for personal injury. If no personal injury, damages for car wreckage will only be exempt to the extent of the amount of the actual damage (4) Under the Tax Code (GIRL CRM) (a) G ifts, Bequests & But, income from such included in gross income propert y shall be by disinterested generosity and pure liberality Difficult to establish gift situations if there is an (f) R etirement Benefits, Pensions, Gratuities Retirement benefits receive under R.A. 7641 (Labor Code of the Philippines) and those received in accordance with a Employer- Employee relationsh ip (A servic e bonus/assistance in recognition of rendered is not exempt) If given under a) of any (1) R.A. 7641 Conditions: (i) at least 60 years old; (ii) 5 years of service at time of retirement Availed if there is no reasonable private benefit plan (benefits under this option is less) moral or legal duty or b) from the incentive of c) an anticipated benefit of an economic nature or where it is a return for services rendered, proceeds cannot qualify as a gift. Most critical is the giver’s intention or (b) Income Exempt under Treaty To the extent required by any treaty obligation binding upon the Phil govt. (2) Reasonable Private Benefit Plan (RPBP) Conditions: (i) at least 50 yrs old; (ii) in the service of same employer for at least 10 years at time of retirement Must be approved by BIR A pension, gratuity, stock bonus or profit- sharing plan maintained by an employer for the benefit of some or all of his oficials/employees, wherein contributions are made by such employer for the oficials/employees, or both, for the purpose of distributing to such oficials & employees the earnings & principal of the fund thus accumulated; & provided in the plan that no part of the income (c ) Amount Received by Insured Premium as R eturn of Under life insurance, endowment, or annuity contracts, received either during the term or at the maturity of the terms or upon surrender of the contract (d) Life Insurance Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be included in the gross income Insured must die to avail of total exemption. If he survives, there/s only partial exemption You can “avail of the benefits only once” (once you’ve availed of RPBP, you cannot avail of another RPBP); but you can avail of exemption under another ground such as (e) C ompensation for Injuries or Sickness Received through Accident/Health Insurance or Workmen’s Compensation Act , a s compensation for personal injuries/sickness + amount of damages received on account of such injuries/sickness Damages will be exempt only if they arise together with personal injury; TAXATION LAW REVIEWER Page 37 of 165 BIR Ruling No. 125-98 The phrase “shall not have availed of the privilege under a retirement benefit plan of the same or another ER” found in Sec. 32(B)(6)(a) of the Tax Code means that the retiring oficial must not have previously received retirement benefits from the same or another (3) Amount received as a consequence of separation for any cause beyond control Contemplates a particular competition, not a cumulative achievement (Ex. Sportsman of the year award does Sickness must be job threatening must render taxpayer incapable of (4) Prizes & Awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if: recipient was selected without any action on his part recipient not required to render substantial future services as a condition of receiving the prize/award Example: Nobel prize award Construed strictly, take note of 7 categories. It does not include Benefi ts fro m separati on due to retrenchment come under exemption (no choice/option; but if the Employee avails of an optional early retirement plan, he cannot reason that he was separated for reasons beyond his control, therefore, he cannot claim exemption of the benefits on this (5) 13th month pay & other benefits (i.e. productivity incentives & Christmas bonus) (4) Benefits received from a foreign government by resident of nonresident citizens or aliens who reside permanently in If the benefit exceeds P30,000, only the excess will be taxable. (5) Veterans benefits (6) GSIS, SSS, Medicare, Pag-ibig contributions & union dues of individuals (6) Benefits under SSS (7) Gains from the sale of bonds, debentures or other certificates of indebtedness with a (7) Benefits received from GSIS (g) M iscellaneous Items (1) income derived by foreign government (from investments in Philippines in loans, stocks, bonds or other domestic securities) (8) Gains from redemption of shares in mutual fund (6 ) Under a Tax Treaty Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines, is exempt from income tax. Refers only to passive income. If the foreign government engages in taxable. trade, income is (2) income derived by govt/its utility or politic al exerci subdivisions (from public Business profits of a foreign corporation organized under the laws of a treaty country from sources within the Philippines are not subject to Philippine income tax, unless such profits are attributable to a permanent establishment of the foreign essential governmental function) Key: Income should accrue to government; if the income is retained by the public utility, it is not exempt look at charter of political subdivision/GOCC to determine whether its income accrues to the (3) prizes, award s in sports competition sanctioned by national sports associations whether held in Philippines or abroad TAXATION LAW REVIEWER Page 38 of 165 BIR Ruling No. 143-98 The terminal leave pay of government employees whose employment is coterminous is exempt since it falls within the meaning of the phrase “for any cause beyond the control of the said (7) Under Special Laws (a) R.A. 6938 Cooperative Code of the Philippines Agricultural multi-purpose cooperative registered with the Cooperative Development Authority is exempt from ordinary income tax on its transactions with members and non-members for a period of ten (10) NOTE: Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has (2) Return of capital (cost of sales or services) registration. Thereafter, th e incom e ta x exemption shall be limited transactions with members to business (a ) Sale of inventory of goods by manufacturers and dealers of properties – the portion of the receipt representing the cost of goods manufacture and sold (manufacturers) and cost of sales (b ) R.A. 7279 Urban Development Housing Act of 199 2 The National Housing Authority is exempt from all fees and charges of any kind, whether local or national, while the private sector participating in socialized housing shall be exempt from taxes on project-related income directly (b ) Sale of stock in trade by a real estate dealer and dealer in securities – generally, the return of capital are not allowed to be deducted from the gross sales. Rather, they are required to deduct the total cost specifically identifiable to the real (c ) R.A. 7653 New Central Bank Act (as amended by R.A. 8791) The BSP is exempt from all national, provincial, municipal and city taxes for a (c ) Sale of services – not allowed to deduct any return of capital; thus the entire gross receipts (3 ) Itemized Deductions (BELT DID CRP) (d ) R.A. 7916 PEZA Law (as amended) PEZA-registered enterprises are given income tax i. ii. iii . iv. v. vi. vii. viii . ix. B ad Debts E xpens es holidays of commerci al considere 6 or 4 years from the date of operatio ns pionee if their and activities are non- T axes D epreciati on Interest D epletion of oil & gas wells & mines C haritable & other contributions R esearch & Development P ension (e ) R.A. 9178 Barangay Micro Business Enterprises (BMBE) Act of 2002 BMBE shall be exempt from income income arising from the enterprise. operatio n of th e (a ) i. Expenses Requisites for deductibility i. Deductions from Gross Income (1) General Rules To be deductible as a business expense: [1 ] Must be ordinary AND necessary (both must be complied with) trade, business or professional expenses only Must be paid or incurred during the taxable year Must be paid or incurred in carrying on or which are directly attributable to, the development, management, operation and or (a ) (b The expense must be ordinary and necessary, It must be paid or incurred within the taxable year, and It must be paid or incurred in carrying on a trade or business. The expense must be substantially proved by evidence or records the [2 ] [3 ] (c ) (d ) There is yet to be a clear-cut criteria or a fixed test for determining the reasonableness of an advertising C o m m i ss ion er o f I n t er n a l R e v e nu e, [ G . R . N o s . L -2850 8 -9, J u l y 7, 19 8 9] TAXATION LAW REVIEWER Page 39 of 165 fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation. We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, NOT E: Expenses allowable to pr iv a t e to the educational institutions: In addition expenses allowable as educational institution has the option to elect either: (a ) to deduct as expense those otherwise considered as capital outlays of depreciable assets for the expansion of school facilities to capitalize asset & deduct allowance for depreciation (b ) ii. Substantiati on evidence (i.e. statements Requirements: suficient official receipts, other adequate records) to iv. Salarie s, wages & othe r form s of o Amount of expense deducted o Direct connection/relation of the expense compensation for personal services actually rendered (including grossed-up monetary value of FB); but the final tax should have been paid Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether to the development, management operation &/or conduct of the trade, business or profession of the iii. Classification of Expenses: Ordinary expense – normal or usual [1 ] in relation to the taxpayer’s business and the surrounding circumstance. [2 ] Necessary expense – appropriate and helpful in the development of taxpayer’s business and are intended to minimize losses or to increase profits. These are the day v. Travel expenses in pursuit of trade, business/ profession Traveling expenses include transportation expenses and meals and lodging While illegal income will form part of the income of the taxpayer, expenses which constitute bribe, payment, being policy are not income. against law and deductible publi c gros vi . Cost of materials In general, the cost of materials or supplies is deductible as expense when consumed or used in business operation during the taxable period. Unused supplies and supplies not used for business [3 ] Business expense – expenditure related to the business that is deductible in the year incurred, in the same [4 ] Capital expense – expenditure improves or adds to the tha t you If the materials or supplies are used directly or indirectly in the production of the product, the related cost shall for part of the cost of the product and will be deductible as such when the products are sold. property or equipment. Not immediately deductible. It is deductible over time, such as in the form of TAXATION LAW REVIEWER Page 40 of 165 EXPENSES TO BE DEDUCTIBLE: 1. Amount must be reasonable. 2. Amount must be substantiated. 3. It is not contrary to law, public policy or morals. 4. Tax required to be withheld must have been paid to the vii . Rentals &/or other payments as lessee, user or possessor On the accrual basis, rent is deductible as expense when liability is incurred during the period of use. While on cash basis, o 0.50% of net sales (gross sales less sales returns/allowances & sales discounts) for taxpayers engaged in sale of goods or properties; 1% of net revenue (gross revenue less discounts) for those engaged in sale of services, including exercise of profession o An advance payment is not deductible expense of the lessee until the period is used, although the lessor may be 1 0 - 02] xii. Political campaign expenses viii. Repairs and maintenance xiii. Training expenses Incidental (minor) repairs – deductible from gross income; does not materially add to the value of the property nor appreciably prolong its life, but (b) Interest i. Requisites for deductibility, as implemented by Rev. Reg. 13-2000: There must be an indebtedness There should be an interest expense paid or incurred upon such indebtedness Indebtedness must be that of the taxpayer Indebtedness must be connected with the taxpayer’s trade, business or exercise of profession Interest expense must have been paid or incurred during the taxable year Interest must have been stipulated in writing Interest must be legally due Interest payment arrangement must not be between related taxpayers Interest must not be incurred to finance petroleum operations [1 ] [2 Majo r repair s (replaceme nt) – no t deductible since it prolongs the life of the asset; should be capitalized. [3 ] [4 ix . Expenses under lease agreements [5 ] x. Expenses for professionals The cost of supplies in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals, the rent paid for ofice rooms, the expenses of the fuel, light, water, telephone, etc.; [6 ] [7 ] [8 [9 ] [10 ] Amounts currently expended for books, furniture, and professional instruments and equipment, the useful life of which is short, may be [11 ] But amounts expended for books, furniture, NOTE: Ge n e r al R u le On D e du ct i o n an d profession al instrumen ts an d The amount of interest expense paid or incurred within a taxable year of indebtedness in connection with the taxpayer’s trade, business, or exercise of profession shall be allowed as a deduction from the equipment of a permanent character are not allowable as deductions. xi . Entertainment, amusement & recreation expenses directly connected to the devt., mgt. & operation & conduct of trade, business/ profession Directly connected to the Subject to a limit of TAXATION LAW REVIEWER Page 41 of 165 LIMITATION ON DEDUCTION Interest expense shall be reduced by an amount If indebtedness is payable in periodic amortizations, int. is deducted in proportion of the amt. of the principal paid. equal to the following subjected to fnal % of interest incom e 1/1/0 0 1/1/0 6 38 % 42 % [2 ] Payments made: Between members of a family (include onl y brother s & sisters, spouse, ancestors, & lineal descendants) Between an individual & a corp. more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation) Between 2 corps. More than 50% in value of outstanding stock owned by same individual, if either one is a personal holding co. or a foreign holding co. during the taxable yr. preceding the date of sale/exchange Between grantor & fduciary of any trust Between fiduciary of a trust & the fiduciary of another if same person is a grantor to each trust Between fiduciary & a beneficiary of a trust Indebtedness is incurred by a service contractor to fnance petroleum corp. Interest on preferred stock which in reality is dividend Interest on unpaid salaries and bonuses Interest calculated for cost keeping on account of capital or surplus invested in business which does not represent charges arising Example: Year 2012 Interest expense = P2,000 Interest income subject to fnal tax = P1,500 Deductible interest expense = P1,505 [P2,000 – (P1,500 x The objective of the limitation is to discourage tax arbitrage on back-to-back loans, the proceeds of which are invested in income earning interest that is subject to TAX ARBITRAGE - is a method of borrowing withou t enterin g int o a debtor/creditor relationship, often to resolve financing and exchange control problems. In tax cases, back-to- back loan is used to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest ii. Deductible Interest Expense: Interest on taxes, such as those paid for deficiency or delinquency, since taxes are considered indebtedness (provided that the tax is a deductible tax, except in the case of income tax). However, fines, penalties, and surcharges on account of taxes are not [1 ] t ax s h all no t b e s ub je c t e d t o th e l i m i t a t ion o n d ed u ct ion o f 42 % / 33 % . [2 ] Interest paid by a corporation on scrip dividends. Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on such interest was withheld. Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said corporation is the iv. Interest subject to special rules Interest paid in advance Interest periodically amortized Interest incurred to acquire property used in trade or business [1 ] [2 ] [3 ] [4 ] At the option of taxpayer, the interest may be allowed as: as expense (outright deduction) capital expenditure (subject to depreciatio n) iii. Non-deductible Interest Expense: (c) Taxes The term “taxes” refers to national and local taxes, and means TAXES PROPER, hence, no deductions are allowed for: [1] Interest paid in advance through discount or otherwise (in case of cash basis taxpayer) Allowed as deduction in the year TAXATION LAW REVIEWER Page 42 of 165 [1 ] [2 ] Interests* Surcharges Penalties or fines incident to delinquency (Sec. 80, Rev. Reg. 2) Exceptions to the rule that only such persons on whom the tax is imposed by law can claim (a ) Taxes of shareholder upon his interest as such and paid by the corporation without reimbursement from him, can be claimed by the corporation as deduction. A corporation paying the tax for the holder its bonds or other obligation containing a tax-free * Interest incurred or paid by a taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction of 42%/33% (b ) i. Deductible Taxes All taxes, national, or local, paid or incurred during the taxable year in connection with the taxpayer’s profession, trade or deductible from gross busines s, ar e iv. Limitations on Deductions In case of a nonresident alien individual engaged in trade/business in the Philippines, taxes to be deducted shall be allowed only if & to the extent that they are connected ii. Requisites for Deductibility It must be paid or incurred taxable year It must be paid or incurred in [1 ] withi n th e [2 ] connecti on with the taxpayer’s trade, profession or business It must be imposed directly on the taxpayer It must not be specifically excluded by law from being deducted from the v. Tax Credit – a right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid to his foreign country subject to limitation. [3 ] [4 [1 ] Who can Claim? [a ] [b ] [c Citizen Domestic Corporation Member of GPP Beneficiary of an estate or trust iii. Non-Deductible Taxes: [a] Philippine income tax (but FBT can be deducted from gross income as provided for in RR 8-98) [b] Income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign countries) [c] Estate & donor’s taxes [d] Taxes assessed against local benefits of a kind tending to increase the value of the property assessed [e] Final taxes, being in the nature [2] Who cannot claim? [a ] Alien individual (except resident aliens deriving income from within & without the Phils., if there is reciprocity) [b ] [3 ] Substantiation Requirements – The tax credit shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner [a ] The total amount of the income derived from sources without the Philippines; The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and All other information necessary for Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of [b ] For NRAETB and RFC, taxes paid or incurred [c ] extent that they are connected income within the Philippines. fro m TAXATION LAW REVIEWER Page 43 of 165 [4] What amount may be taken as tax credit: The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but NOT TO EXCEED THE FOLLOWING LIMITS: [a] Per Country Limitation – Amount of credit to tax paid/incurred to any country shall E XA M PL E : Countr y Limi T I p e r c o u n t r y ( ou t si d e ) Philippine = x TI from all sources Income Tax A. PER COUNTRY LIMITATION Country A : Country [b] Global Limitation – Total amount of credit shall not exceed same proportion of tax ** maximum tax credit limit B. GLOBAL L Glob al Limi To t al T I f ro m o u t si d e Philippine [(90,000/200,000 x 60,000)] = P27,700 = x TI from all sources Income Tax Computation of Allowable tax credit NOTE: Allowable Tax Credit shall be the LOWER of the actual tax paid to the foreign country, per country limitation and Less: Allowable Foreign Tax Credit [5] When Credit for Taxes may be Taken: The credit for taxes provided by Section 34(C)(3) to (7) may ordinarily be taken either in the return for the year in which the taxes accrued or on which the taxes were paid, dependent upon whether the accounts of the taxpayer are ** Cannot exceed maximum tax credit limit actual; Coun lower than t total of (d) Losses vi . Tax Credit v. Deduction Deduction: included in the but later i. [1 ] [2 ] Requisites for deductibility of ordinary loss Loss must be of the taxpayer Actually sustained during the taxable year Not compensated for by insurance or other forms of indemnity Incurred in trade, business or gross income Tax Credit: paid deducted from the tax liability taxpayer. of th e [4 ] profession lost throug h fires , stor m, shipwreck, or other casualties OR from robbery, theft or embezzlement Evidenced by a completed transaction Not claimed as a deduction for estate tax purpos es [5 ] [6 [7 ] TAXATION LAW REVIEWER Page 44 of 165 Par ti c ul a rs Net A c t ua l Fo re i g n P h i l I n c o me I n c o me Tax Pa i d i n Tax d u e at Country A Country B Phil- source income Tot NI – all A. PER COU Country A : Country B : ** maxi B. GLOBAL L [(90,00 0/ Computat o Tax Due on P Less: Allow P50,000 P18,000 40,000 P11,000 110,000 P200,000 P29,000 P60,000 [(50,000/200,000 x 60,000)] = 15,000 [(40,000/200,000 x 60,000)] = 12,000 IMITATI ON 200,000 P60,000 P15,000 11,000 26,000 P34 , 000 mitation A, Country A, 15K is lower than the try B, 11K (actual) is the lower amount; get the er country amounts. For limitation B, 27.7K is The taxpayer’s failure to record in his books the alleged loss proves that the loss had not been sufered, hence, not There is no substantial change in the ownership of the business when: D o m i n g o ] - not < 75% in nominal value of outstanding issued shares is held by same persons not < 75% of paid up capital of corp. is held by same ii. [1 ] Category and Types of Losses Ordinary Losses - incurred in trade or business, or practice of professi on of property connected with the trade, business, or profession, if the loss arises from fires, storms, shipwreck or other casualties, or NOTE: No actual change in ownership is involved in when: (1) in case the transfer involves change from direct ownership to indirect ownership (2) merger of the subsidiary into the [3] Special Types of Losses NOTE: Rev. Reg. No. 12-77 requires that a declaration of loss should be filed with the BIR within 45 days after the occurrence of the casualty, robbery, etc. Failure to submit the declaration within 45 [a ] Capital Losses – deductions allowed only to the extent of the gains from such sales or exchanges of capital assets (does not apply to banks and trust companies) losses from sale or exchange of capital assets losses resulting from securities becoming worthless and which are capital assets losses from short sales of property [2 ] Net Operating Loss Carry-over Refers to the of allowable deductions over gross income of the business for any taxable year, which has not been previously ofset as deduction from gross [b] Losses from wash sales of stock or securities 30 days before and after the date of the sale, the taxpayer has acquired or has entered into a The net operating loss of a business shall be carried over as deduction from gross income for the next 3 consecutive taxable years immediately acquir e, s ub s t a n t ially i d e n t i c al s t o c k / se c ur i t i e s Ge n e r al ru l e : NOT deductible unless claim is made by a dealer in stock/securities & made in ordinary course of The 3 year period shall continue to run notwithstanding that the corporation paid its taxes under MCIT, or that the individual availed [c ] Wagering Losses - allowed only to the extent of the gains from such For m i n e s o t h e r t h an o il & g as we l l s , if [d ] Abandonment Losses In case of abandoned petroleum operations, accumulated expenditures incurred prior to 1/1/79 allowed as deduction only from income derived from loss incurred in any of the 1st 10 yrs. of operation, carry-over for the next 5 Requiremen ts: [a ] the taxpayer was not exempt from income tax in the year of such net operating loss; the loss was not incurred in a taxable year during which the taxpayer was exempt from income tax, and sam e contra ct area; notice of abandonment shall be filed with Commissio ner In case of abandoned producing well, unamortized cost & undepreciated costs of [b ] [c ] TAXATION LAW REVIEWER Page 45 of 165 [e ] Losses from Illegal Transactions - NOT deductible ii. Ascertainment of Worthlessness (proof of two facts): [f] Losses due to voluntary removal of building incident to renewal or replacements – Taxpayer did in fact ascertain the debt to be worthless in the year for which the deduction was G o od r i ch] That in so doing, he acted in good faith [ C oll e c to r v . G o o d r i c h ] [g ] Loss of useful value of capital assets due to charges in business conditions – deductible Depends upon the facts and the circumstances of the case Good faith does not require that the taxpayer be an incorrigible optimist but on the other hand, he sustain ed (afte r adjustme nt for improvement, depreciation, and salvage value) [h ] Losses from sales or exchanges of property betwee n relate d taxpaye rs – NO T deductible as provided under Section 36 of the NIRC but the gains are taxable (f) Depreciation Gradual diminution in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. Also applies to amortization of intangible assets, the use of which in trade or business is of limited duration. (e) Bad DebtsDebts due to the taxpayer actual ly ascertained to be worthless and charged of during the year may be claimed as [1 ] The allowance for depreciation must be reasonab le. It must be for property used for employment in trade or business or out of its not being used temporarily during the year. The allowance must be “Actually ascertained to be worthless” – Worthlessness is not determined by an [2 ] upon the exercise judgment. The of sound business determination of [3 ] [4 particular facts and circumstances of the case. It must be uncollectible even in the future. C o ., [ 21 S C R A 1336] ii. Methods of Depreciation [1] Straight-line i. [1 ] Requisites for Deductibility: Existing indebtedness due to the taxpayer c o st - salv a ge v al u e Depreciati on Expens = whic h mus t be vali d an d legall y estimated life demandable, Connected with the taxpayer’s business or practice of [2 ] trad e, Example: cost=15,000; SV=5,000; est. life=5 years [3 ] Must not be sustained in a transaction entered into between related parties, Actually ascertained to be worthless and uncollectible as of the end of the taxable year, and Actually charged of in the books of accounts of the 15,000 - 5,000 = 2,00 0 [4 ] 5 years [5 ] [2] Declining balance method: c o st - a c c u m. d e p . Depreciati on Expens x Rate = estimated life NOTE: Tax Benefit Rule - Recovery of bad debts previously allowed as deduction in the preceding yrs. shall be included as part of gross income in the yr. of recovery to the extent of the income tax benefit of Example: cost = 15,000; SV = 5,000; est. life = 5 years; depreciation rate 200% TAXATION LAW REVIEWER Page 46 of 165 Year 1: 15,000 - 0 The BIR and the taxpayer may agree in writing on the useful life of the property to be depreciated. The agreed rate may be modified if justified by facts or circumstances. The change shall not be efective before the taxable year on which notice in writing by certified mail or x 200% = 6,00 0 5 Year 2: 15,000 - x 200% = 3,60 0 5 (g) Depletion of oil and gas wells and mines The reduction of cost or value of natural resources such as oil & gas wells, & mines as the resources are [3] Sum of years digits method: n t h p e r iod Depreciati on Expens x cost - sv* = sum of year *sv = salvage value No further allowance is granted if the allowance Example: cost = 15,000; SV = 5,000; est. life = 5 years Sum of years = 5 + 4 + 3 + 2 + 1 = 15 i. Intangible exploration & development drilling cost: deduct in the yr. incurred if incurred for no n - p ro d u c i n g we l l s & m i n e s Year 1: deduct in full OR capitalize & amortize if incurred for pr o du c i n g we l l s & 5 x 15,000 - 5,000 = 3,333. 33 1 5 same contract area Year 2: ii. Election to deduct exploration & development expenditures for mining operations: 4 15,000 - 5,000 x = 2,666. 67 1 5 [1 ] [2 deduct as cost deduct as adjusted basis provided, total amt. deductible shall not exceed 25% of net income iii. Special Types of Depreciation [1] Petroleum Depreciation of all properties directl y actual exploration & development expenditures net of 25% of NI shall be carried forward to succeeding yrs. until fully related to production of petroleum shall be allowed under straight- line or declining-balance (DB) method May shift from DB method to SL method Useful life: 10 yrs. or shorter life as may be permitted exploration expenditures = incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore/other mineral & pd/incurred before yrs. under straight-line method [2] Mining operations depreciation on all properties development expenditures = incurred during development stage of the mine or other natural operatio ns othe r tha n petroleu m operations at the normal rate if expected life is 10 yrs or less. if expected life is > 10 yrs., depreciate NOTE: Depletion of Oil and Gas wells and mines deductible by a non-resident alien or foreign corporation only in respect of oil and gas wells or mines located in the NOTE: Depreciation is deductible by non-resident aliens engaged in trade/business or non-resident corporation only when such property is TAXATION LAW REVIEWER Page 47 of 165 (h ) Charitable & other contributions [2 ] Donations to certain foreign institutions or international organizations - in compliance with agreements, treaties, or commitments entered i. [1] Requisites for Deductibility: The contribution or gift must be actually paid It must be given to the organizations specified in the code The net income of the institution must not [2 ] foreign organizatio ns institutions/internati onal [3 ] inure to the benefit stockholder or of an y privat e [3 ] Donations to accredited NGOs Organized & operated exclusively for scientific, educational, character-building & youth & sports development, health, social welfare, cultural or charitable purposes or combination thereof (no part of net income inures to the benefit ii. Valuation The amount of any charitable contribution of property other than money shall be based on the ac q ui si t i o n c o s t of iii. [1 ] Contributions subject to limitations: Contributions or gifts actually paid or made w/in the taxable year To or for the use of the government or its agencies or any political subdivision, exclusively for public purpose, or To accredited domestic Must be utilized within 15th of the 3rd month after the close of the taxable year, directly for the [2 ] constituti ng th e purpos e of th e organization, unless period is extended [3 ] Administrative expense should not be greater than 30% of total [a ] [b ] [c ] [d ] Religious Charitable Scientific Youth & sports development Cultural or educational purposes For the rehabilitation of veterans To social welfare Upon dissolution, assets would be distributed to another nonprofit domestic corp. organized for similar purpose or to the state for public purpose or to another org. to be used in same purpose as [4 ] To NGOs No part of NI inures to the benefit of any (i) Research and Development Paid or incurred by a taxpayer during the taxable yr. in connection with his trade, business or profession as ordinary & necessary expenses which are not chargeable to capital account; allowed as deduction during the taxable year iv. Limitation [1] For individual: taxable not more than 10% of before deducting the charitable contributions [2] For corporation: not more than 5 % of taxable income before charitable deducti ng th e Paid or incurred during the taxable year Ordinary and necessary [1 ] [2 connecti on professio wit h trad e busine ss or v. Contributions deductible in full [1] Donations to the govt. – to finance, to provide for, or to be used in undertaking priority activities in education, health, youth & sports development, human settlements, science & culture & in economic development according to National Priority Plan determined by NEDA If not in accordance w/ Not chargeable to capital account [3 ] ii. Requisites for amortization of certain R&D expenditures (treated as deferred expenses): [1 ] paid/incurred by the taxpayer in connection w/ his trade/business not treated as expense chargeable to capital acct. but not chargeable to property of a [2 ] [3 TAXATION LAW REVIEWER Page 48 of 165 [4] amortized over a period of not < 60 months as may be elected by the taxpayer subject to the control and disposition of the employ er; The payment has not yet been allowed as a deduction; and The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with [5 ] iii. This subsection on research and development cost is not applicable to: [6 ] [1 ] Any expenditure for the acquisition or improvement of land, or for the important of prop. to be used in connection with R&D of a character subject to depreciation and depletion Any expenditure paid/incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or ii. Summary rules on Retirement Benefits Plan/Pension Trust: [2 ] EXEMPT FROM INCOME TAX – employees’ trust under Sec. 60(B) EXCLUSION FROM GROSS INCOME – amount received by the employee from the fund upon compliance of certain conditions under Sec. 32(B) (j) Pension trusts (Past Service Cost) Pension Trust Contributions – a deduction applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee. This deduction is purely business in NOTE: Amounts contributed by the employer during the taxable year into the pension plan to cover the pension liability accruing during the year – considered as ordinary and necessary expenses under Sec. 34(A)(1). Established or maintained by employer to provide for the payment of reasonable pensions to his 1/10 of the reasonable amount paid by the employer to cover pension liability applicable to the years prior to the taxable year, or so paid to place the trust in a sound financial basis – deductible Normal Cost – the contributions during the taxable year to cover the pension liability accruing during the taxable year. Allowed as a deduction under Sec. 34(A)(1) as “expenses in (k) Premium paymen ts on health and/or hospitalization insurance An amount of premium on health and or hospitalization paid by an indi v i d u al t a xp a y er Past Service Cost – amount in excess of the above contribution (covering pension liability pertaining to old (head of family or married), for himself and members of his family during the taxable year. i. Requisites for durin g th e year s previo us to th e establishment of the pension trust); allowed as deduction only if: [1 ] [2 Insurance must have actually been taken; The amount of premium deductible from gross income does not exceed P2,400 per family or P200 per month during the taxable year; That said family had a gross income of not more than P250,000 for the taxable year; o such amount not been allowed as a deduction apportioned in equal parts over 10 consecutive years beginning with o [3 ] i. Requisites for Deductibility of Past Service Cost The employer must have established a pension or retirement plan to provide for the payment of [4 ] [1 ] ii. Who may avail of this deduction? [1 ] Individu al taxpaye rs earnin g purel y compensation income during the year. Individual taxpayers earning business income or in practice of his [2 ] The pension plan is reasonable actuarially sound; It must be funded by the an d [2 ] [3 ] [4 The amount contributed must be no longer TAXATION LAW REVIEWER Page 49 of 165 standard deductions during the year. generally be the husband, except if the husband is (1) unemployed (2) working abroad like an OFW or seaman (3) husband waived his right (4) Optional standard deduction (OSD) [As amended by R.A. 9504 which took effect July 6, 2008] (a) An individual, other than a nonresident alien, may elect a standard deduction of 40% of his gross sales or gross receipts. (prior to RA 9504, rate is 10% of gross income) (b) In the case of a corporation, it may elect s standard deduction of For legally separated spouses, the additional exemption may be claimed only by However, the total amount of additional exemption that may be claimed by both shall not exceed 4. NOTE: Parents, brothers, and sisters may not entitle the taxpayer to the additional exemption of P25,000. Such election should be signified in shall be irrevocable for the taxable which the return was made yea r for Non-resident aliens engaged in trade or business (NRAETB) may be entitled to personal exemptions (but not additional (5) Personal and Additional Exemption (a) Basic Personal Exemption Pursuant to amendments RA No. 9504, i. The country from which he is a citizen has an income tax law; and The income tax law of his country allows personal exemption to citizens of the Philippines not residing therein but deriving there shall be allowed personal exemptions amounting to P50,000 for each individual taxpayer regardless of whether he is single, head of the family ii. Note: Prior to R.A. 9504, personal exemptions are P20,000 for Single, P25,000 for Head of the Family and P32,000 for each Married o The personal exemption shall be equal to that allowed by the income tax law of the country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, (b ) Additional Exemptions for Taxpayers Dependents wit h There shall also be allowed an additional exemption of P25,000 for each “dependent” NOTE: Non-resident aliens not engaged in trade or business cannot claim any personal or Note: Prior to R.A. 9504, additional exemption amounted to only P8,000 each (c ) Individuals not entitled to personal and additional exemptions: i. Non-resident alien NOT engaged in trade or business ii. Alien individual employed by Regional or Area Headquarters of Multinational Companies iii.Alien Individual employed by Ofshore A “dependent” means: o A legitimate, illegitimate or legally adopted chil d Chiefly dependent upon and living with the taxpayer Not married, not gainfully employed, not more than 21 years of age o o o (d ) Status-at-the-end-of-the-year-rule i. The death of the taxpayer during the taxable year shall not afect the amount of personal and additional exemptions his estate can claim, as if he died at the end of such year ii. If the taxpayer got married or In case of married individuals, the additional exemption shall be claimed by only one of the spouses. The proper claimant of the exemption would TAXATION LAW REVIEWER Page 50 of 165 additional dependent (child born within the year) during the taxable year, he may claim the corresponding personal exemptions in full for such year iii.If the spouse should die or any of the dependents become twenty one years of age, or become gainfully employed during the taxable year, j. Exempt Corporations Income received by the following corporations shall be exempted from tax: (1 ) (2 ) Government educational institutions Non-stock non-profit educational institutions Non-profit labor, agricultural or horticultural organizations Association of farmers, fruit growers, and the like whose primary function is to market the product of their members Organizations with a purely local operation whose income is derived only from assessments, dues and fees collected from their members to meet operational expenses Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans; provided that no individual person owns its assets or no individual person receives benefit on its earnings Non-stock/non-profit mutual savings (4 ) twenty one years old or became employed at the close of gainful ly (5 ) (6) Items not deductible (a) General Rules: An expense will only be allowed as deduction only if the tax required to be (6 ) (b) Specific Items enumerated under Section 36: i. ii. Personal, living or family expenses Amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate (not applicable to intangible drilling and development costs incurred in petroleum operation) Amounts expended in restoring property or in making good the exhaustion thereof for w/c an allowance is or has been made Premiums on life insurance policy (7 ) (8 ) (9 ) Cemete ry compa ny owne d an d operate d exclusively for the benefit of its members (10) Non-profit business league, chamber of commerce, or board of trade iii. (11) Associations, orders, beneficiary societies operating for the exclusive benefits of their members iv. 10. Taxation of Resident Citizens, Non- resident Citizens and Resident Aliens v. Sale s or Exchang es of Propert y directly/indirectly: Between members of a family (include only brothers and sisters, spouse, ancestors, & lineal descendants) Between an individual and a corporation more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation) Between 2 corporations more than 50% in value of outstanding stock owned by same individual, if either one is a personal holding company or a foreign holding company during the taxable year preceding the date of sale/exchange Between grantor & fduciary of any trust a . General Rule [1 ] (1 ) Resident Citizen – citizen of the Philippines residing therein is taxable on all income derived from sources within and without [2 ] (2 ) Nonresident Citizen – citizen of the Philippines who are taxable only on his income from sources within the Philippines if he qualifes as a non- resident citizen. [3 ] (3 ) Resident Alien – an individual whose residence is within the Philippines and who is not a citizen thereof is taxable only on income derived from sources within the [4 ] [5 b . Taxation on Compensation Income (1) Inclusions (a) Monetary benefits TAXATION LAW REVIEWER Page 51 of 165 i. Salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); Fees [3 ] [4 Living with the taxpayer, and Not married, not gainfully employed, not more than 21 years old ii. E x c e p t : If such dependent, regardless of age, is incapable of self-support because of mental or physical at the same time, an employee employer/corporation; Taxable pensions and retirement pay; of th e iii. iv. iii. In the case of married individuals, the additional exemption can be claimed only by (b) Non-monetary i. Taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; iv. As a rule, the husband claims the exemption, except if the husband Expressly waives in favor of the wife Has no income [1 ] [2 ] (2) Exclusions (a) Fringe Benefit Subject to FBT Any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to a managerial or a supervisory employee Subject to a final tax of 32% v. If legally separated, the spouse who has custody of the dependent can claim the additional exemption. vi . Resident aliens are qualifed to deduct additional exemptions ONLY if the qualifed dependent children are living with (b ) De minimis benefits Benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or ofered by an employer to his employees that are of relatively small value and are ofered or furnished (b) Health and Hospitalization Insurance The actual premium payments for health and hospital insurance taken by an individual for himself or for his family are allowed as deduction. i. Requisites: [1] Amount deductible should not exceed P2,400 per family or P200 per month whichever is LOWER during the year. [2] The gross family income does not exceed goodwill, contentment, or eficiency employees. All other benefits given of b y in hi s th e enumeration under RR No. 05-11, shall no t be considered “de minimis” benefits. (c ) 13th month pay and other benefits 13 th month pay & other benefits (i.e. productivity incentives & Christmas bonus) the total of which does not exceed P30,000 If the benefit exceeds P30,000, only the excess NOTE: The spouse claiming the additional exemptions for dependents shall be the one to (c) Taxation of Compensation Income of a Minimum Wage Earner (MWE) Compensation income of MWEs shall be exempt from income tax and consequently from the withholding tax on compensation if they work: In the private sector and being paid the SMW (3) Deductions (a) Personal exemptions i. Basic Exemption – P50,000 ii. Additional Exemption – P25,000 for every qualifed dependent children not to exceed 4 NOTE: A dependent means a [1] Legitimate, illegitimate or legally adopted child, ii. TAXATION LAW REVIEWER Page 52 of 165 Refers to the rate fixed by the Regional Tripartite Wage and Labor and Employment Statistics (BLES) of the Department regio n shal l determi ne th e wag e rate s in th e differe nt e. Taxation of Capital Gains Stock Not Traded in the Stock Exchange 5 % Local Stock Exchange (Stock HIGHE R NOT E: Capital gains from sale/disposition of principal residence by natural persons may be EXEMPT provided that: i. Proceeds wer e full y utilize d in acquiring/constructing a new principal residence within 18 mos. from date of sale. ii. Historical cost/adjusted basis of sold prop be carried to the new principal residence built/acquired iii.Commissioner duly notified within 30 days from sale iv.Tax exemption can only be availed once every 10 years v. If no full utilization of proceeds of c . Taxation of Business Income/Income from Practice of Profession Please refer to the discussion under Gross d . Taxation of Passive Income Capital gains from other capital assets are subject to the holding period. The reportable capital gain would be: i. 100% if the asset was held for one year or less. There is a net capital loss carryover on the net capital loss provided that the amount of loss does not exceed the income before exemptions at the year the loss was sustained to be recognized immediately succeeding the year TAXATION LAW REVIEWER Page 53 of 165 TAX BASE TAX RATE Royalties, except on books, other literary works and musical composition 20 % Prizes and other Winnings more than P10,000 20 % Interest Income from Long- Term Deposit or investment (held for 5 years or more) In case of pre-termination: if held for 4 years to less than 5 years 3 years to less than 4 years Less than 3 years Exemp t 5% 12 % 20 Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and TAX BASE TAX RATE Capital Gains from Sale of Shares of Net Capital Gains: Not over P100,000 On any amount in excess of Final tax of 10 % Sale of shares of stocks traded in the Transaction Tax) ½ of 1% Capital gains on sale of Real Property situated in the Philippines Selling Price or FMV whichever is Final tax of 6% Income from the sale, exchange or other disposition of capital assets Graduate d Income Tax S TAT U T O R Y MIN I M U M W A G E ( S M W ) Productivity Board (RTWPB), as defined by the Bureau of of Labor and Employment (DOLE). The RTWPB of each regions based on established criteria and shall be the basis of exemption from income tax for this purpose. Note: Holiday pay, overtime pay, night shift differential pay and hazard pay earned by MWE shall likewise be covered by the above exemption. MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, EXCEPT income subject to final tax, in addition to compensation income are NOT exempted from income tax on their entire income earned during the taxable year BUR the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be EXEMPT FROM WITHHOLDING TAX. MWEs who receives/earns additional compensation TAX BASE TAX RATE Interest income earned from deposit NOT FCDU Interest income earned from deposit FCDU 20 % 7.5 % Cash and/or Property Dividends 10 % 11. Taxation of Non-resident Aliens Engaged in Trade or Business a. General rules the regular income tax rate on its taxable compensation income. To qualify for the preferential 15% rate, the Filipinos (1 ) A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year. i. Position and Function Test – must occupy a managerial position or technical position AND must actually exercise such function. Compensation Threshold Test – must have received or is due to receive a gross annual taxable compensation of at least P975,000. Exclusivity Test – must be exclusively working for the ii. (2 ) Shall be taxed on income earned within the Philippines, in the same manner as an individual citizen or a resident alien. iii. (3 ) Except Cinematographic Film owner – Taxable at 25% of Gross Income. 13. Individual Taxpayers Exempt from Income Tax a . Senior citizens (SCs) (1) A Senior Citizen is (a) Any resident of the Philippines (b) At least 60 years old Generally, qualifed Senior Citizens deriving income during the taxable year are required to file and pay their income tax returns, except If the income earned is from compensation income qualifed as a MWE, the income is exempt If the aggregate amount of gross income 12. Exclude Non-resident Aliens Not Engaged in Trade or Business a. G e n eral r ul e: Taxable at a rate of GROSS INCOME WITHIN b. E x ce pt : The said exemption does not extend to income subject to Final Tax (i.e. Interest income from deposit, dividends, share from partnership) and Capital Gains Tax. (2) Compliance Requirements: (a) SCs must be qualifed as such by the CIR of the RDO by submitting a certified true copy of his OSCA ID. (b) Must file a Sworn Statement on or before January 31 of every year that his annual taxable income does not exceed the poverty level. NOT E: b . Exemptions granted under international agreements The same tax treatment shall also apply to Filipinos employed and occupying the same positions as those of the alien employees mentioned above. Only the income earned as an employee of the said entities is subject to the preferential 15% rate; income earned from other sources (i.e. rent) shall be taxable in the same manner as a Resident Alien or NRA-ETB. Filipinos employed by ROHQs or 14 . a. Taxation of Domestic Corporations Tax payable (1) Regular Corporate Income Tax (RCIT) The use of regular TAXATION LAW REVIEWER Page 54 of 165 YEAR APPLICABLE TAX RATE 2009 onwards 30 % 2006-2008 35 % Before 2006 32 % TAXPAYER TAX Alien Individual Employed by Ofshore Banking Units 15% of gross income earned as such employee Alien Individual Employed by Petroleum Service Contractor and 15% of gross income earned as such employee Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of 15% of gross income earned as such employee INCOME EARNED TAX RATE Cash and/or Property Dividends 20 % Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess of 5% 10 % (2) Minimum Corporate Income Tax (MCIT) M CIT Ra t e = 2% of gross E xam p l e : When to begin/apply MCIT? Beginning on the 4 th taxable year immediately f o l l o w ing the year in The following dates are available for X Corp: SEC Registration BIR Registration December 17, 2004 January 4, 2005 January 1, 2006 NOTE: Commencement of Business Operation: Upon Issuance of BIR Certificate of The MCIT will be imposed on X Corp starting taxable year 2009. When will a corporation be liable for MCIT? If 2% of the corporation’s gross income is greater [1 ] Computation of RCIT Rationale: This is designed to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income (Ex. Over statement of depreciation expense) (a ) Carry Forward of Excess Minimum Tax Excess of MCIT ov e r t h e nor mal i n c o me t a x shall be carried forward & credited against normal income tax for the 3 succeeding years [2 ] Computation of MCIT NOTE: You can deduct MCIT Carry Forward only if Regular Income Tax is greater than MCIT. (b) Relief from MCIT MCIT may be suspended by the Sec of Finance when corporation’s losses are due to: NOTE: The MCIT is not applicable in 2008 since it has not yet reached the “fourth taxable year” i. ii. iii . prolonged labor dispute force majeure legitimate business [3 ] Determination of Tax Due and Payable (c) Gross Income (for purposes of applying MCIT) Gross income shall mean gross sales (–) sales returns, discounts and allowances (–) cost of goods sold. Cost of goods sold shall mean all business expenses directly incurred to product the merchandise to bring them to their present location and use. For taxpayers engaged in the sale of services, gross income shall mean gross receipts (–) sales returns, discounts and allowances (–) cost of services Cost of services shall mean all direct [4 ] Determination of Excess of MCIT over RCIT b . Allowable deductions (1) Itemized Deductions Items under Sec. 34 of the NIRC as discussed under Deductions from Gross Income. NOTE: Pursuant to RR No. 12-07, MCIT shall apply at the time of the filing of the quarterly corporate income tax. TAXATION LAW REVIEWER Page 55 of 165 2009 MCIT P 40,000 Less: 2009 RCIT 30,00 0 Excess of MCIT over RCIT P 10,000 2008 2009 2010 RCIT or MCIT (whicheve r is P 17,500 P 40,000 P 120,000 Less: Excess of MCIT over RCIT - - 10,00 0 Tax Due and Payable P 17,500 P 30,000 P 110,000 200 9 201 0 Gross Income P 2,000,000 P 2,500,000 MCIT Rate 2% 2% MCIT P 40,000 P 50,000 2008 2009 2010 Gross Sales P 3,000,000 P 4,000,000 P 5,000,000 Cost of Goods Sold 1,500,00 0 2,000,00 0 2,500,00 0 Gross Income P 1,500,000 P 2,000,000 P 2,500,000 Operating Expenses 1,450,00 0 1,900,00 0 2,100,00 0 Net Taxable Income P 50,000 P 100,000 P 400,000 RCIT Rate 35% 30% 30% RCIT P 17,500 P 30,000 P 120,000 (2) Optional Standard Deduction An amount not exceeding forty percent (40%) of gross income. Gross Income shall mean the gross sales less sales returns, discounts and allowances and cost of goods sold. A taxpayer who elected to avail of the OSD shall signify in his/its return such intention, otherwise he/it shall be considered as having availed himself of the itemized deductions. Once the election to avail the OSD is e . Tax on proprietary-educational institutions and hospitals which are non-profit c . Taxation of capital gains Proprietary educational institution – any private school maintained & administered by private individuals or groups with an issued permit to operate from DECS, or Taxable at 10% on TAXABLE INCOME, except on certain passive income (which are subject Predominance Test: if gross income from unrelated trade/business/other activity > 50% of the total gross income from all sources, E N T IRE be subject to the REGULAR corporate tax rate of 30% (35% - 2006-2008) Distinguish from non-profit non-stock educational institutions which are exempt from tax on revenues and assets Actually, Directly and Exclusively used for educational purposes (Sec 30 (H), NIRC; RMC 76- d . Taxation of Other Passive Income f. Tax on GOCCs, agencies and instrumentalities (1) Ge n e r al R u l e : all corporations, agencies, or instrumentalities owned or controlled by the govt. are taxable. (2) E x c e p t io n s: (a ) (b ) (c GSI S SSS PHIC PCS TAXATION LAW REVIEWER Page 56 of 165 TAX RATE BASI S 30% (2009 onwards ) 35% (2006- Same tax rate upon their taxable income in a similar business, industry, or activity TAX BASE TAX RATE Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties Interest income earned from deposit NOT FCDU 20 % 7.5 % Income Derived under the Expanded Foreign Currency Deposit System Income derived by a depository bank under the FCDU system from foreign currency transactions with local commercial banks (i.e. branches of foreign banks authorized by the BSP to 10 % TAX BASE TAX RATE Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess Final Tax 5% 10 % Sale of shares of stocks traded in the local stock exchange (Stock Transaction Tax) Selling price ½ of 1% Capital gains on sale or exchange of lands and or buildings located in the Philippines Selling Price or FMV whichever is Final Tax 6% Net Capital gains on sales or exchange or disposition of other capital assets Regular Corp. Tax (30%) TAX RATE BASI S 10 % On related trade, business or activity; 30% (2009 onwards) 35% (2006- 2008) IF total gross income from unrelated trade, business, or activity exceed 50% of total income Interest income from foreign currency loans granted by depository banks under the FCDU system to residents. Intercorporate Dividends Exempt 15 . a. Taxation of Resident Foreign Corporations General rules The rest is the same rules as Domestic originating from the Philippines in a continuo us an d uninterrupt ed flight , irrespective of the place of sale or issue and the place of payment of the ticket or passage Provided, tickets revalidated, exchanged and/or indorsed to another international airline form part of the GPB if the passenger boards a plane in a port or point in the Philippines o If the ticket is indorsed to another airline, the GPB will be charged to b . Minimum corporate income tax Same rules as Domestic c . Tax on certain income Provided, for a flight which originates in the Philippines but transshipment (transfer) of passenger takes place at any port outside the Philippine on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to o NOTE: Tr a n sf e r o f ai r l i n e c o m p a n y , not transfer of aircraft GPB rule in the NIRC is a departure from the old rule which emphasized where tickets were bought. Now we adopt the originating rule meaning to form part of GPB, passenger/cargo must Does not apply to domestic corporations (Ex. PAL) Carrier must be an alien resident corporation; if it’s not, then it will be subject to 30% (35% 2006-2008) tax on gross income Does not apply to ofline carriers o Online carriers: those with landing rights in the Philippines Ofline carriers: those without landing rights but may nevertheless be selling tickets in the Phil sale of tickets NOTE: Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. o d . Exclude: (1) International Carrier Doing business in the Philippines shall pay a tax of 2 1/2% on its Gross Philippine Billings defined as: (a) International Air Carrier What’s controlling is the amount stated in the ticket and not the actual purchase In order that a foreign corporation may be o f p e r s on s, e x c e ss b agga g e , c a r go, a n d mail r e ga rd e d as do i n g bu s i n e ss, t h e r e must be TAXATION LAW REVIEWER Page 57 of 165 TAX BASE TAX RATE Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties (from sources within) Interest income earned from deposit NOT FCDU Interest income earned from 20 % 7.5 % Income Derived under the Expanded Foreign Currency Deposit System Income derived by a depository bank under the FCDU system from foreign currency transactions with local commercial banks (i.e. branches of foreign banks authorized by the BSP to transact business with FCDU). Interest income from foreign currency loans 10 % Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange Net Capital Gains: Not over P100,000 On any amount in excess 5% 10 % Intercorporate Dividends Exempt On taxable income from all sources w ith i n the Philippines. 30% (2009 onwards) 35% (2006- continuity of conduct and intention to establish its gross income from within taxable at 30% (35% 2006-2008) a continuo us busines s, suc h a s th e appointment of a local agent, and not one of a temporary character. In other words, a foreign airline company selling tickets in the Philippines through their local agents, whether liaison ofices, agencies or branches, as in the case at bar, shall be considered as resident foreign corporation engaged in trade or business in that country for such activities show continuity of commercial dealings or arrangements and performance of acts or works or the exercise of some Branch will first be subjected to ordinary corporate tax as a resident foreign corporation (35%). Afterwards, the profits for remittance shall then be subject to 15% BPRT. (Because branch assumes personality o Any remittance, so long as you can trace it from a branch to the foreign parent corporation subject to BPRT Ex. X foreign corp. has both regional headquarters and branch in Philippines. Instead of remitting straight to X, branch pays amount to regional headquarters supposedly for administrative support services The amount paid for the 6572, D ecem b er 2 2, 2004] (b) International Shipping Gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight o E x ce pt i on : royalties , Interes t, includin g dividends, rents, remunerati on for (2) Ofshore Banking Units salarie s, wage s, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation from all same a r e e f e c t ive l y c onn ec t e d w i t h t h e c ondu c t o f i t s t r a d e o r bu s i n e ss in t h e P h i l i pp i n e s. Difference between Home Ofice (HO) – Branch (3) Branch Profit Remittance (BPRT) BPRT shall be imposed on any profit Distinguish between a branch and a o o If branch, subject to BPRT If subsidiary amounts received by non- resident foreign corporation TAXATION LAW REVIEWER Page 58 of 165 HO-BRANCH PARENT- SUBSIDIARY Branch is classified as a Resident Foreign Corporation Subsidiary is classifed as a Domestic Corporation HO is classified as a resident Foreign Corporation Parent Company is classifed as a Non-Resident Foreign HO and Branch are taxed on taxable income within the Philippines Subsidiary is taxed on taxable income within and without the Philippines while Parent Company is taxed on gross income within the Income repatriation by Branch to HO is referred to as Branch profit remittances Income repatriation by a Subsidiary to Parent Company is referred to as dividends TAX RATE BASI S 10 % Any interest income derived from foreign currency loans granted to residents other than ofshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with Exempt Income derived by ofshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other ofshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business companies engaged in any of the following services: i. ii. iii. General administration and planning; Business planning and coordination; Sourcing and procurement of raw materials and components; Corporate fnance advisory services; Marketing control and sales promotion; Training and personnel management; Logistic services; Research and development services and product iv . v. vi. vii. viii ix . x. xi 16. Taxation of Non-resident Foreign Corporations a . General rule A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% (2009 onwards; 35% - 2006- 2008; 32% - 2000 to 2005) of the gross income received from all sources within the b . Tax on certain income (1) Interest on Foreign Loans A final tax at the rate of 20% is imposed on the amount of interest on foreign loans contracted on or after August 1, 1986. (2) Intercorporate Dividends A final tax at the rate of 15% is imposed on the amount of cash and/or property dividends received from a domestic corporation subject to reciprocity. (4) Regional or Area Headquarters and Regional Reciprocity rule: The country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the regular income tax on corporations and the 15% Operati ng Headquart ers of multinatio nal companies (RHQ and ROHQ) Regional or area headquarters established in the Philippines by (3) Capital gains from shares of stock not traded through the Local Stock Exchange A final tax on the NET CAPITAL GAINS realized during the taxable year from the sale of shares of stock in a domestic – A branch multinatio companies and which headquarters do not earn or derive income from the Philippines Act as supervisory, communications and coordinating center for thei r affiliate s, Rates of tax on the net capital gains: Not over P100,000 On any amount in excess of P100,000 subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. 5% 10 % Regional operating headquarters – A branch established in the Philippines by TAXATION LAW REVIEWER Page 59 of 165 TAXPAYER TAX RATE BASI S Regional/Area Headquarters Exempt Regional Operating Headquarters of Multinational companies 10% On taxable income Mar ub e n i v . CIR [ G . R . N o . 765 7 3 ] The general rule is that a foreign corporation is the same juridical entity as its branch ofice in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch ofice, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The Branch profit remittances are subject to 15% tax on remittance of branch profits efectively connected to the conduct of Branch’s trade or business in Dividends paid by Domestic Corporation to a Non- Resident Foreign Corporation is subject to the preferential rate of 15% subject to the tax sparing condition HO and Branch are considered as one and the same corporate entity Parent Company and Subsidiary are two separate legal entities Tax and other liability of the Branch in the Philippines can be collected from the HO in foreign country as they are one and the same Tax and other liability of the Subsidiary cannot be collected from the Parent Company in a foreign country as they are considered separate legal entities c . Exclude special nonresident foreign corporations d . Composition The following constitute accumulation of earnings for the reasonable needs of the business: (ILL ABE) A llowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; Earnings reserved for definite corporate e xpansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; Earnings reserved for b uilding, plants or equipment acquisition as 17 . by Improperly Accumulated Earnings Tax (Implemented RR 2-2001 which prescribes rules imposition of IAET) a . Rul e There is imposed for each taxable year, in addition to other taxes, a tax equal to 10% of the improperly accumulated taxable income of domestic and closely- held corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by covenant or pre-existing obligation established under a legitimate business agreement; Earnings required by law or applicable to be retained by the corporation or in respect of which there is legal prohibition against its distributio n; In the case of subsidiaries of foreign among or distributing Holding company). the m to th e sharehold ers (Ex . Philippines as can be proven by corporate records and/or relevant documentary evidence. b . Rationale If the earnings and profits were distribute d, th e shareholders would then be liable for income tax; if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. It is a tax in the nature of a penalty to the corporation for the improper accumulation of its earnings, and a deterrent to the avoidance of tax upon e . Covered corporations Only domestic AND closely-held corporations are liable for IAET. Closely-held corporations are those: o At least 50% in value of the outstanding capital stock; or o At least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held c . Excepti on The use of undistributed earnings and profits for the reasonable needs of the business would not generally make the accumulated or undistributed earnings subject to the tax. f. Exempt corporations The IAET shall not apply to the following corporations: (BIG-PEN-T) Immediacy Test – It states that the “reasonable needs of the business” are the (1 ) B ank s an d othe r non- bank financi al Immediate needs of the business; and Reasonably anticipated needs (Ex. intermediaries; Insurance companies; (2 ) (3 ) (4 ) (5 P ublicly-held corporations; T axable partnerships; G eneral professional partnerships; N on- taxable joint ventures; and E nterprises that are registered: How to prove the “reasonable needs of the business”: The corporation should prove that there is An immediate need for the accumulation of the earnings and profits; or A direct correlation of anticipated needs o a cc u m u la t ion o f pro f i t s. (P E Z A ) u n d e r R. A . 7916; TAXATION LAW REVIEWER Page 60 of 165 CLASSIFICATION APPLICABLE TAX – INCOME Cinematographic Film Owner, Lessor, Distributor 25% Gross Income Lessor of Machinery, Equipment, Aircraft and Others 7 ½ % Gross Income Lessor of Vessels chartered by Philippine Nationals 4 ½ % Gross Income o Pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227; an d Under special economic zones declared by law 1” rule. A Debt-to-Equity ratio (Current Assets over Current Liabilites) of 2:1 is indicative of the liquidity of a corporation, and further accumulation would expose it to the IAET. o Ja nu a r y 2 0 , 200 0 ] 18. Exemption from Tax on Corporations Please see page 48 on the discussion of Exempt Corporations. g . Period for payment of dividend/iaet The dividends must be declared and paid or issued not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days 19. Taxation of Partnerships A general co-partnership is a partnership wherein part or all of its income is derived from the conduct of trade or business. h . Determination of purpose to avoid income tax The fact that a corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members Guidelines of the tax liability of a general partnership: (1 ) For taxation purposes, the general partnership is considered as a corporation liable to pay the corporate income tax. A general partnership is also subject to MCIT like a corporation. The profit distribution to the partners is treated as A “holding or investment company” is a corporation having practically no activities except holding property, and collecting the income therefrom or investing the same; (2 ) (3 ) Where the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business. 20. Taxation of General Professional Partnership (GPP) A GPP is one formed by two or several persons for the sole purpose of exercising their common profession of which no part of income is derived from engaging in any i. Prima facie instances of accumulation of profits beyond the reasonable needs of a business and indicative of purpose to avoid income tax upon shareholders The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass- through" entity where its income is ultimately taxed to the partners (1 ) Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated (2 ) Investment in bonds and other long-term securities; and Guidelines of the tax liability of GPP a. Who is Liable? o A GPP, as an entity, shall not be subject to the income tax. The partners in a GPP shall be liable for income tax only in their (3 ) Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business. The controlling intention of the taxpayer is that which is manifested at the time of accumulation. A speculative and indefinite purpose will not sufice. The mere recognition of a future problem or the discussion of possible and alternative solutions is not suficient. Definiteness of plan/s coupled o Each partner shall report his distributive share, actually or constructively received in the net The share of the partner shall be subject to creditable withholding tax at 10%/15%. Ideally, the working capital should equal the current liabilities and there must be 2 units of current assets for TAXATION LAW REVIEWER Page 61 of 165 b. How computed? the will or trust o For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. All expenses, which are ordinary and necessary, incurred or paid for the practice of profession, are allowed as deductions. Since the taxable income is in the hands of the partner, apart from the expenses claimed by the GPP in determining its net income, the individual partner can still claim deductions incurred or paid by him that contributed to the earning of the income taxable to him. If the GPP availed of the itemized deduction = the partners may still claim itemized deductions from said share, however, they cannot claim the same expenses already claimed by the GPP. If the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from their share in the net income. If the GPP avails of OSD in computing its net income, the partners comprising it can NO longer claim further deduction from their share in the said net income. (2) Income: (a ) To be distributed currently by the fiduciary to the beneficiaries Collected by a guardian of an infant to be held or distributed as the court may (b ) o o (3 ) Income received by estates of deceased persons during the period of administration or settlement of the estate (4 ) Income which, in the discretion of the fiduciary, may be either distributed to beneficiaries or accumulated o b . Excepti on Employee’s trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of all or some of his employees: If contributions are made to the trust by the employer/employees, or both for the o (1 ) o (2 ) If under the trust instrument, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of income to be used for/diverted to, purposes other than for the exclusive benefit of his employees (any amount distributed to employees shall be c . Determination of tax (1) Consolidation of income of two or more trusts (a) Requisites: Two or more trusts deduction allowed partners. to th e GP P an d its The creator of each of the trust is the same person. The beneficiary of each of the trust is the same. Compliance requirements Every GPP shall file in duplicate, a return of its income (except items excluded from gross income and shall set forth the following: o The items of gross income and of deductions allowed The names, TIN, addresses and shares of each of the partners. (b) Efects: The taxable income of all the trusts shall be consolidat ed. The tax provided shall be computed on such consolidated income. The proportion of said tax shall be assessed and collected from each trustee based on the taxable income o 21 . Taxation of Estates and Trusts a. Application Applies to income of estates or of any kind of property held in trust (separate taxable entities), including: (1) Income accumulated in trust: (a) For the benefit of unborn/ unascertained person(s) w/ contingent interests TAXATION LAW REVIEWER Page 62 of 165 (2) Taxable income Computed in same manner & on the same basis as in the case of an ‘individual’, EXCEPT: (a) Deduction allowed: In short, it is a trust where the title can revert back to the grantor anytime. It is not taxable as a separate entity because the income forms part of the income of i. Amount of income of the estate/trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries & the amt. of the income collected by a guardian of an infant which is to be NOT E: An estate is taxable as a separate entity when it is already subject to a judicial ii. A trust is taxable as a separate entity if the trust is irrevocable. This is because the grantor has absolutely given up the corpus and any incidents thereto. In this case, the grantor has no control over the corpus of the trust. The grantor has transferred the income earning property to a beneficiary. If there is a condition that provides that a portion shall be reserved for the grantor’s medical expenses (for example), this condition does not computing the taxable income of beneficiaries, whether distributed or not th e iii. thi s subsection will not be allowed as deduction under (2) hereof (b) Additional deduction: i. Amount of the income of the estate/trust for its taxable year, properly paid/credited during such year to any legatee, heir or beneficiary may be claimed as deduction. This applies in cases of: Income received by estates of deceased person during the period of administration or settlement of the estate Income w/c, in the discretion of the fiduciary, may be either If the transfer is revocable, the entire income shall be taxable in the hands of the (4 ) Income for the benefit of the grantor Requisites: where any part of the income of a trust is, or in the discretion of the grantor/any person not having a substantial adverse ii. (a ) May be held/accumulated for future distribution to the grantor May be distributed to the grantor May be applied to the payment of NOTE: For trust administered in a foreign country, the deductions in (1) and (2) above is not allowed provided that the amount of income included in the return of said trust shall not be included in computing (b ) (c Efect: such part of the income be included in computing the taxable income of the (c) Exemption Allowed to Estates and Trusts: P20,000 (5) Meaning of “in the discretion of the grantor” (3) Revocable Trusts Requisites: the power to re-vest in the grantor title to any part of the corpus of the trust is vested- (a) In the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus/income (b) In any person not having a substantial In the discretion of the grantor, with regard to the “Income for the benefit of the grantor”: Exercised either alone or in conjunction with any person not having a substantial adverse interest in the 22 . Withholding Tax a. Concepts Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. Efect: the income of such trust shall be included in computing the taxable income of the TAXATION LAW REVIEWER Page 63 of 165 of Large and Non-Large Taxpayers who fles through the Electronic Filing and Payment System (EFPS). In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in Consequences for Failure to Withhold Liable for surcharge or penalties Liable upon conviction to a penalty equal to the total amount of the tax not i. ii . Timing of Withholding Withholding tax shall be deducted and withheld by the withholding agent when the income payment is paid or payable or accrued or the income payment is accrued or recorded as an expense or asset, whichever is EARLIER. iii . Any income payment which is otherwise deductible from the payor’s gross income will not be allowed it is shown that the income tax required to be withheld is b. Kin ds Withholding Agent (WA) A separate entity acting no more than an agent of the government for the collection of tax in order to ensure its payments. He is merely a tax collector, NOT a taxpayer. If a withholding agent was assessed for deficiency withholding tax under the Code, as such, it is being held liable in its capacity as a withholding agent and not its March 1 0 , 1995] The following persons are constituted as withholding agents: i. Juridical persons, whether or not engage in trade or business Individual, with respect to payments made n connection with his trade or business ii. iii. Returns and Payments of Taxes Withheld at Source [ S ec. 58 ( A) o f t h e N I R C ] Taxes deducted and withheld by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, Revenue District Oficer, Collection Agent, or duly authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the Note that the payment of taxes is simultaneous with the filing of the returns (pay-as-you-file) TAXATION LAW REVIEWER Page 64 of 165 FINAL WITHHOLDING CREDITABLE TAX Amount of Tax Collected Full and fnal payment of the income due from the payee on the said income Intended to equal or at least approximate the tax due from the said payee on the said income Who is Primarily Liable Liability rests primarily on the withholding agent Liability rests primarily on the taxpayer Need to File a Return Payee is not required to fle an income tax return for the particular income Income recipient is still required to fle an income tax return and/or pay the difference between the tax withheld and the tax due on the income. Covera ge All income subject to fnal taxes (i.e. passive income, gross income of NRA-NETB) Fringe benefit Informer’s reward to persons instrumental to the discovery of violations of the NIRC and Those income payments covered by EWT [ R R 2-98] Examples: Professional fees, talent fees Income payments to partners of GPP (1) Final withholding tax The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due The following are creditable o Expanded Withholding Tax (EWT) on certain income payments Withholding Tax on Wages (WTW) Withholding Tax on money payments to the Government o o The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the c . Withholding on wages A method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding The payee is not required to file an income tax (1) Requirement for Withholding Every employer must withhold from compensation paid to its employees. The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee's other tax liability on said income, such as when the said No withholding of tax shall be required on payments to employees who are classified as Minimum Wage Earners [earning only the Statutory Minimum Formula: Gross Income Multiply by: Final Tax Rate Final Tax P xxx x An employee who receiv es addition al compensation and benefits in excess of the allowable statutory amount of P30,000.00 other than the SMW the entire amount, including the SMW shall P x x x NOTE: Deductions and/or personal exemptions are NOT allowed. (2) Tax paid by recipient Every person who is required to withhold the tax from the compensation of an employee is liable for the payment of such tax to the BIR. Such liability stays even if the employee subsequently pays the tax. (2) Fringe benefit tax A final withholding tax is imposed on the grossed- up monetary value of fringe benefit furnished, granted or paid by the employer to the non-rank and file employees except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the The payment of the tax by the employee does not relieve the employer from the liability for penalties and/or additions to the tax for failure to deduct and withhold within the time prescribed by law or The tax imposed under Sec. 33 of the NIRC shall be treated as a final income tax on the employee, which shall be withheld and paid The employer will not be relieved of his liability for payment of the tax required to be withheld unless he can show that the tax has been paid by the employee. (3) Creditable Withholding Tax Taxes withheld on certain income payments are intended to equal or at least (3) Refunds or credits When the total amount withheld exceeds the annual tax due for the employee, the excess shall be credited or refunded to the employee not later than January 25 of the The income recipient is still required to file an income tax return to report the income and/or pay the difference between the tax TAXATION LAW REVIEWER Page 65 of 165 penalties or additions to the tax from the due date of remittance until the date of payment. In case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. For failure or refusal to file the said BIR Form 2305, the excess taxes withheld by the employer, if any, shall not be refunded to the employee but shall be forfeited in The employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer d . Withholding value-added tax (1) O N P AYME N T S T O N O NR E S I DE N T S (creditable withholding VAT) Payments to non-residents, with respect to lease or use of property or property rights in the Philippines owned by such non-residents, are subject to withholding VAT. The VAT shall be based on the contract price. Other services rendered in the Philippines by non-residents (4) Year-end Adjustment [ S ec. 2.7 9 .6 o f R R 2 -98] On or before the end of the calendar year, and prior to the payment of the compensation for the last payroll period, the employer shall determine the sum of the taxable regular and supplementary compensation paid to each employee for the entire year, including the last compensation to be paid and compute for the amount of General guidelines for Creditable WVAT: The party required to withhold is the payor, regardless of whether or not he is VAT- registered. The VAT is passed on to the resident withholding agent. The payor shall claim this as input tax upon filing of his own VAT return, subject to the The taxable fringe benefits received by non-rank and file employees shall be subject to a final fringe benefits tax. (5) Liability for Tax Employ er The employer shall be responsible for the withholding and remittance of the correct amount of tax required to be (2) O N P AYME N T S BY GOV E R N ME NT (Fin al Withholding VAT) The Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods and/or services taxed at 12% shall deduct and withhold a fnal VAT of 5% of the gross payment. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in lieu of If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together Failure to refund excess withholding tax not later than January 25 of the succeeding year, shall make the employer liable to a penalty equal to the total amount of refund which was not Employ ee Where an employee fails or refuses to file the Application of Registration or Certificate of Update of Exemption and of Employer's and Employee's Information (BIR Form No. 2305) together with the attachments or willfully supplies false or inaccurate information thereunder after due written notice by the employer, the TAXATION LAW REVIEWER Page 66 of 165 e. Deadli ne withhe o f filin g o f retur n and payment of tax es DEADLI NE TAXATION LAW REVIEWER Page 67 of 165 TYPE OF WITHHOLDING TAX FILING AND PAYMENT Final Withholding Tax (FWT) On or before the tenth (10 th ) day of the month following the month in which withholding was Fringe Benefit Tax (FBT) On or before the 10 th day of the month following the c al e nd ar qu a r te r in which the fringe benefits were Withholding Tax on Wages (WTW) On or before the tenth (10 th ) day of the month following the month in which withholding was made. Except for taxes withheld for December which shall be Expanded Withholding Tax On or before the tenth (10 th ) day of the month following the month in which withholding was made. Except for taxes withheld for December which shall be filed/paid on Withholding Value- Added Tax (WVAT) On or before the tenth (10 th ) day of the month following the month in which withholding was 6. Classification of decedent/Composition of gross estate ====================== ================ TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE B. Estate Tax ======================= R E S I DE N T S A ND CI T I Z E NS The gross estate of a decedent shall be comprised of the all properties, real or personal, tangible or intangible, wherever situated and interest therein at the time of his death, including revocable transfers and transfers for insuficient 1. Basic principles ACCRU A L O F E S T A T E T A X N O N-R E S I DE NT A LI E NS The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit The gross estate of a decedent shall be comprised only of properties situated in the Philippines provided, that, with respect to intangible personal property, its 7. Gross estate vis-à-vis net estate GOV E RNING LAW Estate taxation is governed by the statute in force at the time of death of the decedent. E S T A T E T AX F O R MU LA Gross Estate (Sec. 85) R E S I DE N CE For estate tax purposes, residence refers to the permanent home, the place to which whenever absent, for business or pleasure, one intends to return, and depends on facts and circumstances, in the Les s: (1) Deduction (Sec. 86) (2) Net share of the surviving spouse ------------------------------------------------- --------- Net Taxable Estate X Tax rate (Sec. 84) ------------------------------------------------- --------- Estate Tax due Less: Tax Credit (if any) Sec. 86 [E] or 110 [B] 2. Nature A tax imposed upon the pr ivil e ge t o t r a n smit prop e r t y at the t i m e o f d e a t h ; the tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon. GR OS S E S T A T E OF T HE DE CE DE NT (S ec . 85) Includes the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. In the case of nonresident citizen, only that part of the gross estate which is situated in the Philippines shall be included in his 3. Definitio An EXCISE TAX on the rights of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon 8. Determination of gross estate and net estate 4. Purpose or Object V A LU AT IO N 5. Time and transfer of properties Real Property FMV as determined by the Commissioner OR the FMV shown in schedule of values fixed by the assessors, whichever is HIGHER a. No zonal value: use the FMV in the latest tax declaration. The properties and rights are transferred to the successors at the time of death. [ Ar t . 777 o f t h e C iv i l However, the Register of Deeds shall not transfer the title to the properties without the Certificate of Authority to Register (CAR) issued by the RDO evidencing Shares of Stock 200 2 ] Listed shares: average of the highest and lowest quotation at date of death (or the date nearest to the date of death, if no quotation is available at the time of TAXATION LAW REVIEWER Page 68 of 165 c. d. Revocable Transfer Property Passing Under General Power of Appointment Proceeds of Life Insurance Prior Interests Transfers for Insuficient Consideration Unlisted Shares – – – Common stocks: use BOOK VALUE Preferred stocks: use PAR e. f. g . Personal Property Valued at FMV NOTE: The capital of the surviving spouse of the decedent shall not be deemed part of his gross estate. S P E CIAL R U LES ON IN T ANGIBLE P ROP E R T I E S Intangible personal properties with situs in the Philippines (Section 104) a . Decedent’s Interest Franchise, which must be exercised Philippines. Shares, obligations or bonds in th e i. To the extent of the interest therein of the decedent at the time of his death. by an y corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws, Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines, b . Transfer in Contemplation of Death Transfers impelled by the thought of an impending death (i.e., the motivating factor or controlling motive is the thought of death), without regard of the state of health of the transferor. Transfers made before the decedent’s a. the possession or enjoyment of, or the right to the income of the property; the right either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property Shares, rights in any partnership industry established in the busine ss or b. R E CIPR O CI T Y CLA U S E Intangible personal property of a decedent who is non- resident alien, with a situs in the Philippines (Section 104) money or money’s worth The intangibles shall not form part of the gross estate if: c . Revocable Transfer 1. The decedent at that time of his death was a citizen and resident of a foreign country which at the time of his death a. Did not impose a transfer tax or death tax of any character b. In respect of the intangible personal property of Transfers made by the decedent by trust or otherwise, where the enjoyment was subject at the date of his death to any change through the exercise of a power by the decedent alone or in conjunction with any other person, to alter, amend, revoke, or terminate, or where any such power is relinquished in 2. The law of the foreign country of which the decedent was a citizen and resident at the time of his death: Allow a similar exemptions from transfer taxes or death taxes of every character The power to alter, amend or revoke shall be considered to exist at the date of the decedent’s death a. – Th e exerci se is subje ct to th e b. requirement of giving prior notice The alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power. – 9. Composition of the gross estate 10. Items to be included in the gross estate Does not include bona fide sales for an adequate and full consideration in money or money’s I TEM S OF G RO S S E S T A T E: a. Decedent's Interest b. Tr a n sf e r i n C on t e m p la t ion o f De a t h TAXATION LAW REVIEWER Page 69 of 165 d . Proper ty Passi ng Und er Gener al Pow er o f (b ) Judicial expenses of the testamentary or intestate proceedings Claims against the estate Claims against insolvent persons included in the gross estate Unpaid mortgages or indebtedness upon property Appointment (GPA) (c ) (d GPA is the power to designate, w i t hou t r e s t r i ct io ns , the persons who shall receive, succeed to, possess or enjoy the property or its income received from the estate of a (e ) (f) (g The GPA is exercised by: Transfers for Public Use-to the government of the Republic of the Philippines or any political subdivision thereof, exclusively for public purposes Vanishing deductions Family Home - Fair value but not to exceed P1,000,000 Standard Deduction -- P1,000,000 Medical Expenses – Not to exceed P500,000 Amount Received by Heirs under RA 4917 a . b. c. Wil l Deed executed in contemplation of death Deed under which he has retained for his life or for any period which The possession or enjoyment of, or the right to the income from, the property or The right, either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or in money or money’s worth a . Ordinary Deductions e . Proceeds of Life Insurance i. F un e r al e x p e n ses Proceeds from life insurance form part of the gross estate only when: Actual funeral expenses or in amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed - The beneficiary is the administrator, whether estate, executor the or is FUNERAL EXPENSES are costs which are actually incurred in connection with the interment or burial of - The beneficiary is other than the estate, executor or administrator and the designation is f. Prior Interests Examples of DEDUCTIBLE funeral expenses: The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial; Expenses for the deceased’s wake, including food and drinks; Publication charges for death notices; Telecommunication expenses incurred in informing relatives of the deceased; Cost of burial plot, tombstones, Except as otherwise provided, the provisions on (1) transfer in contemplation of death, (2) revocable transfers and (3) proceeds of life insurance shall apply to the transfers, trusts, etc., whether made before or after the g . Transfers for Insufficient Consideration The amount includible in the gross estate is the excess of the FMV at the time of death over the value of the consideration received. owns a family estate or several burial lots, only th e value corresponding to the plot where he is buried is deductible; Interment and/or cremation fees and charges; and All other expenses incurred for the 11. Deductions from estate DEDU C T IONS F O R E S T A T E OF A CI T IZ E N OR A R E S I DE N T [ R e v e nu e R e g ul a t i on s 2 -2003 a n d Sec. 8 6 ] : Examples of NON-DEDUCTIBLE funeral expenses: Expenses, Losses, Indebtedness, and Taxes (ELIT): (a) Actual funeral expenses or five percent (5%) of the gross estate whichever is lower (not exceeding P200,000) Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. TAXATION LAW REVIEWER Page 70 of 165 Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible. Must not have been condoned by the creditors or the action must not have prescribed. Duly Substantiation REQUIREMENTS: The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred Substantiation REQUIREMENTS: no t a r i ze d at the time incurred, except loans from financial institutions where notarization not part of business practice or policy A s t a te m e n t und e r o a t h executed by the ii. J ud i c ial E xp e n ses or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent Judicial Expenses are expenses incurred during the settlement of the estate but no t b e y o n d d ay p r e s c r i b e d b y la w , or the extension thereof, for the fling of the estate tax return. iv. C l aims a gai n st I n s o lve n t P e r s on s Judicial Expenses should be supported by a sworn statement of account iss u e d an d si g n e d b y t h e c r e d i t o r . Condition for DEDUCTIBILITY: The claim against the insolvent person should be included as part of the gross estate of the decedent. Examples of judicial expenses (1 ) (2 ) (3 ) (4 ) (5 Fees of executor or administrator Attorney’s fees Court fees; Accountant’s fee; Appraiser’s fee; Clerk hire; Cost of preserving and distributing the v. Unp aid Mor t gage Conditions for DEDUCTIBILITY: The value of the decedent’s interest over the property encumbered is included as part of the gross estate undiminished by the amount of mortgage The deduction shall be limited to the extent that the mortgage was contracted bona Expenses incurred in the extrajudicial settlement of the estate must be necessary costs toward the settlement of the Other Rules Determine who is the recipient or beneficiary of the loan which must be verified; If merely an accommodation made by decedent in favor of another person, then balance of loan considered as receivable from that person and part of gross estate If there is a legal impediment to recognize the same as receivable of the estate, the Attorney’s fees to be deductible should essential to the collection of assets, payment of debts or the distribution of the estate. C I R v. CA [ 328 S C R A iii. C l aims a gai n st t h e E s t a t e Claims against the Estate are debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to vi . T ax e s What taxes are deductible? Income taxes, real estate or property taxes du e a t Requisites for DEDUCTIBILITY: A personal obligation of the deceased existing a the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses which are classified under a different category of deductions, Contracted in good faith and for adequate and full consideration in money or money's worth, t h e t i me o f d e a t h which were unpaid as of the time of death Taxes NOT DEDUCTIBLE: Estate taxes Income tax on income received after death Property taxes not accrued before TAXATION LAW REVIEWER Page 71 of 165 vii. Losses d. Family Home Requisites for DEDUCTIBILITY: FMV of the family home but not to exceed P1,000,000. Losses should arise from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement; Losses should not be compensated by insurance otherwise; Family Home is the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside as certified by Barangay or Losses should not be claimed as deduction in the income tax return of the taxable estate; The losses should occur during the settlement of the estate; AND that The losses should occur before the last day for the payment of the estate tax (last The family home is deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, b . Transfer for Public Use Requisites for DEDUCTIBILITY: the disposition is in the last will and testament to take effect after death in favor of the government of the Philippines or any political subdivision thereof exclusive for public purpose the value of property given is included in The family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return. Conditions for the allowance of FAMILY HOME as DEDUCTION from the gross estate- The family home must be the a ct u al r e si d e n t ial ho me of The transfer transfers to also contemplates bequests, devices, or social welfare, cultural and the decedent and his family at the time of his death, as ce r t i f i e d b y t h e Ba r a n gay C a p t ain of the the family home is situated; The total value of the family home must be included as part of the gross estate of the decedent; and Allowable deduction must be in an amount equivalent to the current fair market value of c. Vanishing Deductions (Property Previously Taxed) Nature and Purpose VANISHING DEDUCTIONS are deductions allowed for properties which were already subjected to transfer taxes (e.g., estate and donor’s tax). The purpose is to minimize the efect of double taxation within a short period of time since the same property will be again subjected to tax in the o f t h e d e c e d e n t ’ s in t e r e st (wheth er conjugal/community or exclusive property), whichever is lower, but not exceeding P1,000,000. NOT E: The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse, depending upon the classifcation of the property (family home), and the property relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property. For purposes of availing of a family home Requisites for DEDUCTIBILITY: Present decedent acquired the property by inheritance or donation within 5 yrs prior to his death The property must have formed part of the gross estate of previous decedent or the taxable gift of the donor Estate tax on the prior estate or the donor’s tax must have been paid It must be the same property received from previous decedent or donor Estate of previous decedent or donor TAXATION LAW REVIEWER Page 72 of 165 e. Standard Deduction favor of another beneficiary in accordance with the desire of the testator All bequests, devises, legacies, or transfers to social welfare, cultural or charitable institutions Provided, not more than 30% of the value given is used for administrative purposes Proceeds from life insurance where the beneficiary is other than estate, executor or administrator AND the designation is irrevocable SSS death benefits Properties held in trust by the A deduction in the amount of P1,000,000 shall be allowed as additional deductions w i t hou t n ee d o f Full amount shall be allowed as deduction for the benefit of the decedent f. Medical Expenses Requisites for DEDUCTIBILITY Medical cost incurred within the one year Up to a maximum amount of P500,000, whichever is lower Any excess over P500,000 cannot be reclassifed and deducted as claims against the estate It must be duly substantiated with oficial receipts for services rendered 13. Tax credit for estate taxes paid in a foreign country ESTATE TAX CREDIT is a remedy against international double taxation to minimize the onerous efect of taxing the same property twice g . Amount Received by Heirs under R.A. 4917 Amount received by the heirs from the decedent’s employer as a consequence of death of the decedent employee in W HO M AY A V A IL O F T AX CR ED I T S ? Only the estate of a citizen or resident alien at the time of the death can claim tax credit for any estate taxes paid to a h. Net Share of the surviving spouse Property in the Conju gal W HAT AM O U NT OF T AX C R ED I T M AY BE CLAI M E D ? DEDU C T IONS F O R N O NR E S I DE NT A LI E NS The estate tax imposed by the Philippines shall be credited with the amounts of any estate tax imposed by the authority of a foreign country, subject to (for property situated in the Philippines) Expenses, Losses, Indebtedness and Taxes (ELIT) Only the proportion of the total losse s indebtedness and taxes which the value of such part bears to the value of his entire GE wherever P E R C O U N T RY LI M I T A T I O N – net estate within a foreign countr y Property Previously Taxed Transfers for Public N e t e s t a t e , f or e i g n x Phil. Estate Tax = max amt. of credit Net estate, world Net Share Property of th e survivi ng spous e in th e Conjug al GL O B A L LI M I T A T ION NOTE: To be allowed To t al n e t es t a t e ou t si d e X Phil. Estate tax = max amt. of deductions for a non-resident alien, credit Net estate, world executor/administrator/any heir must include in the return to be filed, the value of the gross estate not situated in the The final allowable amount shall be the lower of the country and global limitation amounts. 12. Exclusions from GROSS estate 14. Exemption of certain acquisitions and transmissions [ S ec. 84 a n d 8 7 o f t h e NI R C] Acquisitions and transfers expressly declared as exempt: Merger of the usufruct in the owner of the naked title Transmission or delivery of the inheritance or legacy by the fduciary heirs or legatee to the fduciary Transmission from the first a. First P200,000.00 value of the net estate b. Merger of usufruct in the owner of the naked title TAXATION LAW REVIEWER Page 73 of 165 E xam p l e : A died leaving a fishpond; naked title to B, his son, and usufruct to C, another son, for life. C died a year later. The fishpond will be included in the gross estate of A, being the owner. Upon the death of C, the usufruct will be merged into the owner of the naked title B who shall become the absolute owner thereof. knows of the acceptance of the donee (exception: donations of immovable 1 properties); d o n o r ’ s t ax Donation mortis causa: a donation which takes efect upon the death of the donor; s ub je c t t o AP P LICABILI T Y O F LA W S GOV E RNING T HE I M P O S I T ION O F D O N O R’ S T A X The donor’s tax applies to a completed gift. The transfer is perfected from the moment the donors knows of the acceptance by the donee; it is completed by the delivery, either actual or constructively, of the donated property to the donee. The law in force at the time of the perfection/completion of the c. Transmission or delivery of the inheritance or legacy by the fduciary heir or legatee to the The substitution must not go beyond one degree from the heir originally instituted The fiduciary or first heir must be both living at the A gift that is incomplete because of reserved powers, becomes complete when either: E xam p le A dies and leaves in his will a lot to his brother B who is entrusted with the obligation to transfer the lot to C, a son of A when A reaches legal age. B is the fiduciary heir and C is the fideicommissary. The transfer from A to B is subject to estate tax. But the transmission or The donor renounces the power; or His right to exercise ceased because of the happening of some event or contingency or the fulfillment of some condition, other than S P E CIAL R U LES ON H US B A ND A ND WI F E Husband and wife are considered as separate and distinct taxpayer’s for purposes of the donor’s tax. d. Transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donor’s tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines e. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided not more than 30% of the transfers shall be used by such institutions for administration purposes N E T G IFT The net economic benefit from the transfer that accrues to the donee. 15 . Filing of notice of death (see F. Compliance Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of requiremen ts) 16. Estate tax return (see F. Compliance requirements) ====================== ================ TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE C. Donor’s Tax 2. Definitio Donor’s Tax is a tax on the privilege of transmitting one’s property or property rights to another or others without 1. Basic principles KIN D S OF D O NA T ION S : Donation inter vivos: a donation made between living persons; perfection is at the moment when TAXATION LAW REVIEWER Page 74 of 165 See Estate of Fidel Reyes, CTA Case No. 6747, January 16, 2006 where the repudiation by the heirs of an inheritance was held 3.Natu re The subject of donor’s tax is the gift or donation. Article 725 of the Civil Code defines a gift or donation as “an act of liberality whereby a person disposes 7. Transfers for less than adequate and full consideration Where property, other than a real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual 4. Purpose or object The purpose of donor’s tax is to complement estate tax by preventing tax-free depletion of the transferor’s estate It is also to prevent avoidance of income tax through the device of splitting income among numerous donees, who are usually members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of NOTE: In the case of real properties considered as capital assets, the difference between the FMV and the actual value received in transfers for less than the adequate or full consideration shall not be subject to donor’s tax. The rationale is that under Section 24 (d), the FMV itself, if higher than the gross selling price, is the base for the computation of capital gains tax. In essence, 5. Requisites of valid gift or donation (CIDA) Capacity of the donor Intent to donate Delivery of the constructive subje ct gift, whether actu al or Acceptance by the donee 8. Classification of donor 6. Transfers which may be constituted as donation Resident citizen Non-resident citizen Resident alien Non-resident a. Debt condoned or remitted [ S ec. 50 o f R R 0 2 - 40] If a creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the 9. Determination of gross Gift Gross gift refers to all property, real or personal, tangible or intangible, that is given by the donor to the donee by way of b. Transfers made in trust for another person 10. Composition of Gross Gift c. Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of R E S I DE NT CI T I Z E N / N O N -R E S I D E NT CI T IZ E N / R ES I DE NT ALI E N Real property within and without the Philippines Tangible personal property within and without the Philippines Intangible personal property within and However, a g e n e r al r e nun c i a t ion by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is no t subject to donor’s tax, u n l e ss specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other N O N-R E S I DE NT A LI E N Real property within the Philippines Tangible personal property within the Philippines Intangible personal property within the 200 3] TAXATION LAW REVIEWER Page 75 of 165 S P E CIAL R U LES ON IN T ANGIBLE P ROP E R T I E S FO R MU L A Intangible personal properties with situs in the Philippines (Section 104) - Limitation A (per country): N e t g i f t s, f or e i g n c oun t r y X Phil. donor’s tax Franchise, which must be exercised Philippines. Shares, obligations or bonds in th e Net gifts, world - Limitation B (by total): by an y corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws, Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines, Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or bonds have acquired a business situs in the Philippines, Shares, N e t g i f t s, fo r e i g n c oun t r y X Phil. donor’s tax Net gifts, world 13 . Exemption of gifts from donor’s tax (Sec. 101) The exemptions are not to be treated as exclusions from the gross gifts of the donor. They partake the nature of deductions and are therefore, deductible from the gross gift in order to arrive at the net taxable gift. R E CIPR O CI T Y CLA U S E Intangible personal property of a decedent who is non- resident alien, with a situs in the Philippines M A D E B Y A R E S I D E NT (a ) Dowries or gifts made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children t o The intangibles shall not form part of the gross gift if: 1. The donor at that time of his death was a citizen and resident of a foreign country which at the time of his death a. Did not impose a transfer tax or death tax of any character b. In respect of the intangible personal property of citizens of the Philippines not residing in that foreign country; or NOTE: Both parents may make dowries and gifts made on account of marriage. Each parent shall be entitled to the exemption above. This has the effect of splitting the value of the gift into half for both spouses so each spouse can claim the exemption. However, both spouses must file separate returns because the husband and wife 2. The law of the foreign country of which the donor was a citizen and resident at the time of his death: a. Allow a similar exemptions from transfer taxes or death taxes of every character c. In respect of the intangible personal property owned by citizens of the (b ) Gifts made to the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government (c ) Gifts in favor of a non-profit educational and/or charitable, religious, cultural or social welfare corporation, institution accredited non- government organization, trust or philanthropic organization or research institution or organization; provided, not 11. Valuation of gifts made in property Personal property: FMV at the time of donation Real Property: FMV as th e Commissioner or the FMV in the latest schedule of values of the provincial or city assessor, whichever is NON- PROFIT EDUCATIO NAL AND/O R CHARITA BLE CORPORATION is one which is incorporated as a non-stock entity paying no dividends, governed by trustees who received no compensation, and devoting all its income to the accomplishment and promotion of the purposes enumerated in 12. Tax credit for donor’s taxes paid in foreign country W HO A RE E N T I T LED T O C L AIM CR ED I TS : Only resident or citizen donors TAXATION LAW REVIEWER Page 76 of 165 (d ) Encumbrances on the property donated if assumed by the donee in the deed of donation administration purposes 14. Person liable (e ) Donations made to entities as exempted under special laws. Any person, resident or nonresident, transferring the property by gift. (f) Donations not exceeding P100,000 per year (Sec. 99[A]) 15. Tax Basis NOTE: To be exempt from donor’s tax and to claim full deduction of the donation given to qualifed donee institutions duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC), the donor engaged in business shall give a notice of donation on every donation worth at least Fifty Thousand Pesos (P50,000) to the Revenue District Office(RDO) which has jurisdiction over his place of business C O M P UT A T ION OF T AX A ND P E RS O N LI A BLE (Applicable only on donations made to a person who is no t a stranger.) On the 1 st donation of the year Gross Gift Less: deductions Net gift Multiply by: tax rate Donor’s tax xx xx Don a t io n , which shall be attached to the said Notice of Donation, stating that not more than thirty percent (30%) of the said donation/gifts for the taxable year shall be used by such qualifed- donee institution for administration purposes pursuant to the provisions of Section 101(A) xx xx xx ====== ==== On subsequent donation during the year Gross Gift Less: deductions Net gift Add: prior net gift Aggregate net gifts Multiply by: tax rate Donor’s tax on aggregate gift Less: xx xx Donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of one’s patrimony to another without consideration. Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. The Court was not convinced that since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners’ contribution of money without any material consideration evinces animus donandi. The fact that their purpose for donating was to aid in the election of the xx xx xx xx xx xx x x ====== ==== T AX RA T E S 1. Donee is a Stranger to the Donor Rate: 30% A Stranger is a person who is not a: 1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant Relative by consanguinity in the collateral line M A D E B Y A NONR E S I DE N T ALI E N 2) (a ) Gifts made to the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, donation to him shall not be considered as donation made to stranger. Donation made between business organizations and those made between an individual and a business organization shall be considered as donation (b ) Gifts in favor of an non-profit educational and/or charitable, religious, cultural or social welfare corporation, institution accredited non-government organization, trust or philanthropic organization or research institution or organization; provided, not TAXATION LAW REVIEWER Page 77 of 165 2. Donee is NOT a Stranger to the Donor Rate: Graduated Rates ====================== ================ TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE D. Value- Added Tax 2. IMPACT OF TAX Originally, the tax is imposed against the seller of goods properties or services. 1. NATURE AND CHARACTERISTIC 3. INCIDENCE OF TAX VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines Seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. In the case of The tax is shifted to the buyer of the goods, properties or services. VAT is an indirect tax levied on goods and services; not on persons, and ultimately paid 4. DESTINATION PRINCIPLE DESTINATION PRINCIPLE: VAT is imposed in the country in which the products or services are actually consumed or used. Exports exempt, Actual shipment of the goods from the Philippines to a foreign country is a precondition of an export sale following the destination principle being adhered to by our VAT system. ORIGIN PRINCIPLE: only national taxpayers would be exposed to the tax, without distinguishing between transactions “consumed” locally or abroad. Exports taxable, imports exempt. Situs: CROSS-BORDER DOCTRINE: No VAT shall be imposed to form part of the cost of goods sold destined for consumption outside of the territorial border of 6185, M a y 17, 2007] reimbursed by Sony International does not render the same questioned transaction. Neither was there an exchange of misplaced. In the above ruling, COMASERCO rendered services rendered to its affiliates. Thus, the SC held that TAXATION LAW REVIEWER Page 78 of 165 So n y P h i l i p p i n es v . CI R , [ CTA E B C a s e N o . 90 C TA C a s e N o . The fact that the advertising expense is subsidized or automatically subject to output VAT. There was no sale, barter or exchange of goods or properties from the service. The CIR’s reliance on the case of CIR v. COMASERCO is services to its affiliates. What [ CIR v. Ame r i can Ex p re ss , G .R . N o . 1526 0 9, J un e 29, 2 005] As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. However, our VAT law itself provides for a clear exception, under which the supply of service shall be zero-rated when the following requirements are met: (1) the service is performed in the Philippines; (2) the service falls under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in [ CIR v. CO M A S E R C O , G . R . N o . 125355, M a rch 3 0 , 2000] VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and in the performance of services, e v e n in t h e a b se n c e o f pro f i t a tt r i bu t a b le t h e r et o . The term “in the course of trade or business” requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit- oriented. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payment for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of Considering that there are no sale, barter or exchange of goods or properties in the instant case, the imposition of output VAT on subsidized advertising expense has no leg to stand on. (NOTE: Basically, in order that VAT may be imposed, there must be the existence of a 5. PERSONS LIABLE [ S ec. 105] 6. VAT ON SALE OF GOOD OR PROPERTIES [ S ec. 10 6 ] Any person who, in the course of trade or business Every sale, barter or exchange of goods or properties shall be subject to 12% VAT based on the gross selling price or Sells, barters, or exchanges goods or properties (seller or transferor) Leases goods or properties (lessor) Renders services (service provider) Imports goods (importer), whether or not Goods: all tangible and intangible objects which are capable of pecuniary estimation. Real properties held primarily for sale to customers or held for lease in the ordinary course of business the right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right the right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment the right or the privilege to use motion picture films, film tapes and disc D e f i n i t ion o f “in t h e c o u r se o f t r ad e o r b u sin e ss” (Ru le o f Reg u la r i t y) The regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization or government entity Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or Gross Selling Price: the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of sale, barter or exchange of the goods or properties, excluding the VAT. The excise tax, if any, of such goods or properties shall form The consideration stated in the sales document, or The fair market value (FMV) as determined by the Commissioner (zonal value) or FMV as shown in the schedule of values of the Provincial and City Assessors, whichever is NOT E: If the VAT is not billed separately, the selling price stated in the sales document shall be deemed to be inclusive of VAT If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT. Thus, the zonal/market value, net of the output VAT, should still be higher than the consideration in the E x c e p t io n s t o t h e ru le o f r e g u la r i t y Any business where the gr o ss sal e s o r r ece i p t d o no t Sale of Real Properties e x c ee d P100 , 000 during any 12-month period shall be sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall considered principally for subsistence or livelihood and not in the course of trade or business Services rendered in the Philippines by non- resident foreign persons shall be considered sale of real properties may either be on an installment basis or deferred-payment basis. TAXATION LAW REVIEWER Page 79 of 165 CS G ar m e nt s v. C I R , [ CTA ca s e no . 65 2 0, 4 J a nu a r y 200 7 ] A transaction will be characterized as having been entered into by a person in the course of trade or business if it is (1) regularly conducted; and (2) undertaken in pursuit of a commercial or economic activity are considered as entered into in the course of trade or business. “Incidental” means something else as primary; s o m et h i n g n ece ss ar y, a pp e r t ai n i n g t o , o r d e p e nd i n g upo n a no t h e r , w h i c h is te r m e d t h e pr i nc i p al . Hence, an isolated transaction is not necessarily disqualifed from being made incidentally in the course of trade or business. Therefore, the sale of motor vehicle CIR v. M a g s a y s ay Lin e s , [G . R . N o . 14698 4 , J u l y 2 8 , 2006] The term “course of business” or “doing business” connotes regularity of activity. Any sale, barter, exchange of goods or a. sale of real property on installment plan: sale of real property by a real-estate dealer, the initial payments of which in the year of sale do not exceed 25% of the 7. ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERO RATED SALES OF GOODS OR PROPERTIES t h e V A T s h all b e c o l le c te d o n t h e i n s t all me n t (a) The following sales by V A T - R E G I S T E R E D persons shall be subject to 0% rate: p a y m e n t s. Initial payments: Covers any down payment made E xp or t Sal e s an d includ es all paymen ts actuall y or a. The sale and actual shipment of goods from the Philippines to a foreign country constructively received during the year of sale. It excludes amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the property to the seller, in which case the excess shall be considered part if the initial payments. It also excludes notes or other evidence of i. ii. Irrespective of any shipping arrangement Paid for in acceptable foreign currency or its equivalent in goods or services Accounted for in accordance with iii. b. Sale of raw materials or packaging materials by a VAT- registered entity to a nonresident buyer i. for delivery to a resident local export- oriented enterprise Used in the manufacturing, processing, packing, repacking in the Philippines of the said buyer’s goods Paid for in acceptable foreign currency Accounted for in accordance with b. sale on the deferred-payment basis: the transaction shall be treated as cash sale which makes the e n t i r e se l l i n g pr i c e ii. o f sale (sale of real property where the initial payment exceeds 25% of the gross selling price. iii. iv. The real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller. Correspondingly, the buyer can claim the input tax in the same period that the seller recognized the c. Sale of raw materials or packaging materials to export- oriented enterprise whose export sales exceed 70% of total annual production Sale of gold to the BSP Those considered export sales under the Omnibus d. e . - “Real estate dealer” includes any person engaged in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or Under Omnibus Investment Code: i. the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same; Provided, that sales of export products to another producer or to an export trader shall only Sale of residential lot with gross selling price exceeding P1.5 million, residential house and lot or other dwellings with gross selling price exceeding P2.5 million, where the instrument (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale, or otherwise) is executed on or after November 1, 2005 shall be ii. iii. - Where the instrument of sale was executed prior to November 1, 2005, exceed P1 million of the price needs only to the installment sale of lot or dwellings to be subject to 10% VAT Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary. However, is the property transferred is one for sale, lease or use in the ordinary course of trade or business and the transfer constitutes a complete gift, the transfer is subject to VAT as a deemed sale Constructive Exports: i. sales to bonded manufacturing warehouses of export-oriented manufacturers; sales to export processing zones sale to enterprises duly registered and ii. iii. TAXATION LAW REVIEWER Page 80 of 165 iv. sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, (b) Automatic vs. Efectively Zero- Rated Sale Although both are taxed similarly, automatic zero-rated transactions differ from efectively zero-rated transactions v. An a u t o ma t i c ally z e r o - r a te d sale refers to a sale of goods, properties and services by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section NOT E: An e f ect i v e ly z e r o - r a te d sale , on the other hand, refers For purposes of zero-rating export sales of registered export traders shall include commission income. Exportation of goods on to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the deemed export sales until the export consigned are in fact sold by the produc ts Provided, finally, that sales of goods, properties or services made by a VAT-registered supplier to a BOI- registered manufacturer/ producer whose products are 100% exported are considered export sales. A certification to this effect must be issued by the Board of Investment (BOI) which shall be good for one year unless subsequently re-issued by the BOI. The sale of goods, supplies, equipment Automatic zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of tax credit certificate for the VAT previously charged by supplier. Efectively zero-rated transactions, however, refer to sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory efectively subjects such transactions to zero-rate. Again, as applied to the tax base, such rate does not yield any tax chargeable against NOTE: Limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without docking or stopping at any other ports in the F or e i g n C urr e n c y D e no m i n a te d Sale (i n te r n al e x por t s) Sale to a non-resident of goods, except those mentioned in Section 149 (automobiles) and 150 (non- essential goods) Assembled or manufactured in the Philippines For delivery to a resident in the Philippines Paid for in acceptable foreign currency and N o . 1538 6 6, F e b r u a r y 11, 2 0 0 5 ] 8. TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO 12% VAT) S al e s t o p e r s on s o r e n t i t i e s w h o se e x e m p t ion und e r s p ec ial For transactions deemed sales, the output tax shall be based on the market value of goods deemed sold as of the time of the occurrence of the transaction. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, la w s o r i n te rn a t io n al ag r ee m e n t s t o w h i c h t h e P h i l i pp i n e s is a sig n a t or y e f ec t ive l y s ub je ct s s u c h sal e s t o z e r o - r a te . Refer to exemptions granted under special laws or treaties which are extended not only to the grantee but also to its supplier NOTE: The gross selling price is “unreasonably lower” than the fair market value if it is lower by more than TAXATION LAW REVIEWER Page 81 of 165 actual market value. [ R e v e nu e R e g ul a t i on s 1 6 -200 5 ; voluntarily registered despite being exempt under Sec 109 (2) of the Tax Code approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipt exceeding P1,500,000 R e v e n u e R e g ul a t i on s 4 - 2 007] (4 ) a. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of Transfer of goods or properties not in the course of business can take place when VAT- b. not subject to 12% output VAT person withdraws goods personal use fro m hi s busine ss for (1 ) change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders b. Distribution or transfer to: Shareholders or investors VAT-registered shar e in the profits of i. The goods or properties used in business or those comprising the stock-in- trade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in Property dividends which constitute stocks in trade or property primarily held for sale or lease declared out of Retained Earnings on or after Jan.1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or fair market value at the time of ii. Exchange of property by corporation acquiring control for the shares of stocks of the target corporation is (2 ) change in the trade or corporate name of the business merger or consolidation of corporations c. Consignment of goods if actual sale is not made within 60 days following the date such goods were (3 ) Consigned goods returned by the consignee within the 60-day period are not deemed sold i. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation. d. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. 10. VAT ON IMPORTATION OF GOODS [ S ec. 107] Change of ownership of the business (when a singl e proprietors hip incorporat es or th e VAT is imposed on goods brought into the Philippines, whether for use in business or not. The VAT shall be paid by the importer prior to the release of such goods from customs proprietor of a single proprietorship sells his entire business Dissolution of a partnership and creation of a new partnership which takes over Importer: refers to any person who brings goods into the Philippines, whether or not made in the course of his trade or business. Includes non-exempt persons or entities who acquire tax-free imported goods from exempt NOTE: For retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or 9 . CHANGES IN OR CESSATION O F STAT US O F A VA T REGISTERED PERSON Tax base = total value used by BOC in determining tariff and customs duties, plus custom duties, excise tax, and if any, other charges (postage, commission, and similar charges, prior to the release of the goods from a. subject to 12% output VAT (1 ) change of business activity from VAT taxable status to VAT-exempt status (2 ) approval of a request for cancellation registration due to reversion to exempt status approval of a of If the valuation used is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost = invoice amount, customs duties, freight, insurance and other charges (3 ) of registration due to a desire to revert to exempt status after the lapse of 3 consecutive years from TAXATION LAW REVIEWER Page 82 of 165 a. Sale, transfer, or exchange of imported goods by tax- exempt persons: In the case of goods G r o s s R ec e i p t s : total amount of money or its equivalent exempt persons, entities or agencies which subsequently sold, transferred or exchange in Philippines to non-exempt persons or ar e th e th representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services shall be liable for VAT due on such importation. The tax due on such importation shall constitute a lien on the goods, superior to all charges/liens, irrespective of the possessor Gross Receipts exclude amounts earmarked for payment to unrelated third (3rd) party, and amounts received as reimbursement for advance payment on behalf 11. VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES Sale or exchange of service, as well as the use or lease of properties shall be subject to 12% VAT C on s t r u c t iv e rec e i p t : occurs when the money consideration a. Sale or Exchange of Service: the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in or its equivalent is placed at the control of the person who rendered the service without restrictions by the Deposit in banks which are made available to the seller of service without restrictions Issuance by the debtor of a notice to ofset any debt or obligation and acceptance thereof by the seller as payment for services rendered Sale or exchange of service shall also include: i. Lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand, or other like property or right The lease or the use of, or the right to ii. A dv a n ce p a y me n t s ma d e b y l e ss ee f o r l ea s e o f pr op e r ty : Advance payments may be in the form of: iii. The supply of scientific, technical, industrial commercial knowledge or information or i. ii. iii . A loan to the lessor from the lessee, or An option money for the property, or A security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, or iv. The supply of any assistance that is ancillary and subsidiary to and furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (b) hereof or any such knowledge or information as is mentioned in subparagraph (c) hereof The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery, or other apparatus purchased from such nonresident person The supply of technical advise, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, iv. If the advance payment is for the faithful performance of certain obligations of the lessee, it is not subject to VAT A security deposit that is applied to v. If the advance payment constitutes a pre-paid rental, then such payment is taxable to the lessor in the month when received, irrespective of the accounting method employed by the lessor vi . 12. ZERO-RATED SALES OF SERVICE The following services performed in the Philippines by a V AT- R E G I S T E R E D person shall be subject to 0% vii . viii . a. processing, manufacturing, or repacking goods for other persons doing business outside the i. ii. which goods are subsequently exported where the services are paid for in acceptable foreign currency b. Lessors of property – all forms of property for lease, whether real or personal, are liable to VAT TAXATION LAW REVIEWER Page 83 of 165 iii. accounted for in accordance with the rules and regulations of the BSP 13. VAT EXEMPT TRANSACTIONS [ S ec. 109] b. services other than repacking processing, manufacturing, or (Refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT and i. rendered to a person engaged in business conducted outside the Philippines or to a non- resident person not engaged in business who is outside the Philippines when the The following are VAT-exempt transactions: a. sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and 153205, J a nu a r y 22, 2007 r e q ui re p er f o r m a n ce o f s er vi ces t o n o n re s id e n t t o q u a l i fy as zer o -ra t e d .] ii. The consideration of which is paid for in acceptable foreign currency accounted for in accordance with the rules and regulations of the BSP iii. Livestock: cows, bulls and calves, pigs, sheep, goats and rabbits Poultry: fowls, ducks, geese and turkey Does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets Marine food products: fish and crustaceans, such as but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams Meat, fruit, vegetables and other agricultural and marine food products are considered in their original state even if hey undergone the simple process of preparation or preservation for the market : freezing, drying, salting, broiling, roasting, smoking or stripping, shrink wrappings in plastic, vacuum packing, tetra-pack, and other similar packaging methods Polished and/or husked rice, corn grits and raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural product in their original state c. services rendered to persons or entities whose exemptions under special laws or international agreements to which the Philippines is a signatory efectively subjects the supply of such services to zero percent rate services rendered to persons engaged in international shipping or air transport d. NOTE: shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines (subject to e. servic es perform ed b y subcontract ors and/o r contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production transport of passengers and cargo by f. NOTE: Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are b. sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fishes, zoo animals and other animals generally considered as g. sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging c. belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines such goods are exempt from customs duties under the Tariff and Customs NOTE: Zero rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or d. Importation of profession al instrumen ts an d implements, wearing apparel, domestic animals, and p e r s on al h ou se ho ld e f ect s ( e x ce p t a n y v e h i cle, vessel, TAXATION LAW REVIEWER Page 84 of 165 aircraft, machinery and other goods for use in the i. Services rendered by individuals pursuant to an employer-employee relationship Services rendered by regional or area HQ established in the RP by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the Philippines Transactions which are exempt under manufacture and merchandise commercial quantity) o f an y kin d i n j. Belonging to persons Philippines coming to settle in the For their own exchange, use and not for sale, barter or Accompanying such persons or arriving within 90 days before or after their arrival Upon the production of evidence satisfactory to the CIR that such persons are actually coming to settle in the k. C on ce ss i o n a i res u nd er t h e P e t r ol e u m Act o f 194 9 ] l. sales by agricultural cooperatives duly registered and in good standing with the CDA to their members, as well as sale for their produce, whether in its original state or processed form, to non-members their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the e. f. services subject to percentage tax services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar into raw sugar BIR has clarified that toll processing or toll dressing, which are covered by the VAT exemption of services by agricultural contract growers under Section 109(F) of the Tax Code of 1997, pertain to toll processing services for clients from which growing of animals were contracted. Thus, the activity of preparing and packaging hogs/chicken ready for delivery after producing or growing is considered within the purview of agricultural contract growing, which is exempt from VAT under Section 109(F) of the Tax Code of 1997, as amended. However, if the toll processing/toll dressing/toll manufacturing service is performed independently from growing poultry, livestock, or other agricultural and marine food products, the activity Sale by agricultural cooperatives to non- members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT; However, the sale or importation of agricultural food products in their original m. Gross receipts from lending activities by credit or multi- purpose cooperatives duly registered and in good standing with the CDA Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in n. Share capital contribution of each member does not exceed 15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members Importation of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT D e cem b er 21, 20 1 0 ] g. medical, dental, hospital and veterinary services, except those rendered by professionals Laboratory services are exempted If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and merchandise is subject to VAT. However, sales of drugs to in- patients of hospitals are considered part of o. p. Export sales by persons who are not VAT- registered The following sales of real properties are exempt from Not primarily held for sale to customers or held for lease in the ordinary course of trade or business h. Educational services rendered by private educational institutions duly accredited by the DepED, CHED and TESDA and those rendered by government educational institutions – A subdivision or a condominium registered and licensed by the HLURB Undertaken by the gov’t or private – Does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED Utilized for socialized housing Residential lot valued at 1.5M and below, or house and lot and other residential dwellings valued at 2.5M and below TAXATION LAW REVIEWER Page 85 of 165 – Instrument must be executed on or after July 1, 2005. Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic Act No. 9295, otherwise known as ‘The Domestic Shipping Development Act of 2004'; Importation of fuel, goods and supplies – shal l be publish ed throug h revenu e v. regulations to be issued not later than March 31 of each year. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale – Shall be used exclusively or shall pertain to the transport of goods and/or passengers from a port in the Philippines directly to a foreign port without stopping at any w. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non- bank financial intermediaries subject to percentage tax such as money changers and pawnshops Sale or lease of goods or properties or the performance of services other than the transaction mentioned in the preceding q. Lease of residential units Monthly RENTAL: not exceeding P10,000 Gross receipts from rentals exceeding P10,000 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P10,000) x. For purposes of the threshold of 1.5M, the husband and wife shall be considered separate taxpayer. The aggregation rule for each taxpayer shall apply For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold r. Sale, importation, printing or publication of books and any newspaper, magazine, review, or which appears at regular intervals with fxed prices for subscription and sale which is not devoted principally to the publication of paid advertisements s. Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations A V A T - r e g i s te r e d p e r s o n may, e l e c t t h at t h at t h e e x e m p t ion Limited to 150 tons and above, including engine and spare parts of said vessels Comply with the age limit requirement, at the time of acquisition counted from s h all no t a p p ly t o h is sal e s o f g ood s o r se r v i ce s o r p rop e r t i e s w h i c h is i rr e vo c a b le f o r a p e r i o d o f 3 y e a r s. – – – Passenger/cargo vessel: 15 years old Tankers: 10 years old High-speed passenger crafts: 5 Exemption shall be subject to the provisions of “The Domestic Shipping Development t. Importation of life-saving equipment, safety and rescue equipment and communication and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates, used for shipping transport operations; Provided, that the exemption shall be subject to the provisions of Section 4 of Republic Act No. 9295, otherwise known as 'The Domestic Shipping u. TAXATION LAW REVIEWER Page 86 of 165 Zero-Rated vs. VAT-Exempt Transaction CIR v . C eb u T o y o C o r p o ra t i o n , [ G . R . N o . 14907 3 , F e b r u a r y 16, 2005] A zero-rated transaction differs from VAT-exempt transaction on the following points: a. a zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to output tax. b. The input tax on purchases of a VAT- registered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not v) For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code Purchase of real properties for which a VAT has actually b. c. Purchases of services in which a VAT has actually been paid d. Transactions deemed sale e. Transitional input tax A person who becomes liable to VAT or any person who elects to be a VAT-registered person shall be allowed to claim input tax on his beginning inventory of goods, materials and supplies equivalent to 2 % o f t h e t h e a ct u al V A T p aid o n s u c h g ood s, ma te r ials a n d s upp l ie s, w h i c h e v e r is h i g h e r . f. Presumptive input tax Covered: Persons or firms engaged in the processing of sardines, mackerel, and milk and in the manufacturing refined sugar, cooking oil and packed The term “processing” shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to 14. INPUT VAT AND OUTPUT VAT DEFINED Input tax means the VAT paid by a VAT- registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in Rate: 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production a m e nd e d b y R.A. 7 716; F o rt Bo n i fa c i o D e vt . C o r p . v . C I R , G. R . N o s . 158885 a n d 1 7 0680, A p r i l 2, 2009; B IR W e b si t e ] g. Transitional input tax credits allowed under the transitory and other provisions of these Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or services by any person registered or required to register under section 236 of the Tax Code. h. Creditable Withholding VAT on payments to non- residents 16. PERSONS WHO CAN AVAIL OF THE INPUT TAX 15. SOURCES OF INPUT TAX a. Purchase or impartation of goods i) ii) For sale; or For conversion into or intended to form part of a finished product for sale, including packaging materials; or For use as supplies I the course of business; or For use as raw materials supplied in the iii) iv ) TAXATION LAW REVIEWER Page 87 of 165 TAXPAYER TIME TO CLAIM INPUT TAX To the importer Upon payment of VAT prior to the release of goods from customs custody To the purchaser of the domestic goods or properties Upon consummation of the sale To the purchaser of services or the lessee or licensee Upon payment of the compensation, Exempt Transaction vs. Exempt Party The object of exemption from the VAT may either be the transaction itself or the parties to the transaction. An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed and expressly exempted from the VAT under the Tax Code, without regard to the tax status (VAT exempt or not) of the party to the transaction. Such transaction is not subject to VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. Such party is also not subject to VAT, but may be c. Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while registration is optional for VAT-exempt persons. Input tax arising from qualifed transactions in the current month or quarter Input tax carried-over from the preceding month or quarter Reduction in Creditable Input Tax Amount of claim for VAT refund or Tax Credit Certificate (whether filed with the BIR, the Department of Finance, the Board of Investments or the BOC) Other adjustments, such as purchase returns or allowances, input tax attributable to exempt sales and input tax attributable to NOTE: Even if the said events have already transpired but the required documents are not on hand, the input taxes may not be claimed. 17. DETERMINATION OF THE INPUT/OUTPUT PAYABLE; EXCESS INPUT TAX TAX ; VA T C r e d i t s for I npu t T ax The VAT due on or paid by a VAT-registered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of trade or business Include the transitional and the presumptive input tax Includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input taxes which cannot be directly attributed to a. Computation of output tax i. Goods or properties: Gross selling price x VAT rate Al l o w a b le d e du ct io n s f ro m g ro s s se l l i n g pr i c e (1 ) discounts determined and granted at the time of sale (expressly indicated in the invoice, amount thereof should form part of gross sales duly recorded in the books, and the granting of the discount does not depend on the happening of the future event) (2 ) C l aim for I npu t T ax o n D ep r ec ia b le Good s month or quarter to the buyer for previously recorded as taxable sale s i. Requisit es: A VAT-registered person purchases or imports capital goods (which are depreciable goods for income tax purposes) If aggregate acquisition cost of all capital goods (exclusive of VAT) in a calendar month exceeds P1 million, the input tax cannot be claimed outright but should be subject to amortization over a period of 5 years or useful life of the capital goods, whichever is lower. If the aggregate acquisition cost of all capital goods in a calendar month does not exceed P1 million, the input tax may be claimed ii. Sellers of service: Gross receipts x VAT rate b. Determination of input tax credit D ete r m i n a t ion o f I npu t T ax C r e d it dur i n g a t axa b le mo n t h o r qu a r te r All creditable input taxes during the month or quarter + any amount of input taxes carried- over from preceding month/quarter (claim for VAT refund or tax credit certificate) (other adjustments – purchase returns) (input tax attributable to exempt sales) (input tax on capital goods purchased during the month/quarter subject to amortization) - - - - Aggregate acquisition cost refers to the total price agreed upon for one or more assets acquired and not the payments actually made during +/ - + ( c r e d i t a b l e V A T w i t hh e l d o n p a yme n t s t o no n - ii. Manner of claiming input tax of more than P1 million r e si d e n t s) = Input Tax (1 ) estimated useful life of a capital good is 5 years or more: input tax spread evenly over a period of 60 months NOTE: Adjustments to Input Tax Addition to Creditable TAXATION LAW REVIEWER Page 88 of 165 royalty or fee. To the purchaser of real property under: Cash/Deferred Payment Basis Upon consummation of sale Upon every installment VAT payable computation: Output Tax - I n p u t T a x commenced in the calendar month when the capital good is acquired VAT payable (2) estimated useful life is less than 5 years: input tax spread evenly on monthly basis by the actual number of months comprising the estimated useful life of the capital good commenced in the calendar V A T P a y a b le ( E x c e ss O u t pu t ) o r E x c e ss I npu t T ax If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to zero-rated sales by a VAT- registered person may at his option be If the depreciable capital good is sold/transferred within the period of 5 years or prior to the exhaustion of the amortizable input tax thereon: entire unamortized input tax on the capital goods sold, can be claimed as input tax credit during the 18 . SUBSTANTIATION REQUIREMENTS OF INPUT TAX CREDI TS c. Allocation of input tax on mixed transactions Re qu i r e d S u p por t i n g Do c u m e n t s for c lai m i n g I npu t VAT A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax i. all the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit input taxes which are directly attributable to VAT taxable sales of goods and services from the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall not be credited against output taxes arising from ii. if any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax NOT E: input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost of goods sold for persons engaged in both zero-rated sales and non- zero rated sales, the aggregate input taxes shall be allocated ratably d. Determination of the output tax and VAT payable and computation of VAT payable or excess tax TAXATION LAW REVIEWER Page 89 of 165 TRANSACTIONS REQUIRED SUPPORT On domestic purchases of goods or properties made in the course of trade or business VAT Invoice On purchases of real property Cash/Deferred Payment Basis Installment Basis Public Instrument (i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.) together with the VAT Invoice for the entire selling price and Non-VAT ORs for the initial and succeeding payments Public Instrument On domestic purchase of services VAT OR On importation of goods Import entry or other equivalent document showing actual payment of VAT on the imported goods and BOC OR. On transitional input tax Inventory of goods as shown in a detailed list to be submitted to the BIR. On “deemed sale” transactions Required invoices On payments made to non- residents Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) fled by the resident payor in behalf of input VAT. In case of full or partial denial by the CIR, the taxpayer’s recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. Otherwise, if after the 120-day period, the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days. Hence, if filed with CTA before the 120-day period expires, CTA will dismiss for prematurity. If filed with CTA after the 150-day (120 + A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Sec. 113 and 19. CLAIMS FOR REFUND/TAX CREDIT CERTIFICATE OF INPUT TAX C o m p a n y , [ G . R . N o . 184 8 23 , O c t ob e r 6 , 2 01 1 ] d. Manner of giving refund a. Zero-rated and efectively zero-rated sales of goods, properties or services Refund shall be made upon warrants drawn by the CIR or by his duly authorized representative without the necessity of being countersigned by the Chairman of COA Refunds under this paragraph shall be Any VAT-registered person whose sales are zero- rated or efectively zero-rated may after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of the creditable input tax due or paid attributable to such sale. The creditable input tax allowed to be refunded does not include transitional input tax. In case the taxpayer is engaged in zero- rated and also in taxable or exempt sale, and the amount of creditable input tax due or paid cannot be directly and 20. INVOICING REQUIREMENTS a. Invoicing requirements in general i. A VAT-registered person shall issue: A VAT Invoice for sale of goods or properties A VAT Oficial Receipt for sale of services or lease of goods or ii. The following information shall appear in the VAT Invoice or VAT Official Receipt: b. Cancellation of VAT registration A statement that the seller is a VAT- registered person followed by the TIN The amount of tax shown as a separate item The word “VAT- Exempt Sale” written or printed prominently if sale is VAT-exempt The word “Zero-Rated Sale” written or printed prominently if sale is VAT- exempt. Date of transaction, quantity, unit cost and description of the goods or properties or the nature of service A person whose VAT registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status, may within 2 years from the date of cancellation, apply for the issuance of tax credit certificate for c. Period within which refund or TCC of input taxes shall be made The Commissioner shall grant a TCC/refund for creditable input taxes within 120 days from the date of submission of complete documents in support of the application Taxpayer may appeal to the CTA within 30 days from receipt of said denial If no action on the claim for refund has been taken by the CIR after the 120 day period from the date of submission of the application with complete documents, the taxpayer ,may appeal to the CTA within 30 days from the laps b. Consequences of issuing erroneous VAT invoice or VAT oficial receipt If a person who is not a VAT-registered person issues an invoice or receipt showing his Tax Identification Number (TIN), followed by the word “VAT”, the issuer shall, in addition to any liability for other percentage taxes, be w h i c h t o gr an t o r d e n y t h e c la i m for r e f und/ c r e d it TAXATION LAW REVIEWER Page 90 of 165 the non-resident evidencing remittance of VAT due which was withheld by the payor. Advance VAT on Sugar Payment order showing payment of the advance VAT i. VAT without the benefit of any input tax credit, and A 50% surcharge on the VAT payable If the invoice/receipts contain the NOTE: For the electronic payment of tax for returns required to be filed earlier under the staggered filing system, the taxpayer, upon e- filing, shall, still using the facilities of EFPS, likewise give instructions to the Authorized Agent Bank (AAB) to debit its account for the amount of tax on or before the due date for ii. iii. information, purchaser shall be allowed recognize an input tax credit. to If a VAT-registered person issues a VAT invoice or b. Withholding VAT Return (BIR Form 1600) F i l i n g a n d P a yme n t D e a d l i n e : 10 days from the end of oficial receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words “VAT-EXEMPT SALE”, the transactions shall become taxable and the issuer shall be liable to pay the VAT thereon. The the month c. Quarterly VAT Return (BIR Form 2550Q) F i l i n g a n d P a yme n t D e a d l i n e : 25 days following the close of each taxable quarter The quarterly returns shall reflect the cumulative totals of the sales, purchases, output tax and input tax for the 3 months of the applicable quarter The VAT payable (Output Tax less Input Tax) for each quarter shall be reduced by the VAT invoices and oficial receipts cannot be used interchangeably for purposes of substantiating input VAT. In supporting claims for input VAT on purchase of goods or properties, the law requires that a VAT invoice be presented while a VAT oficial receipt is necessary to substantiate claims for input VAT involving the purchase of services. Citing the case of CIR v. Manila Mining Corporation, where an invoice is distinguished from a receipt, the SC clarified that the VAT invoice is the seller’s best proof of sale of goods or services to the buyer while the VAT receipt is the buyer’s best evidence of the payment of goods or services received from the seller. As explained by the SC, even though VAT invoices and receipts are normally issued by the supplier/seller alone, the VAT invoices and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods sold and their selling price (proof of transaction), and the best means to prove the payments of 22. WITHHOLDING OF VAT a. On Payments to Nonresidents (creditable withholding VAT) (Rule applies to payments by government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, as well as private corporations, individuals, estates and trusts, i. Payments to non-residents, with respect to lease or use of property or property P h i l i pp i n e s owned by such non- residents, are subject to withholding VAT. The VAT shall be based on the contract price. C o m m i ss ion er o f I n t er n a l R e v e n u e, [G . R . 18 1 85 8 , ii. Other services rendered in the Philippines by non- residents N ov e m b er 24, 2010] 21. FILING OF RETURN AND PAYMENT Services rendered in the Philippines, such as providing assistance in establishing tender price of a project and designing materials, by a non- resident, shall be subject to the a. Monthly VAT Declarations (BIR Form No. 2550M) Refers to frst 2 months of taxpayer’s quarters the month, except for Electronic Filing and Payment System (EFPS) taxpayers NOT E: F i l i n g D e a d l i n e for E F PS: Deadline depends on the The party required to withhold is the payor, regardless of whether or not he is VAT- registered. The VAT is passed on to the resident withholding agent. The payor shall claim this as input tax upon filing of his own VAT industry classifcation of the taxpayer but applicable only for fling the monthly VAT return P a yme n t D e a d l i n e for E F PS: 25 days from the month TAXATION LAW REVIEWER Page 91 of 165 (2 ) Individuals earning purely compensation income whether locally or abroad; Overseas Workers; GAIs, in the discharge of their governmental functions; Marginal Income Earners; LGUs, in the discharge of their governmental functions; Tax exempt persons such as those enumerated VAT withheld and paid for the non-resident recipient, which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. If the resident withholding agent is a non- VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, shall form part of the cost of purchased services, which may be treated either as an “asset” or “expense,” whichever is applicable, of the (3 ) (4 (5 ) (6 (7 ) (8 ) (9 ) Person s subje ct to ta x unde r one- time transactions; and (10) Facility/ies where no sales transactions occur. b. On Payments by Government (final withholding VAT) Reg i s t r a t ion o f E a c h T y p e o f I n t e rn al R e v e nu e T ax Every person who is required to register with the BIR shall register each type of internal revenue tax for which he/it is obligated to OR is expected to periodically file a return, pay taxes due thereon, and update such record of any changes in the registration information. Note that the registration of one tax type does not automatically register the other type of taxes (e.g. registered for income tax is not registered for VAT) Generally, registration of tax types/fees by a business The Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods and/or services taxed at 12% shall deduct and withhold a final VAT of 5% of the gross payment. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) efectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. (a ) (b ) (c Income tax; VAT and/or percentage tax; Withholding tax on compensation; Creditable withholding tax at source on certain income payments; Final withholding tax on certain income payments; Documentary stamp tax; Excise (e ) (f) (g ) If actual input VAT attributable to sale to government is less than 7% of gross payment, the difference must exp en se o r c o st Tr a n sf e r o f Re g is t r a t ion Registration Requirements It shall be duty of the taxpayer to inform the RDO where he is registered by filing the prescribed BIR Form specifying the RDO where he is intending to transfer. In case of transfer of registration of individuals earning purely compensation income due to change of employer, it shall be the responsibility of the RDO having jurisdiction of the new employer to effect the transfer of employee's registration. It shall be the duty of the old RDO to transfer the accountabilities of the taxpayer to the new RDO where he is transferring. The old RDO can still institute collection on 1. ADMINISTRATIVE REQUIREMENTS a. Registration Requirements (see RR 11-08) A nnu al R e g i s t r a t ion F e e ( R F ) Fee of (P500.00) for every separate or distinct establishment or place of business shall be paid upon registration and every year thereafter on or before January 31 by every person subject to any internal revenue tax. The following are exempt from the Annual RF: (1) Cooperatives duly TAXATION LAW REVIEWER Page 92 of 165 within six (6) months from the date of transfer. The filing of tax returns and payment of taxes to the new RDO shall commence at the time the transfer is efected by the old RDO. Both the new and the old RDO shall be responsible in notifying the taxpayer concerned that the transfer of registration has already been effected. Transfer of head ofice of taxpayers engaged in business during the interim period shall only be oficially efected in the records of the BIR by the end of the year. The taxpayer may be allowed to physically transfer its business to the intended RDO, however, the filing of its returns and payment of taxes in the new RDO shall still bear the RDO Code of the old RDO until the end of the year and without imposition of any surcharge for "wrong-venue fling of return" Request for transfer of registration of branch/facility, which has no registered tax types in the RDO where it is registered, shall a) Death of an individual; b) Dissolution, merger or consolidation of juridical person; c) Discovery of a taxpayer having multiple TINs; d) Payment of estate tax by the heirs, administrator or executor or upon full settlement of the tax liabilities of the estate. The cancellation of business registration may be granted on the following instances: a) Closure/Cessation of business operation; b) Dissolution of corporation/partnership; P o we r o f Com m issio n e r t o s u s p e n d t h e bu si n e ss op e r a t io n s o f a n y p e r s o n w h o fails t o r e g i s te r Suspension of business operations: In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the CIR or his duly authorized representative may order suspension or closure of a business establishment for a a ) b) Failure to issue receipts and invoices Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter new RDO once the employer is transf er of registrati on of th e c) Ot h e r Upd a te s Any person registered shall , whenever applicable, d) update his registration information with the RDO where he is registered under any of the following a ) b) A person's business has become exempt A change in the nature of the business itself, i.e. from sale of taxable goods and services to exempt A person whose transactions are exempt from VAT but voluntarily registered under VAT system applies for cancellation of his VAT registration after the lapse of 3 years after his registration NOTE: optional registration as a VAT taxpayer of a franchise grantee of radio and/or television broadcasting whose gross receipts for the preceding year did not exceed P10,000,000.00 shall be irrevocable; A VAT-registered person whose gross b. Persons Required to Register for VAT M a nd a t o r y V A T r e g i s t r a t ion c) Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or engages in the sale or exchange of services shall be liable to i. His gross sales or receipts for the past 12 months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, have exceeded P1.5 million; or There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those d) ii. e) informati on previous ly supplied, including cancellation or change in any tax types. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding taxable year exceeded P10 million, shall register within thirty (30) days from the end Ca n ce l l a t ion o f Re g is t r a t ion Either cancellation of business registration and/or TIN. The cancellation of business registration shall not automatically cancel the TIN of the TIN is c a n ce l l e d upon : TAXATION LAW REVIEWER Page 93 of 165 NOTE: If he fails to register, he is liable to output VAT but cannot claim input VAT, for the period in which not properly registered. from the BIR an authority to print receipts or sales or commercial invoices before a printer can print the same. No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are O p t io n al VAT R e g i s t r a t ion Taxpayers may apply for VAT registration not later than 10 days before the beginning of the taxable quarter and shall pay the P500 registration fee, unless a ) b ) c) the name business style Taxpayer Identification Number (TIN) business address of the person or entity to use the same, other information that may be required The Commissioner of Internal Revenue may, administrative reason deny any application registration. for for e) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. I nvo i c i n g r e qu i r e m e n t s for V A T A VAT-registered person shall issue: a) A VAT invoice for every sale, barter or exchange of goods or properties; and b) A VAT oficial receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or oficial receipts. All purchases covered by invoices/receipts Ca n ce l l a t ion o f VAT R e g i s t r a t ion If he makes a written application and can demonstrate to the commissioner’s satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will not exceed one million five hundred thousand pesos (P1,500,000); or If he has ceased to carry on his trade or I n fo r ma t ion c on t ai n e d in t h e V AT i nvo i c e NOTE: The cancellation for registration will be effective from the first day of the following month the cancellation was approved. A statement that the seller is a VAT- registered person, followed by his TIN; The total amount to be paid with the indication that such amount includes the c. Supplying TIN Any person required to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicated in such return statement or document fled with the BIR for his proper identification for tax purposes. In case a registered taxpayer dies, the administrator or executor shall register the estate of the decedent a new TIN. In case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the RDO where he is registered BUT if the executor or administrator is not registered, registration shall be made with the RDO (a ) (b The amount of tax shall be a separate item If the sale is exempt from VAT, the term "VAT- exempt sale" shall be written or printed prominently on the invoice or receipt; If the sale is subject to zero percent (0%) VAT, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zero- rated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt. (c ) (d ) In the case of sales of P1,000.00 or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client, d. Issuance of Receipts or sales or commercial invoices P r i n t i n g o f r ece i p t s o r sal e s o r c o m me r c ial i nvo i ce s All persons who are engaged in business shall secure TAXATION LAW REVIEWER Page 94 of 165 Co n se qu e n ce s o f iss u i n g e rr o n e ou s V A T i nvo i c e o r ORs Gross receipts of common carriers derived from incoming and outgoing freight is not subject to local taxes under the Local Government Code (LGC). Covers cars for rent or hire driven by the lessee, transportation contractors, including persons who transport passengers for hire, and other domestic carriers by land, air or water, for the transport of passengers, and keepers of garages (Please refer to 22. Invoicing Requirements under the VAT Section for further discussion) e. Exhibition of certificate of payment at place of business The original copy of Certificate of Registration and the duly validated Annual Registration Fee Return a r e r e qu i r e d t o b e t h e h e ad o f ice , br a n c h o f ice , s t or age p la c e o r p la c e o f pro d u ct io n . [ R MC N o . 39-95 d a t ed D ecem b er 1 , 199 5 ] f. Continuation of business of deceased person If during the year, the owner of a business dies, the business is continued, and the annual registration fee has been duly paid, NO ADDITIONAL PAYMENT shall be required for the remainder of the year. However, the persons interested in the estate of the deceased owner shall submit to the BIR, within 30 days from the death, a list of the inventories of goods or stocks of the business at the time of death. g. Removal of Business to another location Any business for which the annual registration fee has been paid may be removed and continued in any other place without the payment of additional tax during the term for which the payment was made subject to the rules and regulations ====================== ================ TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE E. Percentage Tax ======================= A . TAX ON INTERNATIONAL CARRIERS 3% of their quarterly gross receipts Covers International air carriers and shipping carriers doing business in the Philippines A. TAX ON PERSONS EXEMPT FROM VAT 3% of gross quarterly sales or receipts Any person who is exempt from VAT and who is not a VAT-registered person. – Those who gross annual sales and receipts does not exceed P1.5 million are exempted from VAT. Cooperatives shall be exempt from the 3% gross receipts tax (GRT) Those earning less than P100,000 which is neither covered by percentage tax B. TAX ON DOMESTIC CARRIERS AND KEEPERS OF GARAGES 3% of quarterly gross receipts TAXATION LAW REVIEWER Page 95 of 165 COMMO N CARRIE TRANSPORT ING KIND OF CARRI TAX LIABILI TY By Land Persons Domestic 3% Percenta ge Tax Goods/cargo Domestic 12% VAT By Sea Whether transporti ng person or goods/car go Domestic Domesti c Trip – 12% VAT Internatio nal Trip – Zero- rated Internation al 3% Percenta ge Tax By Air Domestic Domestic MINIMUM QUARTERLY GROSS RECEIPTS: Jeepneys Manila and other cities P 2,400 Provincial 1,200 Public Utility Bus Not exceeding 30 Passengers P 3,600 More than 30 but not more than 50 passengers 6,000 More than 50 Passengers 7,200 Taxis Manila and other cities P 3,600 Provincial 2,400 Cars for hire With chaufer P 3,000 Without chaufer 1,800 Tax on gross receipts derived from sources within the Philippines by all banks and non- banks financial intermediaries B. TAX ON FRANCHISES 1. Franchises on radio and broadcasting companies whose annual gross receipts of the preceding year does not exceed P10 million 3% tax on the gross receipts derived from the business covered by law granting the franchise Radio and television broadcasting has an irrevocable option to be 2 Gas and water utilities 2% tax on the gross receipts derived from the business covered by the law granting the franchise NOTE: 1. The term “banks” refer to entities engaged in the lending of funds obtained in the form of deposits. [ R A NOTE: Electric companies are now subject to VAT and not percentage tax C . O VE RS E AS CO MM U NICATI O NS TAX Covers every overseas dispatch, message or conversation transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and either communication equipment services 10% on the amount paid for services rendered Paid by the person paying for the services rendered to the person rendering the services 2. “Quasi-bank” refers to a non-bank financial institution authorized by BSP to engage in quasi-banking functions and to borrow funds from more than 19 lenders through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes. 3. The 20% final withholding tax on a bank’s passive income forms part of the taxable gross receipts for the b. Diplomatic services E . TAX O N O TH E R N O N - B ANK F I N ANCE INT E R M E DIA R I E S c. International organizations (based in the Tax on gross receipts derived by other non-bank finance intermediaries, doing business in the Philippines, from interest, commissions, discounts from lending activities, income from financial leasing, and all other items treated as gross income Based on the remaining maturities of the Philippines and enjoying privileges, exemptions and immunities pursuant to an international agreement) d. News services (which messages deal exclusively with the collection of news for D . TAX O N B ANKS AND N O N - B A NK F INANCI A L INT E R M E DIA R I E S P ER F O R M ING QU A S I - B ANKI N G F U NCTI O N S TAXATION LAW REVIEWER Page 96 of 165 MATURITY RATE 5 years or less 5% More than 5 years 1% RECEIP TS RATE Interest, commission, discounts from lending activities and fnancial leasing bases on remaining maturities of instruments Maturity period is 5 years or less 5% 1% Dividends and equity shares in net income of subsidiaries 0% Royalties, rentals of property (real/personal), profits from exchange and all other items treated as gross income under Section 32 7% Net trading gains on foreign currency, debt securities, derivatives, and other similar fnancial instruments 7% flight – 12% VAT Internatio nal flight – Zero- rated Internation al 3% Percenta ge Tax F. TAX O N L I F E IN S U R ANCE P R E M I U MS operator of the amusement place, income from television, radio and motion picture 5% of total premiums collected (whether paid in money, notes, credits or any substitute for money) by every person, company or corporation exce pt purel y cooperati ve companies or associations Premiums not included in the taxable receipts: 1. Premiums refunded within 6 months after payment on account of rejection of risks Premiums paid upon reinsurance by a company that has already paid the tax Premiums collected or received by any branch of a domestic corporation, firm or association doing business outside the Philippines on account of any life insurance of the insured who is a non-resident, if any tax on such premiums is imposed by the foreign country where the branch is established Premiums collected or received on account of any reinsurance, if the insured of a personal insurance, resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has 2. 3. Boxing exhibitions, wherein World or Oriental Championships in any division is at stake having at least one (1) Filipino contender I. TAX O N W INNIN G S 4. 5. NOT E: “Cooperative companies or associations” are such as are conducted by the members thereof with the money collected from among themselves NOT E: The tax shall be withheld by the operator, manager or person in charge of the horse races before paying the dividends or prizes G . TAX O N AG E NTS O F F OR E I G N I N S U R ANCE C O MPANI E S 10% of total premiums collected by every fire, J. TAX O N S A L E , B E R T ER , O R EX C H AN G E O F S H A R E S O F marin e or miscellaneo us insuran ce agen t S T O CK L I S T E D AND T R A DE D TH RO U G H THE LO C A L authorized to procure policies of insurance as he may have previously been legally authorized to transact on risks located in the Philippines for companies not authorized to transact business in the Philippines Does not cover premiums paid on reinsurance In cases where owners or property EX C H AN G E O R TH RO U G H IN I TIAL P U BL IC O FF E R I N G ( IP O ) A. Through Local Stock Exchange ½ of 1% of the Gross Selling Price or Gross Value in Money of the shares of stocks sold, bartered, exchanged or otherwise disposed of through the local stock exchange other than the sale by a dealer in securities H . AM U S E M E NT TA XE S For purposes of amusement tax, gross receipts include all receipts of the proprietor, TAXATION LAW REVIEWER Page 97 of 165 SOUR CE RATE PERS ON LIABL Winnings or dividends based on the actual amount paid to winner for every winning ticket after deducting the cost 10% Every person who wins in horse races Winnings from double, forecast/quinella and trifecta bets 4% Prizes of owners of winning horses 10% Owner of winning race horses SOUR CE RATE Cockpits 18% Cabarets, night or day clubs 18% Boxing exhibitions 10% Professional basketball games (in lieu of all other percentage taxes) 15% Jai-alai and racetracks (whether or not they charge for admissions) 30% B. Through Initial Public Offering (IPO) ====================== ================ TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE F. Compliance Requirements ======================= Imposed on the sale, barter, exchange of shares of stock of closely held corporations in proportion to the total outstanding shares after the listing in the local stock exchange Tax based on the Gross Selling Price or Gross Value in Money shall be paid by the issuing corporation in the h. Registration Requirements (see RR 11-08) A nnu al R e g i s t r a t ion F e e ( R F ) Fee of (P500.00) for every separate or distinct establishment or place of business shall be paid upon registration and every year thereafter on or before January 31 by every person subject to any internal revenue tax. The following are exempt from the Annual RF: (11) Cooperatives duly registered with the CDA; (12) Individuals earning purely compensation income whether locally or abroad; (13) Overseas Workers; (14) GAIs, in the discharge of their governmental functions; (15) Marginal Income Earners; (16) LGUs, in the discharge of their governmental functions; (17) Tax exempt persons such as those enumerated under Section 30 of the C. Return on Capital Gains Realized from Shares of Stock s Includes both return on capital gains realized from sale of shares of stock listed and traded in the local stock exchange and return on public II. PAYM E NT O F P E R C E NTA G E TAX Persons subject to percentage tax shall file a quarterly return of the amount of his gross sales, receipts or earnings and pay the tax due within 25 days after the end of each taxable quarter In case of a person whose VAT registration is cancelled and who becomes liable to percentage tax, the tax shall accrue from the date of cancellation Persons retiring from business subject to percentage tax shall file his return and pay the tax due within 20 days after closing the business Every person liable may, at his option, file a separate return for each branch or place of business or a consolidated return for all branches or places of business with the authorized agent bank, revenue district oficer, collection agent or duly authorized treasurer of the city or municipality where the said business or principal place of business is located The Commissioner may, by rules and regulations, prescribe the time for filing the return and manner of payment, and a minimum amount of gross receipts, sales and taxable base when it is found (19) Persons subje ct to ta x unde r one- time transactions; and (20) Facility/ies where no sales transactions occur. Reg i s t r a t ion o f E a c h T y p e o f I n t e rn al R e v e nu e T ax Every person who is required to register with the BIR shall register each type of internal revenue tax for which he/it is obligated to OR is expected to periodically file a return, pay taxes due thereon, and update such record of any changes in the registration information. Note that the registration of one tax type does not automatically register the other type of taxes (e.g. registered for income tax is not registered for VAT) Generally, registration of tax types/fees by a business (i ) (j) (k ) Income tax; VAT and/or percentage tax; Withholding tax on compensation; Creditable withholding tax at source on certain (m) Final withholding tax on certain income payments; (n) Documentary stamp tax; TAXATION LAW REVIEWER Page 98 of 165 NUMBER OF SHARES RATES Up to 25% of all shares 4% Over 25% but not over 33 ⅓ % 2% Over 33 ⅓% 1% (o) Excise tax; and (p) Annual registration fee. the lapse of 3 years after his registration NOTE: optional registration as a VAT taxpayer of a franchise grantee of radio and/or television broadcasting whose gross receipts for the preceding year did not exceed P10,000,000.00 shall be irrevocable; A VAT-registered person whose gross sales or receipts for three consecutive years did not exceed P1,500,000.00. Upon Tr a n sf e r o f Re g is t r a t ion It shall be duty of the taxpayer to inform the RDO where he is registered by filing the prescribed BIR Form specifying the RDO where he is intending to transfer. In case of transfer of registration of individuals earning purely compensation income due to change of employer, it shall be the responsibility of the RDO having jurisdiction of the new employer to effect the transfer of employee's registration. It shall be the duty of the old RDO to transfer the accountabilities of the taxpayer to the new RDO where he is transferring. The old RDO can still institute collection on concluded audit cases at the time of transfer of registration. The old RDO shall terminate audit cases that are prescribing within six (6) months from the date of transfer. The filing of tax returns and payment of taxes to the new RDO shall commence at the time the transfer is efected by the old RDO. Both the new and the old RDO shall be responsible in notifying the taxpayer concerned that the transfer of registration has already been effected. Transfer of head ofice of taxpayers engaged in business during the interim period shall only be oficially efected in the records of the BIR by the end of the year. The taxpayer may be allowed to physically transfer its business to the intended RDO, however, the filing of its returns and payment of taxes in the new RDO shall still i) j) informati on previous ly supplied, including cancellation or change in any tax types. Ca n ce l l a t ion o f Re g is t r a t ion Either cancellation of business registration and/or TIN. The cancellation of business registration shall not automatically cancel the TIN of the person. TIN is cancelled upon: e) Death of an individual; f) Dissolution, merger or consolidation of juridical person; g) Discovery of a taxpayer having multiple TINs; h) Payment of estate tax by the heirs, administrator or executor or upon full settlement of the tax liabilities of the estate. The cancellation of business registration may be granted on the following instances: P o we r o f Com m issio n e r t o s u s p e n d t h e bu si n e ss op e r a t io n s o f a n y p e r s o n w h o fails t o r e g i s te r Suspension of business operations: In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the CIR or his duly authorized representative may order suspension or closure of a registered, shall immediately concerned old RDO. Registration of employees employers be efected by the of the transferring be transferred to the e) f) Failure to issue receipts and invoices Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter new RDO once the employer is transf er of registrati on of th e g ) Ot h e r Upd a te s Any person registered shall , whenever applicable, update his registration information with the RDO where he is registered under any of the following h) f) g) A person's business has become exempt A change in the nature of the business itself, i.e. from sale of taxable goods and services to exempt A person whose transactions are exempt from VAT but voluntarily registered under i. Persons Required to Register for VAT h) M a n d a t o r y V A T r e g i s t r a t ion Any person who, in the course of trade or business, se l ls, b a r te r s o r e x c h a n g e s go od s o r p ro perties or TAXATION LAW REVIEWER Page 99 of 165 engages in the sale or exchange of services shall be liable to register if: iii. His gross sales or receipts for the past 12 months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, have exceeded P1.5 million; or iv. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those document fled with the BIR for his proper identification for tax purposes. In case a registered taxpayer dies, the administrator or executor shall register the estate of the decedent a new TIN. In case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the RDO where he is registered BUT if the executor or administrator is not registered, registration shall be made with the RDO Franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding taxable year exceeded P10 million, shall register within thirty (30) days from the end k. Issuance of Receipts or sales or commercial invoices P r i n t i n g o f r ece i p t s o r sal e s o r c o m me r c ial i nvo i ce s All persons who are engaged in business shall secure from the BIR an authority to print receipts or sales or commercial invoices before a printer can print the same. No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are NOTE: If he fails to register, he is liable to output VAT but cannot claim input VAT, for the period in which not properly registered. O p t io n al VAT R e g i s t r a t ion Taxpayers may apply for VAT registration not later than 10 days before the beginning of the taxable quarter and shall pay the P500 registration fee, unless f) g ) h) i) the name business style Taxpayer Identification Number (TIN) business address of the person or entity to use the same, other information that may be required The Commissioner of administrative reason Internal Revenue may, deny any for for j) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input I nvo i c i n g r e qu i r e m e n t s for V A T beginning on the first day registration. of th e mont h followin g A VAT-registered person shall issue: c) A VAT invoice for every sale, barter or exchange of goods or properties; and A VAT oficial receipt for every lease of goods or properties, and for every sale, Ca n ce l l a t ion o f VAT R e g i s t r a t ion d) If he makes a written application and can demonstrate to the commissioner’s satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will not exceed one million five hundred thousand pesos (P1,500,000); or If he has ceased to carry on his trade or Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or oficial receipts. All purchases covered by invoices/receipts other than VAT Invoice/VAT Oficial Receipt shall not give rise to any input tax. I n fo r ma t ion c on t ai n e d in t h e V AT i nvo i c e NOTE: The cancellation for registration will be effective from the first day of the following month the cancellation was approved. A statement that the seller is a VAT- registered person, followed by his TIN; The total amount to be paid with the indication that such amount includes the j. Supplying TIN Any person required to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall (e ) (f) The amount of tax shall be a separate item If the sale is exempt from VAT, the term "VAT- exempt sale" shall be written or printed prominently on the invoice or TAXATION LAW REVIEWER Page 100 of 165 (g ) If the sale is subject to zero percent (0%) VAT, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT- exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zero- rated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or 2. Tax Returns a . Income tax returns (h ) (1 ) (a Individual Tax Returns Filing of individual tax returns i. Who are required to fle Hus b a n d a n d W i fe Married individuals shall file a return for the taxable year to include the income of both spouses, computing separately their individual income tax based on their respective total taxable income. Where it is impracticable for the spouses to file one return, each spouse may file a separate return of income. If any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the In the case of sales of P1,000.00 or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, purchaser, customer or client, shall be indicated addition to the information required. in Co n se qu e n ce s o f iss u i n g e rr o n e ou s V A T i nvo i c e o r ORs (Please refer to 22. Invoicing Requirements under the VAT Section for further discussion) Re t ur n o f P ar e n t t o i n c l ud e i n c o me o f C h i l dr e n The income of unmarried minors derived from property received from a living parent shall be included in the return of the parent l. Exhibition of certificate of payment at place of business The original copy of Certificate of Registration and the duly validated Annual Registration Fee Return a r e r e qu i r e d t o b e (i) when the donor’s tax has been paid on such property, when the transfer of such property is t h e h e ad o f ice , br a n c h o f ice , s t or age p la c e o r p la c e o f pro d u ct io n . [ R MC N o . 39-95 d a t ed D ecem b er 1 , 1995] (ii ) m. Continuation of business of deceased person If during the year, the owner of a business dies, the business is continued, and the annual registration fee has been duly paid, NO ADDITIONAL PAYMENT shall be required for the remainder of the year. However, the persons interested in the estate of the deceased owner shall submit to the BIR, within 30 days from the death, a list of the inventories of goods or stocks of the business at the time of death. Re t ur n o f p e r s o n s w i t h d isa b i l i t y If the taxpayer is unable to make his own return, the return may be made: (i) b y hi s duly authorized agen t or representative or by the guardian or other person charged with the care of his person or property, (ii ) (iii ) Where the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or n. Removal of Business to another location Any business for which the annual registration fee has been paid may be removed and continued in any other place without the payment of additional tax during the term for which the payment was made subject to the rules and regulations ii. Who are not required to fle An individual whose gross income does not exceed his total personal and additional exemptions for dependents However, a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of TAXATION LAW REVIEWER Page 101 of 165 Ofice where the taxpayer is required to register/which has jurisdiction over the location of the principal ofice of the “CORPORATION” filing the return. In places where there are no AABs – with the Revenue Collection Oficer or duly Authorized City or Municipal Treasurer within the Revenue District Ofice where the taxpayer is required to register/which has jurisdiction over the location of the principal ofice of the “CORPORATION” An individual with respect to pure compensation income derived from sources within the Philippines and the income tax has been correctly withheld However, if an individual derives compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. T i m e o f f l i n g Within sixty (60) days following the close of each of the first three (3) quarters of the taxable year whether calendar or fscal year. NOTE: Any individual not required to file an income tax return may be required to fle an information ii. Final adjustment return Place o f f l i n g Any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the Revenue District Ofice where the taxpayer is required to register/which has jurisdiction over the location of the principal ofice of the “CORPORATION” filing the return. In places where there are no AABs – with the Revenue Collection Officer or Duly Authorized City or Municipal Treasurer of the municipality or city under the jurisdiction of the Revenue District Ofice where the taxpayer is required to register/which has jurisdiction over the (b ) Where to fle With any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the Revenue District Ofice where the taxpayer is required to register/where the taxpayer has his legal residence or place of business in the Philippines. In places where there are no AABs, the returns shall be filed with the Revenue Collection Oficer or duly Authorized City or Municipal Treasurer of the Revenue District Office where the taxpayer is required to register/where the taxpayer has his legal residence or place of business in the Philippines. In case taxpayer has no legal residence or place of business in the Philippines, the T i m e o f f l i n g On or before the 15 th day of the fourth month following the close of the taxpayer's taxable year. (c ) When to fle For the quarterly income tax return: First Quarter – On or before April 15 of the current taxable year Second Quarter – On or before August 15 of the current taxable year Third Quarter – On or before November 15 of the current taxable year iii. Taxable year of corporations A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return. The corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section For the annual income tax return: On or before April 15 of the next succeeding year. iv. Extension of time to file return The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income, subject to the provisions of Section 56 of this (2 ) (a Corporate Returns Requirement for fling returns i. Declaration of quarterly corporate income tax Place o f f l i n g Any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the TAXATION LAW REVIEWER Page 102 of 165 (b ) Return of corporation contemplating dissolution or reorganization (4 ) Returns of general partnerships Every general professional partnership shall file a return of its income, except exempt income setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of (5 ) Fiduciary returns b . Estate tax returns Pe r s on s l i a b le t o p ay es t a t e t ax The person primarily liable is the estate itself, through the executor and administrator. When there are 2 or more executors or administrators, all of them are The heir or beneficiary has a subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the net estate. The extent of his liability shall not, however, exceed (1) Notice of death to be fled (c ) Return on capital gains realized from sale of shares of stock not traded in the local stock exchange WHO files: the executor, administrator or any of the legal heirs, Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange shall: WHEN to file: within 2 months after the decedent's death, or within a like period after qualifying as such executor or i. file a return within thirty (30) days after each transacti on file a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following ii. TO WHOM filed: Commissioner. (2) Estate tax returns WHEN to file: within six (6) months from the decedent's death; except, the Commissioner, in meritorious cases, grants a reasonable extension not exceeding (3 ) Returns Assigne es of Receivers, Trustees in Bankruptcy or In cases wherein receivers, trustees in bankruptcy or assignees are operating the property or business of a corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net income as and for such corporation, in the same manner and form as required from the organization Any tax due on the income as MANDATORY filing of estate tax returns in all cases of: i. ii. transfers subject to the tax imposed herein transfers though exempt from tax, where the gross value of the estate exceeds P200,000 regardless of the gross value, the estate consists of registered or registrable property iii. directly against the organizations businesses or properties they have control. of whose WHERE to fle: custod y or i. ii. Authorized agent bank Revenue district TAXATION LAW REVIEWER Page 103 of 165 iii. Duly authorized city or municipal treasurer of the place of decedent’s domicile If there is no legal residence in the country, with the c. Donor’s Tax Return iv. W h o a r e liab le t o f l e d o n o r ’ s t a x r e t u r n ? Every person, whether natural or juridical, resident or non- resident, who transfers or causes to transfer (3 ) Discharge of liabilities If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability, the Commissioner as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax shall notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is (1 ) Requireme nts Any individual who makes any transfer by gift (except those which are exempt shall, for the purpose of the said tax, make a return under oath in duplicate. The return i. Each gift made during the calendar year which is to be included in computing net gifts; The deductions claimed and allowable; Any previous net gifts made during the same calendar year; The name of the donee; and Such further information as may be ii. iii. iv. v. (2 ) Time and place fling The donor’s tax return shall be filed within 30 days after the date the gift is made Filed with any Authorized Agent Bank (AAB) of the RDO having jurisdiction over the place of the domicile of the donor at the time of the transfer. In places where there are no AAB, the return will be filed directly with the Revenue Collection Oficer or duly D is t r i bu t ion o f E s t a t e Upon payment, the distributive administrator shall deliver the the inheritance to any heir or beneficiary. The estate tax clearance issued by the Commissioner or the Revenue District Oficer having jurisdiction over the estate will serve as the authority to distribute the In case of installment payments, the clearance shall be Quezo n City . released only with respect corresponding tax has to th e propert y th e In the case of gifts made by a non-resident alien, the return may be fled with Revenue District No. 39 - South Quezon City, or with the Philippine Embassy or Consulate in the country where donor is domiciled at the (a ) Definition of deficiency The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment d . VAT Return (1 ) a. In General Monthly VAT Declaration (BIR Form No. 2550M) and Payment of VAT Refers to frst 2 months of taxpayer’s quarters • • the month, except for Electronic Filing and Payment System (EFPS) taxpayers F i l i n g d e a d l i n e for E F P S : Deadline • industry classifcation of the taxpayer – but applicable only for fling of the monthly VAT return. NOTE: For the electronic payment of tax for the returns required to be filed earlier under the staggered filing system, the taxpayer TAXATION LAW REVIEWER Page 104 of 165 Authorized Agent Bank (AAB) to debit its account for twenty five (25) days after the end of each month. The return for final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements shall be filed and the payment made within twenty five (25) days from the the amount of tax on or before the due date for iii. payme nt there of a s prescrib ed unde r th e prevailing/applicable laws/regulations. P a yme n t d e a d l i n e for E F P S : 25 days from the end of the • mont h b. • Withholding VAT Return (BIR Form 1600) Deadline of filing and payment: 10th da y of th e (2 ) Annual Information Return The payor is required to file with the Commissioner, Revenue Regional Director, Revenue District Oficer, Collection Agent in the city or municipality where the payor has his legal residence or principal place of business, where the government ofice is located in the case of a government agency, an Annual Information Return of Income Tax Withheld at Source (Form No. 1604), showing among others the following informatio n: i. Name, address and taxpayer's, identification number (TIN); and ii. Nature of income payments, gross amount and amount of tax withheld from each payee and such other information as may be required by the Commissioner. On or before January 31 of the following year in which payments were made. If the payor is the Government of the c. • Quarterly VAT Return (BIR Form No. 2550Q) D e a d l i n e for f i l i n g a n d p a yme n t : S hou ld b e f i l e d w i t h in 25 d a y s fol l o w i n g t h e c lo s e o f e a c h t axa b le qu a r te r . • The quarterly return shall reflect the cumulative totals of the sales, purchases, output tax and input tax for the three (3) months of the applicable quarter. The VAT payable (output tax less input tax) for each quarter shall be reduced by the total amount • • (2 ) Where to fle the return The returns/declarations must be filed with any Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Ofice where the taxpayer is required to register. In places where there are no Authorized Agent Bank (AAB), the returns/declarations shall be filed with the Revenue Collection Oficer or duly within the revenue district required to register. Taxpayers with wher e th e taxpayer is shal l fil e only one consolidated return/declaration for his principal place of business or head ofice and all branches. 3. Tax Payments e. (1 ) Withholding Tax Returns Quarterly returns and payment of taxes withheld Taxes deducted and withheld by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, Revenue District Officer, Collection Agent, or duly authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where a. (i ) Income Taxes Payment, in general; time of payment Pay as you fle In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a suficient bond i. Within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year. For large taxpayers, the filing of (ii ) Installment payment ii. When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer OTHER TAXATION LAW REVIEWER Page 105 of 165 CORPORATION may elect to pay the tax in two (2) equal installments: in which case, i. The first installment shall be paid at the time the return is fled ii. The second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole not to exceed 5 years, in case the estate is settled through the courts; or 2 years in case the estate is settled In which case it shall be paid on or before expiration of the extension and running of the Statute of Limitations for assessment shall be suspended for the period The Commissioner may require a bond not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary when an extension for payment is granted. (iii ) Payment of capital gains tax Pay as you fle However, if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no Res t r i c t io n s as t o E x t e n si o n o f T i m e t o P a y : No extension shall be allowed when taxes are assessed by reason of: i. ii. iii . negligence intentional disregard of rules and regulations fraud on the part of the taxpayer In case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, and subject to the penalties prescribed under applicable provisions of this Code: If the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualifed to report the gain by installments, the tax due from each installment payment shall be paid within thirty (30) days from the receipt of such payments. No registration of any document transferring real property shall be efected by the Register of Deeds (2 ) Liability for payment D is c h a r ge o f l i a b i l i t i e s If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability, the Commissioner as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax shall notify the executor or administrator of the amount of the tax. The executor or administrator, upon D is t r i bu t ion o f E s t a t e Upon payment, the administrator shall deliver the distributive share in the inheritance to any heir or beneficiary. The estate tax clearance issued by the Commissioner or the Revenue District Oficer having jurisdiction over the estate will serve as the authority to distribute the b. Estate Taxes (1 ) P a yme n t o f T a x : Time of Payment G E N E R A L R U L E : at t h e t i m e t h e r et ur n is f i l e d by th e executor, administrator or the heirs but before delivery of the distributive share in the inheritance to any heir or In case of installment payments, the clearance shall be released only with respect to the property the corresponding tax has been paid. E XCEP T ION: when the Commissioner finds that payment on due date would i m po se undu e h a rd s h i p upon any of the heirs, he may extend the time for payment of such tax: TAXATION LAW REVIEWER Page 106 of 165 D e f i n i t ion o f d e f ic i e n c y depositor s. The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax; or If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously (4 ) Duties of certain oficers and debtors Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is shown, and they shall immediately notify the Commissioner, Regional Director, Revenue District Oficer or Revenue Collection Oficer or Treasurer of the city or municipality where their ofices are located, of the nonpayment of the tax discovered by credito r, unless the certificati on of th e Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the (3 ) Payment before delivery by executor or administrator No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has (5 ) Restitution of tax upon satisfaction of outstanding obligations P a yme n t o f t ax a nt e c e d e n t t o t h e t r a n sf e r o f s h a r e s, If, after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the bond s o r r i g h t s There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the c. Donor’s Taxes Within thirty days (30) after the date the gift (donation) is made. A separate return will be filed for each gift (donation) made on the different dates If th e gif t (donatio n) involv es conjugal/community/property, each spouse will file separate returns corresponding to his/ her respective share in the conjugal/community property. This rule will also apply in the case of co- may, upon authorization by withdraw an amount not thousand pesos (P20,000) certification. the Commissioner, exceeding Twenty without d. VAT (Please see discussion under Tax Returns) For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the 4. Penaltie S u s p e n si o n o f b u si n e ss o p er a t io n s : In addition to other by any one of the joint depositors statement shall be under an d th suc h sai administrative and penal sanctions provided for in the Tax Code and implementing regulations, the TAXATION LAW REVIEWER Page 107 of 165 Internal Revenue or his duly authorized representative may order suspension or closure of a business companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium a period of not less than five (5) days following violations: for an y of th e i. ii. Failure to issue receipts and invoices Failure to file VAT return as required provisions of Sec. 114 of unde r th e iii. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter Failure of any person to register as required Each partner shall report as gross income his distributive share constructively received in the net income of the partnership. ( S ec. 26) iv. S ur c h a r g e , i n te r e st a n d o t h e r p e n al t i e s : The interest on Assignment of Income Doctrine – Ex: A is entitled to his salary of P10 Million but assigns it to B for unknown reasons. In this case, both A and B realized income. A constructively received income (because he was able to assign and thus has complete control/dominion over it) and B actually received it. The income is taxable in the unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title ====================== ================ TOPIC UNDER THE SYLLABUS: II. NATIONAL INTERNAL REVENUE CODE G. Tax remedies under the NIRC c. I nv e n t o ry me t h o d f o r i n c o m e d e t er m i n a t i o n i. ii. Basis: Revenue Memorandum Circular No. 43-74 The taxpayer’s net worth is determined both at the beginning and end of the taxable year. The increase or decrease in the net worth is adjusted by adding all non-deductible items and subtracting therefrom non- taxable receipts. The general theory is that the taxpayer’s money and other assets in excess of 1. CONCEPT OF ASSESSMENT iii. What Constitutes an Assessment? – An assessment contains not only a computation of tax liabilities but also a demand for payment within the prescriptive period. There is no form for an assessment. It can be written anywhere as long as it is signed by the BIR. Any notice sent to the iv. – Conditions of the Net Worth Method: 1. Inadequate records as prerequisite - The taxpayer’s books of account do not clearly reflect his income or he has no books, or if he has books, he refuses to produce them; Need for evidence of source of income - That there is evidence of possible source/ sources of income to account for the increases in the net worth or expenditures; A definite starting point or opening net worth - That there is a fixed starting point or opening net worth (date beginning with a taxable year or prior to it when his financial condition can be established with definiteness); Proper adjustments to conform with income tax laws - That the circumstances are such that the method does not reflect his income with accuracy and certainty and proper and just additions of personal expenses and non-deductible expenditures were made and a. R e q ui s it es f o r v a l i d a ss e ss me n t The law requires that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment 2. b . C on s t r u c t i v e me t h o d s o f i n c o me d e t er m i n a t i o n 3. Doctrine of Constructive Receipt – an income is constructively received when it is credited, or segregated in favor of a person. The person may withdraw the said account anytime without any substantial limitations or conditions upon which payment or 4. Examples: Cash and/or property dividends constructively received by an individual from a domestic from a j o i n t s t o c k c o m p a n y, i n s ur a n c e o r m u t u al f u n d e l i m i n a t i n g no n - t axa b le i t e ms. TAXATION LAW REVIEWER Page 108 of 165 d . Je o p ar d y ass e ss me n t regular basis from: (a ) A n y p e r s o n other than the person under A jeopardy assessment is a tax assessment made by an authorized Revenue Oficer without the benefit of complete or partial trial in light of the Revenue Oficer’s belief that assessment and collection of tax will be jeopardized by the delay caused by the taxpayer’s failure to 1) comply with audit and investigation requirements and investigation or Any o f ic e or o f ice r (b ) of the national/local governme nt, governme nt agenci es an d instrumentalities (Bangko Sentral, GOCCs) To Summon 3) (a ) The person liable for tax or required to file a return or Any oficer or employee of such person or (b ) (c e. Tax d e l i n qu e n cy a n d t a x d e f i c i e n c y 1. 2. The books of accounts Accounting records of entries relating to the business of the person liable for tax or any other person Delinquency means: Failure to 1. 2. 3. tax due on any return required to be fled, or tax due for which no return is required, or A deficiency tax, or any surcharge or interest thereon on the due 4) To Produce such books, papers, records and other data and to give testimony To take the Testimony of the person concerned, under oath as may be relevant to the inquiry To cause revenue oficers and employees 5) 6) Deficiency means: - The amount by which the tax imposed exceeds the amount shown as tax by the taxpayer on his return. The amount shown on the return shall be increased by the amounts previously assessed as a deficiency, and decreased by the amount previously abated, credited, return or repaid. If no amount is shown as tax by the Nothing in Section 5 shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for under Sec. 6 (F) of the Code (authority to inquire into bank Power to make assessments, prescribe requirements for tax administration and enforcement (Sec. - 1) Examination of returns and determination of tax due - previously assessed assessment) as a (or collected without deficiency, but such (a ) After a r et ur n h as b ee n f i l e d the Commissioner or his representative may authorize i. Examination of any taxpayer; and ii. Assessment of the correct amount of tax; F ail ur e t o f i le a r et ur n shall not assessment shall first be decreased by the amounts previously abated, credited, return (b ) Commissioner from authorizing the examination of any taxpayer; 2. POWER OF COMMISSIONER TO MAKE ASSESSMENTS AND PRESCRIBE ADDITIONAL REQUIREMENTS FOR TAX Any tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or his representative. Any return, statement or declaration filed in any authorized ofice shall not be withdrawn; but within THREE YEARS from date of filing, the same may be modified, changed or amended; provided that no notice for audit or investigation of such return, has in the meantime, been actually served upon a. Power to obtain information, summon, examine and take testimony of persons (Sec. 5) For the Commissioner to ascertain: (a ) Correctness of any return or in making a return where none has been made Liability of any person for any internal revenue tax or in correcting such liability Tax compliance (b ) 2) (c ) (a ) If a person: The Commissioner is authorized: 1) To Examine any relevant Book, paper, record or other data 2) To Obtain any Information (costs, volume of production, receipts, sales, gross income, i. F ails t o f i le a required return or report at the time prescribed or Willfully or otherwise f i l e s a false o r ii. f r a u d u l e n t return, TAXATION LAW REVIEWER Page 109 of 165 (b) The Commissioner shall Make or Amend the return from: (b) Determine the fair market value of real properties located in each zone or area i. ii. His own knowledge or From such information as he can obtain through testimony or otherwise For tax purposes, the value of the property shall be whichever is higher of: iii. Which shall be prima facie suficient for all legal correct and (a ) Fair market value as determined by the Commissioner; or Fair market value as shown in the schedule of values of the provincial and (b ) 3) Inventory-taking, Surveillance, Presumptive Gross Sales (a ) The Commissioner may, at any time during the taxable year 6) Authority to Inquire into Bank Deposit – Notwithstanding R.A. 1405 (Bank Secrecy Law) the Commissioner is authorized to inquire into the Bank deposits of: v. Order the i nv e n t or y t aki n g of goods of any taxpayer; or May place the business person (natural/juridical) o r vi . operations of any under (a ) (b A d ece d e n t to determine his gross estate A taxpayer who has filed an application to c o m pro m i se payment of tax liability by reason of financial incapacity A t ax p a y e r s ub je c t o f a r e qu e st for the vii . If there is reason to believe that such person is not declaring his correct income, sales or receipts for tax purposes. The findings may be used as (c ) viii . tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of: Provided, That the information obtained from banks and financial institutions may be used by the BIR for (b ) Commissioner may prescribe a m i n i m u m am oun t of gross receipts, sales and taxable base (taking into account the sales and income of other persons engaged in similar i. When a person has fail e d t o i s s u e r ece i p t s as required by Sec. 113 (Invoice requirements for VAT-registered persons) and Sec. 237 (Issuance of Receipts or Commercial Invoices); The taxpayer’s application for compromise shall not be considered unless he w ai v e s in w r i t i n g under R.A. 1405 and other general or special laws. Such waiver shall authorize the Commissioner to inquire into his bank deposits. The Commissioner shall provide the tax information obtained from banks and financial institutions pursuant to a convention or agreement upon request of the foreign tax authority when such requesting foreign tax authority has provided information to demonstrate the relevance of the information under R.A. 10021. RMC No. 29-2010 publishes R.A. 10021 entitled “An Act to Allow the Exchange of ii. c orr ect ly r e f l e c t the declarations made or required to be made in a return, iii. Such minimum amount correct shall be prima facie 4) Terminate taxable period - Commissioner shall declare the tax period of a taxpayer terminated and send notice to the taxpayer of such decision with a request for immediate payment of the tax, when it has come to the knowledge of the (a ) That a taxpayer is R etiring from business subject to tax or Is Intending to leave the Philippines or (b ) (c ) (d To R emove his property therefrom or To H ide or conceal his property or Is performing any act (a ) Authority of the Commissioner of Internal Revenue to inquire into bank deposit accounts and related information held by financial institutions O bstru ct th e (b) Allowing a Foreign Tax Authority to examine Income Tax Returns of taxpayers in the Philippines (c) Authority of the Commissioner of Internal Revenue 5) Prescribe Real Property Values - The Commissioner is authorized to: (a) Divide the Philippines into different zones or areas and TAXATION LAW REVIEWER Page 110 of 165 (d) Penalties, for willful refusal to supply information (e) Obligation to maintain confidentiality of information received (f) Notice to taxpayers regarding respect for exchange a. Pre s cr i p tiv e p er i o d f o r a ss e s s me n t G E N E R AL R U L E – 3 years after the date the return is due or filed, whichever is later (Sec 203) Note: A return filed before the last day prescribed by law for fling shall be considered as filed on the last day. - False, fraudulent, and non-filing of 7) Authority to Register tax agents - (a ) The Commissioner shall Accredit and Register, individuals and general professional partnerships and their representatives who prepare and file tax returns and other papers or who appear before the BIR The Commissioner shall create national and regional accreditation EX C E PTI O N S : 1. Failure to file return: 10 years from date of discovery of the omission to file the return (Sec. 222 A) False or fraudulent return with intention to evade the tax: 10 years from the date of the discovery of the falsity or fraud (Sec 222A) a. Nothing in Sec 222A shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the (b ) 2. Those who are denied accreditation may appeal the same to the Sec. of Finance who shall rule on the appeal within 60 days from receipt of such appeal. Failure of the Sec. of Finance to rule on the appeal within the said period shall be deemed 8) Authority to Prescribe Additional Requirements – – intentional and substantial understatement of the tax liability by the taxpayer (substantial under declaration of income; >30% of that declared [Sec. 248]) intentional and substantial overstatement of deductions of exemptions (>30% of the actual The Commissioner may prescribe the manner of compliance with any documentary or procedural – submission or preparation of accompanying tax returns. financi al stateme nts c. 3. WHEN ASSESSMENT IS MADE due to mistake, carelessness or ignorance. Sections 203 and 222 of the NIRC provide for a statute of limitations on the assessment and collection of internal revenue taxes in order to safeguard the interest of the taxpayer against unreasonable investigation. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. As was held in Republic of the Phils. vs. Ablaza: “…The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about NOT E: 1. Agreement in writing to the extension of the period to assess between the CIR and the taxpayer before the expiration of the 3 year period. “Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period... The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its 178087, M a y 5, 2 0 10] 200 4] 2. Notice of the assessment must be released, mailed or sent to the taxpayer within the 3 year Rules on Prescription 1. When the tax law itself is silent on prescription, the tax is imprescriptible 2. When no return is required, tax is imprescriptible r e qu i r e d t h at t h e no t i c e b e r ece i v e d b y t h e t ax p a y e r w i t h in t h e pr e s c r i b e d p e r io d . But the sending of the notice must clearly be proven. B a s il an Es t a t e v. CI R , [ G . R . N o . L - 22492, S e pt e m b er 5, 1967] NOTE: Remedy of taxpayer is to fle a return TAXATION LAW REVIEWER Page 111 of 165 Amendment of Return Prima facie evidence of a false or fraudulent return as determined by the Commissioner pursuant to the rules and If the amended return is substantially different from the original return, the prescriptive period shall be counted from the filing of the amended return. 1. substantial under declaration of taxable sales, receipts or income – failure to report sales, receipts or income in an amount exceeding 30% of that declared per return substantial overstatement of deductions – C o ., [ L - 1 9727, M ay 2 0 , 196 5 ] b . Su s p e n s i o n o f r u n n i n g o f s t a tut e o f l i m i t a t i o n s 2. 1. when the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court, and for 60 days thereafter when the taxpayer requests for a reinvestigation which is granted by the CIR when the taxpayer cannot be located in the address given by him in the return, unless he informs the CIR of any change in his address when the warrant of distraint or levy is duly served and no property is located b . I n t ere s t 2. A) There shall be assessed and collected an Interest at 20% per annum on any unpaid amount of tax OR higher rate prescribed by rules and regulations from the date prescribed for payment until the amount is fully paid. 3. B) 4. C ) 5. a ) b) Deficiency Interest in the tax due Delinquency Interest – In case of failure to pay: 4. GENERAL PROVISIONS ON ADDITIONS TO THE TAX 4. tax due on any return required to be filed, or tax due for which no return is required, or A deficiency tax, or any surcharge or interest thereon on the due date appearing in the a. Ci v i l p e n a l ti es 5. 6. A) Penalty: 25% of the amount due, in addition to the tax required to be paid in case of the following: a) Failure to file any R eturn and pay the tax on the date prescribed; or Filing a return with an Internal D) Interest shall form part of the tax. b) other than those with whom the return is required to be filed, unless otherwise authorized by the Commissioner; or Failure to pay the D eficiency tax within the time prescribed for its payment in the notice of assessment; or Failure to pay on or before the date prescribed for its payment: 1. the full or part of the amount NOTE: Pursuant to Section 249 of the Tax Code, the imposition of interest on delinquency is ma n d a t or y . c) is but a just compensation to the state for the delay in the payment of the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's d) E) Interest on extended payment. a. any person who is qualifed and elects to pay the tax on installment but fails to pay the tax, or any installment, or any part on or before the date prescribed; or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, B) Penalty: 50% of the tax or of the deficiency tax, in case any payment has been made on the basis of a return before the discovery of the falsity or fraud. In case of: [ FiF a ] a) Willful neglect to F i le the return within the period prescribed; or b) F a lse or fraudulent return is willfully made, in case any payment has been b. c. TAXATION LAW REVIEWER Page 112 of 165 5. ASSESSMENT PROCESS d . N o ti ce o f i n f o r m a l c on fer e n ce (see above) a. Tax a u d i t e. I ss u a n ce o f pr e li m in a ry a ss e ss me n t n o ti ce (see abov e) b . N o ti ce o f i n f o r m a l c on fer e n ce – A written notice informing a taxpayer that the findings of the audit conducted on his accounting records indicate that additional taxes or deficiency assessment has to be paid. f. E x ce pt io n s t o i ss u a n ce o f p rel i m in a r y a ss e ss me n t no t i c e Instances where a pre-assessment notice NEED NOT be – given : – MET DC when the finding for deficiency tax is a result of Mathematical error in the computation of tax appearing on the face of the return; or Discrepancy is determined between the tax withheld and the amount actually remitted by the withholding agent a taxpayer who opted to claim a refund or tax credit was determined to have Carried over and applied the amount against succeeding tax liabilities Excise tax has not been paid an article locally purchased or tax assessment, this recommendation is communicated by the BIR to the taxpayer during an informal conference. The taxpayer shall have 15 days from the receipt of the notice of – – c. I ss u a n ce o f p rel i m i n ary a ss e ss me n t n o ti ce – Communication issued by the BIR informing a taxpayer who has been audited of the findings by the BIR. The assessment shall be in writing, and should inform the taxpayer of the law and the facts on which the assessment is made; otherwise, the assessment is void. There is a presumption of correctness and good faith on the part of the CIR, thus, the burden lies on the taxpayer. Otherwise, the finding of the CIR will be – – – g . R e p l y t o p re l i m i n a r y a ss e s s me n t n o ti ce – If the taxpayer disagrees with the PAN, he has 15 days to file a written reply to contest the proposed assessment. Su g ar M i l l i n g v. C A , [ G . R . N o . 12245 1 , O c t ob er h . I ss u a n ce o f f o r m al l e tt er o f dem a n d a n d a ss e ss me n t 12, 2000] no t i ce/f i n al a ss e ss me n t n o t i ce – A notice of assessment is a formal letter of demand where a declaration of deficiency taxes is issued to a taxpayer who fails to respond to a pre- assessment notice within the prescribed period of time, or whose reply to the PAN was found to be Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in i . D i s p u t ed a ss e ss me n t j. A d m i n i s t ra t iv e d e c i s i o n o n a di s p u t ed a ss e ss me n t From the provision [of RR 12-99] it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the "due process requirement in the issuance of a deficiency tax assessment," the absence of which renders nugatory any assessment made 6. PROTESTING ASSESSMENT a. Pr ot e s t o f a ss e ss m e n t b y t a x p a y er - Protested assessment A protest is a vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case of administrative remedies have been exhausted. It is also De cem b er 8, 2010] TAXATION LAW REVIEWER Page 113 of 165 oficial actuations of the CIR. This is equivalent to a pleading. 7. RENDITION OF DECISION BY COMMISSIONER a. De ni al o f p r ot e s t - When to file a protest File a request for reinvestigation or reconsideration within 30 da y s from receipt of the assessment - Commissioner’s actions equivalent to denial of protest If protest is denied, elevate the matter with the CIR within 30 days from receipt of the decision of the CIR’s duly authorized - Forms of protest a. request for reinvestigation – a plea for re- evaluation of an assessment on the basis of n ew ly d is c ov e r e d o r (a) Filing of criminal action against taxpayer Criminal action may be filed during the pendency of an administrative protest in the BIR It is not a requirement for the filing thereof that there be a precise computation and assessment of the tax, since what is involved in the criminal action is not the collection of tax but a criminal prosecution for the violation of the NIRC. Provided, however, that there is a prima facie showing of a willful attempt to evade taxes. An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the taxpay er intends to present in th e – reinvestigation. Involves a question of fact or law or both. request for reconsideration – a plea for re- evaluation of the assessment on the b. e v i d e n c e . Involves a question of fact or law or both. – b . S u b m i ss io n o f d o c u me n t s wi th i n 60 d a y s fr o m f i l i n g o f p r ot e s t Submission of documents within the 60 days period is optional to the taxpayer. The relevant supporting documents mentioned in the law refers to such documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted, otherwise the taxpayer would always be at the mercy of the BIR which may require production of such documents which – See also C I R v . Pa s c o r R ea l t y , [ G . R . N o . 1 2831 5 , J un e 29 , 1999 ] , which reached the same conclusion as in Ungab. 16, 2001] HOWEVER, in the case of CIR v . C A , CTA, & Fo r t un e After the company submitted its letter- reply stating that it would not comply with the presentation of the proof of DST payment, no reply was then heard from the CIR. The company has complied with the requisites in disputing an assessment, which provides that in case the protest is not acted upon within 180-days from the submission of the documents, the taxpayer adversely afected may appeal to the CTA within 30- days from the lapse of the 180- T ob a c co [ G . R . N o . 11 9 761, A u g u s t 29, 1 996 ) , the CIR held a contrary position b . I ss ui n g a warr a n t o f d i st ra in t a n d l e v y - Inaction by commissioner 8. REMEDIES OF TAXPAYER TO ACTION BY COMMISSIONER Appeal of Protest to the CTA (Judicial Relief) Grounds: a. In case of denial of protest b. In case of inaction by commissioner within 180 days from submission of documents Paw n s h o p C o m p a n y , I n c., [ G . R . N o . 17204 5 - 4 6, J un e 16, 2009] c. E ffect o f fa i lu re t o p r o t e s t Pe r iod t o app e al: Within 60 days from filing of protest, all relevant a. within 30 days from receipt of decision denying the protest or 30 days from the lapse of 180 day supporting documents should have been submitted, otherwise, the assessment shall become FINAL (cannot be appealed). b. TAXATION LAW REVIEWER Page 114 of 165 c. Effect of failure to appeal The decision shall be final, executory and demandable (NOTE: See the CTA case of Lascona which gives the taxpayer the option either to appeal to the CTA after 180 days or to await the decision of the CIR.) - serving a copy of the warrant upon the taxpayer AND upon the president, manager, treasurer or other responsible (c ) Debts and Credits 1. leaving a copy of the warrant with the person owing the debts or having in his possession such credits or his agent. the warrant shall be suficient authority to the B. COLLECTIO 2. 1. REQUISITE 2. PRESCRIPTIVE PERIODS (d ) Bank accounts (garnishment) 1. serve a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible oficer of the bank bank shall turn over to the Commissioner so much of the bank accounts as may be 1. Local taxes, fees or charges – five (5) years from the date they became due (sec. 194, LGC) 2. When there is fraud or intent to evade the payment of taxes, fees or charges – ten (10) years from discovery of fraud or intent to 2. Local taxes, fees or charges may be collected within five years from the date of assessment by administrative or judicial action. No such action shall be 3) Posting of Notice [ S ec. 2 09] (a ) Notice specifying the time and place of sale and the articles disdained. The posting shall be made in not less than 2 public places in the city or municipality where the distraint is made. (b ) 3. DISTRAINT OF PERSONAL PROPERTY INCLUDING GARNISHMENT (c ) a. Summary remedy of distraint of personal property - Procedure for distraint and 4) Sale of Property Distrained - Sale of property distrained and disposition of proceeds 1) Report on the distraint (Commencement of distraint proceedings) (a) by the distraining oficer – submitted within 10 days from receipt of the warrant to the Revenue District Oficer or Revenue Regional Officer. (b) by the Revenue Regional Director - a (a) Release of distrained property upon payment prior to sale - Purchase by the government at sale upon distraint - Report of sale to the BIR - Constructive distraint to protect the The order of distraint may be lifted by Commissioner or his representative th e – – There may be no actual delinquency. Taxpayer is prohibited from disposing of the property and must preserve the same 2) Service of warrant of distraint. respect to: Procedur es wit h (a) Goods, efects, property chattels and othe r person al 4. SUMMARY REMEDY ON REAL PROPERTY a. Advertisement and sale Advertisement of the time and place of sale, which shall contain: 1. a copy of an account of the propert y distrained, signed by the oficer, shall be left either with the owner or the person from whom the property was taken or at the dwelling or place of business a . b. c. The amount of tax and penalties due Name of the taxpayer Short description of the property to and with someone of suitable discretion together with a statement of demanded ag e an d 2. th e su m The advertisement shall be made within 20 days after the levy, and the same shall be for a period of at least 3. and also a note of the time and place of sale (b) Stocks and other Securities i. posting a notice at the main entrance of the TAXATION LAW REVIEWER Page 115 of 165 municipal building or the city hall and in public and conspicuous place in the barrio or district where the property is located ii. by publication once a week for 3 consecutive weeks in newspaper of general circulation in the municipality or city an accounting of the same shall rendered to the Chairman of the Commission on Audit. [ S ec. c. When property to be sold or destroyed – Forfeited property shall not be destroyed until at least 20 days from seizure. d. Disposition of funds recovered in legal proceedings or obtained from forfeiture b. Redemption of property sold Within 1 year from the date of sale, the property may be redeemed by the delinquent taxpayer or any one from him, upon the payment of the taxes, penalties and interest thereon from the date of delinquency to the date of sale together with interest on purchase price at The Revenue District Oficer or his duly authorized representative, other than the oficer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is made, specifying; the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice. One place The owner shall not be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its c. Final deed of purchaser If the property is not redeemed, a fnal deed of sale shall be issued to the purchaser. At the time and place fixed in such notice, the said revenue oficer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, 5. FORFEITURE TO THE GOVERNMENT FOR WANT OF BIDDER Forfeiture is the divestiture of property without compensation, in consequence of a default a. Remedy of enforcement of forfeitures - Action to contest forfeiture of chattel In case of the seizure of personal property under claim of forfeiture, the owner desiring to contest the validity of the forfeiture may, at any time before sale or destruction of the property, bring an action against the person seizing the property or In the case of stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities. Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure months, he may bring an action to recover proceeds realized at the sale. [S ec. th e ne t b. Resale of real estate taken for taxes The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days notice, sell and dispose of the same of public auction or with prior approval of the Secretary of Finance, dispose of the same at TAXATION LAW REVIEWER Page 116 of 165 6. FURTHER DISTRAINT OR LEVY with or without the consent of the Prosecutor Pe opl e v . M a gd a l u y o , [ G . R . The remedy of distraint and levy may be repeated if A p r i l 20, 1961] necessary until the full amount of the tax delinquency due including all expenses is collected from the taxpayer. [ S ec. 21 7] Otherwise, a clever taxpayer who is also able to conceal This is more so when the court has rendered a final judgment. As agen t of th e Governme nt, th e Commissioner is not authorized to accept anything less than what is adjudicated in favor of the government by virtue of such final judgment; the government has already acquired a vested rights. The BIR Commissioner may compromise the payment of tax liabilities on the basis of the doubtful validity of the assessment if the 7. TAX LIEN Tax Lien is a legal claim or charge on property, either real or personal, established by law as a security in default of the the property irrespective of ownership or transfer thereof Na t ur e : a lien in favor of the Government of the Philippines when a person liable to pay a tax neglects or refuses to do so upon demand Dur a t io n : lien exists from the time assessment is made by the Commissioner until paid, with interests, penalties and costs that may accrue in addition thereto E x t e n t : upon all property and rights to property belonging to the taxpayer 9. CIVIL AND CRIMINAL ACTION 1 . Must be brought in the name of the Government of the Philippines Conducted by legal oficers of the BIR In case of actions for recovery of taxes or enforcement of a fine, penalty or 2. 3. such lien is filed by the Commissioner in the Register of Deeds in the province/city where situated [ S ec. 219] the property is a. Suit to recover tax based on false or fraudulent returns Prima facie evidence of a false or fraudulent return as determined by the Commissioner pursuant NOT E: A tax lien is superior person. to judgment claim of private a) substantial under declaration of taxable sales, receipts or income – failure to report sales, receipts or income in an amount exceeding 30% of that declared per return substantial overstatement of deductions – claim of deductions in an amount Attaches not only from the time the warrant was served BUT from the time tax was due and demandable (from the time when the assessment was b) 8. COMPROMIS E a. Authority of the commissioner to compromise and abate taxes C. REFUND 1. GROUNDS AND REQUISITE FOR REFUND 1. Before the complaint is filed with the prosecutor’s ofice: the CIR has full discretion to compromise except those involving fraud After the complaint is filed with the prosecutor’s ofice but before the information is filed with the court: the CIR can still compromise provided the prosecutor must give consent a) taxpay er file s in writin g wit h th e Commissioner a claim for credit or refund for: Taxes erroneously or illegally received Penalties imposed without authority Any sum alleged to have been excessively or in any manner wrongfully collected Refund the value of internal revenue 2. 3 . TAXATION LAW REVIEWER Page 117 of 165 wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest Redeem or change unused stamps rendered unfit for use and refund their value upon proof of destruction, in the discretion of b) application must be filed within 2 yrs after the payment of the tax or penalty (no suit or proceeding shall begun after the expiration of the said 2 yrs regardless of any supervening cause that may arise after the payment) a) a return filed showing an 4. Statutory basis for tax refund under the tax code a. Scope of claims for refund Taxes erroneously or illegally received Penalties imposed without authority Any sum alleged to have been excessively or in any manner wrongfully collected Refund the value of internal revenue stamps when returned in good condition by the purchaser Redeem or change unused stamps rendered unfit for use and refund their 2. Requirements for refund as laid down by cases a. Necessity of written claim for refund b. Claim containing a categorical demand for reimbursement c. Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment 3. Legal basis of tax refunds Broadly speaking, tax refunds are based on the lega l principle of quasi-contracts or solutio indebiti. The pertinent rules are found in Arts. 2142 and 2154 of the Civil Code: Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. Art. 2154. If something is received when there b. Necessity of proof for claim or refund It partakes of the nature of an exemption and is strictly construed against the claimant. CIR v . Lt d ., [ 244 S C R A 33 2] . c. Burden of proof for claim of refund The burden of proof is on the taxpayer claiming the refund that he is entitled to the same CIR v. T o k y o Sh i p p i n g L td . , [ 244 S C R A 3 3 2] . Particular references in the NIRC: d. Nature of erroneously paid tax/illegally assessed collect ed Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at the Sec. 204 C. Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, e. Tax refund vis-à-vis tax credit Sec. 229. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any TAXATION LAW REVIEWER Page 118 of 165 TAX REFUND TAX CREDIT Tax refund takes place when there is actually a reimbursement of tax. The government issues a Tax Credit Certificate covering the amount determined to be reimbursable, which is applied after proper verification against any sum that may be due to the taxpayer. Tax Credit Certificate: a) may be applied Commencement of 2- year period f. Essential requisites for claim of refund a) a claim for refund or credit has been filed with the Commissioner the suit may be maintained whether or not such tax/penalty/sum has been paid under protest in any case, suit must be filed in court within 2 yrs. from date of payment of the tax/penalty regardless of any supervening cause that may arise after payment the Commissioner may, even b) c) d) 5. WHO MAY CLAIM/APPLY FOR TAX REFUND/TAX CREDIT a. Taxpayer/withholding agents of non- resident foreign 6. PRESCRIPTIVE PERIOD FOR RECOVERY OF TAX ERRONEOULSY OR ILLEGALLY TAXATION LAW REVIEWER Page 119 of 165 CAS E 2-YEAR PERIOD NOTE S If the tax sought to be refunded is illegally or erroneously collected From date tax was paid [ CIR v. V i c t o r i as M i l li n g ] If the tax is paid in installment or only in part From date of the last or fnal installment or CIR v. Prieto, [G.R. No. L- 13912, September There is no payment until the whole/entire tax liability is fully paid If the taxpayer merely made a deposit From conversion of the deposit to payment [U nio n G ar m e n t v. C oll ] Merely making a deposit is not equivalent to payment until the amount is actually applied to the purpose for which it was If tax has been withheld from source (through the withholding tax system) From date it falls due at the end of the taxable year Gibbs v. CIR, [G.R. No. L- A taxpayer who contributes to the withholding tax system performs and extinguishes his tax obligation for Corpora te taxpaye r At the earliest, on the date of the fling of the adjusted fnal return [ A C CPA v . It is only then that the corporation can ascertain whether it made profits or incurred If tax was not erroneously or illegally paid but the taxpayer became entitled to refund because of supervening circumstance s From the date the taxpayer becomes entitled to refund and not from the date of payment CIR v. Don Pedro Central Azucarera , [G.R. No. L- Before the right to refund or credit arises, there is absolutely no basis to fle a claim with the CIR or commence a suit in court revenue tax, EXCEPT withholding taxes b) original copy is surrendered to the revenue oficer c) no tax refund will be given resulting from availment of incentives The following must be established: a) that there was an actual collection and receipt of the government of the tax to be recovered and this requires actual proof; and b) that there is a legal basis for granting the refund or credit including the verification of compliance with the statutory requirements relative to the fling of the claims within the Forfeiture of cash refund/tax credit: a) Forfeiture of refund in favor of the government when a refund check or warrant remains unclaimed or uncashed within 5 yrs. from date of mailing or delivery b) Forfeiture of Tax Credit – a tax credit certificate which remains unutilized after 5 A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress [ S ec. Section 230 of the NIRC provides for a 2-yr prescriptive period to be counted "from the date of payment of tax" for actions for refund of corporate income tax. Thus, the 2-yr period should be reckoned from the actual filing of the Adjustment Return or Annual ITR, because Similarly, payment under protest is not necessary in refund for local taxes. [ S ec. 196 payment under protest is necessary is case of: (a) real property taxes [ S ec. N o . 1172 5 4, J a nu a r y 21, 1 999] (b) custom duties [ S ec 2308 TCC] If a Revenue Regulation provides for a prescriptive period different from the NIRC, then the regulation is invalid and 3. The Commissioner may, even without a written claim, refund or credit a tax, where on the face of the return upon which payment was made, payment appears to be erroneous. (Sec. 229) 112024, J a nu a ry 2 8 , 1999] Suspension of the 2 yr Prescriptive Period 1. there is a pending litigation between the 4 . 2. The Commissioner in that litigated case agreed to abide by the decision of the SC as to the collection 196 1] in case taxes are payable in installments, the two- year period is counted from the payment of the last 5. C oll e c t o r, [ May 2 8 , 1 9 58] O c t ob er 2 9 , 1966] 7. OTHER CONSIDERATION AFFECTING TAX REFUNDS 6. If a taxpayer had lost his right to dispute the validity of a tax assessment in view of his failure to appeal the Commissioner’s decision to CTA, may he be granted a 1. Sec. 112 (A) Zero-Rated or Efectively Zero-Rated Sales. - any VAT-registered person, whose sales are zero-rated or efectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or efectively zero- rated sale and also in taxable or exempt sale of goods of properties or services, NO. The expedient of an appeal from a denial of a tax request for cancellation of warrant of distraint and levy cannot be utilized for the purpose of testing the legality of an assessment, which had become conclusive and binding on the taxpayer, there being no appeal, the procedure set forth in Section 306 (now Sec. 204 C and 229) of the National Internal Revenue Code is not available to revive the right to contest the validity of an assessment once the same had been irretrievably C on ce p c i o n [ G . R . N o . L- 2 3912, March 1 5 , 1968] 2. Payment Under Protest is NOT Necessary under NIRC TAXATION LAW REVIEWER Page 120 of 165 2. Nature and Source of Taxing Power (CITE LAW) The 1987 Constitution provides III. LOCAL GOVERNMENT CODE OF 1991, as amended =========================== =========== TOPIC UNDER THE SYLLABUS: Article X Section 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, 1. Fundamental Principles The fundamental principles governing the exercise of the taxing and other revenue-raising powers of The grant of taxing power to local government units is also embodied in the LGC: (a ) Taxation shall be U niform in each local government unit; Taxes, fees, charges and other impositions shall Section 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges (b ) 1) be E quitable and based as far as practicable on the taxpayer's ability to pay; be levied and collected only for P ublic purposes; 2) 3) confiscatory; not be contrary to Law, public policy, national P o w e r t o Pre s cr i b e Pen a l ti es f o r Tax Vi ol a t i on s a n d 4) Li m it a t i on s T h er e o n economic policy, or in the restraint of trade; The collection of local taxes, fees, charges and other (c ) 1. The Sanggunian is authorized to pr e s c r i b e f n e s o r o t h e r p e n al t i e s for violations of tax ordinances person; The revenue collected shall Inure solely to the benefit a. in no case shall fines be less than P1,000 nor more than P5,000 nor shall the imprisonment be less than one month nor more than six months (d ) of the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, Each local government unit shall, as far as b. 2. Such fine or other penalty shall be imposed at the discretion of the court. The Sanggunian Barangay may prescribe a fine of not (e ) 3. Equality and uniformity in local taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate within the territorial jurisdiction of the taxing authority or local government unit and not necessarily in comparison with other units although belonging to the same political subdivision. In fine, uniformity is required P o w e r t o A d j u s t L o cal T a x R a t e ( S ec. 191 LG C) LGUs are authorized to adjust the tax rates as prescribed herein not oftener than once every 5 years, and in no case shall such adjustment exceed 10% of the rates Ma n i l a, G . R . N o . L -481 7 , May 2 6, 195 4 ] P o w e r t o Gr a n t L o c a l E x em p t io n s ( S ec. 192 LG C) A city can validly tax the sales to customers outside the city as long as the orders were booked and paid for in the company’s branch ofice in the city. A different interpretation would defeat the tax ordinance in question or encourage tax evasion by simply arranging for the delivery at the outskirts of the city. LGUs, may through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem Tax exemptions shall be conferred through the issuance of a non-transferable tax exemption certificate. Ja nu a r y 1 8 , 1978] TAXATION LAW REVIEWER Page 121 of 165 Na tu re o f th e T a x i n g P o w e r o f L o cal G ov e r n me n t Un it s Tax E x em p t i on s e xi st i n g b e f o r e th e E ffec t i vi t y o f th e L G C: (1987 Constitution Article X Section 5,LGC Sec. 129) . Unless otherwise provided by the LGC, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including GOCCs are hereby withdrawn upon 1. not inherent E v erett St e a m s h i p C o r p . v. M u n i c i p a l i t y o f M e d i n a [ G . R . N o . L- 2 1191, 3 0 Ap r i l 30, 1966] 2 . exercised only if delegated to them by law or Constitution Ma c tan C e b u Marc o s [ G . R . N o . 1 20082, S e pt ember 11, 1 9 96] 1. 2. local water districts, cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and educational institutions. 3. not absolute subject to limitations provided for by law Ma n i l a E l ec t r i c C o m p a n y v . P r o v in ce o f N o . 1313 5 9, M a y 5, 1995] 3. 3. Local Taxing Authority Tax E x em p t i on s n o t a p p li c a bl e t o R e g u l a t o r y Fe e s The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU. a) P o w e r t o C re a t e S o u rces o f R e v e n u e Each local government unit has the power to: Gu i d e l in es f o r th e G r a n t i n g o f Tax E x em p t i o n s , Tax 1. 2. create its own sources of revenue and levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. [ S ec. 12 9 ] I n ce n tiv es a n d Tax R e l i efs (Art. 282 [B], Rules and Regulations Implementing the LGC) 1. On the grant of tax exemptions or tax reliefs: Such taxes, fees, and charges shall accrue exclusively to the local government units. (NOTE: As distinguished from internal revenue taxes which do not accrue exclusively to the national government but are shared to the local governments in the form of internal revenue a. the same may be granted in cases of natural calamities, civil disturbance, general failure crops, or adverse economic conditions such substantial decrease in prices or agricultural agri-based products. The grant shall be through an of a s or b. c. Any exemption or relief granted to a type or kind of business shall apply to all business similarly situated. The same shall take efect only during the next calendar year for a period not exceeding 12 months as may be provided by the ordinance. 4. Residual Taxing Powers of the LGU (Sec. 186 LGC) LGUs have the power to levy taxes, fees or charges on any base or subject NOT: d. a . b. specifically enumerated in LGC taxed under the provisions of the NIRC, as amended other applicable laws e. c. 2. On the grant of tax incentives Condition s: a. The same shall be granted only to new investments in the locality and the ordinance shall prescribe the terms and conditions therefore. The grant shall be for a definite period of not exceeding 1 calendar year. The grant shall be by ordinance passed prior to the a. That the taxes, fees or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy. The ordinance levying such taxes, fees or charges shall not be enacted without any b. b. c. d. So u rces o f R e v e nu es 1. Internal Revenue Allotment (IRA) National internal revenue collected and not applied as hereinabove provided or otherwise specially disposed of by law shall TAXATION LAW REVIEWER Page 122 of 165 be available for the general purposes of the Government, with the exception of the amounts set apart by way of allotment as provided for under Republic Act No. 7160, otherwise known as the Local Government a . b. necessity of quorum submission for approval by the local chief executive the matter of veto and overriding the same the publication and afectivity c. d. 3. Public hearings are required before any local tax ordinance is enacted [ S ec. 18 7 , LG C ] National internal revenue collected and not applied as hereinabove provided or otherwise specially disposed of by law shall accrue to the National Treasury and shall be available for the general purposes of the Government, with the exception of the amounts set apart by way of allotment as provided for under 4. Within 10 days after their approval, publication in full for 3 consecutive days in a newspaper of general circulation. In absence of such newspaper in the province, city or municipality, then the ordinance may be posted in at least two Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows… (c) On the third year and thereafter, 40%... [ S e c. 4. S c o p e o f T a x i n g P o w e r 1. 2. Grant of tax power under existing law [ S ec. 129, LG C ] Power to prescribe penalties for tax violations and exemptions [ S ec. 516, L G C ] 3. 4. 5. Power to grant local tax exemptions [ S ec. 192, L G C ] 50% share in collections for the f: (2 nd par., Sec. 283, NIRC) Power to adjust local tax rates [ S ec. 191, LG C ] 2. Residual taxing powers of local governments [ S ec. 186, LG C] a. VAT on sale of goods or properties under Sec. 106, NIRC VAT on sale of services and use or lease of properties under Sec. 108, Li m it a t i on s o f th e R e s idu a l P o w e r b. 1. 2. 3. Constitutional limitations on taxing power Common limitations prescribed in Sec. 133 of LGC Fundamental principles governing the exercise of the taxing power of the LGUs prescribed under Sec. 130 of the LGC The ordinance levying such residual taxes shall not be enacted without any prior public hearing conducted for the purpose and The principle of preemption c. b ) Pr o ce d u re f o r a p p r o v al a n d effec ti v i t y o f t ax o r d in a n ces The power to impose a tax, fee or charge or to generate revenue is exercised by the Sa n g g un ian of the LGU 4. 5. 1. The procedure applicable to local gov’t ordinances in general should be observed. [ S ec. 187, 2. Procedural details [ S ec s . 54, 55, a n d 5 9 LG C ] : 5. Specific Taxing Power of Local Government Unit (LGU) A. PROVINCE TAXATION LAW REVIEWER Page 123 of 165 TYPE OF TAX RAT E EXCEPTIONS NOTE S Tax on Transfer of Real Property Ownership. The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real Not more than 50% of the 1% of the total consideration or of the fair market value, whichever is higher Sale, transfer or other disposition of real property pursuant to R.A. No. 6657 (CARL) It shall be the duty of the seller, donor, transferor or administrator to pay the tax imposed within 60 days from the date of the execution of the deed or from the date of the Tax on Business of Printing and Publication. The province may impose a tax on the business of persons engaged in the printing and/or publication of books, Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year. Newly started business, the tax shall not exceed 1/20 of 1% of the capital investment. School texts or Provided, A fter pa y me n t he/she TAX LAW REVIEWER Page 124 of 162 certifcates, receipts, pamphlets, and others of similar nature. shall be exempt from the tax. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, within its territorial Newly started business, the tax shall not exceed 1/20 of 1% of the capital investment. Tax on Sand, Gravel and Other Quarry Resources. The province may levy and collect taxes on ordinary stones, sand, gravel, earth, and other quarry resources extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction. Not more than 10% of fair market value in the locality The permit to extract resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the Sangguniang Panlalawigan. Proceeds distributed as follows: Province - 30% Component City or Municipality where the quarry resources are Professional Tax. The province may levy an annual professional tax on each person engaged in the exercise or practice of his profession requiring government examination. To be paid on or before the 31 st day of January. Any person frst beginning to practice a profession after the month of January must, however, At such amount and reasonable classifcation as the Sangguniang Panlalawigan may determine but shall in no case exceed P300.00. Professionals exclusively employed in the government shall be exempt from the payment of this tax. To be paid to the province where he/she practices his/her profession or where he/she maintains principal office in case the practice is in several places sha l l be e n t i t l ed to p r a c t ic e hi s/ h er p r o fess io n i n a n y pa r t o f t h e Ph il s. w/ o u t be in g su b jec t ed to a n y o t h er Amusement Tax. The province may levy an amusement tax to be collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement Not more than 30% of the gross receipts from admission fees. The holding of operas, concerts, dramas, recitals, painting and art exhibitions, fower shows, musical programs, literary and oratorical presentations, except pop, rock, or similar concerts Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions for the payment of tax. In case of fraud or failure to pay, the Sangguniang Panlalawigan may impose surcharges, interest and penalties. The proceeds from the amusement tax shall be shared equally by the Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products. The province may levy an annual fxed tax for every truck or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery of distilled spirits, soft drinks, cigars and cigarettes, and other products as may be determined by the Amount not exceeding P500.00. B . C IT I E S NOTE S: The city may levy the taxes, fees, and charges which the province or municipality may impose. The tax rates that the city may levy may exceed the maximum rates allowed for the province or municipality by not more Rates of Tax within the Metropolitan Manila Area shall not exceed by 50% the maximum rates prescribed for a- The Sanggunian concerned may prescribe a schedule of graduated tax rates but in no case shall exceed the rates prescribed in the LGC. The tax is payable for every separate or distinct establishment or place where business is C. M U NICIPA L IT I SCOPE: Municipalities may levy taxes, fees and charges not otherwise levied by provinces. [ S ec. 142] A tax that bears a direct relation to the volume of sales or when there is a set ration on the volume of sales and the amount of tax, such may not be imposed by the local government since these amounts to percentage tax on I. Tax on Business The municipality may impose taxes on the following: a. On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature. On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature. On exporters, and on manufacturers, N o . L - 2481 3 , A p r i l 28, 1969] However, if the tax is based on past quarterly sales, these could be valid. [ MMIC v. b. II. Fees and Charges c . Municipalities may impose: a. The municipality may impose and collect such reasonable fees and charges on business and occupation except professional taxes reserved for provinces. [ S ec 14 7 ] LG C] Rice and corn; Wheat or cassava 1 . 2. flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; Cooking oil and b. Reasonable fees for the sealing and licensing of weights and measures. [ S ec 148] c. Fishery rentals, fees and charges, including the authority to grant fishery privileges within municipal waters, as well as issue licenses for the operation of fishing vessels of three 3 . 4. 5. Agricultural implements, equipment and harvest facilities, fertilizers, pesticides and farm inputs; Poultry feeds and other animal feeds; School supplies; and post - othe III. Payment of Business Taxes: 6. 7 . 8. a. It shall be payable for every separate or distinct establishment or place where the business subject to the tax is conducted and one line of business does not become exempt by being conducted with some other business for which such tax has been paid. The tax on a business must be paid by the person conducting the same. In cases where a person conducts or operates 2 or d. e . f. On retailers On contractors and other independent contractors On banks and other fnancial b. g. On peddlers engaged in the sale of any merchandise or article of commerce On any business, which the Sanggunian concerned may deem proper to tax. For businesses subject to the excise, value- added or percentage tax, the tax rate shall c. h. 1. If these are subject to the same rate of tax, the tax shall be computed on the combined total gross sales or receipts of the said 2 or more related businesses. If these are subject to different rates of tax, the gross sales or receipts of each 2. TAX LAW REVIEWER Page 125 of 165 separately reported for the purpose of computing the tax due from each business. Rule 5: Where there are 2 or more factories, project ofices, plants, or plantations located in different localities, the above mentioned 70% shall be prorated among the localities where the factories, project ofices, plants, and plantations are located in proportion to their respective volumes of production during the IV. Situs of Local Taxation a. Situs According to the Cases: Excise Tax – not dependent on the domicile of the taxpayer, but on the place in which the act is performed or the occupation is engaged in; not upon the location of the ofice, but the place where the NOTE: In case of manufacturers or producers which engage the services of an independent contractor to produce or manufacture some of their products, these rules shall apply except that the factory or plant and warehouse of the contractor utilized for the production and storage of the manufacturers’ products shall be considered as N ov e m b er 21, 198 4 ] Sales Tax – it is the place of the consummation of the sale, associated with the delivery of the things which are the subject matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place The city or municipality where the port of loading is located shall not levy and collect reasonable fees unless the exporter maintains in said city or municipality its principal ofice, a branch, sales ofice, or warehouse, factory, plant or plantation in which M u n i c i p a l i t y o f S i p o c ot , C a m a r in es S u r , [ 105 P h i l 12 6 3] b. Situs According to Section 150 of LGC D. BA R AN G A Y Rule 1: For purposes of collection of the taxes under Section 143 (tax on business), businesses maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the Scope of Taxing Powers: The barangays may levy the following taxes and charges, which shall exclusively accrue to them: [ T O B S ] (a ) T axes - On stores or retailers with fixed business establishments with gross sales of receipts of the preceding calendar year of P50,000.00 or less for cities and P30,000.00 or less, in the case of municipalities, rate = not exceeding 1% on gross sales or receipts. S ervice Fees or Charges for services rendered in connection with the regulations or the use of barangay- owned properties or service facilities such as palay, copra, or tobacco dryers. B arangay Clearance. - No city or municipality may issue any license or permit for any business or activity unless a Rule 2: In case there is no branch or sales outlet in the city or municipality where the sale is made, the sale shall be recorded in the principal ofice and the (b ) Rule 3: The following sales allocation for sales recorded in the principal ofice of businesses ofices, plants, and wit h factorie s, projec t (c ) 30% of all sales recorded in the principal ofice shall be taxable by the city or municipality where the principal ofice is located; and (d ) 70% of all sales recorded in the principal ofice shall be taxable by the city or municipality where the factory, project ofice, plant, or 1. On commercial breeding of fighting C ocks and cockpits; On places of R ecreation which charge admission fees; and 2. Rule 4: Where the plantation located at a place other than the place where the factory is located, the above mentioned On B illboards, signboards, neon signs, and outdoor ads. (Sec. 152) E . CO M M O N R EVE N U E - R AI S I NG P O WER S O F LGUS ( S ec s . 60% to the city or municipality where the factory is located; and 153-155) [ SPT ] a . b. S ervice Fees and Charges for services rendered P ubic Utility Charges for the operation of public utilities owned, operated and 40% to the city or municipality where the plantation is located. TAX LAW REVIEWER Page 126 of 165 jurisdiction. c. T oll Fees or Charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU concerned. Except: The dividends received by a corporation shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said 3) Those exempt from the community tax are: 1. oficers and enlisted men of the AFP and PNP on mission, post ofice personnel delivering mail, physically-handicapped, and disabled citizens who 1 . 2. Diplomatic and consular representatives; and Transient visitors when their stay does not exceed 3 months. 2. 3. 4) Place and time of Payment F . CO M M U NITY TAX Place of Payment - place of residence of the individual, or in the place where the principal ofice of the juridical entity is located. [ S ec. 160] Cities or municipalities may levy a community tax (Sec. 156) Time for Payment - accrues on the 1 st day of Jan. of each year which shall be paid not later than the last day of Feb. of each year 1) Individuals Liable to Community Tax –[I E R ] a. b. c. Inhabitant of the Philippines E ighteen years of age or over R egularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate Penalties for Delinquency. - An interest of 24% per annum from the due date until it is paid shall be added on the amount due. A community tax certificate may also be issued to any person or corporation not subject to the community tax upon payment of P1.00. Rate: P5.00 a n d an annual additional tax of P1.00 for every P1,000.00 of income regardless of whether from business, exercise of profession or from property which 5) Presentation of Community Tax Certificate on Certain Occasions: (Sec. 163, LGC) A. Individua In the case of husband and wife, the tax imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived 1. When an individual subject to the comm. tax acknowledges any document before a notary public; Takes the oath of ofice upon election or appointment to any position in the government service; Receives any license, certificate or permit from any public authority; Pays any tax or fee; Receives any money from any 2. 2) Juridical Personalities (Sec. 158) Corporations, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines are also liable to pay an annual 3. 4. 5. 6. 7. Rate: P500.00 a n d an annual additional tax, which shall not exceed P10,000.00 in accordance with the following schedule: The presentation of the CTC shall not be required in connection with the registration of a voter. a. For every P5,000.00 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax - P2.00; and b. For every P5,000.00 of gross receipts derived by it from its business in the Philippines B. Corporatio 1. receives any license, certificate or permit from any public authority; pays any tax or fee; receives any money from any public fund; or transacts other oficial 2. 3. 4. TAX LAW REVIEWER Page 127 of 165 6. Common Limitations on the Taxing Powers of LGUs and common revenue LGUs CANNOT LEVY: [ IDECTA_BEV_TRELEBI ] Cla ss i f i ca t i o n o f C o m m o n L i m it a t i on s 1. Taxes which are levied under the NIRC unless otherwise provided by the LGC (*a, b, c, h, I, j) Taxes, fees, etc. which are imposed under the TCC (*d) Taxes, fees and charges where the imposition of which contravenes existing gov’tal policies or which are violative of the fundamental principles of taxation (*e, f, g, k, m, n, s) Taxes, fees and charges imposed under (a ) Income tax, except on banks and other financi al institutio ns; (NOTE: Since income tax is already imposed by the National Government under NIRC, LGUs cannot impose the same even on banks and other fnancial institutions. The exception is referring to the percentage tax on banks’ 2. 3. 4. (b ) (c E state Tax, acquisitio ns inheritanc e, gifts, legacies and other otherwis mortis causa, except as The imposition of 5% tax on the gross receipts on rentals or lease of space in privately-owned public markets are not income tax, rather, these constitutes as valid license fees for the regulation of the business. (d ) C ustoms duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues, except wharfage on wharves constructed and maintained by the local government unit concerned; T axes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, Taxes, fees or charges on A gricultural and aquatic products when sold by marginal farmers or fshermen; Taxes on business enterprises certified to by the B oard of Investments as pioneer or non-pioneer for a period of 6 and 4 years, respectively from the date of registration; E xcise taxes on articles enumerated under N o . L - 3608 1 , A p r i l 24, 198 9 ] (e ) Pr in c i p l e o f Pr e e m p t i o n o r E x c l u s i o n Where the national government elects to tax a particular area, it impliedly withholds from the local government the delegated power to tax the same field. This doctrine principally rests on (f) (g ) Excluded impositions pursuant to the doctrine of preemption 1. Taxes which are levied under the NIRC, unless otherwise provided by LGC of 1991; Taxes, fees, etc. which are imposed under the TCC; Taxes, fees, etc. the imposition of which contravenes existing (h ) 2. 3. (i) similar transactions on otherwise provided; Taxes goods or services except as A province may not levy excise taxes on articles already taxed by the NIRC. The current Tax Code already imposes a tax on ALL quarry resources, regardless of origin, hence, the Province may no longer impose any additional amounts (j) receipt s of T ransportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in the Code; Taxes on premiums paid by way of R e insurance or retrocession; Taxes, fees or charges for the (k ) 126232, N ov e m b er 2 7 , 199 8 ] (l) 7. Collection of Business Taxes permits for the driving thereof, except tricycles; Taxes, fees, or other charges on Philippine products actually E xported, except as otherwise provided; Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. 6810 and R.A. 6938 Taxable Period – The tax period of all local taxes, fees and charges shall be the ca l e nd ar y ear , (m ) provided in the Code. (n ) Accrual of Tax – All local taxes, fees, and charges accrue on first day of January of each year, unless otherwise provided in the Code. (o ) Government, its agencies and Instrumentalities, local government units. an d Time of Payment – ALL local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be, unless otherwise provided in the TAX LAW REVIEWER Page 128 of 165 Surcharges and Penalties on Unpaid Taxes, Fees, or Charges – The Sanggunian may impose a surcharge not exceeding twenty five percent (25%) of the unpaid taxes, fees or charges not paid on time. They may impose interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges, until such amount is fully paid but in no case shall the total interest on the unpaid entitled to a tax credit. b) Protest of assessment (Sec. 195, LGC) 1. The Local Treasurer or his duly authorized representative shall issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, surcharges, interests and penalties. Within 60 days from the receipt of the notice of assessment, the taxpayer MAY file a WRITTEN PROTEST with the Local Treasurer contesting the assessment (otherwise the assessment shall become FINAL and EXECUTORY). The Local Treasurer shall decide the protest within 60 days from the time of fling of the written protest. a. IF the protest is found to be 2. Interest on other unpaid revenues – On any other source of revenue, LGUs are authorized to impose an interest of a maximum of 2% per month, maximum of 36 3. Collection of Revenues by the Local Treasurer – All local taxes, fees and charges shall be collected by the provincial, city, municipal or barangay treasurer, or their duly authorized deputies. i. The taxpayer has 30 days from the receipt of the denial of the protest or from the lapse of the sixty-day period prescribed herein within which to appeal with the court of competent jurisdiction (otherwise the assessment becomes The provincial, city or municipal treasurer may designate the barangay treasurer or his deputy to collect local taxes, fees or charges. In case a bond is required for the purpose, the provincial city or municipal government shall pay premiums thereon in 8. Taxpayer’s Remedies c) Claim for refund of tax credit for erroneously or illegally collected tax, free or charge a) Periods of assessment and collection of local taxes, fees or charges 1. A WRITTEN claim for refund or credit must be filed with the Local Treasurer for the recovery of any tax, fee, or charge erroneously or illegally collected. 2. The claim must be filed within 2 years I. Administrati 1. Before assessment Protest against a newly enacted ordinance – any question on constitutionality or legality of tax ordinance within 30 days from efectivity thereof to 187, LGC) Such appeal shall not have the effect of 9. Civil Remedies by the LGU for the Collection of Revenues suspending the efectivity of the ordinance and the accrual and payment of tax. a) Local government’s lien for delinquent taxes, fees or charges 2. After Assessment a. Protest – within 60 days from receipt of assessment (sec. 195, LGC). P a yme n t b). Civil Remedies, in general is no t n ece ss ary . i) B y administra tive action— through b. Payment and subsequent refund or tax credit – within 2 years from payment of tax to local treasurer (Sec. 196, LGC). It is to be noted that, unlike in internal revenue taxes, the supervening cause applies in local taxation because the period for the filing of the claims for refund or credit of distraint of personal property and by levy upon real property a . b. c. d. Distraint of personal property Levy of real property, procedure Further distraint or levy Exemption of personal property from distraint or levy Penalty on local treasurer for e . TAX LAW REVIEWER Page 129 of 165 issue and execute warrant of distraint or levy (ii) Levy of real property, procedure ii ) Judicial action NOTE: Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the LGU c) Procedure for administrative action (i) Distraint of personal property than 3 public and conspicuous place, including the office of the proceeds to the delinquency and expenses of sale and return of TAX LAW REVIEWER Page 130 of 165 If property is not disposed of within 120 days from date of distraint, the property shall be considered sold to the LGU concerned for the amount of the assessment made thereon by the Committee on Appraisal. The tax delinquency shall be cancelled to the extent of such amount. Disposition of the proceeds of the sale by application of such the balance to the If property redeemed, a certifcate of redemption will be issued. If not redeemed, a final deed of sale shall be issued to the purchase r. The local treasurer shall purchase the property on behalf of the LGU if: (a) there is no bidder for the real property Issuance of the certifcate of sale to the purchaser. The owner of the property has 1 year from date of sale to redeem. The sale shall be scheduled in not less than 20 days after notice to the owner or possessor of the property and the publication and posting the property shall be sold to the highest bidder. The local treasurer shall make a report of the proceedings within 5 days from the sale. Sale of levied property. Posting of notices of the sale of distrained properties in not less chief executive, in the territory of the LGU Accounting for distrained goods Advertisement of the sale of the property through sale or auction within 30 days after levy. The advertisement shall be efected by: (a) posting a notice in the main entrance of the municipal building or city hall and a conspicuous place in the barangay where the real property is located. (b) publication once a week for 3 consecutive weeks in a newspaper of general circulation in the province, city or municipality where the property is located. Seizure or confscation of personal property belonging to the person subject to tax or subject to lien in sufficient quantity to satisfy the liability Report on levy within 10 days from levy by the levying officer. Defcien cy Written notice of levy to the assessor, register of deeds of the province or city where the property is located and the delinquent taxpayer. Local treasurer shall prepare a duly authenticated certifcate showing the name of the taxpayer and amount of tax, fee and penalty due him. Local Government’s Lien – Local taxes, fees, charges and other revenues, constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by any appropriate administrative or judicial action. Levy of real property before, simultaneously or after distraint of personal property belonging to the delinquent taxpayer. Defcien cy (iii) Further distraint or levy speedy and adequate remedy. (iv) Exemption of personal property from distraint 2. Action for Declaratory Relief or levy Injunction – if irreparable damage would be caused to the taxpayer and no adequate remedy is available. The following property shall be exempt from distraint and the levy, attachment or execution thereof for delinquency in the payment of any local tax, fee or charge, including the related surcharge IV. Jurisdiction of Courts Over Local Taxation Cases 1. With the amendment brought by R.A. No. 9282, the Court of Tax Appeals now has appellate jurisdiction over local taxation cases decided by the RTC in the exercise of its appellate or (a) Tools and the implements necessarily used by the delinquent taxpayer in his trade or employment; (b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation; (c) His necessary clothing, and that of all his family; (d) Household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding Ten thousand pesos (P10,000.00); (e) Provisions, including crops, actually provided for individual or family use suficient for four (4) months; (f) The professional libraries of doctors, engineers, 2. Regular judicial courts are not prohibited from enjoining the collection of local taxes, subject to Rule NOTE: Unlike the NIRC, the Local Tax Code does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent may have allowed preliminary injunction where local taxes are involved. But it cannot negate the procedural rules and requirements under [ 198 9] =========================== =========== TOPIC UNDER THE SYLLABUS: III. LOCAL GOVERNMENT CODE OF 1991 B. Real Property Taxation ============================= ========= (v) Penalty on local treasurer for failure to issue and execute warrant of distraint or The Local Treasurer who: 1. Fails to issue or execute the warrant of distraint or levy after the expiration of the time prescribed, or 2. Who is found guilty of abusing the exercise thereof 1. 2. C URRENT and fair market value is the basis of appraisal U NIFORMITY in classifcation in each local government unit should be observed A CTUAL USE of the property should be the basis of classifcation Appraisal, assessment, levy and collection should N OT BE LET to any private person. 3. s h all be a u t o ma t i c ally d is m iss e d f ro m t h e s e rv i c e af t e r du e no t i c e a n d h e a r i n g without prejudice to criminal 4. prosecution under the Revised Penal Code and other applicable laws. [ S ec. 177, LG C] 5. d) Procedure for judicial action 2. Nature of Real Property Tax 1. Court action a. within 30 days after receipt of decision or lapse of 60 days of Secretary of Justice’s inaction LG C] within 30 days from receipt when protest of assessment is denied [ S ec. 195, LG C ] b. c. if no action is taken by the treasurer in refund cases and the two year period is about to lapse d. if remedies available does not provide plain, TAX LAW REVIEWER Page 131 of 165 Real Property Tax is a direct tax on ownership of lands and buildings or other improvements thereon payable regardless of whether the property is used or not, although the value may vary in accordance with such factor. Real Property Taxation covers the administration, appraisal, assessment, levy and collection of Real Property Tax, i.e. tax on land and building and other structures and improvements on it, including machineries. Improvement – valuable addition made to a property or amelioration in its condition amounting to more than a mere replacement of parts involving capital expenditures and labor. automatic dispensing machines which are not directly and exclusively used to meet the needs of a particular industry, business or activity shall not be considered within the definition of 3. Imposition of Real Property Tax Classification of Land for Purposes of Assessment - Sec 218(a) [CARMITS] a. Power to Levy Real Property Tax 1 . 2 . 3 . C ommerc ial A gricultu ral R esidenti al 6. T imberland 7. S pecial Characteristic of Real Property Tax [LIPAD] 1. 2. 3. D irect tax on the ownership of real property A d Valorem tax. The value is based on the tax base P roportion - the tax is calculated on the basis of a certain percentage of the value assessed Indivisible single obligation Special Classes of Real Property (Sec. 216) 4. 5. 1. 2. 3. 4. Hospita ls Cultural and scientific purposes owned and used by local water districts GOCCs rendering essential public services Local Tax Properties Liable for Real Property Tax According to the Local Government Code, Real Property liable for Real Prop tax are: b. Properties Exempt from Real Property Tax (Sec. 234) 1. 2. 3. 4. Land Buildings Machinery and Other improvements not otherwise exempted under said code [ S ec 232] 1. Owned by the REPUBLIC of the PHILS or its political subdivisions. E x ce pt : when beneficial use has been granted to a taxable person Charitable institutions, churches, parsonages, convents appurtenant thereto, mosques, non-profit or religious cemeteries, buildings and improvements actually directly and exclusively used for religious, charitable or educational purposes. Machinery and Equipment actually, directly, and exclusively used by local Water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power Real property owned by duly registered Cooperatives under R.A. 6938 Machinery & equipment for pollution 2. NOTE: Although the term real property has not been expressly defined in the LGC, early decisions of the Supreme Court in Mindanao Bus Co. v. City Assessor of Cagayan de Oro; Board of Assessment Appeals v. Meralco; Manila Electric Co. v. Board of Assessment Appeals, seem to 3. 4. Machinery – embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self- propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its 5. Exemptions previously granted, (not falling within the above enumeration) are withdrawn. Although powerless to grant RPT exemption, LGU in MM can exempt the 5% ad valorem tax on idle lands. LGUs (within and outside MM) may Proof of Tax Exemption: Every person by or for whom real property is declared who shall claim the exemption shall file with the provincial, city or municipal assessor within 30 days from date of declaration of real property suficient documentary evidence in support of such claim (i.e. corporate charters, title of ownership, articles of incorporation, Machinery which are of general purpose use including but not limited to ofice equipment, typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons), microcomputers, facsimile machines, telex machine, cash dispensers, furniture and fixtures, TAX LAW REVIEWER Page 132 of 165 4. A pp r a i s al a n d A ss e ss me n t o f R eal P r op e r t y T a x Under Sec. 238 of the LGC, idle lands may be exempt from tax by reason of force majeure, civil disturbance, natural calamity or any cause which physically or legally prevents the owner of the property or person having legal interest Actual Use of Property as Basis for Assessment (LGC Sec. 217) Real property shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it. 5. C o l l ec t i o n o f R e a l P r op e r t y T ax Unpaid realty taxes attach to the property and are chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the RPT on the subsequent owner which was neither the owner nor the beneficial user of the property during the designated periods would not only be St e p s i n th e A ss e ss me n t a n d C oll e c t i o n o f R PT 1. Declared by Owner or Administrator (Secs. 202-203, LGC) If newly acquired property – file with the assessor within 60 days from date of transfer a sworn statement containing FMV and description of property If improvement on real property – file w/in 60 days upon completion or occupation (whichever is earlier) a sworn statement of FMV and description of property Ma n i l a, [ G . R . N o . 9063 9 , Fe b r u ary 21, 1 9 90] Types of Real Property Tax 1. 2. Basic real property tax Special levies: a. Special Education Fund (SEF) – 1% additional real estate tax to finance the SEF [ S ec. within MM area only Additional Ad Valorem on the Lands – not exceeding 5% of the assessed value of the property 2. Declared by Provincial / City / Municipal Assessor (Sec. 204, LGC) b. This is done only when the person under Sec 202 c. For Public Works – on lands specially benefited by public works, projects or improvements funded by the LGU refuses or fails to make the Declaration within the prescribed time. No oath by the assessor is required. May be imposed even by municipalities outside MM provided: Special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith not apply to lands exempt from basic real property tax and the remainder of the land had been donated to NOTE (1): If filing for exemption under Sec. 206 of LGC, the person claiming exemptions must file with assessor suficient documentary evidence to support If the required evidence is not submitted within 30 days, the property will be listed as taxable. NOTE (2): If property is declared for the first time, Sec. 222 of LGC states that the property shall be assessed for back taxes for not mare than 10 years prior to the date of initial assessment. The taxes shall be computed on the basis of applicable schedule of What Are Considered as Idle Lands: (Sec. 237, LGC) 1. Agricultural lands – More than 1 hectare if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having Not Idle Lands: Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU. All declarations shall be kept and filed under a uniform classifcation system to be 1 . Agricultur al lands planted to permanent or perennial crops with at least 50 trees to a hectare Lands actually used for grazing 2. 2. Non-Agricultural Lands – More than 1,000 sq. m. in area if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. TAX LAW REVIEWER Page 133 of 165 STEP 2: LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS (Secs. 205, 207, LGC) STEP 1 - DECLARATION OF REAL PROPERTY PERIOD WITHIN WHICH TO COLLECT (LGC Sec 270): – within five (5) yrs from the date they become due within ten (10) yrs. from discovery of fraud, in – How to determine Fair Market Value: FO R L AND Period of prescription shall be SUSPENDED when: (LGC Sec 270) 1. Assessor of the province/city or municipality may summon the owners of the properties to be affected and may take depositions concerning the property, its ownership, 1. 2. local treasurer is legally prevented to collect tax the owner of prop requests for reinvestigation and writes a waiver before expiration of period to collect 2. Assessor prepares a schedule of FMV classes of properties Sanggunian enacts an ordinance for different 3. 3. 4. R eme d i es o f L G U s f o r th e Co ll e c t i o n o f R eal P r o p er t y Tax The schedule of FMV is published in a newspaper of general circulation in the province, city or municipality concerned or in the absence thereof, shall be posted in the provincial capitol city or A. Administrati A) Lien (Sec. 257, LGC) – superior to all liens, charges or encumbrances and is enforceable by administrative or judicial action. It is extinguished only upon payment of tax and FO R MA C HIN E R Y 1. For brand new machinery: acquisition cost 2. In all other cases: FMV is equivalent to FMV = Remai n i n g ec o . l i f e X Replacement cost Estimated eco. life Proced ure 1. 2. 3. take the schedule of FMV Assessed value = FMV X Assessment level Tax = Assessed value X Tax W H EN : January 1 of every year (Sec 246) H O W a. basic real prop tax in 4 equal installments (Mar 31, Jun 30, Sep 30, Dec 31) b. special levy - governed by ordinance NOTE (1): Interest for late payment – two percent (2%) each month on unpaid amt. until the delinquent amt is paid. – provided in no case shall the total interest NOTE (2): Advance and prompt payment – advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC) prompt payment - discount not exceeding 10% – W HO CO L L E CTS The provincial, city, municipal or barangay treasur er TAX LAW REVIEWER Page 134 of 165 STEP 5: PAYMENT AND COLLECTION OF TAX STEP 4: DETERMINE ASSESSED VALUE (Sec 218) STEP 3: APPRAISAL AND VALUATION OF REAL PROPERTY (Secs. 212-214, LGC For machineries: 224-225) B) Levy (Sec. 258, LGC) B. Judicial Civil Action (Secs. 266, 270, LGC) – filed by the local treasurer within 5 or 10 years as provided in Sec. 270 of the 7. Taxpayer ’ s R e m e d i e s A. Administrati 1 . Prote st certifcate of sale (containing the name of the purchaser, The proceeds of the sale in excess of the delinquent tax, the interest due thereon and the expenses of the sale shall be remitted to the owner of real property or person having C. Distraint (Sec. 254, LGC) - with notice of delinquency posted and published. Personal property may be distrained to 6. C l a i m f o r Tax Refu n d o r C r e d i t ( S ec 253, LGC) a. The taxpayer may file a written claim for refund or credit with the provincial or city treasurer within 2 years from the date the taxpayer is entitled to such reduction or adjustment. Provincial or city treasurer should decide the claim within 60 days from receipt of the claim. b. c. TAX LAW REVIEWER Page 135 of 165 Appeal to SC (within 15 days from receipt of adverse decision of Appeal to CTA (within 30 days from receipt of adverse decision of CBAA) Appeal with the CBAA (within 30 days from receipt of adverse decision of LBAA) Purchase of property by local treasurer for want of bidder in case there is no bidder for the real property advertised or if the highest bid is insufficient to pay the RPT and other costs. Appeal with the LBAA (in case of denial or inaction of the treasurer after the lapse of 60 Apply for tax refund or tax credit Issuance of Final Deed to purchaser (upon the delinquent taxpayer’s failure to redeem) Denie d Approve d Redemption (within 1 year from date of sale) Treasurer decides (within 60 days from receipt of protest) Report of sale (within 30 days after sale). Preparation of description of the property, amount of delinquent tax and its interest, expenses. File written protest with local treasurer (within 30 days from payment of tax) Sal e Pay the tax under protest Advertise sale or auction (within 30 days after service of warrant) by posting and publication Issuance of warrant by the LGU treasurer (on or before or simultaneously with the institution of civil action for collection of delinquent tax) 2. Redemption of Real Property (Sec. 261, LGC) a. Within 1 year from the date of sale, the owner of the delinquent real property, or person having legal interest or his representative, shall have the right to redeem the property upon payment to – – – Amount of delinquent tax Interest thereon Expenses of sale from date of delinquency to date of the sale Interest of not more than 2% per month on the purchase price from date of sale to date of redemption – b. A certificate of redemption shall be issued, and the certificate of sale issued to the purchaser shall be invalidated. B. Judicial 1. Court Action – appeal of CBAA’s decision to CTA en banc; Suit assailing the validity of tax; Recovery of refund of taxes paid [ S ec. 2. 3. 4. Suit to declare invalidity of tax due to irregularity in assessment and collection; Suit assailing the validity of tax sale 5. a n d Se c . 267, LG C ] CO N DONAT I O N O F R E A L P R O P E R TY TA XE S 1. By Sanggunian – RPT may be condoned wholly or partially in a given LGU when: a . b. There is general failure of crops; There is substantial decrease in the price of agricultural or agri- based products; or There is calamity. c. 2. By the President of the Philippines - when public interest so requires TAX LAW REVIEWER Page 136 of 165 Jurisdiction of Collector of Customs over Importation of Articles IV. TARIFF AND CUSTOMS CODE OF 1978, as amended ======================== ============== TOPIC UNDER THE SYLLABUS: 1. Cause all articles for importation to be entered in the customhouse Cause all such articles to be appraised and classifed Assess and collect the duties, taxes and other charges thereon Hold possession of all imported articles until 2. 3. 4. 1. TARIFF: Custom duties, toll or tribute payable upon merchandise to government. Territorial Jurisdiction of the BOC 2. CUSTOMS DUTIES: Tax assessed from or exported to a upon merchandise countr y G arc i a v . 1. All the seas within the jurisdiction of the Phils. 2. All coasts, ports, airports, harbors, bays, rivers and inland waters whether navigable or not E x ec ut i v e Sec . , [ 211 S C R A 2 2 7, 1992] =========================== =========== TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 B. General Rule ============================= ========= All imported articles are subject to duty. Other Types of Fees Charged by the BOC: 1. 2. Arrastre charge Wharfage due- counterpart of license, charged not for the use of any wharf but for a special fund- Port Works Fund Berthing fee Harbor fee Tonnage 3. 4. 5. B U R E AU OF C U S T O M S Functio ns: ====================== ================ TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 C. Purpose for Imposition ====================== 1. Assessment and collection of the lawful revenues from imported articles and all other dues, fees, charges, fines and penalties accruing under the tariff and customs laws. Prevention and suppression of smuggling and other frauds upon the customs. Supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce. Enforcement of tariff and customs laws, rules and regulations relating to the tariff and customs administration. Supervision and control over the handling of foreign mails arriving in the Phils. For the purpose of the collection of the lawful duty on dutiable articles thus imported and prevention of smuggling through the medium of such mails Supervision and control all import and export cargoes, landed or stored in piers, airports, terminal 2. 3. Maka s i ar, [ 177 S C R A 2 7 ] 4. LIABILITY FOR CUSTOMS DUTIES 5. G E N E R AL R U L E : No exemptions from customs duties The provisions of general and special laws, including thos e granting franchises, to the contrar y notwithstanding, there shall be no exemptions whatsoever from the payment of customs duties [ S e c . 6. EX C E PTI O N S : 7 . 1. If provided under the TCC (e.g. conditionally-free importatio n) Exemptions granted to GOCCs with existing contracts, commitments, agreements or obligations with foreign countries 2. 3. TAX LAW REVIEWER Page 137 of 165 organizations pursuant to agreements and special laws 4. Exemptions granted by the President of the Phils. Upon recommendation of NEDA in the interest of national economic development. of the NEDA in the interest of national economy, general welfare and national security. Liability of Importer for Customs Duties A personal debt due from the importer which can be discharged only by payment in full of all duties 1. To increase, reduce or remove existing protective rates of import duty (including any necessary change in a lien upon imported articles which may be enforced while the existing rates may be increased or decreased to any level on one or several stages but in no case shall be higher than a maximum of 100% as valorem they are in custody or subject government [ S e c. 1204] to th e contr ol of th e Extend of Importer’s Liability 2. To establish import quota or to ban imports of any commodity, as may be necessary To impose an additional duty on all imports not exceeding 10% ad Limited to the value of the imported merchandise. In case of forfeiture of the seized materials, the maximum civil 3. 791 ] Limitation Imposed Regarding the Flexible Tariff Clause Imported Goods Must be Entered in the Customhouse 1. Conduct by the Tariff Commission of an investigation in a public hearing Imported goods must be entered in the customhouse at their port of entry otherwise they shall be considered as contraband and the importer shall be liable for smuggling [ S e c. 1201] a. The Commissioner shall also hear the views and recommendations of any government ofice, agency or instrumentality concerned The NEDA thereafter shall b. Port of entry means a domestic port open to both foreign and coastwise trade including “airport of entry”. 2. The power of the President to increase or decrease the rates of import duty within the abovementioned limits fixed in the Code shall include the modification in the form of duty. In such a case the corresponding ad valorem or specific equivalents of the duty with respect to the imports from the principal competing country for the most All articles when imported from any country into the Philippines shall be subject to duty upon each importation, even though previously exported from the Phils. except as otherwise specifically provided for in the 3. Preference on the Owner of Imported Articles for Customs Purposes All articles imported into the Philippines shall be held to be the property of: ====================== ================ TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 E. Requirements for Importation the person to whom the property is consigned the holder of the bill of lading duly endorsed by the consignee therein named the consignee if consigned to order by the consignor the underwriters of the abandoned articles saved from a wreck at sea, along the coast Application of the TCC TCC applies only after importation has begun but before importation is terminated =========================== =========== TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 D. Flexible Tariff ============================= ========= Importation Begins: when the conveying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unload NOTE: If there is intention to unload, even if cargo not yet unloaded, and there is TAX LAW REVIEWER Page 138 of 165 Sec. 28, ART VI of the 1987 Constitution and Sec. 401, TCC. The President may fix tarif rates, import and export quotas, etc. under TCC forfeiture may take place because importation has already begun. Goods prohibited from being Imported 1. Absolutely prohibited Importation Terminates: 1. Upon payment of the duties, taxes, and other charges due upon the articles, or secured to be paid at the port of entry and legal permit for withdrawal shall have been granted 2. In case the articles are free of duties, a . b . c. d. e. Weapons of war Immoral/obscene or insidious articles Articles for treason Prohibited drugs/narcotics Gambling paraphernalia/devices Those prohibited under Special Laws other charges until they have legally jurisdiction of customs [ S ec. lef t th e TC C ] R E QUI R E M E NT TO KE E P R E CO R DS 2. Qualifedly prohibited (Sec. 3514 TCC, as amended by R.A. 9135) Where such conditions as to warrants a lawful importation do not exist, the legal effects of the importation of qualifedly prohibited articles are the same as those absolutely prohibited All importers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner of Customs and for a period three (3) years from the date of importation, all the records of their importations and/or books of accounts, business and computer systems and all customs commercial data including payment S C R A 110] =========================== =========== TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 G. Goods Conditionally-free from Tariff and Customs Duties All brokers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner of Customs and for a period of three (3) years from the date of importation copies of the above mentioned records covering transactions that 1. 2. Those provided for in Sec. 105 of the TCC; Those granted to government agencies, GOCC with agreements with foreign countries; Those given to international institutions entitled to exemption by agreement or special law; and ====================== ================ TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 F. Importation in Violation of 3. 4. TAX LAW REVIEWER Page 139 of 165 Exempt articles under Sec. 105 TAX LAW REVIEWER Page 140 of 165 ARTIC CONDITIO Animals and plants For scientific, experimental, propagation, botanical, breeding, zoological and national defense purposes Aquatic products caught or gathered by vessels of Philippine registry Not have landed in foreign territory, or if landed, solely for Equipment used for the salvage of vessels or aircraft not available locally Bond= 1 ½ x of ascertained duties, taxes and charges Costs of repair made in foreign country of Phil vessels or aircraft Phil must not have adequate facilities to make repair Vessel was compelled by weather or casualty to go to a foreign port of repair Articles brought into the Philippines for repair, processing, or reconditioning to be re-exported upon completion of the repair, processing or reconditioning Bond = 1 ½ x of ascertained duties, taxes and charges Trophies, prizes (medals, badges, cups) Those received as honorary distinction Samples in such quantity and of such dimensions or constructions as to render them unsaleable or of no appreciable commercial value, models not adopted for practical use, and samples not for sale marked sample sale punishable by law for purpose of introducing new product imported by person duly registered and identified to be engaged in that trade Importations authorized by Sec of Finance Personal and household effects of returning Phil residents formally declared and listed before departure and identified under oath before the Collector of Customs when exported from the Phil by such returning residents upon their departure therefrom or during their stay abroad personal and household effects including wearing apparel, articles of personal adornment (except luxury items) toilet articles, instruments related to one’s profession and analogous personal or household effects, excluding vehicles, watercraft, aircraft and animals, purchased in foreign countries by residents of the Philippines which were necessary, appropriate and normally used for their comfort and convenience during their stay abroad, accompanying them on their return or arriving within a reasonable time which, barring unforeseen and fortuitous events, in no case shall exceed 60 days after the owner’s return, subject however to the following provisions: 1. That the personal and household effects shall neither be in commercial quantities nor intended for barter, sale or hire and that the total dutiable value of which shall not exceed P10,000 Wearing apparel, articles of personal adornment, toilet articles, portable tools and instruments, theatrical costumes and similar personal effects accompanying travelers or tourists in their baggage arriving within a reasonable time, before or after the owners, in use of and necessary and appropriate for the wear or use of such persons according to their profession or position Personal and household effects, vehicles of foreign Accompany them or arrive at a reasonable time TAX LAW REVIEWER Page 141 of 165 consultants and experts hired or rendering service to gov’t, including staf and families In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Professional instruments, tools of trade, wearing apparel, domestic animals, personal and household efects belonging to persons coming to settle in the Phil and OFW In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Change of residence is bona fide Privilege of free entry was never granted to them before or qualifes under LOI 105, 163, 210 Articles used exclusively for public entertainment; display in public expos; exhibition or competition for prizes; devices for projecting picture Must fle bond Exported within 6 months Not exhibited for profit Otherwise, confiscation +penalty Brought by foreign flm producers for making or recording motion pictures on location in Phil. Photographic and cinematographic flms, undeveloped, exposed outside Phil by resident Filipinos or Phil. Must fle a bond Exported within 6 months (unless extended by the Collector for another 6 months) Principal actors are Filipinos Afidavit by importer that the exposed flms are same Importations used by foreign embassies, legations, agencies of foreign gov’t Reciprocity: such foreign country must grant same privilege to Phil. Articles for personal or family use of members and attaches of foreign embassies, legations, consular oficers and other reps of foreign gov’t Such privileges must be accorded in a special agreement between Phil and the foreign country Privilege may be granted only upon specific Articles donated to or for account of relief organization Org not for profit For free distribution to the needy Containers, holders and similar receptacles Except those that are reusable for shipment or transportation of goods Supplies of vessel or aircraft For use or consumption of passengers on board Any surplus or excess shall be dutiable Articles and salvage after 2 years from filing protest Vessels must have been wrecked or abandoned in Phil Cofins or urns containing human remains, bones ashes. Personal and household effects of deceased except vehicles Not exceed P10,000 Economic, technical, vocational, scientific, philosophical, historical, and cultural books and publications Phil articles previously exported and returned without increasing value or improved condition. Foreign articles previously exported when returned after having been exported and loaned for use temporarily abroad solely for exhibition Foreign container used in packing Note that if a drawback or bounty was allowed to any Phil article under this subsection, upon re-importation article shall be subject to duty equal to the bounty or drawback Articles and supplies imported by and for use of scheduled airlines operating under congressional franchise Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations Machineries, equipments, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals, transpo and Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations TAX LAW REVIEWER Page 142 of 165 facilities imported by and used by new mines and old mines Aircrafts imported by agro industrial companies, spare parts and accessories Spare parts of vessels or aircrafts of foreign registry engaged in foreign trade Brought to Phil as replacement or for emergency repair Spare parts utilized to secure safety, Articles for easy identification exported from Phil for repair and subsequently reimported Cannot be repaired locally Cost of repair made on article shall pay 30% ad valorem Trailer chassis imported by shipping companies for handling containerized cargo Bond (1 ½ x) to cover 1 year Must be properly identified and registered with the LTO Subject to customs supervision fee Deposited in Customs zone when not in use Upon expiration of period (1 year or as extended by Personal and household effects (including one car) oficer or employee of DFA, attaché, staf assigned to Phil diplomatic mission abroad, personnel of Reparations Missions in Tokyo, AFP military personnel in SEATO, AFP military personnel accorded diplomatic rank on duty abroad = returning from regular assignment, reassignment, dies, resigns or retires Car must have been purchased or ordered before the mission or consulate received his order of recall The value of personal and household effects shall not exceed 30% of his total salary. as a condition of sale of the goods to the buyer; The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller; The cost of transport of the imported goods from the port of exportation to the port of entry in the Philippin es; Loading, unloading and handling charges =========================== =========== TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 H. Classification of Duties ============================= ========= 1. Ordinary/ Regular Duties - those which are imposed ordinarily as a 2. 3. 4. a. Ad Valorem - this is a duty based on the value of the imported article 5. Dutiable Importation Articles although previously All additions to the price actually paid or payable shall be made only on the basis of objective and exported from the Philippines, become dutiable from the entry of the vessel or aircraft into the Philippine jurisdiction until the payment of duties, taxes, and other charges and the issuance of the permit for the withdrawal of said No additions shall be made to the price actually paid or payable in determining the customs value except as provided in this Section: Provided, That Method One shall not be used in determining the dutiable value of imported Methods of Valuation/ Basis of Dutiable Value (Sec. 201 TCC, as amended by RA 9135) a) There are restrictions as to the disposition or use of the goods by the buyer other than restrictions (A) Method One. – Transaction Value. - The dutiable value of an imported article subject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods Are imposed or required by law or by Philippine authorities; Limit the geographical area in which the goods may be resold; or Do not substantially afect the value of 1. The following to the extent that they are incurred by the buyer but are not included in the price actually paid b) The sale or price is subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued; Part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions hereof; or The buyer and the seller are related to a. Commissions and brokerage buying commissions); Cost of containers; fee s (exce pt c) b. c. The cost of packing, materials; whether for labor or d. The value, apportioned as appropriate, of the following goods and services: d) componen ts, parts and similar items incorporated in the imported goods; tools; dies; moulds and similar items used in the production of imported goods; materials consumed in the They are oficers or directors of one another’s businesses; They are legally recognized partners in business; There exists an employer- employee relationship between them; Any person directly or indirectly owns, controls or holds five percent (5%) or more of the outstanding voting stock or shares of both seller and buyer; One of them directly or indirectly controls the other; Both of them are directly or indirectly controlled by a third person; Together they directly or indirectly good s; an d engineeri ng, developme nt, artwork, design work and plans and sketches undertaken elsewhere than in the Philippines and necessary for the production of imported goods, where such goods and services are supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods; The amount of royalties and e. TAX LAW REVIEWER Page 143 of 165 (5) cost of containers and packing, if their values are not included under (1). They are members of the same family, including those related by affinity or consanguinity up to the fourth civil degree. (E) Method Five. – Fallback Value. – determined by using other reasonable means and on the basis of data available in the Philippines. Persons who are associated in business with one another in that one is the sole agent, sole distributor or sole concessionaire, however described, of the other shall be deemed to be related for the purposes of this Act if they fall within any of the b. Specific - this is duty based on the dutiable weight of goods (either the gross weight, legal weight or the net (B) Method Two. – Transaction Value of Identical Goods. – Where the dutiable value cannot be determined under method one, the dutiable value shall be the transaction value of identical goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Identical goods" shall mean goods which are the same in all respects, including physical characteristics, quality and reputation. Minor differences in appearances shall not 2. Special Duties - those which are imposed and collected in addition to ordinary duties usually to protect local industries against foreign competition: SPECIAL DUTIES are: (C) Method Three. – Transaction Value of Similar Goods. – Where the dutiable value cannot be determined under the preceding method, the dutiable value shall be the transaction value of similar goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Similar goods" shall mean goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their If the dutiable value still cannot be determined through the successive application of the two immediately preceding methods, the dutiable value shall be determined under method four or, when the dutiable value still cannot be determined under that method, under method five, except that, at the request of the importer, the order of application of methods four and five shall be reversed: Provided, however, That if the Commissioner of Customs deems that he will experience real difficulties in determining the dutiable value using method five, the Commissioner of (D) Method Four. – Computed Value. –– the computed value which is the sum of: (1) cost or the value of materials and fabrication or other processing employed; (2) amount for profit and general expenses; (3) freight, insurance fees and other transportation expenses for the TAX LAW REVIEWER Page 144 of 165 NATURE AMOUNT / RATE IMPOSIN G AUTHORI DUMPIN G Imposed on foreign articles: a. Being imported into, sold or is likely to be sold in the Phils. b. At a price less than its normal value The importation or sale of which might injure an industry Difference between the actual price and the normal value of the article (extent of the underpricin g) Special Committee on Anti- dumping (Sec. of Finance- chairman; members: Sec. of DTI, Sec. of Agriculture/ Sec. of Labor) COUNTERVAIL ING Imposed upon foreign goods enjoying subsidy thus allowing them to sell at lower prices to the detriment of local products similarly situated Equivalent to the bounty, subsidy or subventio n Secretary of Finance MARKIN Imposed upon those not properly marked as to the place of origin of the 5% ad valorem of articles Commissioner of Customs DISCRIMINAT ORY Imposed upon goods coming from countries that discriminate against Philippine products President of the Philippines Na tu re a n d P u r p o s e o f S p ec i a l C u s to ms Du ti es ====================== ================ TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 J. Tax Remedies under the 1. These are additional import duties imposed on specific kinds of imported articles under certain conditions These are imposed for the protection of consumers and manufacturers as well as Phil. Products from undue competition posed by foreign made products. These cannot be imposed without 2. 3. 1. Governme I. Administrative/Extraj ====================== ================ TOPIC UNDER THE SYLLABUS: IV. TARIFF AND CUSTOMS CODE OF 1987 I. Drawback 1 . Tax Lien (Sec. 1508, TCC) Attaches on the goods, regardless of ownership, while still in the custody or control of the Gov’t. Availed of when the importation is neither prohibited nor 2 . Administrative Fines and Forfeitures Applied when the importation in unlawful; And it may be exercised even where the articles are not or no longer in Custom’s custody unless the importation is merely attempted in which case it may be effected only while the goods are still within the Custom’s jurisdiction or in the TC C ] Under Sec. 2530 (a) of the TCC, in order to warrant forfeiture, it is not necessary that the vessel or aircraft must itself carry the contraband. The complementary if collateral use of the Cessna plane for smuggling operations is suficient for it to be deemed to have C on d i t i o n s f o r G ra n t o f D ra w b ack 1. Imported material was actually used in the production of article to be exported. Refund or credit shall not exceed 100% of duties paid on the imported material No determination by NEDA of the requirement for certification on non-availability of locally produced or manufactured competitive substitutes for the imported material (no local substitute for the materials) Exportation must be made within 1 year after importation of material and claim for refund or credit must be made within 6 months from exportation When 2 or more result from the used of same imported material, apportionment shall be made. 3 . Reduction of customs duties/compromise: 2. - Subject to approval of Sec. of finance [ S ec s . 709, 2316 T CC] 3. 4 . Seizure, Search, Arrest [ S ec s . 2205, 221 0 , 2211 TC C ] II. Judicial 4. This remedy is normally availed of when the tax lien is lost by the release of the goods 5. 1. Civil action [ S ec. 1204 TC C ] 6. 2. Criminal action 7. 2. Taxpaye I. Administrati 1. Protest - Any importer or interested party dissatisfied with published value within 15 days from date of publication, or within 5 days from the date the importer is TAX LAW REVIEWER Page 145 of 165 IMP O R T E N T R Y: It is a declaration to the BOC showing particulars of the imported article that will enable the customs authorities to determine the correct duties. An importer is required to file an import entry. It must be accomplished at the moment the last cargo is disembarked from the vessel. D R A W B A C K: It is a device resorted to for enabling a commodity afected by taxes to be exported and sold in foreign markets upon the same terms as if it had not been taxed at all. U y C h i aco S on s v . C o l l ec t o r of Cus t o ms, [ 24 rendered erroneous or illegal by events occurring after the payment. Taxpayer - within 15 days from assessment. Payment under protest is necessary [ S ec s . These are cases which are solely with liability for customs duties, fees, and other charges. - Before filing a protest there must first be a payment under protest. 2 . Refu nd - A written claim for refund may be submitted by the importer in abatement cases on missing packages, deficiencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical When Customs Protest Applicable - The customs protest is required to be filed only in case the liability of the taxpayer for duties, taxes, fees and other charges is determined and the taxpayer - When Customs Protest NOT Required 3. Settlement of any seizure by payment of fine or redemption - When there is no dispute, but the claim for refund arises by reason of the happening of supervening events such as when the raw material imported is utilized in the production of finished - BUT this shall not be allowed in any case where importation is absolutely prohibited or the release would be contrary to law or when there is an actual and intentional fraud [ S ec. Requirements for Making a Protest 4. Appe al - 1. 2. Must be in writing Must point out the particular decision or ruling of the Collector of Customs to which to which exception is taken or objection made; Must state the grounds relied upon for relief; Must be limited to the subject matter of a single adjustme nt; Must be filed when the amount claimed Within 15 days to Commissioner after notification by collector of his decision [ S ec. II. Judicial 3. 4. 1 . Appe al - Within 30 days from receipt of decision of the Commissioner or Secretary of Finance to the 5. 1125, as ame n d ed b y Sec. 9 R . A. 9282] 6. - Since Sec. 11 of RA 1125, as amended by Sec. 9 RA 9282 empowers the tax court to issue injunctions, it would appear than an importer may appeal without first paying the duties, Procedure on Customs Protest Cases 1. The Collector acting within his jurisdiction shall cause the imported goods to be entered at the customhouse. The Collector shall assess, liquidate, and collect the duties thereon, or detain the said goods if the party liable does not pay the same. The party adversely afected may file a written protest on his foregoing liability with the Collector within 15 days after the liquidated amount (the payment under protest rule applies) Hearing within 15 days from receipt of the 2 . Action to question the legality of seizure 2. 3 . Abandonment (Sec. 1801 TCC) - - i. Expres sly implied ly failure to file an import entry within 30 days from the discharge of goods or 3. 4. ii. a m e nd e d b y R. A . 7 6 51] Two K i nd s o f Pr o ce e di n g s i n t h e B O C A. Customs Protest Cases TAX LAW REVIEWER Page 146 of 165 3. The procedure of passing goods through the customs house R od r i g u ez v. C A , 199 5] Evidence for Conviction in Smuggling Cases - Mere possession of the article in question UNLESS the defendant could explain that his possession is lawful to the - Payment of the tax due after apprehension is not a valid defense Rod r i gu ez v. S C R A 28 8 ] Things Subject to Confiscation in Smuggling Cases Anything that was used for smuggling is subject to confiscation, like the vessel, plane, B. Seizure and Forfeiture Cases o f C u s t o ms, [ 1983] These refer to matters involving smuggling. It is civil and administrative in nature and is directed against the res or imported articles and entails a determination of the legality of their importation. These actions are in rem. Thus, it is of no defense that the owner of the vessel sought to be forfeited had no actual knowledge that his property was used illegally. The absence or lack of actual knowledge of such use is a defense personal to the owner E x ce pt i on : Common carriers that are not privately chartered cannot be confiscated. Right of Customs Officers to Effect Seizure & Arrest [ 227 S C R A 317] May seize any vessel. Aircraft, cargo, article, animal or other movable property when the same is subject to forfeiture or liable for any time as imposed under tariff and customs laws, rules and regulations. May exercise such powers only in Smuggl ing A. An act of any person who shall: Fraudulently import any article contrary to law, or Assist in so doing, or Receive, conceal, buy, sell, facilitate or transport such article knowing its illegal Common Carriers – Forfeiture Common carriers are generally not subject to forfeiture although if the owner has knowledge of its use in smuggling and was a consenting party, it may also be forfeited. If a motor vehicle is hired to carry smuggled goods but it has no Certificate of Public Convenience (CPC), It is not a common carrier. It is thus subject to forfeiture and lack of personal knowledge of the owner or Export contrary to law [ S ec. 351 4 , TC C ] B. The Philippines is divided into various ports of entry - entry other than thru port of entry will be Properties Not Subject to Forfeiture in the Absence of Prima Facie Evidence – ALL articles imported into the Philippines whether subject to duty or not shall be customs house at a port of entere d throug h a The forfeiture of the vehicle, vessel or aircraft shall not be efected if it is established that the owner thereof or his agent in charge of the means of conveyance used as aforesaid has no knowledge of or participation in the unlawful ENTRY in Customs law means - 1. The documents filed at the Customs house 2. The submission and acceptance of the TAX LAW REVIEWER Page 147 of 165 Port of Entry: A domestic port open to both foreign and coastwise trade including “airport of entry”. [ S ec. 3514, TC C ] Contraband: Articles of prohibited importations or exportations. [ S ec. 351 4 , TC C ] IF DECISION IS ADVERSE TO THE IF DECISION IS ADVERSE TO THE GOVERNMENT Appeal with the Commissioner within 15 days from notice Automatic review by Commissioner Appeal with CTA division Automatic review by Sec. of Appeal with the CTA en banc If decision of Commissioner or Sec. is adverse to the protestant, he may appeal to the CTA and SC under the same Appeal by certiorari to the SC within 15 days from notice Persons Having Police Authority to Enforce the Tariff and Customs Laws and Effect Searches, Provided, however, that a prima facie presumption shall exist against the vessel, vehicle or aircraft under any of the following 1. Oficials of the BOC, district collectors, police oficers, agents, inspectors and guests of the BOC; Oficers of the Phil. Navy and other members of the AFP and national law enforcement agencies when authorized by the Comm. Of Customs; Oficials of the BIR on all cases falling within the regular performances of their duties, when the payment of internal taxes are involved 1. If the conveyance has been used for smuggling at least twice before; If the owner is not in the business for which the conveyance is generally used; and If the owner is financially not in the 2. 2. 3. 3. Doctrine of Hot Pursuit 4. Requisit es: 1. Over Vessels a. An act is done in Phil. Waters which constitute a violation of the tariff and custom laws. b. A pursuit of such vessel began within the jurisdictional waters which i. may continue beyond the maritime zone, and ii. The vessel may be Administrative and Judicial Procedures Relative to Customs Seizures and Forfeitures 1. Determination of probable cause and issuance of warrant. Actual seizure of the articles. Listing of description, appraisal and classifcation of seized property. Report of seizure to Comm. Of Customs and the Chairman, Comm. On Audit. Issuance by the Collector of warrant of detention. Notification to owner or 2. 3. 2. Over Imported Articles a. There is a violation of the tariff and customs laws. b. As a consequence, they may be pursued in the Phils. c. With jurisdiction over them at any place therein for the 4. 5. 6. 7. 8. Jurisdiction of RTC over seizure and forfeiture proceedings The RTC do not have jurisdiction over seizure and forfeiture proceedings conducted by the BOC and to interfere with these proceedings. The Collector of Customs has exclusive jurisdiction over all questions touching on the seizure and forfeiture of dutiable goods. No petitions for certiorari, prohibition or mandamus filed with the RTC will lie because these are in reality attempt to review the Commissioner’s actuations. Neither replevin fled with the RTC will issue. Rationale: Doctrine of Primary Jurisdiction. Even if a Customs seizure is illegal, exclusive R e q u i rem e nt s f o r C u s t o ms F o r fe itu re 1. The wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same persons of any invoice, letter or paper - all touching on the importation or exportation of merchandise; and Places Where Searches and Seizures May Be Conducted Goods in Customs Custody Beyond Reach of Attachment 1. 2. Enclosures dwelling house (there must be search warrant issued by a judge) vessels or aircrafts and persons or articles conveyed therein vehicles, beasts or persons persons arriving from foreign countries Goods in the customs custody pending payments of customs duties are beyond the reach of attachment. As long as the importation has not been terminated, the imported goods remain under the jurisdiction of the Bureau 3. 4. 5. TAX LAW REVIEWER Page 148 of 165 IF DECISION IS NOT FAVORABLE TO THE AGGRIEVED IF DECISION IS NOT FAVORABLE TO THE GOVERNME Appeal by aggrieved owner or importer Automatic review by Comm. Burden of Proof in Seizure or Forfeiture The reduction or non-imposition of customs duties on certain imported materials as a result of; claimant [ S ec. 25 3 5, TC C ] – – – – Damage incurred during voyage; Deficiency in contents package; Loss or destruction of articles after arrival; Death or injury of animals. Requirements for Manifest A manifest in coastwise trade for cargo and passengers transported from one place or port in the Phils. to another is required when one or both of such places is a port of entry. [ S ec. 906, TC C ] Fraudulent Practices Considered As Criminal Offences Against Customs Revenue Laws a foreign port. [ S ec. 1005, TC C ] 1. 2. Unlawful importation; Entry of imported or exported article by means of any false or fraudulent practices, invoice, declaration, afidavit or other documents; Entry of goods at less than their true weights or measures or upon a classifcation as to quality or value; Query: Is Manifest Required Only for Imported Goods? No. Articles subject to seizure do not have to be imported goods. Manifests are also required of articles found on vessels or aircrafts engaged 3. R o bl e s , [ 117 S C R A 780] 4. Unmanifested Cargo is Subject to Forfeiture Whether the act of smuggling is established or not under the principle of res ipsa loquitur. It is enough that the cargo is unmanifested and that there was no showing that payment of duties thereon had been made for it to be subject Settlement of Forfeiture Cases G e n eral R ul e: Settlement of cases by payment of fine or redemption of forfeited property is allowed. E x ce pt i o n s : 1. 2. The importation is absolutely prohibited or The surrender of the property to the person ofering to redeem would be contrary to law, or Where there is fraud [ S ec. 230 7 , TC C ] 3. Acquittal in Criminal Charge Not Res Judicata in Seizure or Forfeiture Proceedings Reaso ns: Criminal proceedings are actions in personam while seizure or forfeiture proceedings are actions in rem. Customs compromise does not At any time prior to the sale, the delinquent importer may settle his obligations with the Bureau of Customs in which case the aforementioned articles may be delivered upon payment of the corresponding duties and taxes and compliance TC C] Abatem ent TAX LAW REVIEWER Page 149 of 165 – Original jurisdiction over all criminal ofenses arising from violation of the NIRC and TCC and other laws administered by BIR and BOC where the principal amount of taxes and fees, exclusive of charges and penalties claimed, is P1,000,000 or more. Appellate jurisdiction over appeals from the judgments, resolutions or order of the RTC in their original jurisdiction in criminal ofenses arising from violation of NIRC and TCC and other laws administered by BIR and BOC where the principal amount is less than P1,000,000 or there is no specified amount. Over petitions for review of the decisions of the RTC in the exercise of V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax Appeals (CTA), as amended, and the Revised Rules of the Court of Tax Appeals – What is the new law governing the CTA? R.A. 9282, an act expanding the jurisdiction of the CTA, and elevating it to the level of the Court of What is the composition of the CTA and how may the CTA rule? – CTA shall consist of a Presiding Justice and five (5) Associate Justice They may rule as follows: 1. En banc 2. Sitting in 2 divisions, each division with 3 justices each ====================== ================ TOPIC UNDER THE SYLLABUS: V. JUDICIAL REMEDIES B. Judicial Procedures What is the quorum? The affirmative votes of 4 Justices for sessions En Banc and 2 Justices for sessions of a Division shall be necessary for the rendition of a decision or resolution When the required quorum cannot be constituted, the Presiding Justice shall designate any The CTA have jurisdiction over the following cases involving tax collection: – Original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is P1,000,000 or more. Appellate jurisdiction over appeals from the judgment, resolutions or orders of the RTC in tax collection cases originally decided by them within their respective jurisdiction. ======================= =============== TOPIC UNDER THE SYLLABUS: V. JUDICIAL REMEDIES A. Jurisdiction of the Court of Tax Appeals ========================= – – The CTA shall exercise exclusive appellate jurisdiction to review by appeal: 1. 2. 3. 4. 5. Decisions of CIR Inaction of CIR Decisions of RTC on local tax cases Decisions of Commissioner of Customs What is the Procedure? (Sec. 9, R.A. 9282) 1. Appeal within 30 days from receipt of decision or period of inaction of CIR, COC, Secretary of Finance, Secretary of Trade and Industry or appella te jurisdiction over RPT tax cases decided by LBAA) Decisions of DOF on customs cases elevated to him on automatic review due to adverse decision versus the government Decisions of DTI (on non-agricultural products) and Department of Agriculture (on agricultural products) involving 6. a . b. Generally, appeal will be to a Division Except: appeal by filing a petition for review to En Banc in case of decisions of CBAA or RTC in the exercise of its 7 . 2. In case the decision of the Division is adverse: a. File MR with same Division within 15 days from notice thereof In case resolution of Division on the MR or new trial is still adverse: Does the CTA have jurisdiction over criminal cases? 3. Yes, the CTA have jurisdiction over the following cases involving criminal ofenses: TAX LAW REVIEWER Page 150 of 165 4. In case the decision of the CTA En Banc is adverse, file a review on certiorari with the SC pursuant to Rule 45 of protested assessment. Thus, the taxpayer can file an appeal with the CTA. [ CIR v. I s a b e l a o Demand letter of the CIR - which states a warning that in the event the taxpayer fails to pay, collection will be enforced - constitutes the order appealable to Where can you appeal a decision of a local assessment board? (Sec. 9, R.A. 9282) To the Central Board of Assessment Appeals (CBAA) and not yet to the CTA. It is only after the CBAA has ruled that an appeal may be made to the CTA In which case, the appeal shall be by petition for review to the CTA En Banc o The BIR should always indicate to the taxpayer in clear and unequivocal language what constitutes final action on a disputed assessment. The object is to avoid repeated requests for reconsideration by the taxpayer, thereby delaying the finality of the assessment, and consequently, the collection of the taxes due. This would also prevent the taxpayer from groping in the dark, speculating as to which communication or action of the BIR may be the decision appealable to the CTA. Now, the BIR should make it clear to the taxpayer that he can appeal if not satisfied with the assessment. Since the power to make an What is the rule on suspension of collection? o Ge n e r al R u l e : no injunction to restrain collection of taxes E x c e p t io n : Under Section 9 of R.A. 9282, suspension is allowed when the following conditions concur: o – It is an appeal to the CTA from a decision of CIR, COC or the RTC, provincial, municipal treasurer, or the Secretary of Finance, Secretary of Trade and Industry or Secretary of Agriculture, as the case may be; and o – aforemention ed governme nt agenci es ma y wherein the taxpayer failed to appeal to the CTA within 30 days of receipt of the demand letter made by the Chief of the jeopardize the interest of the Government and/or taxpayer In case of suspension, what is the taxpayer required to do? In this case, the investigation was started and concluded by the same division. Sir asks, what if the CIR himself starts the investigation, and then delegates it to his deputy, do you appeal it to the CIR or The taxpayer will be required to either deposit the amount claimed or file a surety bond for not more than double the Ge n e r al ru l e : No injunction to restrain collection of taxes. E x c e p t io n : Suspension is allowed when the following conditions concur: The jurisdiction include not only decisions or rulings but i n a ct ion as well of the CIR. [ R CBC v C I R] 1. 2. There is an appeal to the CTA, and In the opinion of the court, the collection by the government agencies may jeopardize the interest of the Government and/or the taxpayer, and Taxpayer either to deposit the amount claimed or to file a surety bond for not more than the double the amount with o In case the CIR fails to act on the disputed assessment within the 180-day period from date of submission of documents, a 3. 1. File a petition for review with the CTA within 30 days after the expiration of the 2. Awai t th e final or decision of th e Doctrine discussion Commissio ner the disputed The jurisdiction of the CTA is to review by appeal assessments and appeal such final decision to the CTA within 30 days after receipt of a copy of such decision. However, these options are m u t u ally e x c l u sive , and resort to one decisions of the CIR on disputed assessments. When a taxpayer does not protest an assessment, and appeals the assessment itself to the CTA, his appeal is premature. [ CIR v. V i l l a] A final demand letter for payment of delinquent taxes may be considered a decision on a TAX LAW REVIEWER Page 151 of 165 After availing the first option, but filing it out of time, a taxpayer cannot successfully resort to the second option (awaiting the final decision of the CIR and appealing the same to the CTA, on the pretext that there is yet no final decision on the disputed assessment because of the CIR’s inaction). You can’t have your cake and eat it too. Remember that when a taxpayer protests an assessment, he is given 60 days to submit supporting documents. From the time he submits the documents, the 180-day period for the CIR to act on the protest starts. But what if the submitted the additional documents, since the 60-day period is given for the benefit of the taxpayer, and it is his choice whether or not to use the whole period or not. If he submits the a dd i t io n al documents af te r the 60-day period and there is no decision yet. The 180-day period will start from the time he submitted the first documents, since it is mandatory that the supporting documents have period to appeal to the CTA. The 30-day period to appeal to the CTA is still reckoned from the date the taxpayer is notified of the denial of the CIR. [ Fi s h w e a lt h Can n i n g C o rp v . Paw n s h o p . In that case, the CIR was contending that First Express did not submit the relevant documents. However, given that First Express submitted their documents along with their protest, the Court said that the BIR c a n no t d e ma n d w h at t y p e o f s u p por t i n g Compare this to asking for a reinvestigation and it being granted by the CIR. In that case, what is being tolled is the time for the CIR period to appeal to the CTA. But can the period to appeal to the CTA be extended? In Ci t y o f Ma n il a v. should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot Yes . [ 2009 ] , the Court stated that in appeals to the CTA, the Rules of Court are applicable. Since in the Rules of Court, Rule 42 allows e x t e n si on s to fle petitions for review to be filed with Court of Appeals, the same should be applicable in petitions for review with the CTA. Hence, the 30-day original period for filing a Petition for Review with the CTA may be g i v e n for t h e b e n e f i t o f t h e t a xpa y e r . He can take up the entire 60 days or not. The taxpayer has a choice of not utilizing the period, by immediately submitting the documents, efectively starting the 180-day period of the BIR to act much earlier. The legal implication of this is when the taxpayer appeals to the CTA because of the expiration of the 180-day period, the taxpayer m u st all e ge that the supporting documents were submitted along with the protest. If not, the CTA may dismiss the case because it was filed still within the 180-day period, and thus, prematurely fled. The question is, how does the taxpayer know if the documents are in fact, complete? What if the BIR asks him to submit additional documents to substantiate his claim? If he doesn’t submit any ========================= ============= TOPIC UNDER THE SYLLABUS: V. JUDICIAL REMEDIES C. Taxpayer’s Suit Impugning the Validity of Tax Measures =========================== Not every action filed by a taxpayer can qualify to challenge the legality of official acts done by the government. A Paw n s h o p , the BIR can’t demand for the specific documents. If he does submit more documents w i t h in the 60-day period, then the 180-day b e i n g qu e s t io n e d i nvo lve d is bur se me n t o f pub l i c f und s up o n t h e t h e or y t h at t h e e xp e nd i t ur e o f pub l i c f und s b y an o f ice r o f t h e s t a t e for t h e purpo se o f a d m i n is te r i n g an un c on s t i t u t io n al a c t c on s t i t ut e s a m i sa pp l ic a t ion o f s u c h TAX LAW REVIEWER Page 152 of 165 f und s, w h i c h may b e e n j o i n e d at t h e r e qu e st o f a t ax p a y e r . (2) Petitioner is directly afected by the alleged ultra vires act. A n t i - G raft L ea g u e v . S an J u an [ G . R . [ D e an J o s e C oy a v . PC C G G . R . N o . 9654 1 , A u gu s t 2 4 , 1993] 1, 1996] A taxpayer’s suit is properly brought only when there is an e x e r c i s e o f t h e s p e nd i n g o r t axi n g po we r C O NC E PT OF L O CUS STAN D I A ut o mo t i v e I n d u s t ry W o rkers A lli a n ce v . R o m u l o [ G . R . N o . Another requisite rooted in the very nature of judicial power is locus standi or standing to sue. Thus, generally, a party will be allowed to litigate only when he can demonstrate that: 157509. J a nu a r y 18, 2 005] 2. DISTINGUISHED FROM CITIZEN’S SUIT Taxpayers are allowed to sue, for example, where there is a c laim o f i l l e gal d is bur se m en t o f pub l i c f und s o r (1) he has personally sufered some actual or threatened injury because of the allegedly illegal conduct of the government; m e as ur e is assai le d as un c on s t i t u t io n al. Voters are allowed to question the validity of election laws because of their obvious interest in the validity of such laws. Concerned citizens can bring suits if t h e (2) the injury is fairly traceable to the challenged action; and r aise is o f " t r a n s ce nd e n t al i m por t a n ce " which must be (3) the injury is likely to be redressed by the remedy being sought O l iv er L o z a n o v . S p eak e r settled early. Legislators are allowed to sue to question the validity of any oficial action which they claim infringes their 187883, J un e 1 6 , 200 9 ] N o . 1189 1 0, N ov e m b er 16, 1 995 ] DOCT R INE T R AN S C E ND E TAL I MP O R TANCE Determinants whether a matter is of transcendental importance: Case law in most jurisdictions now allows both "citizen" and "taxpayer" standing in public actions. De N o . 1910 0 2, Mar c h 17, 2 010] (1) the character of the funds or other assets involved in the case; The distinction was frst laid down in B ea u c h a mp v . S i l k : The plaintiff in a taxpayer's suit is in a different category from the plaintiff in a citizen's suit. (2) the presence of a clear case of disregard of a constitutional or statutory prohibition by the public respondent agency or instrumentality of the government; and In the former, the plaintiff is afected by the expenditure of public funds, while in the latter, he is but the mere instrument of the (3) the lack of any other party with a more direct and specific interest in the questions being raised. As held by the N e w Y o rk Su p reme C ou r t i n Pe o p l e ex rel Ca s e v. C ol l in s : (CREBA v. ERC and Meralco, G.R. No. 174697, 8 July 2010; citing Senate of the Philippines vs. Ermita, G.R. No. 169777, April 20, 2006, 488 SCRA 1, 39-40; and Francisco v. Nagmamalasakit na mga Manggagawang Pilipino, Inc., G.R. No. 160261, November 10, 2003, 415 SCRA 44, 139, citing Kilosbayan v. Guingona, G.R. No. 113375, May In matter of mere public right, the people are the real parties…It is at least the right, if not the duty, of every citizen to interfere and see that a public ofence be properly pursued and punished, and that a public grievance With respect to taxpayer's suits, Terr v. J o r d an held that: R IP E N E S S The right of a citizen and a taxpayer to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be An aspect of the "case-or-controversy" requirement is the requisite of "ripeness." 3. REQUISITE In the United States, courts are centrally concerned with whether a case involves uncertain contingent future events that may not occur as anticipated, or indeed may not To constitute a taxpayer's suit, two requisites must be met, namely, that: (1) Public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed, and Another approach is the evaluation of the twofold aspect of ripeness: TAX LAW REVIEWER Page 153 of 165 (1) the ftness of the issues for judicial decision; and (2), the hardship to the parties entailed by withholding court consideration. In our jurisdiction, the issue of ripeness is generally treated in terms of a ct u al i n j ur y t o t h e p lai n t i f f. Hence, a ripe for adjudication when the act being challenged has had a direct adverse effect on the individual challenging it. 16, 2009] TAX LAW REVIEWER Page 154 of 165 TAX TAX ON INDI INDIVIDU DUALS **a nonresident alien engaged in trade or business is an individual who shall come to the Philippines & stay therein for an aggregate period of more than 180 days during any calendar year NOT ENGAGED IN TAX LAW REVIEWER Page 155 of 165 TYPE OF INCOME TAX RATE FOR RESIDENT CITIZE RATE FOR NON- RESIDENT CITIZEN TAX RATE FOR RESIDENT NON-RESIDENT ALIEN ENGAGED IN TRADE / BUSINE NON-RESIDENT ALIEN TRADE / Interest from any currency bank deposit & yield or any other monetary benefit from deposit substitutes & from trust funds & similar arrangements Royalties (except on books & other literary works & musical compositions) Prizes > 20% F i n al T ax 20% F i n al T ax 20% F i n al T ax 20% F i n al T ax 25% F i n al t a x Royalties on books & other literary works & musical compositions F i n al T ax of 10% F i n al T ax of 10% F i n al T ax of 10% F i n al T ax of 10% 25% F i n al t a x Prizes < P10,000 Schedular rate Schedular rate Schedular rate Schedular rate 25% F i n al t a x Winnings from PCSO & Lotto exempt exempt Exempt Exempt 25% F i n al t a x Interest Income received by an individual (except a nonresident individual) from a depositary bank under the expanded foreign currency deposit system 7.5% F i n al T ax exempt 7.5% F i n al T ax Exempt Exempt Interest income from long term deposit or investment in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts & other investments evidenced by certification in such form prescribed by the BSP E x e m p t from tax E x e m p t from tax E x e m p t from taxE x e m p t from tax 25% F i n al t a x Pre-termination of such certificate before the 5 th year (i.e. 4 years to less than 5 years) 5% F i n al t a x on the e n t i r e i n c o m e 5% F i n al t ax on the e n t i r e i n c o me 5% F i n al t ax on the e n t i r e i n c o me 5% F i n al t ax on the e n t i r e i n c o me N / A 3 years to less than 4 years 12% 12% 12% 12% N / A less than 3 years 20% 20% 20% 20% N / A Cash and/or Property Dividends from a domestic corp. or from a joint stock co., insurance or mutual fund companies & regional operating headquarters of multinational companies; Share of an individual in the distributable net income after tax of a partnership (except GPP); Share of an 10% F i n al T ax 10% F i n al T ax 10% F i n al T ax 20% F i n al T ax 25% F i n al t a x NOT ENGAGED IN TAX LAW REVIEWER Page 156 of 165 TYPE OF INCOME TAX RATE FOR RESIDENT CITIZE RATE FOR NON- RESIDENT CITIZEN TAX RATE FOR RESIDENT NON-RESIDENT ALIEN ENGAGED IN TRADE / BUSINE NON-RESIDENT ALIEN TRADE / of an assn., a joint account or a joint venture or consortium taxable as a corp. of w/c he is a member/co-venturer Capital gains from sale, barter, exchange or other disposition of shares of stock (of domestic corp.) not traded in the stock exchange For the frst 5% F i n al t ax on net capital gains realized during the 5% F i n al t ax on net capital gains realized during the taxable yr: 5% F i n al t ax on net capital gains realized during the taxable yr: 5% F i n al t ax on net capital gains realized during the taxable yr: 5% F i n al t ax on net capital gains realized during the taxable yr: On any amount in excess of P100,000 10% 10% 10% 10% 10% Capital gains from sale, exchange or other disposition of real property located in Philippines, classifed as capital assets, including pacto de retro sales & other forms of conditional sales 6% F i n al T ax on the gross selling price or current fair market value or zonal value whichever is 6% F i n al T ax on the gross selling price or current fair market value or zonal value whichever is h i g h e r 6% F i n al T ax on the gross selling price or current fair market value or zonal value whichever is h i g h e r 6% F i n al T ax on the gross selling price or current fair market value or zonal value whichever is h i g h e r 6% F i n al T ax on the gross selling price or current fair market value or zonal value whichever is h i g h e r CG from sale/disposition of principal residence by natural persons, the proceeds of which is fully utilized in acquiring/constructing a new principal residence w/in 18 mos. from date of sale, provided historical cost/adjusted basis of sold prop be carried to the new principal residence built/acquired Commissioner. Duly notified w/in 30 days from sale Tax exemption can only be availed once every 10 years If no full utilization of proceeds of sale, E x e m p t f ro m CG t ax E x e m p t f ro m CG t ax E x e m p t f ro m CG t ax E x e m p t f ro m CG t ax E x e m p t f ro m CG t ax TAX O N C OR P O R ATI O NS TAX LAW REVIEWER Page 157 of 165 TYPE OF INCOME DOMESTIC CORP RESIDENT FOREIGN CORP NON-RESIDENT FOREIGN Interest on currency bank deposits & yield or any other monetary benefit from deposit substitutes & from trust funds & similar arrangement Royalties (similar within the Philippines) 20% F i n al T ax 20% F i n al T ax 35%/30% I n c o m e T ax Interest income from a depositary bank under the e xpa nd e d fo r e i g n c urr e n c y d e po sit sy s te m (EFCDS) 7.5% F i n al T ax 7.5% F i n al T ax Exempt from tax CG from sale, barter, exchange or other disposition of shares of stock (of domestic corp.) not traded in the stock exchange For the frst P100,000 5% F i n al t ax on net capital gains realized during the taxable yr: 5% F i n al t ax on net capital gains realized during the taxable yr: 5% F i n al t ax on net cap.l gains realized during the taxable yr: On any amount in excess of P100,000 10% 10%10% Income derived by d ep o si t a r y b a n k under the EFCDS from foreign currency transactions with non-residents, ofshore banking unites in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with FCDS units & other depositary banks under the Exempt from Final tax – Part of gross income subject to 35%/30% corp. income tax (RA 9294) Exempt from Final tax – Part of gross income subject to 35%/30% corp. income tax (RA 9294) N/A Interest income from foreign currency loans granted by such depository banks under said EFCDS to RESIDENTS 10% F i n al T ax 10% F i n al T ax N/A Inter-corporate dividends (from a domestic corp.) E x e m p t from tax E x e m p t from tax 15% F i n al T ax * subject to the rule on tax credit for tax actually paid and tax deemed paid. Otherwise, subject to regular income tax CG from sale, exchange or other disposition of la n d s a nd / o r bu i l d i n g s which are not used in the business of a corp. & are treated as capital assets 6% F i n al t ax on gross selling price or FMV or zonal value, whichever is higher 35%/30% income tax 35%/30% income tax TAX LAW REVIEWER Page 158 of 165 TYPE OF CORPORATE TAXPAYER TAX RATE International Air Carrier G ro ss P h i l . Bi l l i n gs = amount of gross revenue derived from carriage of persons, excess baggage, cargo & mail originating from the Philippines in a continuous & uninterrupted flight, irrespective of the place of sale/issue & the place of payment of the ticket or passage document; Includes tickets revalidated, exchanges &/or indorsed to another int’l airline if the passenger boards a plane in a port/point in the Philippines. For a flight which originates from the Philippines but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the GPB International 2 ½% on Gross Phil Billings Ofshore Banking Units Final Tax of 10% on gross income from transactions with residents Branch P ro f it s r e m it t e d (connected with the conduct of its trade/business in the Philippines.) = based on the total profits applied/earmarked for remittance without any deduction for the tax component thereof (except the PEZA-registered) 15% on branch profits remittance Regional/Area Headquarters of Multinational Cos. = do not earn/derive income from the Philippines. & w/c act as supervisory, communication & coordinating center for their affiliates, subsidiaries or branches in the Asia -Pacific Region & other foreign markets Regional Operating Headquarters of Multinational Companies = engaged in any of the following services: a. General Administration & planning j. Technical support & maintenance b. Business planning & coordination k. Data processing & communication c. Sourcing & procurement of raw materials & components l. Business development d. Corporate fnance advisory services e. Marketing control & sales promotion f. Training & Exempt from tax 10% of taxable income ** Multinational company = a foreign frm/entity engaged in international trade with afiliates/subsidiaries/branch ofices in the Asia Pacific Region & other foreign markets. TAX LAW REVIEWER Page 159 of 165 TYPE OF INCOME TAX RATE FOR ALIEN INDIVIDUAL EMPLOYED BY Regional Or Area Headquarters & Regional Operating Headquarters of Ofshore Banking Units Petroleum Service Contractor & Subcontractor Gross Income = Salaries, Wages, Annuities, Compensation, Remuneration and Other Emoluments (i.e. honoraria & allowances) received from such cos. Provided, same tax treatment shall apply to Filipinos abroad employed & occupying same positions in these companies 15% of gross income 15% of gross income 15% of gross income Other income (that is income other than compensation from being employed by a RHQ/ROHQ, OBU or Petroleum Service Contractor & Subcontractor) Subject to regular graduated tax rate Subject to regular graduated tax rate Subject to regular graduated tax rate TYPE OF TAXPAYER TAX RATE Nonresident cinematographic film owner, lessor or distributor (NOTE: Even to individuals) 25% of gross income Nonresident owner or lessor of vessels chartered by the Phil. Nationals 4.5% of gross rentals, lease or charter fees Nonresident owner or lessor of aircraft, machineries & other equipment 7.5% of gross rentals or fees PROCEDURE TO PROTEST CUSTOM COLLECTORS ASSESSMENT 2303, TCC) days from promulgation or after TAX LAW REVIEWER Page 160 of 165 No appeal assessment final Appeal to SC w/in 15 days from notice (Rule 43, ROC) w/in 15 days from notice Commissioner of Customs fails to render decision w/in 30 days Protest Affirmed Protest Denied Automatic appeal to Sec. of Finance reports elevated w/in 5 lapse of 30 days if no decision If unfavorable, appeal to CTA w/in 30 days from receipt of decision (Sec. 7, RA 1125) Assessment final CTA decides w/in 30 days Assessment final Protest Affirmed Automatic appeal to Sec. of Finance Assessment final Protest Denied Files written protest with ruling of Collector (Sec. Within 15 days from receipt of assessment No protest considered unless amount due is paid Collector schedules hearing of protest w/in 15 days from receipt of protest Collector renders decision w/in 30 days from termination of hearing Protest Granted Protest Denied Automatic appeal to Customs Commissioner (Sec. 2313, TCC) Appeal to Customs Commissioner (Sec. 2313, TCC) Pays duties, taxes, etc. Goods released Taxpayer disagrees with assessment Taxpayer agrees with assessment Articles enter customs Articles appraised, classified and assessed R EME D I E S O F G O V E RN ME N T AN D T AX P A Y E R U ND E R N IRC, TCC a n d L GC TAX LAW REVIEWER Page 161 of 165 NIR C TC C LG C GOVERNMENT REMEDIES A. TO EFFECT TAX COLLECTION: 1. Compromise (Sec. 204) 2. Distraint (actual and constructive) (Sec. 205- 208) and Levy (Sec. 207-B) 3. Tax Lien (Sec. 219) 4. Civil Action (Sec. 220, 205-B) 5. Criminal Action (Sec. 220, 221, 205- B) 6. Forfeiture of Property (Sec. 224-225) 7. Suspension of Business Operations in Violation of VAT (Sec. 115) 8. Enforcement of Administrative Fine B. TO CANCEL TAX LIABILITY: 1. Abatement (Sec. 204-B) GOVERNMENT REMEDIES A. TO EFFECT TAX COLLECTION: 1. Tax Lien (Sec. 1204) 2. Administrative Fines and Forfeitures (Sec. 2530, 2531) 3. Reduction of customs duties/compromise – subject to approval of Sec. of Finance (Sec. 709, 2316) 4. Seizure, Search, Arrest (Sec. 2205, 2210, 2211) 5. Civil Action (Sec. 1204) 6. Criminal Action B. TO CANCEL TAX LIABILITY: 1. Abatement – reduction or non- imposition of customs duties on certain imported materials (Sec. 1701-1708) C. POWER/AUTHORITY TO ASSESS AND COLLECT ALL LAWFUL REVENUE FROM IMPORTED ARTICLES AND ALL OTHER DUTIES, FEES, CHARGES, FINES AND PENALTIES ACCRUING UNDER TCC IS WITH COMMISSIONER OF CUSTOMS. (Sec. 602) NOTE: Au t o matic Appe a l – if the collector renders decision adverse to the government, it will be automatically elevated to the Commissioner. If affirmed by the latter, decision shall be reviewed automatically by the Secretary of Finance. GOVERNMENT REMEDIES LOCAL TAX A. TO EFFECT TAX COLLECTION: 1. Tax Lien (Sec. 173) 2. Distraint and Levy (Sec. 174, 175) 3. Civil Action (Sec. 183) 4. Purchase of property by local government units for want of bidder (Sec. 181) Property distrained not disposed within 120 days from date of distraint – considered sold to the local government for the amount of assessment made and to that extent, the tax delinquency shall be cancelled. (Sec. 175) B. TO CANCEL TAX LIABILITY: - May grant tax exemptions but may not condone or remit taxes (Sec. 192) REAL PROPERTY TAX A. TO EFFECT TAX COLLECTION: 1. Tax Lien (Sec. 246, 251) 2. Distraint and Levy (Sec. 254) 3. Civil Action – formal demand not required (Sec. 266) 4. Purchase of property by local treasurer for want of bidder (Sec. 263) B. TO CANCEL TAX LIABILITY: Condonation or reduction of real property tax by the President when public interest requires or by the Sanggunian concerned in cases of general failure of crops, or PRESCRIPTIVE PERIOD OF ASSESSMENT AND COLLECTION 1. Power/Authority to assess tax: Commissioner of Internal Revenue a. 3 yrs – from fling of return or PRESCRIPTIVE PERIOD OF ASSESSMENT AND COLLECTION LOCAL TAX 1. Assessment: a. 5 yrs – from the day they become due TAX LAW REVIEWER Page 162 of 165 NIR C TC C LG C (Sec. 203) b. 10 yrs – when (1) no return is fled, (2) the return is false or fraudulent with intent to evade tax (from date of discovery) (Sec. 222) 2. Collection of tax: a. 5 yrs – from assessment or within the period for collection agreed upon in writing before expiration of the 5 yr. Period (Sec. 222) 3. Criminal Liability a. 5 yrs – from commission or discovery of violation, whichever of later (Sec. 281) GROUNDS FOR SUSPENSION OF THE RUNNING OF THE STATUTE OF LIMITATIONS: 1. When the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court, and for sixty (60) days thereafter; 2. When the taxpayer requests for a reconsideration which is granted by the CIR; 3. When the taxpayer cannot be located in the address given by him in the return, unless he informs the CIR of any change in his address; 4. When the warrant of distraint or levy is duly served and no property is located; 5. When the taxpayer is out of the Philippines. (Sec. 223) b. 10 yrs – in case of fraud or intent to evade payment of taxes from discovery of fraud or intent to evade payment (Sec. 194) 2. Collection a. 5 yrs – from day of assessment by administrative or judicial action (Sec. 194) Local government may appeal to courts from adverse decision of Sanggunian on purely legal issue. GROUNDS FOR SUSPENSION OF THE RUNNING OF THE PERIODS OF PRESCRIPTION: 1. When the treasurer is legally prevented from making the assessment or collection; 2. When the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and 3. When the taxpayer is out of the country or otherwise cannot be located. REAL PROPERTY TAX 1. Collection: a. 5 yrs – from the date they become due (Sec. 270) b. 10 yrs – in case of fraud or with intent to evade payment from the discovery of fraud or intent to evade payment GROUNDS FOR SUSPENSION OF THE RUNNING OF THE PERIODS OF PRESCRIPTION WITHIN TAX LAW REVIEWER Page 163 of 165 NIR C TC C LG C having legal interest therein is out of the country or otherwise cannot be located. TAXPAYER REMEDIES A. ADMINISTRATIVE: 1. Before Payment a. Protest – fling a petition for reconsideration or reinvestigation within 30 days from receipt of assessment (Sec. 228 ) b. Entering into a compromise (Sec. 204) 2. After Payment a. Filing a claim for refund or tax credit – within 2 years from date of payment regardless of any supervening cause (Sec. 229 ) Note the suspension of the 2-year period (Panay Electric Co. v. Collector; May 28, 1958) Note that payment under protest is n o t ne c ess a ry Note that the taxpayer is given the right of redemption within 1 year from the date of sale or forfeiture (Sec. 215) B. JUDICIAL: 1. Civil Action a. Appeal – within 30 days from receipt of decision on the protest or from the lapse of 180 days inaction of the Commissioner to the CTA TAXPAYER REMEDIES A. ADMINISTRATIVE: 1. Protest a. Any importer or interested party if dissatisfed with published value within 15 days from date of publication or within 5 days from the date the importer is entitled to refund if payment is rendered erroneous or illegal by events occurring after the payment b. Taxpayer – within 15 days from assessment. Payment under protest is necessary (Sec. 2308, 2210) 2. Refund a. A written claim for refund may be submitted by the importer in abatement cases on missing packages, defciencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical errors; and b. Drawback cases where the goods are re- exported. (Sec. 1701-1708) 3. Settlement of any seizure by payment of fine or redemption – BUT this shall not be allowed in any case where importation is absolutely prohibited, or the release would be contrary to law, or when there is an actual and intentional fraud (Sec. 2307) 4. Appeal – within 15 days to Commissioner after notifcation by collector of his decision (Sec. TAXPAYER REMEDIES LOCAL TAX A. ADMINISTRATIVE: 1. Before Payment a. Appeal – any question on constitutionality or legality of tax ordinance within 30 days from efectivity thereof to Secretary of Justice (Sec. 187) b. Declaratory relief whenever applicable 2. After assessment a. Protest – within 60 days from receipt of assessment (Sec. 195). Payment under protest not necessary. b. Payment and subsequent refund or tax credit – within 2 yrs from payment of tax to local treasurer (Sec. 196) c. Right of redemption – 1 yr from the date of forfeiture (Sec. 181) Real Property Tax 1. Protest – payment under protest is required. Filed within 30 days (From date of payment) to provincial, city or municipal treasurer 2. Refund or tax credit – within 2 years from the date the taxpayer is entitled thereto (Sec. 253) 3. Redemption of real property within 1 yr from date of sale (Sec. 261) 4. Appeal – within 60 days from assessment of provincial, city or municipal assessor to LBAA (Sec. 226) - Within 30 days from receipt of decision of LBAA TAX LAW REVIEWER Page 164 of 165 NIR C TC C LG C 3. Abandonment (Sec. 1801) protest of assessment is denied - If no action is taken by the treasurer in refund cases and the two year period is about to lapse (Sec. 195) - If remedies available do not provide plain, speedy and adequate remedy. 2. Action for declaratory relief 3. Injunction – if irreparable damage would be caused to the taxpayer and no adequate remedy is available. REAL PROPERTY TAX 1. Court Action – appeal of CBAA’s decision to CTA 2. Suit assailing validity of tax; recovery of refund of taxes paid (Sec. 64 PD 464)

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Taxation Law Bar Reviewer

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Page 1: Taxation Law Bar Reviewer

Pay the tax under protest

TAXATION LAWBAR

REVIEWER

FACULTY ADVISERS

ATTY. MICHAEL DANA MONTEROATTY. FRANCISCO GONZALES PIERRE MARTIN REYESSHERYL CHRISTINE

ACADEMICS HEADSUBJECT

A TEN EO CENTRA L BA R OPERA TIONS 20 12 A CADEMI CS

COM MITTE EAcademics Head: Pierre Martin Reyes;Understudy: Clariesse Jami

REVIEWCOMMITTEE

Head: Yla Gloria MarieParas;

Understudy: KenKoga;

TAXATION LAW COMMITTEE

Heads: Sheryl Christine Lagrosas; EllieChris Navarra

Understudies: Abigail Bernandino; Philip Marion Ortal;

TAXATIONLAW

I. GENERAL PRINCIPLES OF TAXATION.........................5

A. Definition and concept of Taxation...................5

B. Nature and Characteristics of Taxation..............5

D. Purpose ofTaxation...........................................6

E. Principles of Sound Tax System (FAT)................6

F. Theory and Basis of Taxation (JBL).....................7

G. Doctrines in Taxation.........................................7

1. Prospectivity of taxlaws................................. 7

2. Imprescriptibility............................................ 7

3. Double Taxation(DT)...................................... 7

4. Escape from Taxation..................................... 8

12. Exclude Non-resident Aliens Not Engaged inTrade or Business...............................................5413. Individual Taxpayers Exempt from Income Tax5416. Taxation

of Non-resident

ForeignCorporations............................................

...........5917

.18.19

Improperly Accumulated Earnings Tax ....60Exemption from Tax on Corporations ......61Taxation

of General

ProfessionalPartnership (GPP)

...............................................6121

.22

Taxation of Estates and Trusts.................62Withholding TaxB. Estate

Tax..........................................................68

C. Donor’s Tax.......................................................74

D. Value-Added Tax..............................................781. NATURE AND CHARACTERISTIC

..................... 782. IMPACT OF TAX

............................................. 78

a.b.c.

Must be for a public purpose........................14It should be uniform and equitable..............14within the jurisdiction of the taxing

authority ...14d. That it complies with therequirements of dueprocess ...............................................................14 e. That it does not

7. ZERO-RATED SALES

OF GOODS

ORPROPERTIES, AND EFFECTIVELY

ZERO RATEDSALES OF GOODS OR PROPERTIES..................... 808. TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO 12% VAT)....................................... 819. CHANGES IN OR CESSATION OF STATUS OF A VAT.................................................................... 8210. VAT ON IMPORTATION OF GOODS (Sec. 107)........................................................................... 8211. VAT ON SALE OF SERVICES AND USEOR LEASEOF PROPERTIES.................................................. 83

L. Tax as distinguished from other forms ofexactions ...................................................

............14M. Kinds of Taxes

.................................................15II. NATIONAL INTERNAL REVENUE CODE................... 17

A. Income Taxation...............................................17

1. Income Tax Systems.................................... 17

2. Features of the Philippine IncomeTax Law.. 17

3. Criteria in Imposing Philippine TaxLaw.........18

4. Types of Philippine Income Tax.................... 18

5. Taxable Period............................................. 18

18. SUBSTANTIATION REQUIREMENTS OF INPUTTAX CREDITS

TAXATION LAW REVIEWER

Page 3 of 165

19.

CLAIMS

FOR

REFUND/TAX

CREDIT

D. Flexible Tariff..................................................138

E. Requirements for Importation........................138

F. Importation in Violation ofTCC.......................139

G. Goods Conditionally-free fromTariff and

Customs Duties...................................................139

H. Classification of Duties...................................143

1. Ordinary/ RegularDuties............................. 143

2. Special Duties.............................................. 144

I. Drawback.........................................................145

J. Tax Remedies under the TCC...........................145

1. Government................................................ 145

2. Taxpayer...................................................... 145

CERTIFICATE OF INPUT TAX............................... 90

20. INVOICING REQUIREMENTS........................ 90

21. FILING OF RETURN AND PAYMENT............. 91

22. WITHHOLDING OF VAT................................ 91

E. PercentageTax..................................................95

F. Compliance Requirements................................98

G. Tax remedies under the NIRC.........................108

III. LOCAL GOVERNMENT CODE OF 1991,as amended............................................................................... 121

1. Fundamental Principles............................... 121

2. Nature and Source of Taxing Power(CITE LAW)

1213. Local Taxing Authority................................. 122

4. Residual Taxing Powers of the LGU(Sec. 186

LGC) ................................................................. 122

5. Specific Taxing Power of LocalGovernment

Unit(LGU)........................................................

1236. Common Limitations on the Taxing

Powers ofLGUs and common revenue

............................ 1287. Collection of BusinessTaxes........................ 128

8. Taxpayer’s Remedies................................... 129 a) Periods.................................................................... 133Rem e d i e s o f LGUs for t h e Co l l e c t ionProp er ty T ax............................................... 1346. Claim for Tax Refund or Credit (LGC Sec253) .............................................................1357. Taxpayer’s Remedies...............................135

IV. TARIFF AND CUSTOMS CODE OF 1978, as amended............................................................................... 137

TAXATION LAW REVIEWER

Page 4 of 165

I. GENERAL PRINCIPLES OF TAXATION======================================TOPICS UNDER THE SYLLABUS:I. GENERAL PRINCIPLESA. Definition and concept of TaxationB. Nature and Characteristics of TaxationC. Power of Taxation Compared with Other PowersD. Purpose of TaxationE. Principles of Sound Tax System (FAT) F. Theory and Basis of Taxation (JBL)

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESB. Nature and Characteristics of Taxation The power of taxation is inherent in

sovereignty as anincident or attribute thereof, being essential to the existence of independent government.The right to tax exists apart from Constitutions and without being expressly conferred by the people.It is legislative in character.

i. To LGUs in respect to matters of local concern tobe exercised by the LG bodies thereof L. Tax as

distinguishedexactionsM. Kinds of Taxes

from

other

forms

of

X , 1987 C onst it ut io n] ;ii. When allowed by the Constitution [ Sec. 28[2] , Ar t.V I, 1987 Co ns ti tut io n] ;iii. When the delegation relates merelyto adminimplementation that may call for somedegree of discretionary powers undera set of suficient standards

============================================================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESA. Definition and concept of Taxation

General , [ 91 P hi l. 359] , or implied from the policyand purpose of the Act Mace d a v. Macara ig , [ 197SCRA 771].

It is subject to constitutional andinherent limitations.It must be used for public purposes – Ithas been held that tax has been utilized forpublic purpose if the welfare of the nation orthe greater portion of its population has

Power inherent in every sovereign State toimpose acharge or burden upon persons, properties,or rights to raise revenues for the use andsupport of the government to enable it todischarge its appropriate functions.Power by which an Independent State,through its lawmaking body, raises andaccumulates revenue from its inhabitants topay the necessary expenses of the

[ 25 SCRA 82 7]; Phi l Gu arant y Co ., I nc. v.Comm iss ioner , [ 13 SCRA 7 75] . It is the strongest of all the inherent powers of thegovernment Siso n v. An cheta , [ 130 SCRA It is territorial in operation – The power to tax can onlybe exercised within the territorial jurisdiction of a taxing authority [ 51 Am

Process or act of imposing a charge by governmentalauthority on property, individuals or transactions to raise money for public

exists privity of relationship between the taxing Stateand the object of tax.It is an enforced charge and contribution. Generally pecuniary in

Dicti on ary]Taxation is merely a way of apportioning thecost of government among those who insome measure are privileged to enjoy itsbenefits and must bear its burdens. [ 71 AM

Taxation is described as a destructivepower whichinterferes with the personal and propertyrights of the people and takes from them aportion of their property for the support ofDe velo pmen t C or por atio n v.C A, [ 2004]

TAXATION LAW REVIEWER

Page 5 of 165

TAXATIONLAW

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESC. Power of Taxation Compared with Other Powers

DOMAIN

private propertywith just

to take privatepublic use

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLES D. Purpose of 1.

Revenue-raisingTaxation is the power by which thesovereign raises revenue to defray thenecessary expenses of government.It is to provide funds or property withwhich to promote the general welfare andprotection of the whole citizenry.It is raised to serve as a means to providepublic improvements designed for theenjoyment of the citizenry within the State’s

2.

Non-revenue/special orregulatoryTaxation is also used for regulatorypurposes; it is used to attain non-revenueobjectives and pursue policy decisions.

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESE. Principles of Sound Tax System (FAT)1. Fiscal Ad equ acy - the sources of tax revenue shouldcoincide with and approximate the

needs of thegovernment expenditures

TAXATION LAW REVIEWER

Page 6 of 165

TAX

POLICEPOWER (inthe form of

a

EMINENT

ConceptPower to

enforce contribution to raise government funds

Power to make and implement laws for the general welfare

Power to

take for

public use

ScopePlenary,

comprehensive and supreme

Broader in application General power to make and implement

Merely a

power

property for

ExercisingAuthorityGovernment

or political subdivisions

Governmentor political subdivisions

Maybe granted to public service companies or public utilitiesPurpo

seRaise revenue Exercise to promote public welfare through

The takingof property for public useAmount of Imposition

No limit Limited to the cost of regulation, issuance oflicense, or surveillance

No limit imposed, but the amount should be based on the market value of the Effec

Becomes part of publicfunds

Restraint onthe injurioususe ofproperty

Transfer of right to the property

PersonsApplies to all persons, property and excises that may be subject

Applies to all persons, property and excises that may be subject

Only particular property is comprehended

Superiority of ContractsContracts may be impaired unless (a) government is party to

Contracts may be impaired

TAX

POLICEPOWER

(in the formof a

EMINENTDOMAIN

granting exemption; or (b) involves franchise Benefits

ReceivedProtection and general benefits fromthe government

No direct or immediate benefit but only such as may arise from the maintenance of ahealthy economic

Market Valueof the property

Relationship to ConstitutionSubject to certain constitutional limitations

Relatively free from constitutional limitations

Subject to certain constitutional limitations

2. Ad min istra ti v e Fea sib ility - the tax system should be

Although the NIRC provides for thelimitation in theassessment and collection of taxes imposed,such prescriptive period will only beapplicable to those taxes that werereturnable. The prescriptive period shallstart from the time the taxpayer files

capable of being properly and eficiently administeredby the government and enforced with the least inconvenience to the taxpayer

3. Th eoretical Ju stic e - the tax system the average taxpayer and based upon the ability to pay Transp orta ti on C o.,

[ 1958] As to IAET, the court held that there is no time limit onthe right of the BIR Commissioner to assess this type of tax [ S ec. 25, NI R C ] .

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESF. Theory and Basis of Taxation (JBL)

The law on prescription being a remedial measureshould be interpreted liberally in order to protect the

1.2.

Ju risd iction o ver sub je ct & ob j ects

3.

Double Taxation (DT)B en efit s-Pro te ction Th eory (Symbiotic

relationship) –The basis of taxation is found in the reciprocal duties ofprotection and support between the state and its inhabitants. In return for this contribution, the taxpayer receives the general advantages and protection which the government afords the taxpayer and his

a. Direct Duplicate Taxation (Strict sense)– To constitute

double taxation in the objectionable or prohibited The same property must be taxed twice

when itshould be taxed once;Both taxes must be imposed:

3.proceeds upon the theory that the existence ofgovernment is a necessity; that it cannot continue without means to pay its

i. On the same property or subject matter;ii.iii.iv.v.

For the same purpose;By the same State Government or taxingauthority; Within the same jurisdiction ortaxing district; during the same period; andthey must be the same kind or character of tax

means it has the right to compel all citizensproperty within its limits to contribute.

and

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

b. Indirect Duplicate Taxation (Broadsense) – It means

indirect duplicate taxation. It extends to allcases in w/cthere are two or more pecuniary impositions.The Constitution does not prohibit the

1.

Prospectivity of tax laws

This principle provides that a tax billmust only beapplicable and operative afterbecoming a law.As a general rule, taxing authorities must beapplied prospectively, except by expressprovision of the law.Ex post facto is not applicable for taxpurposes. However when it comes to civilpenalties like fines and forfeiture (exceptinterest), tax laws may be applied

c. Constitutionality of DT – The SC heldthat there is no

constitutional prohibition against doubletaxation in the

therefore it is not a valid defense against thevalidity ofa tax measure Peps i Co la v. T an auan , [ 69

i.i.

There is no double taxation in the following cases:By taxing corporate income and stockholders’dividends from the same corporationTax imposed by the State and the localgovernment upon the same occupation, calling or activityReal estate tax and income tax

ii.Fernan dez , [ 99 Ph il. 934]; Co mmiss io ner v. Fi li pi nasCia de Seg ur os , [ 107 Ph il. 1055 ] .

iii.2.

Imprescriptibility

Unless otherwise provided by the tax law itself, taxes ingeneral are not cancelable

578]Taxes are imposed on taxpayer’s final product andthe storage of raw materials

iv.Securi ties C or po ratio n, [ 101 SC RA 231] .

TAXATION LAW REVIEWER

Page 7 of 165

production of the final product. Proc ter a n dGamb le P hil ip pi nes vs . Mu nic ipal it y of Ja na, [ 9 4

It connotes the integration of three factors:SCRA

894]End to be achieved, i.e., the payment ofless thanthat known by the taxpayer to belegally due, orthe non-payment of tax when it is shownthat a tax is due;Accompanying state of mind which isdescribed as being "evil," in "bad faith,""willful," or "deliberate and notaccidental"; and

d. Modes of eliminating DT(1) Provide for exemptions or allowance of

deduction or tax credit for foreign taxes(2) Enter into treaties with other states

[like the former Phil-Am Military BasesAgreements as to income tax]

(3) Application of the Principle of Reciprocity

March 26 , 1990 ]4. Escape from

Taxationa. Shifting of tax burden – The imposition of tax is

transferred from the statutory taxpayer to another without violating the law.(1)i.

Ways of shifting the tax burden (FBO)F or w a r d s h i ft i n g – the transfer of burden from theproducer to distributor until it finally reaches theultimate purchasers or consumersB a c k w a r d s h i ft i n g – the reverse of

5.

Exemption from taxationii.

e.g. the manufacturer has agreed to buy thesupplier’s product only if the price is reduced bythe amount of tax.

a.

Meaning – The grant of immunity toparticular personsor corporations or to persons or corporationsof a particular class from a tax whichpersons and corporations generally withinthe same state or taxing district are obligedto pay.i. It is an immunity or privilege; it is

freedom from a financial charge or burden

iii.more either forward or backward

(2)

i.ii.iii.

Taxes that can be shiftedVATPercentage taxExcise tax on excisable articlesAd valorem taxes that oil companies pay to BIR

b.

NatureExemption from taxes is personal in

nature andcovers only taxes for which the taxpayer-grantee is directly liable. In any case, itcannot be transferred or assigned by theperson to whom it is given without theconsent of the State.Tax exemptions are strictly construedagainst the taxpayer because suchprovisions are highly disfavored and mayalmost be said to be odious to the lawManila Electric Company v. Vera, [67SCRA351].Exemptions are not presumed, but when

upon removal of petroleum products fromrefinery

its

(3)i.

Meaning of impact and incidence of taxationIm p a c t o f T axa t ion – point on which originally imposed or the one on whom the tax isformally assessed.I n c i d e n c e o f T axa t ion – point on

ii.burden fnally rests or settlesdown.

Example: VAT is originally assessed against theseller who is required to pay the said burden is actuallybuyer.

shifted or passed on to the

b. Tax avoidance – also

called Tax Minimization; tax c

.Kinds (ICE)

saving device that is legally permissible (1

)E xpr ess (or affirmative) – when certainpersons,property or transactions are, by expressprovision, exempted from all or certaintaxes, either entirely or in part.

c. Tax evasion – connotes fraud throughthe use of

pretenses and forbidden devices to lessen or defeat

TAXATION LAW REVIEWER

Page 8 of 165

TAX EVASION TAX AVOIDANCEOther

NameTax Dodging Tax Minimization

Means Use illegal means Use legal meansPenalty Punishable by law Not punishable by

lawObject To entirely escapepayment of taxes

To merely minimizepayment of taxes

each other Repu bli c v. Mam bu lao L um ber Co., [ 6 SCR A

Examples of Statutory Tax Exemptions: 622]; C altex Ph ils . V . COA ,

[ 208 SCRA 726] .i. Inter-corporate dividends by a

domesticcorporation

from

another

domestic Not subject to set-of or compensation for the

followingreasons:

corporation [ Sec. 27 D [ 4], NIRC]ii.

iii.iv.

Section 105 of the Tariff andCustoms CodeSection 234 of the LocalGovernment CodeOther special laws such asOmnibus Investment Code of 1987,

i. Taxes are of distinct kind, essence and nature, andthese impositions cannot be classed in merely thesame category as ordinary obligations;The applicable laws and principles governing each are peculiar, not necessarily common, to each; and Public

ii.(2)

Imp lied (or by omission) – when a tax is levied oncertain classes of person, properties ortransactions without mentioning the other classes. Every tax statute makes exemptions since all those not mentioned are deemed exempted. The omission may either be accidental orintentional. C on t r a ct u al – those lawfully entered into by the government in contracts under existing laws. These exemptions must not be confused with the tax exemptions granted under

iii.

Mamb ula o L um ber C o., [ 6 SC R A 622] . A person cannot refuse to pay tax on the

basis that thegovernment owes him an amount equal toor greater than the tax being collected. Thecollection of a tax cannot await the resultsof a lawsuit against the government. P h i l ex

(3)

[ 1998]; Francia v. In terme dia te C ourt , [ 162 SC RA 753] An exception to the rule is where both theclaims of thegovernment and the taxpayer against eachother have already become due,demandable and fully liquidated. In thiscase, compensation takes place byoperation of law and both obligations are

d.

Rationale/grounds for exemptionA presumption that the

publicinterest will besubserved by the exemption allowed.

Grant ofexemption rests upon that such will benefitthe body of the people and not upon anyidea of lessening the burden of theindividual owners of property.Purpose is some public benefit or interest, which the law-making body considers suficient to ofset the monetary loss

443]

7.

Compromise

Compromises are generally allowed andenforceablewhen the subject matter thereof is notprohibited from being compromised and theperson entering such compromise is dulyauthorized to do so.The law allows the ff: persons to do

lessen the rigors of the internationalmultiple taxation.Equity is not a ground for tax

double

or

i. BIR Commissioner as expressly authorized by theNIRC subject to certain conditions [ S ec. e

.Revocation

ii. Collector of Customs with respect tocustoms dutieslimited to cases where the legitimateauthority is specifically granted such asin the remission of duties [ S ec. 709,

Tax exemption is generally revocable.The congressional power to

exemptionnecessarily carries with it the consequent

power torevoke thesame.In order to be irrevocable, the taxexemption must be founded on acontract or granted by the Constitution.Revocations are constitutional even thoughthe corporate do not have to perform a

iii. Customs Commissioner subject to the approval ofthe Secretary of Finance, in cases involving theimposition of fines, surcharges, and

8.

Tax Amnesty

a.

Meaning – It is the general or intentionaloverlookingby the State of its authority to imposepenalties on persons otherwise guilty ofevasion or violation of a revenue or tax law.

It partakes of an absolute forgiveness

or waiver of

6.

Compensation and Set-off

This doctrine states that taxes are not subject to set-offor legal compensation because the government and the taxpayer are not

TAXATION LAW REVIEWER

Page 9 of 165

not a suficient justification for exemption fromthe payment of surcharges imposed by the law for failing to pay tax within the period required. A tax statute should be construed to

It is a way to give tax evaders, who wish to relent &

b.

Distinguished from tax exemption:

b.

Tax Exemption and Exclusion(1)

Generalrule:Exemptions are not favored and areconstrued strictissimi juris [by the moststrict right or law] against the taxpayer.An exemption from the common burdencannot be permitted to exist upon vagueimplication or inferenceThe fundamental theory is that alltaxable property should bear its share ofthe cost and expense of government.Applying the rule of strict construction tostatutory provisions granting taxexemptions [or deductions] wouldminimize differential treatment andfoster fairness and equality of treatmentamong taxpayers.Taxation is the rule and exemption, the exception. Therefore, whoever claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.”If not expressly mentioned by law, it must at least be within its purview by clear legislative intent. Claims for

9.

Construction and Interpretation of:

a.

Tax Laws (1)

Generalrule:No person or property is subject totaxation unless within the terms orplain import of a taxing statute.In case of doubt, tax statutes areconstrued strictly against thegovernment and liberally in favor of thetaxpayer.Taxes being burdens, they are not to bepresumed beyond what the statuteexpressly and clearly declares.Tax statutes offering rewards are

(2)

Exception:When the law itself expressly providesfor a liberal construction, that is, in caseof doubt, it shall be resolved in favor ofexemptionWhen the exemption is in favor of thegovernment itself or its agenciesbecause the gen. rule is that they areexempt from tax.When the exemption refers to religious,charitable and educational institutions.If there is an express mention or if thetaxpayer falls within the purview of the

(2)

Exception:The rule of strict construction as against the government is not applicable where the language of the tax statute is plain and there is no doubtas to the legislative intent. In such case, the words employed are to be given their ordinary meaning. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent. They should not be construed as

c.

Tax Rules and Regulations(1)

Gen er al ru le on ly – The construction placed by the

ofice charged with implementing andenforcingthe provisions of a Code shouldbe given controlling weight unless suchinterpretation is clearly erroneous.

TAXATION LAW REVIEWER

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AMNESTY EXEMPTIONScope of immunity

Immunity from all criminal, civil and administrative liabilities from non- payment

Immunity from civil liability only

To whom granted

General pardon given to all taxpayers

A freedom from a charge or burden towhich others are subjectedApplication Applies only to

past tax periodshence retroactive application

Generally, prospectivein application

Presence ofActual Revenue Loss

Yes, there is revenueloss since there was actually taxes due but collection was waived by the government

None, becausethere was no actual taxes due as the person or transaction is protected by tax exemption

d.

Penal provisions of tax laws

time of its enactment. Pas c ual v. Secretar y of Strict construction so as not to extend

the plainterms thereof that might create ofensesby mere implication not so intended bythe legislative body R P v . M a r t i n , [ G . R .

Pub lic W orks , [ G.R . No. L-10 405, De cember 29 ,1960]Legislature is not required to adopt apolicy of “all or none” for the Congresshas the power to select the object of

e.

Non-retroactive application totaxpayers

7859, De cember 2 2, 1955] The (tax) law cannot be given

retroactive effect. Itis established that tax laws areprospective in application, unless it isexpressly provided to apply retroactively.

A special benefit to specific individual does notdiminish the nature of tax being for public purpose as long as it is incidental.

No. 15999 1, N ovem ber 16, 200 6]

b.

Inherently Legislative(1) Gen er al ru le – power of taxation cannot be

A tax law should not begivenapplication when it

retroactive

harsh delegated. Contemplates the power to

determine kind,object, extent, amount, coverage, and

oppressive, for in such case, theconstitutionallimitation of due process would beviolated.Sec. 246 of the NIRC provides that anyrevocation, modification or reversal ofany of the rules and regulationspromulgated in accordance with Secs.244 and 255 or any of the rulingsor circularspromulgated by the Commissioner shall

(2) E xcep tion s:(a

)Delegation to local governments – It is in linewith the principle that the power to create municipal corporations for purposes of local self- government carries with it the power to confer the power to tax on such local governments. Delegation to the President – Certain aspects of the taxing process that are not legislative in character may be vested to him.Delegation to administrative agencies –

(b)(1

)

E xcep tion s:While it is not favored, a statute maynevertheless operate retroactivelyprovided it is expressly declared or isclearly the legislative intent. Forinstance: the universal practice ofincreasing taxes on income alreadyearned.The rules and regulations promulgatedby the CIRshall be retroactive in thefollowing cases:

(c)

c. Territorial

(1) Situs of Taxation(a) Meaning – place of taxation; power

to tax is limited to the territorialjurisdiction of the taxing state.

i.

ii. Where the facts subsequently gathered by the

Bureau of Internal Revenue arematerially different from the facts onwhich the ruling is based; or

iii. Where the taxpayer acted in bad faith.

E XCEPT where privity of relationship exists, theState can exercise its taxing powers over its citizen outside its

(b) Situs of Income Tax(1

)

From sources within thePhilippinesInterests derived from sourceswithin thePhilippinesDividends from domestic and foreigncorporationsCompensation for services performedwithin the PhilippinesRentals and royalties from properties

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESH. Scope and Limitation of Taxation======================================1. Inherent Limitationsa. Public Purpose

Test: whether the proceeds will be used for

use of or for the privilege of using within the Th e pub lic pur po se o f th e tax law mu st exist at th e

Ph ilipp in es, p aten ts,

cop yr igh ts an d other likeTAXATION LAW REVIEWER

Page 11 of165

properties.Sale of Real property located in thePhilippines Sale of Personal property– Gains, profit, and income derivedfrom the purchase within and its salewithout the Phil, or from thepurchase without and its sale withinshall be treated as derived entirelyfrom sources within the country inwhich the personal property is sold.Except: the gain from the sale ofshares of stock in a domesticcorporation shall be treated as

SUMMARY:

(2)

From sources without thePhilippinesInterest other than thosederived from sources within thePhilippinesDividends other than those derivedfrom sources within the PhilippinesCompensation for services performedwithout the PhilippinesRentals and royalties from propertylocated without the Philippines orfrom any interest in such propertyincluding rentals or royalties for theuse of or for the privilege of using

d.

International Comity Property of a foreign State of

government may notbe taxed by another.

e.

Exemption of Government Entities, Agencies, andInstrumentalities(3

)Income partly within and partlywithout thePhilippinesItems other than those specifiedabove in i. and ii. shall be

Taking money from one pocket tothe other.Applies only to entities exercisingsovereign functions (acta jure imperii).However, it can tax itself if there is astatutory authority to do so and noexpress provision against such act.

(c) Situs of Property Taxes(1) Taxes on Real Property – Location

property(2) Taxes on Personal Property

i. Tangible – Location of the property ii. Intangible –

of the

2. Constitutional Limitationsa. Provisions Directly Affecting Taxation

(1) Prohibition against imprisonment of non-payment

of poll tax [ S ec. 20, Ar t . I II]Can still be made to pay fines andpenalties fornon-payment.Taxpayer may be imprisoned for non-payment of other kinds of taxes where

(d) Situs of Excise Tax(1) Estate Tax – Domicile of the decedent at the

time of his death(2) Donor’s Tax – Domicile of the

donor at the time of the transfer

(2)

Uniformity and equality of taxation [ Sec. 28 ( 1) ,Art V I](e) Situs of Business Tax – Place where

the taxpayeris registered or required to register

Uniform: all articles or properties of thesame class

taxed at the same rate Equity: apportionment must be more or

less just inthe light of taxpayer’s ability to

(1)(2)

Sale of Real PropertySale of Personal PropertyVAT

TAXATION LAW REVIEWER

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OBJECT SITUSRULEPerson Residenc

e, Domicile, Real Property Location of the property

TangiblePersonal

Physical location although theowner resides in another jurisdiction

Intangible Personal

Domicile of the owner (mobilia sequntur personam)

Income CitizenshipResidenceSource of Income

Transfer of property

CitizenshipResidenceLocation of Property

Business orOccupation

Where the act/business/occupation is performed/exercised

treatment in likecircumstancesThe uniformity and equity clause refersto the proper relative treatment for taxpurposes of persons in unlike

(6)

Majority vote of Congress for grant of taxexemption [ S ec. 28 ( 4 ) , Ar t . V I]

Includes amnesties, condonationsand refundsInvolves majority of all members votingseparately Relative majority (majority ofquorum) is suficient to withdraw

(3)

Grant by Congress of authority to the President toimpose tariff rates/Flexible tariff clause ( 2) , Art. V I]Includes import and export quotas,tonnage andwharfage dues aside fromtariff ratesDelegated byCongressThrough a law; the Tariff and CustomsCode has provided for what has been

(7)

Prohibition on use of tax levied for special purpose[ S ec. 29 ( 3 ) , Ar t . V I]

Revenues derived for a special fund

shall beadministered for the purposeintended only.Once the purpose is achieved, thebalance, if any, is to be transferred to

Subject to Congressional limits and restrictionsWithin the framework of national development program

(8)

President’s veto power on appropriation, revenue,and tariff bills [ Sec. 27 ( 2) , Art. V I]

(9)

Non impairment of jurisdiction of the SC [ Sec.5( 2)( b) , Art. V III]

(4)

Prohibition against taxation of religious, charitableand educational entities/Exemption from real (10) Grant of power to the local

government units tocreate its own sources of revenue

Cons ti tu tion]Covers charitable institutions, churches,and parsonages or convents appurtenantthereto, mosques and non-profitcemeteries and all lands, buildings andimprovements ACTUALLY, DIRECTLY andEXCLUSIVELY USED for charitable,religious and educational purposesPertains only to realestate tax

(11) No appropriation or use of public money for

religious purposes [ S ec. 29 ( 2 ) , Ar t . b.

Provisions Indirectly Affecting Taxation(1)

Due process [ Sec. 1, Art. III]

(5)

Prohibition against taxation of non-stock, non-profit [educational] institutions [ S ec. X IV]Exempts from taxes all revenues andassets of non- stock, non-profiteducational institutions used ACTUALLY,DIRECTLY AND EXCLUSIVELY foreducational purposesExemption covers income, real estate,donor’s tax, and customs duties

It can also be invoked by the government. Pro vin ceof Abr a v. He rna nd o, [G .R. No. L-4933 6 Au gus t 31 ,1981]Income exempt

provided itmaintenance or improvement(indispensable or essential).The exemption is

isof

used forinstituti

(2)

Equal protection [ Sec. 1,Art. I II ]All persons subject to legislation shallbe treatedalike, under like circumstances andconditions both in privileges conferredand liabilities imposed. Si s o n , Jr. v .

personal.

(non-

1984]

i. Proprietary

educational

institutions(Preferential Tax of 10%);

Government educational institutions (exempt, ex. UP)

ii.

TAXATION LAW REVIEWER

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SUBSTANTIVE PROCEDURALShould not be harsh, oppressive, or confiscatory (reasonableness)

No arbitrariness in assessment and collection

By authority of valid law Right to notice and hearingMust be for a public

purposeImposed within territorialjurisdiction

No violation of equal protection when there is

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESJ. Definition, Nature, and Characteristics of Taxes

proper classifcation made; classifcationvalid must:

to be

i.ii.iii.iv.

Rest on substantial distinctionsBe germane to the purpose of the lawNot be limited to existing conditions only; and

A burden, charge, exaction, imposition orcontributionassessed in accordance with somereasonable rule of apportionment byauthority of the sovereign state upon thepersons or property within its jurisdiction, toprovide public revenue for the support of thegovernment, the administration of the law,

(3)

Religious freedom [ Sec. 5, Ar t II I]The constitutional guaranty of thefree exerciseand enjoyment of religious professionand worship carries with it the right todisseminate religious information.

ND

Any payment exacted by the State orits municipalsubdivisions as a contribution toward thecost of maintaining governmental functions,where the special benefits derived from theperformance is merged in the generalbenefit.Taxes operate in INVITUM and are in no waydependent upon the will or contractualassent, express or implied, of the persontaxed.(1) Enforced (2) proportional and (3)pecuniary contributions (4) from persons andproperty (5) levied by law-making body of

Mani la, [ G. R. N o. L- 9637, A pri l 30, 1957] .Activities simply and purely for propagationfaith are exempt.

of

Tax is unconstitutional if it operatesas a priorrestraint on exercise of religion or favorsa certain religion (non-establishment ofreligion)Income of religious organizations fromany activity conducted for profit or fromany of their property, real or personal,

(4)

Non-impairment of obligations [ Sec. 10, Art. I II]Applies only when governmentcontract granting

is party to the

======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESK. Requisites of a valid tax======================

E XCEPT if Franchise tax-exemption TheConstitution provides that franchise is

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

a.b.c.

Must be for a public purposeIt should be uniform and equitableThat either the person or property taxed is within thejurisdiction of the taxing authority

d. That it complies with the requirements of due processe. That it does not infringe any constitutional

Levy – Refers to the enactment of a law byCongress,imposing a tax.

1.2.

Assessment –implementat

The act of administration and

of the tax law by the ======================================TOPIC UNDER THE SYLLABUS:I. GENERAL PRINCIPLESL. Tax as distinguished from other forms of exactions=======================

department through the administrativeagenciesPayment – Act of compliance by thetaxpayer, including such options, schemes orremedies as may be legally available to him.R efund – Recovery of any tax alleged tohave been erroneously or illegally assessedor collected, or of any penalty claimed tohave been collected without authority, or ofany sum alleged to have been excessively,

3.

4.

1.

Customs Duty/Tariff

TAXATION LAW REVIEWER

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TAX

CUSTOMS DUTYCoverag

eMore comprehensive than customs duty

Kind of tax

Object Persons, prop, etc Goods importedor exported

2. Toll

of property

======================================TOPIC UNDER THE SYLLABUS: I. GENERAL PRINCIPLESM. Kinds of Taxes

3. License Fee

1.

As to subject matter or objecta.

Personal, poll, capitation tax –Fixed amountIndividuals residing within specified territory Without regard to their property, occupation or businessEx. Community Tax (Cedula)

Distinction lies in the primary purpose: b

.

Property tax –Imposed on property, real or personalIn proportion to its value or other reasonable method of apportionmentEx. Real estate tax

License fee primary purpose is to

regulate andtheexcess of the amount collected from the

cost to carryout the regulation is minimal and incidental.Tax’s primary purpose, or at least one of the real and

If amount is too high for regulation, it wouldbe a tax; c

.Excise/Privilege tax - (different fromthe excise taxof Title VI of theNIRC)Imposed upon performance of an act,the enjoyment of a privilege or theengaging in an occupation, profession or

unless imposed on non-usefulbusinesses.Purpose of distinction:

occupations or

and

exemptionsapply only to one and not to the other (ex. Exemptionfrom taxation does not include exemption

2.

As to who bears the burden or incidencea. Direct – the tax is imposed on the person who also

bears the burden thereofEx. Income tax, community tax, estate

4.

Special Assessment

b. Indirect – imposed on the taxpayer who shifts the

burden of the tax to anotherEx. VAT, specific tax, percentage tax,customs

3.

As to tax rates or determination of amounta.

Specific – tax imposed and based on a physical unitof measurement, as by head, number, weight,

5.

Debt Ex. Tax on distilled spirits,

fermented liquors,

f the valueof property with respect to which

the tax isor.TAXATION LAW

REVIEWERPage 15 of165

TAX

DEBT

Ex. Tax on distilled spirits, ferment cigars

b. Ad Valorem - tax of a fixed proportion o of property with respect to which assessed; requires intervention of assess

Source Law; legal obligation

Based on contract

Nature Personal Assignable

Right to set-of

Generally not subject to compensation/

May be the subject of compensation/

TAX

SPECIAL ASSESSMENTImpose

d onPersons, properties, etc.

Only on land

Why imposed

Regardless of public improvement

Public improvement that benefits the Purpose Support

of governme

Contribution to cost of public improvementWhen

imposed

Regular exaction Exceptional as to time and locality

Basis Necessity Benefits obtained

TA LICENSE FEESource Exercise of

Taxing powerEmanate from the police power of the StatePurpos

eRaise revenue

RegulationObject Persons,

property and privilege

Right to exercise a privilege

Amount

no limit only necessary to carry out regulation

TAX

TOLLKind of

demand

Demand of sovereig

Demand of ownership

Purpose support ofgovernment

Collection for the use

Amount No limit – depends on need of the government

Fair return of the cost of the property or improvement

of

Efect Imprisonmentis sanction fornon-payment

No imprisonmentfor non-payment

Ex. Real estate tax, excise tax on cars, non-essential goods

c. Mixed

4.

As to purposesa. General, fiscal or revenue -

imposed for the general purpose of supporting the governmentEx. Income tax, percentage tax

b. Special or regulatory - imposed for a special

purpose, to achieve some social or economic objectivesEx. Protective tariffs or customs duties

5.

As to scope or authority to imposea. National - imposed by the national government

Ex. National internal revenue taxes, b. Municipal or local - imposed by the municipal

corporations or local governmentsEx. Real estate tax, occupation tax

6.

As to graduation of rate (Three systems of taxation)a.

Proportionate - based on a fixed percentage of theamount of the property, income or otherbasis tobe taxed

b.

Progressive or graduated - tax rate increases asthe tax base or bracket increasesEx. Income tax, estate tax, donor’s tax

c.

Regressive - tax rate decreases as the tax baseincreases

TAXATION LAW REVIEWER

Page 16 of165

of graduated tax rates for an individual or normalcorporate income tax rate for corporations.

II.NATIONAL INTERNAL REVENUE CODE======================================TOPICS UNDER THE SYLLABUS:A. Income TaxationB. Estate TaxC. Donor’s Tax

With respect to the income, the computationof incomeis global while the scheduler tax systemapplied to the capital gains and passiveincome subject to final tax at preferential tax

NOTE: Philippine income taxation is a combination of bothsystem but is more schedular for individual while more global for corporation.

E. Compliance RequirementsTaxes)F. Tax Remedies under

(Internal

Revenue

G. Organization and Function of the Bureau ofInternal Revenue===================================================================TOPIC UNDER THE SYLLABUS:A. Income Taxation========================1.a

Income TaxSystemsGlobal (unitary) Tax System – thetotal allowabledeductions, as well as personal andadditional exemptions, in the case ofqualifed individuals, or the total allowabledeductions only, in the case of corporations,are deducted from the gross income (i.e.sum of all items of taxable income, profitand gain) to arrive at the net taxable incomesubject to the graduated income tax rates,

All items of gross income, deductions,personal andadditional exemptions are reported in oneincome tax return and a single tax isimposed on all income received or earnedactivities

which

produced

the

income

(i.e.compensation income, net income from

business, tradeor profession).

2.a

Features of the Philippine Income Tax LawDirect tax – tax burden us borne by the income tax

b.

Schedular Tax System – different types ofincomes aresubjected to different sets of graduated orflat income tax rates. The applicable taxrates will depend on the classifcation of thetaxable income and the basis could be gross

b.

Progressive tax – tax rate increases asthe tax baseincreases; direct taxes are to be preferredand as much as possible, indirect taxesshould be minimized. T ol e nt i n o v .Oct ober 30 , 1995]

c.

Semi-Schedular or Semi-Global TaxSystem – thecompensation income, business orprofessional income, capital gain and passiveincome not subject to final tax, and otherincome are added together to arrive at thegross income and after deducting the sum of

c.

Comprehensive system – adopts the citizenshipprinciple, residence principle and the source

d.

Semi-schedular or semi-global tax system – certainpassive incomes and capital gains are subject to final taxes at preferential rates TAXATION LAW

REVIEWERPage 17 of165

GLOBAL SYSTEM SCHEDULAR SYSTEMA system which

imposes a personal tax upon the total income of the

A system which imposes various typesof tax on income producing activitiesEmphasizes the burden

allocation aspectsEmphasizes on revenue and

Most equitable in distributing tax burden, as burden of an individual is closely related to his resources and his ability to pay

Because of its multiple rates, the tax burden of a person does not respond to his income but rather fall fortuitously on the typeof

It serves as a meansfor redistributing income andwealth

This function is alien to schedular system where intimes of plenty or in times of need, people pay the same fixed taxIt serves as a

supplementary devise to accomplish non- fiscal goals of the government

Schedular system cannot perform these functions

Administration is not quite as easy as schedularbecause one has to consider all income from whatever sources

Administration is simple being confined to eachtransaction or activity

added together to arrive at the grossincome and afterdeducting the sum of allowable deductions,the taxable income is subjected to one setof graduated tax rates for an individual ornormal corporate income tax rate for

c.

Short Period – a taxpayer may have a taxable period ofless than twelve (12) months when:

Taxpayer diesCorporation is newly organized Corporation changes its accounting period Corporation is dissolved.

3.a

Criteria in ImposingPhilippine Tax LawCitizenship principle – a citizen taxpayer issubject to income tax: (a) on his worldwideincome if he resides in the Philippines; or (b)only on his income from sources within thePhilippines, if he qualifes as non-resident

6.

Kinds of Taxpayers

b.

Residence principle – a resident alien is liable to payincome tax on his income from sources within thePhilippines but exempt from tax on his

c.

Source principle – a non-resident alienis subject toPhilippine income tax because he derivesincome from sources within thePhilippines such as dividend, interest,

4.

Types of Philippine Income Tax

a.

Net Income Tax/Taxable Income (GI –Deductions –Exemptions)GrossIncome TaxFinal Income Tax (On passive income andcapital gains)Fringe Benefits Tax (amount of benefits toManagerial and Supervisory Employee paidby Employer; employee is taxed but burdenis on employer)Capital Gains Tax (Real property and stocks not traded in stock market)Optional Corporate

b.c.

e.f.g.h.

5.

Taxable PeriodGE NE RA L RU LE : The accounting period of a

taxpayer is aperiod of twelve (12) months. a

.Individual Taxpayers(1) Citizens

a.

Calendar Year – accounting period from January 1 toDecember 31 which is allowed if the:

(a)

Resident Citizen

– citizen

of the Philippinesresiding therein is taxable on all

income derivedfrom sources within and without the

Taxpayer is an individualTaxpayer is a partnershipAccounting period is other than a fscal yearTaxpayer has no accounting periodTaxpayer does not keep books.

(b)

Nonresident Citizen – citizen of the Philippineswho are taxable only on his income from sourceswithin the Philippines if he:

Establishes the fact of his physicalpresence abroad with a definite

i.b.

Fiscal Year – accounting period of twelve (12) monthsending on the last day of any month other than

TAXATION LAW REVIEWER

Page 18 of165

TAXPAYER TAX BASE

TAXABLE ON INCOMEResident

CitizenTaxableIncome

Within and without thePhilippinesNonresident

CitizenTaxableIncome

Within the Philippines

Resident AlienTaxableIncome Within the

PhilippinesNonresident Alienengaged in trade or business

TaxableIncome Within the

Philippines

Nonresident Alien not engaged in trade or business (180

GrossIncome Within the

Philippines

General Professional Partnership

TaxableIncome

GPP itself not taxable, however,individualpartners will be taxed depending on classifcation

Estate and Trust

TaxableIncome

Same basis as anindividual (depending on classifcation of decedent, if estate, trustor, if Domestic

CorporationTaxableIncome

Within and Withoutthe Philippines

Resident ForeignCorporation

TaxableIncome Within the

PhilippinesNon-residentForeign corporation

GrossIncome Within the

Philippines

ii. Leaves the Philippines during thetaxable yearto reside abroad, as immigrant or foremployment on a permanent basis.Works & derives income fromabroad &whose employment requires him tobe physically present abroad mostof the time (i.e. not less than 183days) during the taxable year.Was previously considered asnonresidentcitizen & arrives in the Philippines atany time during the taxable year to

Length of stay is indicative ofintentionAn alien actually present in thePhilippines who is not a meretransient or sojourner is a resident ofthe Philippines for purposes of theincome tax. Whether he is a transientor not is determined by hisintentions with regard to the lengthand nature of his stay.A mere floating intention indefinite asto time, to return to another countryis not suficient to constitute him atransient.If he lives in the Philippines andhas no definite intention as to hisstay, he is a resident. One whocomes to the Philippines for adefinite purpose which in its naturemay be promptly accomplished is atransient.But if his purpose is of such a naturethat an extended stay may benecessary for its accomplishment,and to that end the alien makes hishome temporarily in the

iii.

iv.

v.a. Immigrant – one who

leaves thePhilippines to reside abroadas animmigrant for which a foreignvisa has been securedPermanent employee – one wholeavesthe Philippines on a more or lesspermanent basisContract Worker – one wholeaves thePhilippines on account of acontract of employment which isrenewed from time to time

b.

c.

Loss of Residenceby alienAn alien who has acquired residencein the Philippines retains his statusuntil he abandons the same andactually departs from the PhilippinesA mere intention to change hisresidence does not change hidstatus. An alien who has acquired aresidence is taxable as a residentfor the remainder of his stay in

NOTE: The taxpayer shall submit proof tothe CIR toshow his intention of leaving the Philippinesto reside permanently abroad or to return toand reside in the Philippines as the case may

Non-resident citizens who are exempt fromtax withrespect to income derived from sources Philippines shall no longer be required toinformation returns from sources outside

fileth

(b)

Nonresident Alien – anindividual whoseresidence is not within the Philippinesand who is not a citizen thereof butdong business therein is taxable onlyFor Overseas Contract Worker, the time

spent abroad isnot material for tax exemption purposes.All that is required is for the worker’semployment contract to pass through andbe registered with the POEA [ B IR R u li n g

(1)

Engaged in trade or business – analien whocomes and stays in the Philippinesfor an aggregate period of morethan 180 days dur i n g a n y c al e nd ar(2

)Not engaged in trade or business – an alienwhose stay in the Philippines is 180days or

(2) Aliens(a) Resident Alien – an individual

whose residence is within thePhilippines and who is not a citizenthereof is taxable only on incomederived from sources within the

(3) Special Class of Individual Employees(a

)Aliens

employed

by regional

regiona

or areaheadquart

ersand

operating One who comes to the

Philippines for adefinite purposes which in itsnature would require an extendedstay, and makes his hometemporarily in the country becomes a

headquarters of multinational companies in thePhilippines.Aliens employed by ofshore banking units.Aliens employed by petroleum

(b)(c

TAXATION LAW REVIEWER

Page 19 of165

(d) Minimum Wage Earner

may be regarded as doing businesswithin aState, there must be continuity ofconduct and intention to establish acontinuous business, such as theappointment of a local agent, and not

A worker in the private sectorpaid thestatutory minimum wage, or to anemployee in the public sectorwith compensation income of notmore than the statutory minimumwage in the non-agricultural sector

(b) Nonresident foreign corporation – foreign

corporation not engaged in trade or business within the Philippines

His earnings (i.e. SMW,

holiday, overtime,night shift differential and hazard

pay) areexempt from income tax pursuant c

.d

provisions of thisgeneral or

Code

and

other

laws,

Partnerships. Taxed as a corporation.General Professional Established solely for purpose of

exercisingcommon profession and no part of income derived from engaging in trade orbusiness.As an entity, it is not subject to income tax.

Partners are liable for income tax ontheir distributive share (computed bydividing net income of GPP).Each partner shall report hisdistributive share as part of his gross

b.

Corporations A corporation shall include

partnerships, no matterhow created or organized. Joint stockcompanies, joint accounts, associations,and insurance companies

i.

But does not include, for the purpose of imposingordinary 30% (starting 2009; 35% 2006 - 2008)corporate income tax:i. General professional partnershipsii. Joint venture or consortium formed for

the purpose of undertakingconstruction projects or engaging inpetroleum, coal, geothermal & otherenergy operations pursuant to an

ii.

iii.

Taxable/Business/Ordinary/General Partnership

All other partnerships no matter howcreated or organized.Includes unregistered jointventures andbusinesspartnerships.Taxable as an entity ordinarycorporateincometax.Joint ventures are not taxable as

i.

ii.

iii.(1)

Domestic Corporation – created or organized inthe Philippines or under its laws and is liable for income derived from sources

iv.

(2)

Foreign Corporation

–a

organized and existingforeign country,

under theincludes:

laws of v. Partners are considered stockholders;

therefore,their distributive share is taxed asdividends, thus subject to final incometax on their gross distributive share.

(a)

Resident

foreign

corporation

– foreigncorporation engaged in trade or

business withinthe Philippines and is liable from In the case of CIR v. Bri tis h Overs eas Airways

e.

Estate and TrustsCorp , [ G.R . No. L-6 5773-74 , A pri l

30, 1 987] , the Estate: property, rights and obligations

of a personwhich are not extinguished by his deathand those that accrues thereto; taxed inthe same way as an individual providedit is irrevocable and earns income; whatis taxed is not the property thatconstitutes the trust (this was already

Court held that there is no specificcriterion as towhat constitutes "doing" or"engaging in" or"transacting" business. Each casemust be judged in the light of itspeculiar environmental circumstances.The term implies a continuity ofcommercial dealings andarrangements, and contemplates, tothat extent, the performance of actsor works or the exercise of some of thefunctions normally incident to, and

Trust: arrangement created byagreement underwhich title to property is passed toanother for conservation or investmentwith the income and the corpus/principaldistributed in accordance with the

TAXATION LAW REVIEWER

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separate entity, grantor must have absolutely andirrevocably given up control and benefitover the trust.

c.

General Principles

f. Co-ownership Exists whenever the ownership of an

undividedthing or right belongs to differentpersons. Forincome tax purposes, the individual co-owners are liable for the taxes due ontheir respective shares and the co-

There is co-ownership in the followinginstances:

i. Two or more heirs inherit an undivided property from a decedent;

ii. A donor makes a gift of an undividedproperty in

It is not taxable when the activitiesare limitedmerely to preservation of the co-ownedproperty but the co-owners are liable forincome tax in their separate and

It is taxable when the income of the co-ownershipis invested by the co-owners in business creating a partnership.

7.a

IncomeTaxationDefinition – A tax on all yearly profitsarising from property, professions, trades, orofices, or as a tax on a person’s income,emoluments, profits and the life. Income tax

b.

Nature (same as Features of Philippine Income Tax Law)

8.a

IncomeDefinition and Nature

(1)

Direct Tax – tax burden us borne by the income taxrecipient upon whom the tax is imposed. Progressive Tax – tax rate increases as the tax base increases; direct taxes are to be preferred and as much as possible, indirect taxes should be

Income, in the broad sense, meansall wealthwhich flows into the taxpayer other thanas a mere return of capital. It includesthe forms of income specificallydescribed as gains and profits, includinggains derived from the sale or otherdisposition of capital assets. Incomecannot be determined merely byreckoning cash receipts, for the statuterecognizes as income determining factorother items, among which are

(2)

No. 11545 5, O ct ober 30 , 1995](3

)Comprehensive System – adopts the citizenshipprinciple, residence principle and the source principle(4

)Semi-Schedularcertain

or Semi-Global Tax System –incomes and capital subject to final taxes at preferential

rates while allother income are added together toarrive at thegross income and after deducting thesum of allowable deductions, the taxableincome is subjected to one set ofgraduated tax rates for an individual or

40 date d 10 Febr uar y 1940]

b.

When income is taxable(1)

Existence of income For a taxable income to exist, gain or

profit isnecessary – where there is an exchange ofvalue received in the form of

TAXATION LAW REVIEWER

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TAXPAYER TAX BASE

TAXABLE ON INCOMEResident Citizen Taxable

IncomeWithin and without the PhilippinesNonresident

CitizenTaxableIncome

Within the Philippines

Resident AlienTaxableIncome Within the

PhilippinesNonresident Alienengaged in trade or business (more than

TaxableIncome Within the

Philippines

Nonresident Alien not engaged in tradeor business (180 days or less)

GrossIncome

Within the Philippines

General ProfessionalPartnership

TaxableIncome

GPP itself not taxable, however,individualpartners will be taxed depending on classifcation

Estate and TrustTaxableIncome

Same basis as anindividual (depending on classifcation of decedent, if estate, trustor, if Domestic

CorporationTaxableIncome

Within and Withoutthe Philippines

Resident ForeignCorporation

TaxableIncome Within the

PhilippinesNon-resident Foreigncorporation

GrossIncome

Within the Philippines

earnings in excess of capital invested. BI RR u li n g [ D A - (C -335) 8 1 5 -09]

for the sale, and you recognize the expensewhen you actually pay cash for the 22,

2009 ACCRUAL METHOD – methodunder whichincome, gains and profits areincluded in gross income whenearned whether received or not, andexpenses are allowed as deductionswhen incurred, although not yet paid.It is the right to receive and not theactual receipt that determines the

(2) Realization ofincome

(a) Tests of Under the REALIZATION PRINCIPLE, revenueis generally recognized whenfollowing conditions are

both

of the

The earning is complete or virtually complete;andAn exchange has taken place.

(b) Installment payment v. Deferred payment v.

Percentage of completion This principle requires that revenues

must beearned before they are received.Amounts received in advance arenot treated as revenue of theperiod in which they are received,but as revenue of the future periodor period or periods in which they areearned. These amounts are carriedas unearned revenue, that is,

INSTALLMENT METHOD – the taxpayer mayreport income over the several taxable yearsin which collections are made Generally, the income derived oninstallmentsale is the proportion of installmentcollection actually received duringthe year in relation to the gross profit

earning

process

is complete.

Ma ni laMandar in H ote ls v.

Co mmissio ner, [ CTA Cas e DEFERRED PAYMENT METHOD –where theinitial payments on installmentsale exceed25% of the selling price but they mayonly be realized in the subsequentyear, the taxpayer is allowed to deferreporting income for accountingpurposes but such sale is to beconsidered as the equivalent of

No. 5046 , Marc h. 24, 19 97]

(b) Actual v. Constructive Receipt ACTUAL RECEIPT occurs when

there is aphysical transfer of the money consideration or its equivalent to a

CONSTRUCTIVE RECEIPT occurswhen themoney consideration or itsequivalent is placed at the control ofthe person who rendered the servicewithout restrictions by the payor. Forexample:

Deposit in banks which are made available to the seller of service without restrictions; Issuance by the debtor of a notice to ofset anydebt or obligation and acceptance thereof by the seller as payment for services rendered; and

No. 263- 92 da ted Sep tem ber 16, 1992]

PERCENTAGE OF COMPLETIONMETHOD – amethod of recognizing the earningsderived from long-term constructioncontracts. This method requiresrecognition of income based on the

i.

ii.

c.

Tests in determining whether income is earned for taxpurposes

iii. (1

)Under the REALIZATION PRINCIPLE, revenue isgenerally recognized when both of the followingconditions are met:(a) the earning is complete or virtually complete;

(3) Recognition of income(4) Methods of accounting

(a) Cash method v. Accrual method This principle requires that revenues

must beearned before they are received.Amounts received in advance are nottreated as revenue of the period in whichthey are received, but as revenue of the

CASH METHOD – recognition of income andexpense dependent on inflow or outflow ofcash (meaning, you recognize the

TAXATION LAW REVIEWER

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in which they are earned. Theseamounts arecarried as unearned revenue, that is,liabilities to transfer goods or renderservices in the future — until the earningprocess is complete. Ma n il a Ma nd a r i n5046, March 24, 1 997] = collectio

nx

Income

Contract(2

)The "CLAIM-OF-RIGHT" DOCTRINEprovides that if ataxpayer receives earnings under a claimof right andwithout restriction as to its disposition, hehas received income even though one mayclaim he is not entitled to the money. Shouldit later appear that the taxpayer was notentitled to keep the money, the taxpayerRu lin g DA -(C -168) 519-0 8 da ted De cember 12 , 2008]

(3)

The ECONOMIC BENEFIT THEORYprovides thatanything which benefits a person materiallyor economically in whatever way is taxableunder the law. [ B IR R u l i n g N o . 1 2 3 -97

Gen er al Ru le: in this jurisdiction, mere increase in thevalue of property without actualrealization, eitherthrough sale or other disposition, is nottaxable, the only exception being that evenwithout sale or other disposition, if by reasonof appraisal, the cost basis of property isincreased and the resultant basis is used asthe new tax base for purposes of computingthe allowable depreciation expense, the netdifference between the original cost basisand new basis due to appraisal is taxable

9. Gross Incomea.

DefinitionAll income derived(but not limitedto

from whatever source, includingthe following items) (GRIP

(4)

Under the SEVERANCE TEST THEORY, income isrecognized when there is a separation of something which is of exchangeable value. Gross income derived from the conduct

of trade orbusiness or the exercise of a professionRent IncomeInterest Income

[ 252 U S 189]

The annual increase in value of an asset isnot taxableincome because such increase has notyet been realized. The increase in valuei.e., the gain, could only be taxed when adisposition of the property occurred whichwas of such a nature as to constitute arealization of such gain, that is, a severanceof the gain from the original capital investedin the property. The same conclusion obtainsas to losses. The annual decline in thevalue of property is not normally allowable

Prizes &winningsCompensation for services in whateverform paid, including, but not limited tofees, salaries, wages, commissions &similar itemsAnnuities Royalties Dividend IncomeGains derived from dealings inpropertyPensionsPartner’s distributive share from the net

pp. 422 -4, as cite d i n [ BIR R uli ng N o.

206 -90 da tedOct ober 30 , 1990]

TAXATION LAW REVIEWER

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To compute the reportableincome:

GrossReportable

Installment

proft

received Price

W he n I n s ta l lm e n t M e t h o dA ll o w e d(a) Installment sale of personalproperty

Personal property is regularly sold on

an installmentbasis by a dealer; Sec. 49(A)

Casual sale if personal property on

installment basiswhere the selling price exceeds P1,000 and the initialpayments do not exceed 25% of the selling price; Sec.49(B)

NOTE: if the initial payment exceeds 25% ofselling price, the transaction is considered cashsales; considered as initial payments are thedown payments and all other payments receivedby the seller during the year of sale, includingexcess mortgage assumed by the buyer over the

c.

Gross income v. net income v. taxable income GROSS INCOME is described as

income fromwhatever source, includingcompensation forservices; the conduct of trade orbusiness or the exercise of profession;dealings in property; interests; rents;royalties; dividends; annuities; prizes andwinnings; pensions; and a partner'sas cited i n Co m missi oner of I ntern al Re ven ue v .PAL, In c., G.R. N o. 180 066, J ul y 7, 2009]

NET INCOME means gross income lessstatutorydeductions and exemptions. It is referred to as

TAXABLE INCOME means thepertinent items ofgross income specified in this Code,less thedeductions and/or personal andadditional exemptions, if any, authorizedof t he Ta x C ode as c ite d i n Co mm iss ioner o fInter nal Re ven ue v. PAL , Inc. , G.R . No. 180 066 ,Jul y 7, 2009]

d.

Classification of Income asto Source(1)

Gross income and taxable income from sourceswithin the Philippines

(a)

GR OSS I nc ome fr om S our cesw ith in thePhi lip pines

b. Concept of income from whatever source derivedInc

oof all income not expressly exempted within the class oftaxable income under the laws irrespective of thevoluproducing the gains, and whether derived from legal orillegal sources.

TAXATION LAW REVIEWER

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me from whatever sources derived

means inclusion ntary or involuntary

action of the taxpayer in

INCOME TEST OF SOURCE OF INCOMEInterests Residence of Debtor

Dividends a) From domestic corporation –

income withinb) From foreign

corporation: I n c o me w i t h in if more than50% of the gross income ofsuch foreign corp. for the 3-yr. period ending with the closeof the taxable year prior tothe declaration of

BIR Ruling No.017-2003The transfer of land made by a person toanother inpayment of services rendered in the form ofattorneys fees shall be considered as part of thegross income of the latter valued at either thefair market value or the zonal valuation,whichever is higher, in the taxable year received

Doctrine of InvoluntaryConversion of PropertyThis is a doctrine provided for in USJurisprudence (i.e.,Herver vs. Helvering) and was adopted by theBIR in several of its rulings.

This doctrine states that if property (as a resultof its destruction, in whole or in part, theft orseizure, or an exercise of the power ofrequisition or condemnation or the threat orimminence thereof) is compulsorily orinvoluntarily converted into property similarto the property so converted, or into money,which is forthwith in good faith expended in theacquisition of other property, or in theestablishment of a replacement fund, no gainor loss shall be recognized. If any part of themoney is not so expended, the gain shall berecognized, but in an amount not in excess ofthe money so expended.

EXAMPLES OF INCOME

EXAMPLES OF INCOME

Employee’s salary, bonus;and commissions/rebates

Gambling, kidnapping, extortion, smuggling,

Recovery of damages (compensation for injury;from tortuous acts)

Not taxableRecovery of damages pertaining to

recovery or return of loss income or profit

Taxable

Recovery of items previously deducted from gross income (tax benefit rule)

Taxable

Forgiveness of indebtedness (if efectof entire transaction is a reduction ofpurchase price of property acquiredin prior year)

NotTaxable

Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution)

Taxable

Forgiveness of indebtedness in exchange of a service performed

Taxable

Income derived from illegal business (gain)

TaxableRecovery of lost earnings Taxable

(d)

Supply of any assistance that isancillary &subsidiary to, & is furnished as a meansof enabling the application or enjoymentof, any such property/right in (a) above,such equipment in (b) above orknowledge/info in (c) aboveSupply of services by a nonresidentperson/his employees in connection withthe use of prop./rights belonging to, orthe installation or operation of anybrand, machinery or other apparatuspurchased from such nonresidentpersonTechnical advice, assistance or servicesrendered inconnection with technical mgt./admin. of

(e)

(f)

(g) i.

ii.motion picture flmsfilms or video tapes for use in connection withTVtapes for use in connection with radio broadcasting

iii.

Most favored nation clause – Royaltyincome paid by adomestic corporation to a non-residentforeign corporation which is a resident of aContracting State with which the Philippineshas an efective tax treaty is generallysubject to 15% final withholding tax, but therate may be reduced to 10% for certainroyalty payments or under the most-i. The purpose of the clause in a tax treaty

is to grantto the other Contracting State a taxtreatment thatis no less favorable than that which isgranted tothe “most favored” among othercountries.It means each party to the treatypledges that anytax concession given to any othertreaty country will also be extended to

ii.

(b)

TAX ABLE Inco me fro m S ourcesw ith in thePhi lip pi nesGeneral Rule:Gross Income (within the Philippines)( - ) Deductions (attributable to GI within) Taxable Income

NOTE: ROYALTIES (from property or use of

property located in(a)

Use of/the right/privilege to use in the Philippinesany copyright, patent, design ormodel, plan, secret formula or process,goodwill, trademark, trade brand or otherlike property or rightUse of/the right to use in the Philippines any industrial, commercial orscientific equipment Supply of

By “attributable” is meant that theexpense can beidentified as the expense thatgenerated theincome.For instance, if ABC Corp.

(b)(c)

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INCOME TEST OF SOURCE OF INCOMEPhilippines

Extent:P h il G I x Dividend = Income withinTotal GI

I n c o me w i t hou t, if less than50% of the gross incomeof such foreign corp. for the 3-yr. period ending with the closeof the taxable year prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore,

Services (Compensationfor labor/personal services)

Place of performance of service

Rentals Location of the property/interestin such propertyRoyalties Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royaltiesGain on sale of

Real propertyLocation of property

Gain on sale of personal property other than shares of stock in a domestic corporation purchased in one country and

Place of Sale

Gain on sale of sharesof stock in a domestic

Philippines regardless of wheresold

attributable to the income generatedfrom sellingthe clothes. Since the income from thesale of clothes is income within, then theexpense for manufacturing them must bededucted from gross income within.However, the cost of selling the shoesmay not be deducted from income withinsince it is not attributable to incomewithin. Rather, it is specifically

v. Gains, profits & income from the sale of real

property located without the Tip: The foregoing enumeration ismerely thereverse of the enumeration of grossincome from sources within thePhilippines. Hence, so long as youknow which income are

(b)

TAX ABLE Inc ome fr om S ou rces W itho ut th e Phi lip pines

Deductions:Expenses, losses & other deductionsproperly allocated thereto and a ratablepart of expenses, interests, losses andother deductions efectively connectedwith the business conducted exclusivelywithin the Philippines which cannot

General RuleGross Income (without the Philippines)( - ) Deductions (attributable to GIwithout

Deductions:Expenses, losses & other deductionsproperly apportioned/ allocated theretoand a ratable part of expenses,interests, losses and other deductionswhich cannot definitely be allocated to

Such deductions shall

be allowed only if fullysubstantiat

edcalculation

by

all

info

necessary

for

its

E xcep tion s:No deduction

for interest paid/incurred

abroadshall be allowed unless:

Indebtedness was actually incurredIndebtedness must be that of the

(3)

Income partly within or partly without thePhilippines

a.b.c.

Interestwriting

must be legally due and stipulated

in These are:i. Income from services rendered partly

within andpartly without;Income from sale of personal property produced(in whole or in part) within and sold without thePhilippines;Income from sale of personal property

d. must be paid

or incurred during

thetaxable year

Indebtedness mustbe

ii.e. in connection

w/theth

conduct or operation of trade/business inPhilippines

iii.

(2)

Gross income and taxable income from sourceswithout the Philippines

(a)

GR OSS Inc ome fr om s our ces with ou t t hePhi lip pines

i. Interests (other than those derived fromsources

within the Philippines)ii. Dividends (other than those derived from sources

within the Philippines)iii.Compensation for labor or personal

services performed without thePhilippines

iv.Rentals or royalties from propertylocated without the Philippines or fromany interest in such property includingrentals/royalties for the use of or forthe privilege of using w/o thePhilippines, patents, copyrights, secret

TAXATION LAW REVIEWER

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PERSONAL PROPERTY

INCOMEManufacturing Business

Produced here and sold without

Income partly within, partly withoutProduced here and sold

hereIncome within

Produced abroad and sold here

Income partly within, partly withoutTrading Business

Purchased without and sold within

Income within

Purchased within andsold without

Income without

Purchased within andsold within

Income within

Taxpayer sells it abroad througha sales ofice

Income partly within,partly without

Final tax of 32% imposed on the grossed-up monetary value

In co me wi thou t

Deductionsfrom

Worldwide

=ExpenseInc

o

In co meWorl

dInco

e.

Sou

(1)

(2)

business or profession of the employer; oror advantage of the employer.

employees not exceeding 10 days during the yearto government oficials and employeesnot exceeding P750 per semester or P125 per monthto not more than P1,500per year

(g)

Laundry allowance of P300 permonthsafety achievement in the form of tangible personalannual monetary value not exceeding P10,000 receivedwhich does not discriminate in favor of highly paid

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As for unallocated expenses,meaning thosewhich are not entirely attributable toeither income within or without, suchexpenses shall be allocated using thefollowing formula:

xUnallocated

meWithout

wi th inDeductionswide xUnallocated

Expense = from

IncomemeWithin

rces of incomesubject to taxCompensationIncomeIn general, the term "compensation"means all remuneration for servicesperformed by an employee for hisemployer under an employer- employeerelationship, unless specifically excludedby the Code.Included only when the taxpayer issubject to NetIncomeTax.

FringeBenefits

Any good, service or other benefitfurnished or granted in cash or in kindby an employer to an individualemployee (except rank and fileemployees) such as, but not limited tothe following:(1)Housing(2) Expenseaccount(3) Vehicle of anykind(4) Household personnel (such asmaid, driver &

others)

(5) Interest on loan at less thanmarket rate to the extent of the

Sp ec i a l R ul es o n Fr in g eBe n ef i t Tax

12. Natureof FBT

of fringe benefit furnished/granted to theEmployee by theEmployer, whether an individualor corp.

Fringe benefit is an income of the employeesubject to FBT but is payable by the Employer.Employer can deduct FBT from its taxableincome.

Fringe benefits are only for corporate oficers/ management. For rank and file, it is called anallowance. Allowances (benefits to rank and file)are not subject to FBT but rather compensationsubject to income tax.

13. Fringe Benefits notsubject to FBT(a) Fringe benefit authorized & exempted from

tax under special laws(b) Contributions of employer for the benefit of

the employee to retirement, insurance &hospitalizations benefit plan

(c) Benefits given to the rank & file employees,whether granted under a CBA or not

(d) De minimisbenefits(e) If the grant of fringe benefits to the

employee is required by the nature of, ornecessary to the trade,

(f) If the grant of the fringe benefit is for theconvenience

14. De Minimis Benefits (Last amended by

RR No. 5-2011) (a) Monetized unused

vacation leave credits of private (b)

Monetized value of vacation and sick leave

credits paid (c) Medical cash allowance to

dependents of employees (d) Rice subsidy of

P1,500 or 1 sack of 50 kg rice amounting (e)

Uniform and clothing allowance not exceeding

P4,000 (f) Actual yearly medical benefits not

i. Ordinary assets – assets that are usedprimarily in the ordinary course of trade or business, such as

Stock in trade of taxpayer Property which would properly be

includedin an inventory of the taxpayer, if

Depreciableassets

used

in the

Real property used in

ii. Capital Assets – properties of a taxpayer otherthan ordinary assets, such as

Stock and securities held by

taxpayers otherthan dealers in securities Interest in partnership and joint

venture Goodwill

(b) Types of Gains from Dealings inPropertyi. Ordinary gain (loss) v. Capital

gain (loss)Ordinary gain is derived fromthe sale orexchange of ordinary assetsincluding gains from performanceof services and business; included

(3) Professional IncomeIncome earned from the practice of

profession Ordinary loss is the excessof businessexpenses and losses over thebusiness income of the taxpayerderived from the sale or exchangeof ordinary assets; deductible from

provided

there

is no employer-employeerelationship between him and his

clients.Profession is primarily any endeavor requiring specialized

or workfield learning, art, or science engaged in as a

means oflivelihood or profit of an individual or group of individuals.

Capital gain is the excess ofvalue receivedover the determined cost from thesale or exchange of capital asset.The following are the rules on thetaxability of capital gains:o Sale of Stocks of a domesticcorporation –

subject toCGT

o Gain derived from sale of real property in the Philippines – subject to CGT

(4)

Income fromBusinessIn the case of manufacturing,merchandising, or mining business,“gross income” means the total sales,less cost of goods sold, plus any incomefrom investments and from incidental oroutside operations or sources. Indetermining gross income, deductionsshould not be made for depreciation,depletion, selling expenses or losses, orfor items not ordinarily used incomputing the cost of goods sold.In the case of sellers of services, theirgross income is computed by deducting

Capital Loss is the excess of the

losses fromsales or exchanges of othercapital assetsover the gains from such salesor exchanges; deductible only from(5) Income from Dealings

in Property

(a) Types of Properties

TAXATION LAW REVIEWER

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(j) Daily meal allowance for overtime work andnight/graveyard shift not exceeding 25% ofthe basic minimum wage on a per regionbasis

15. Convenience of theEmployee RuleWhen a fringe benefit is given solely for theconvenience of the employer, the fringebenefit is exempt from FBT because theemployee does not recognize income from thebenefit.

Ex. Expenditure on housing of engineer withinfactory premises is not subject to FBT

Ge n e r al R u l e : If housing is located outside, it issubject toFBT.

E x c e p t io n : If the nature of the employer’sbusiness is hazardous to health of employee,housing can be located outside the factorywithout being subject to FBT.

Ex. If employee is given housing allowance in

ii. Actual gain v. Presumed gain Actual gain is the amount realized from the sale of the asset in excess of the cost to thetaxpayer.

[1]

Cost or basis of property sold:

Presumed gain is thepresumption of the

law of the existence of a gainfrom sale ofreal property which subjects thesaid sale to CGT of 6% based on the

iii.

Long term capital gain v. Short term capitalgainIn case of individuals, the percentages of gain or loss to be taken into account shall be:

100% if the capital asset has been held for

12 months or less; andIn case of a corporation, the holdingperiod isnot applicable; the capital gain andloss are to be reported in full amountregardless of the number of years the

iv.

Net capital gain, net capital loss

Net capital gain is added to Net capital loss is not

deductible from

v. Computation of the amount of gain or lossGAIN = excess of the amount

realized overthe basis/adjusted basis (selling LOSS = excess of the basis/adjusted basisover amount realized (cost >

AMOUNT REALIZED = money received + fairmarket value of the property (other than

[2]

Cost or basis of the property exchanged incorporate readjustmentNon-recognition of gain or loss if exchange of property is solely in [a]

A corporation exchangespropertysolely for stocks in a corp. (bothparties tomerger/consolidation), orA shareholder exchangesstock in a corp. for the stockof another corp. (both corps.are parties to the

[b]

[c]

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MODE OF ACQUISITION

BASIS FORDETERMINING

GAIN/LOSS FROMSALE/DISPOSITION OFPurchase Cost of property acquired

on/after3/1/1913Inheritance Fair market value as of the date of acquisition (at the time of death)Gift the cost to the donor or tothe previous owner who didnot acquire it by gift; BUT, ifsuch basis > FMV at the timeof the gift, the basis shall besuch FMV for the purpose ofdetermining the lossAcquired for

less than adequate consideration

Amount paid by the transferee

Property acquired where gain or loss is not recognized (tax-free exchanges)

Basis of stock or securitiesreceived by transferor:

Same as the basis ofproperty, stock/securitiesexchanged(1) increasedby:

dividends amount of any

gainrecognized by the

exchange(2) decreasedby:

money received fair market value of

the otherproperty received

liability assumed

by thetransferee

his securities in such corp.solely forstock or securities in anothercorp. (both corps. are parties tothe merger/consolidation)If property is transferred to acorporation by a person inexchange for stock/unit ofparticipation in suchcorporation of which as a resultof such exchange such person,alone/together with others, not

income;

applicable

to bothcorporations and

individuals.[b]

E xcep tion : Losses fromsuch saleincurred by a domesticbank/trust company substantialpart of business is receipt ofdeposits, sell any bond,debenture, note or certificate orother evidence of indebtednessissued by any corporation, withinterest coupons or inregistered form (including one

[d]

[3]

Recognition of gain or loss in exchange ofproperty[a]

Gen er al Ru le: the entire amount of the

[2] Net Capital Loss Carry-overgain or loss shall be

recognized uponthe sale or exchange of

Corporations can no t carry overa netcapital lossIf net capital loss is sustainedin anytaxable year, such loss is treated in the succeeding taxable year as a loss from the sale/exchange of a capital asset held for not more than 12 mos. (100% deduction) Such net capital loss that should be carried over should not exceed the net income for the year Incurred (prior year’s net income)

[b]

E xcep tion : no gain or loss is recognized(tax-free exchanges)If in pursuance to a plan of merger ora

corporationexchanges property

solely for stocks in acorp. (bothparties tomerger/consolidation), or Ashareholder exchanges stockin a corp. for the stock ofanother corp. (both corps.are parties to themerger/consolidation), orA security holder of a corp.

o Amount deductible in 2012 is

P6,000only since it should not exceedthe netincome of the taxable yearwhere the loss was incurred.Note that the allowable capitalloss to be deducted in2012 (i.e. P6,000) is only tothe extent of the capital gain

another corp. (both

corps.

areth

parties

tomerger/consolidation)

If property is transferred

to acorporation by a person in

exchangefor stock/unit of participationin suchcorporation of which as a resultof such exchange such person,alone/together with others, not

vii. Dealings in Real Property situated in the

PhilippinesInvolves the sale or otherdisposition of realproperty classifed as capital assetlocated in the Philippines by anon-dealer in real estate.

Control is ownership ofstocks in acorporation possessing at least51% of the total voting powerof all classes of stocks entitled

If the sale is made by a dealer insecuritiesor if the real property is an ordinaryasset, the resulting gain or loss willbe considered as ordinary income.

vi. Income tax treatment of capitalloss

[1] Limitation on Capital Loss[a] Ge n e r al ru l e : Allowed only extent of the gains from such

sales orexchanges, hence, the net capital loss is not

TAXATION LAW REVIEWER

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Tax Base: the higher betweeno Gross selling priceo Prescribed zonal value of real

properties determined by the Commissioner

o Fair Market Value as determinedby the

NOTE:The capital losses realized from

the saleor disposition of stocks not listedand traded during the taxableyear are deductible only to theextent of capital gains from thesame type of transaction duringthe same period.If the transferor of the shares isan individual, the rule on holdingperiod and capital loss carry-overwill not apply.Non-deductibility of losses onwash sales and short salesGains from sale of shares of stockin a foreign corporation are notsubject to capital gains tax but tograduated rates either as capitalgain or ordinary income

NOTE: Gain or loss is immaterial since there is aconclusive presumption of gain.

An individual taxpayer has the option to treatthe capital gain as subject to 6% CGT or 5-32%

the Government orsubdivision, or

any

of its political

Tax Rate:6%

viii. Dealings inshares

Corporati

of stock

of Philippine ix. Sale of principal

residence[1]

Listed and traded in the stock exchange(Stock Transaction Tax)

The term "Principal Residence"shall refer tothe dwelling house, including theland on which it is situated, wherethe husband and wife or anunmarried individual, whether ornot qualifed as head offamily, and members of his family

Tax Rate — one-half of one percent(1/2 of1%)Tax Base — Gross selling priceor grossvalue in money of the shares ofstock sold, bartered, exchanged orotherwise disposed which shall beassumed and paid by the seller ortransferor through the remittanceof the stock transaction tax by the

not

be considered

interrupted

orabandoned by reason of the individual'stemporary absence therefrom due to travel or studies or work similar

circumstances.

Such

principalresidence must be

characterized bypermanency in that it must be the dwellinghouse in which, whenever absent,

[2]

Not listed and not traded inexchange (Capital Gains

the

stock

Amount of Capital Gain:Not over Php100,000On any amount in excess ofPhp100,000

Tax Rate5%

10%

Gen er al Ru le: The address shown inthe ITRis conclusively presumed as the principalresidence.

E xcep tion : If the taxpayer is notrequired tofile a return, certification fromBarangay Chairman or BuildingAdministrator shall sufice.

Tax Base – net capital gains realized duringthe taxable year from the sale,barter, exchange or disposition of not listed and not traded in theexchange.

stock Requisites:

i. Sale or disposition of the old actual

principalresidence

ii. By a citizen or resident alieniii. Proceeds of which is utilized in acquiring

or constructing a new principal

[3]

Dealer in securities (Ordinary Income)The gain on this type of transactionshall beconsidered as ordinary income subject to5%-32% for individuals and

TAXATION LAW REVIEWER

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iv. Notify the Commissioner within30 daysfrom the date of sale ordisposition through a prescribedreturn of his intention to avail taxexemptionCan be availed of only onceevery 10 yearsThe historical cost or adjustedbasis of hisold principal residence shall be

v.

vi.

vii. If there is no full utilization, theportion of

the gains presumed to have beenrealized

shall be subject to capital gains tax,and viii.The 6% capital gains tax

due shall bedeposited with an authorizedagent bank

(6)

Passive Investment Income

As a rule, passive income subjected to final tax is

(a) Interest Income

no longer included inannual taxable

the

computation

of the

Interest income – earned oncurrency bankdeposits & yield or any othermonetary benefit from depositsubstitutes & from trust funds &

Final Tax Rate

Interest Income received by an individual(except a nonresident individual) from adepositary bank under the

i.

Final Tax Rate – 7.5% (RC, RA)Interest income from long termdeposit orinvestment in the form of savings,common or individual trust fund,deposit substitutes, investmentmanagement accounts & otherinvestments evidenced by

ii.

Final Tax Rate:For RC, NRC, RA, NRA-ETB

For NRA-NETB – 25%

TAXATION LAW REVIEWER

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Held for 5 years or more

Exempt4 years to less than 5 years

5%3 years to less than 4 years

12%less than 3 years 20%

RC, NRC, RA, NRA-ETB

20%NRA-NETB 25%

TAX RATE ON CERTAIN PASSIVE INCOME ON CITIZ E NS AND R ES ID E NT

FINAL TAX

1. Interest under the expandedforeign currency deposit system

[Nonresident citizens: Exempt]

7.5%[Exempt fornonresident

aliensengaged in

trade orbusiness]2. Royalty from books, literary works,

&musical compositions

10%

3. Royalty other than above 20%4. Interest on any current bank

deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement

20%

5. Prize exceeding P10,000 20%6. Other winnings, except Phil

CharitySweepstakes & Lotto

20%

7. Dividend from a domestic corporation, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax of a partnership (except a general professional partnership), joint stock or joint venture or consortiumtaxable as a corporationNote: Dividends from foreign corporation

Citizens - computed under Sec.

24 (a) taxtable

Resident aliens – not taxable

10% [20%for non-residentaliens

engaged intrade or

business]

TAX RATE ON INTEREST INCOME FROM FOREIGN CURRENCY DEPOSIT [RR No. 10-1. Interest income actually

received by a resident citizen or resident alien from FCD

7.5% fnalwithholdi

ng tax2. If deposited by an OCW or seaman or nonresident citizen

Exempt

3. If in a bank account in the joint names of an OCW and spouse (resident)

50%exempt/50% fnalwithholding tax of4. Interest income actually

received by a domesticcorporation or resident foreigncorporation from FCD

7.5% fnalwithholdi

ng tax

8. Interest on long-term depositor investment in banks (with maturity of 5 years or more)

Exempt(b)

Dividend IncomeAny distribution made by acorporation to its shareholders out ofits earnings or profits and payable toits shareholders, whether in money orin other property.

Types of Dividends:Cash Dividend – valued andtaxable to the extent of amount ofmoney received by the stockholder.Stock Dividend – generally, purestock dividends are tax-exemptexcept if a corporation cancels orredeems stock issued as a dividendat such time and in such manner asto make the distribution andcancellation or redemption, in

NOTE: Tax SparingCreditTax reduced by the Philippines should befully applied or credited to the tax ondividend income received by the non-resident foreign corporation imposed bythe country of its domicile. This serves asan incentive by reducing their tax

i.

ii.

Ex. Domestic corporation paid cashdividend tonon-resident foreign corporation (NRFC)organized in Brazil. This shall form part ofNRFC’s income therefore taxable also inBrazil. The dividend received shall onlybe taxed at 15% in the Phils (instead of35%) IF Brazil will reduce/credit at least20% of the tax imposed in the Phils. from

part,

essentially equivalent

to thedistribution of a taxable

dividend, theamount so distributed inredemption or cancellation of thestock shall be considered astaxable income to the extent that itrepresents a distribution ofearnings or profits.Property Dividend – property ofan issuing corporation distributedas a dividend; valued and taxableto the extent of fair market value

(c)

Royalty incomeA payment or a portion of proceeds paid to the owner of a right for the use of such right.

iii.

From books, literarysources

works and musical

i.

Liquidating Dividendstockholders

– return ofin the form

iv.

RC, NRC, RA, NRA-ETBNRA-NETB

10%25

asset

distribution upon corporatedissolution; generally, the gain

realized orloss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. Script

ii. Other royalties

RC, NRC, RA, NRA-ETBNRA-NETB

20%25

v.notes; taxable to the extentof its

fairth

market value and inwarrant was

the

year

when

(d) Rental incomeAmount or compensation paid for

the use orenjoyment of a thing or a right andimplies afixed sum or property amounting to afixed sum to be paid at a stated timefor the use of property.TaxTreatment:

Income from LeaseholdImprovements –when the lessee erected or builtpermanent improvements on theleased property, which willbecome the property of the

Tax Rules:i. Tax Exempt:

Receiv

from

a Domestic

Corporation

Another domestic corporationResident Foreign Corporation

Pure Stock Dividend

[1]

ii. Subject to Final Tax (if received

Domestic Corporation)

from

a

Outright method – the income shall

o

be recognized

when

the

TAXATION LAW REVIEWER

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RC, NRC, RA 10%NRA-ETB 20%NRA-NETB 25%Non-resident Foreign

15% subject to the rule on

Corporation tax credit for taxactually paid and taxdeemed paid.Otherwise, subject toregular income taxrate of

improvement is completed at its fairmarket value.

Proceeds of life insurance policiespaid to theheirs/beneficiaries upon the death ofthe insured;If such amounts are held by theinsurer underan agreement to pay interest, theinterest payments shall be

ii.

o Spread-out method – the estimated

book value of the leaseholdimprovement at the end ofthe lease is spread out overthe term of the lease and isreported as income for eachyear of the lease, an

iii.

NOTE: The insured must die toavail of totalexemption. If he survives, there/s onlypartial exemption to the extent that theproceeds constitute return of capital(total amount ofpremiums previously

[2] VA T a dd ed to r en tal/p aid b y the lesse e All forms of property for lease,

whether

If advance payments are (8)

Prizes and Awards

Amount in cash or in kind received bychance or through luck are generallytaxable unless otherwise provided.

faithful

performance

of certainobligations of the lessee, it is not

subjectto VAT.

A security deposit that is applied to rental

shall be subject to VAT at the time of its

If the prizes are derived from

Winnings[3] Adv an ce P ay men t/ Lon g

ter m leaseIf the advance payment is aprepaidrental without restriction as touse, the entire amount is taxablein the year it is received.

If the prizes are derived from sources without – the

said amount is included in the gross income fortaxpayers who are taxable within and

If the advance payment is a securitydeposit which restricts the lessor as to itsuse, such amount shall be

Prizes and awards made primarily in recognition of

religious, charitable, scientific, educational,

If the advance payment is a loandeposit,or option money for theproperty or asecurity deposit to insure thefaithful performance of certainobligations of the lessee, suchamount shall not be taxable to

Recipient was selected without any action onhis partRecipient not required to render substantialfuture services as a condition of receiving the prize/awardExample: Nobel prize awardConstrued strictly, take note of 7 categories. It does not include athletic achievement. Contemplates

i.

ii.

iii.

iv.(7) Annuities, Proceeds from Life Insurance or Other

Types of Insurance Annuity – installment payments for

life, or for a guaranteed fixed period of time, whichever is

v.

Prizes, awards in sports competition sanctioned by

national sports associations whether held in

Amounts Excluded from Gross Income:i. Amount received by insured as return of

premium received either during theterm or at the maturity of the termsor upon surrender of the contract

Contemplates a particular competition, not acumulative achievement (Ex. Sportsman of the year award does

vi.

TAXATION LAW REVIEWER

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TaxpayerP10,000

or less

More thanP10,000

PCSOandLott

oRC, NRC, RA, NRA-ETB

5-32% 20%

Exempt

NRA-NETB 25%

25%

ExemptCorporation

30%

30%

Exempt

(9) Pensions, retirement benefit or separation pay

Pension – lump sum payment or on a staggered basis in consideration of

Income tax imposed byauthority of anyforeign country (except when thetaxpayer signifies his desire to availof the tax credit for taxes of foreigncountries)Estate & donor’staxesTaxes assessed against localbenefits of a kind tending toincrease the value of the propertyassessed

ii.

after an individualretirement.

reaches

the

age

ofiii.

iv.

Amounts Excluded from Gross Income (for further

discussion, please see Exclusions from Gross

v.

Retirement benefits received under RA 7641(Labor Code of the Philippines)

i.vi.

Retirement benefits receivedReasonable Private Benefit

under

aii.(d) Income from any sourcewhatever“Income from whatever sources

derived”means inclusion of all income notexpresslyexempted within the class of taxableincome under the laws irrespective ofthe voluntary or involuntary actionof the taxpayer in producing the

Amount received as a consequence

ofiii.separation for any cause beyond control(death, sickness or other physical disability) Benefits received from a foreign government by resident of nonresident citizens or aliens who reside permanently in the Philippines Veterans benefitsBenefits under SSS

iv.

v.vi. vii

(a)(b)

Gains from expropriation of propertyIncome derived from illegal Compensation

for damages

if itrepresents payment for loss of expectedprofits

(10) Income from any sourcewhatever

(a) Forgiveness off. Source rules in determining income

from within andwithout

income withinIn co me wi th in if more than

(b) Recovery of amounts previously written off

Recovery of bad debts previously allowed as deduction in the preceding years shall beincluded as part of gross income inthe year of recovery to the extent of

(c) Receipt of Tax Refund or Tax Credit

Taxes, when refunded or credited, shall be included as part ofgross income in the year ofreceipt to the extent of income tax

The following are non-taxable tax refunds:

(non-deductible taxes)i. Philippine income tax (but FBT can

be deducted from gross income asprovided for in RR 8-98))

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INCOME TEST OF SOURCE OF INCOMEInterests Residence of Debtor

Dividends c) From domestic corporation –

d) From foreign corporation:

50% of the gross income of such foreigncorp. for the 3- yr. period ending with theclose of the taxable year prior to the declaration ofdividends (or for such part ofsuch period as the corporation has been in existence) was derived from sources w/in the Philippines

Extent:P h il G I x Dividend = Income withinTotal GI

A GIFT – if efect of entire transactionis a reduction of purchase price ofproperty acquired in prior year)

NotTaxabl

eA CAPITAL TRANSACTION – if theforgiveness of a stockholder isequivalent to dividend distribution

Taxable

A TAXABLE INCOME – in exchange of a service performed

Taxable

shall be treated as derived entirely from sourceswithin the Phils regardless where the said shares are sold.

(2)

From sources without thePhilippinesInterest other than those derived fromsources within the PhilippinesDividends other than those derived fromsources within the PhilippinesCompensation for services performedwithout thePhilippinesRentals and royalties from propertylocatedwithout the Philippines or from anyinterest in such property including

(3)

Income partly within and partly without thePhilippinesItems other than those specified above in1) and 2)shall be allocated or apportioned to

h.

Exclusions from Gross Income(1) Rationale: it refers to items that are not included in

the determination of gross income either(a)

They represent return of capital or are notincome, gain or profit.They are subject to another kind of internal revenue tax.They are income, gain or profit that is expressly

(b)(c)

(2)

Exclusions v. Deductions v. Tax Credit

g. Situs of Income Taxation (See page 9 under Inherent

Limitations, Territorial)(a)

Deduction: included in the grossincome butlaterdeductedExclusion: not included in thecomputation ofgross income. Refers to incomereceived or earned but is nottaxable as income because of

(1)

From sources within thePhilippinesInterests derived from sourceswithin thePhilippinesDividends from domestic and foreigncorporationsCompensation for services performedwithin thePhilippinesRentals and royalties from propertieslocated inthe Philippines or any interest in suchproperty including rentals or royalties forthe use of or for the privilege of usingwithin the Philippines, patents,copyrights and other like properties.Sale of Real property located in the

(b)

(c)

(3)

Under the Constitution

Sec. 4(3) Art. XIV of the 1987Constitution provides that all assetsand revenues of a non- stock, non-profit educational institution useddirectly, actually and exclusively forprivate educational purposes shall beexempt from taxation.

TAXATION LAW REVIEWER

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INCOME TEST OF SOURCE OF INCOMEclose of the taxable

year prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore, nothing of such dividends forms part ofServices

(Compensationfor labor/personal services)

Place of performance of service

Rentals Location of the property/interest in such propertyRoyalties Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royaltiesGain on sale of

Real propertyLocation of property

Gain on sale of personal property other than shares of stock in a domestic corporation purchased in one country and sold in

Place of Sale

Gain on sale of shares of stock in a domestic corporation

Philippines regardless of where sold

only if claim includes compensation forpersonal injury. If no personal injury, damages for car wreckage will only be exempt to theextent of the amount of the actual damage

(4) Under the Tax Code(GIRL CRM)

(a) Gifts, Bequests & But, income from suchincluded in gross income

property

shall be

by disinterestedgenerosity and pure liberality

Difficult to establish gift situations if there is an

(f) Retirement Benefits, Pensions, Gratuities

Retirement benefits receive under

R.A. 7641(Labor Code of the Philippines) and thosereceived in accordance with a

Employer-Employee

relationship

(Aservic

ebonus/assistance in recognition ofrendered is not exempt)If given under a)

of any (1) R.A. 7641

Conditions: (i) at least 60 years

old; (ii) 5years of service at time of retirement

Availed if there is no

reasonable privatebenefit plan (benefits under this option isless)

moral or legal duty or b) from the incentive ofc) an anticipated benefit of an economic natureor where it is a return for services rendered, proceeds cannot qualify as a gift.Most critical is the giver’s intention or

(b)

Income Exempt under TreatyTo the extent required by any treaty obligation binding upon the Phil govt. (2) Reasonable Private Benefit

Plan (RPBP)Conditions: (i) at least 50 yrs old;(ii) in theservice of same employer for atleast 10 years at time ofretirementMust be approvedby BIRA pension, gratuity, stock bonus orprofit- sharing plan maintained byan employer for the benefit ofsome or all of hisoficials/employees, whereincontributions are made by suchemployer for theoficials/employees, or both, forthe purpose of distributing to suchoficials & employees the earnings& principal of the fund thusaccumulated; & provided in theplan that no part of the income

(c)

Amount Received by InsuredPremium

as Return of

Under life insurance, endowment, orannuitycontracts, received either during theterm or at the maturity of the termsor upon surrender of the contract

(d)

LifeInsuranceProceeds of life insurance policies paidto the heirs/beneficiaries upon thedeath of the insuredIf such amounts are held by theinsurer under an agreement to payinterest, the interest payments shallbe included in the gross incomeInsured must die to avail of totalexemption. Ifhe survives, there/s only partialexemption

You can “avail of the benefits onlyonce” (onceyou’ve availed of RPBP, you cannot availof another RPBP); but you can avail ofexemption under another ground such as

(e)

Compensation for Injuries or SicknessReceived through Accident/Health Insurance orWorkmen’s Compensation

Act,

ascompensation for personal

injuries/sickness +amount of damages received onaccount ofsuchinjuries/sicknessDamages will be exempt only if theyarise together with personal injury;

TAXATION LAW REVIEWER

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BIR Ruling No.125-98The phrase “shall not have availed of theprivilege under a retirement benefit plan of thesame or another ER” found in Sec. 32(B)(6)(a)of the Tax Code means that the retiringoficial must not have previously receivedretirement benefits from the same or another

(3) Amount received as aconsequence of

separation for any cause beyondcontrol

Contemplates a particular competition, not acumulative achievement (Ex. Sportsman of the year award does

Sickness must be job threatening mustrender taxpayer incapable of (4) Prizes &

Awards in recognition of religious, charitable,scientific, educational, artistic, literary or civic achievement, but only if:recipient was selected without any action on his partrecipient not required to rendersubstantial future services as acondition of receiving theprize/awardExample: Nobel prize awardConstrued strictly, take note of 7 categories. It does not include

Benefits

from

separation

due toretrenchment come under

exemption (nochoice/option; but if the Employeeavails of an optional earlyretirement plan, he cannot reasonthat he was separated for reasonsbeyond his control, therefore, hecannot claim exemption of thebenefits on this

(5) 13th month pay & otherbenefits (i.e.

productivity incentives & Christmas bonus)(4) Benefits received from a foreign

governmentby resident of nonresident citizens or aliens who reside permanently in

If the benefit exceeds P30,000, only the excesswill be taxable.

(5) Veterans benefits

(6) GSIS, SSS, Medicare, Pag-ibig contributions &

union dues of individuals(6) Benefits underSSS (7) Gains from the sale of bonds,

debentures orother certificates of indebtednesswith a

(7) Benefits received from GSIS

(g) Miscellaneous Items(1) income derived by foreign

government (from investments inPhilippines in loans, stocks, bonds orother domestic securities)

(8) Gains from redemption of shares in mutual

fund(6

)

Under a Tax Treaty

Income of any kind, to the extentrequired by any treaty obligationbinding upon the Government of thePhilippines, is exempt from income tax.

Refers only to passive income. If theforeigngovernment engages intaxable.

trade, incomeis

(2) income

derived by

govt/itsutility or

politicalexerci

subdivisions (from public

Business profits of a foreigncorporationorganized under the laws of atreaty country from sources within thePhilippines are not subject to Philippineincome tax, unless such profits areattributable to a permanentestablishment of the foreign

essential governmental function)Key: Income should accrue togovernment; ifthe income is retained by the publicutility, it is not exempt look atcharter of political subdivision/GOCCto determine whether itsincome accrues to the

(3) prizes,

awards

in sports competitionsanctioned by national sports

associationswhether held in Philippines or abroadTAXATION LAW

REVIEWERPage 38 of165

BIR Ruling No.143-98The terminal leave pay of governmentemployees whoseemployment is coterminous is exempt since itfalls within the meaning of the phrase “forany cause beyond the control of the said

(7) Under Special Laws

(a) R.A. 6938 Cooperative Code of the Philippines Agricultural multi-purpose cooperative registered with the Cooperative Development Authority is exempt from ordinary income taxon its transactions with members and non-members for a period of ten (10)

NOTE: Any income payment which isotherwisedeductible under the Code shall beallowed as a deduction from the payor'sgross income only if it is shown that theincome tax required to be withheld has

(2) Return of capital (cost of sales orservices)

registration. Thereafter,

the

income

taxexemption shall be

limitedtransactions with members

to business

(a)

Sale of inventory of goods bymanufacturers anddealers of properties – the portion ofthe receipt representing the cost ofgoods manufacture and sold(manufacturers) and cost of sales

(b)

R.A. 7279 Urban DevelopmentHousing Act of1992

The National Housing Authority isexempt from all fees and charges of anykind, whether local or national, whilethe private sector participating insocialized housing shall be exempt fromtaxes on project-related income directly

(b)

Sale of stock in trade by a real estatedealer anddealer in securities – generally, thereturn of capital are not allowed to bededucted from the gross sales. Rather,they are required to deduct the totalcost specifically identifiable to the real

(c)

R.A. 7653 New Central Bank Act (asamended byR.A.8791)

The BSP is exempt from all national,provincial, municipal and city taxes for a

(c)

Sale of services – not allowed to deduct anyreturn of capital; thus the entire grossreceipts

(3)

Itemized Deductions (BELT DID CRP)

(d)

R.A. 7916 PEZA Law (as amended)PEZA-registered enterprises are given income tax

i.ii.iii.

iv.v.

vi.vii.viii

.ix.

Bad DebtsE xpenses

holidays ofcommercial considere

6 or 4 years from the date ofoperatio

nspionee

iftheirand

activities arenon-

TaxesDepreciationInterestDepletion of oil & gas wells &minesCharitable & other contributions Research & Development Pension

(e)

R.A. 9178 Barangay Micro Business Enterprises(BMBE) Act of 2002

BMBE shall be exempt from income income arising fromtheenterprise.

operation

of the (a

)i.

ExpensesRequisites for deductibilityi. Deductions from Gross Income

(1) General Rules

To be deductible as a business expense:

[1]

Must be ordinary ANDnecessary (bothmust be complied with) trade,business or professional expensesonlyMust be paid or incurred during thetaxable yearMust be paid or incurred in carryingon or which are directlyattributable to, the development,management, operation and or

(a)(b

The expense must be ordinary andnecessary,It must be paid or incurred within thetaxableyear,andIt must be paid or incurred incarrying on a trade or business.The expense must be substantiallyproved by evidence or records the

[2][3](c

)(d)

There is yet to be a clear-cut criteria or a fixedtest for determining the reasonableness of an advertising

Comm iss ioner of In terna l Rev enue, [ G.R. Nos .L-28508 -9, J ul y 7,198 9]

TAXATION LAW REVIEWER

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fast rule on the matter, theright to adeduction depends on a number offactors such as but not limited to: thetype and size of business in which thetaxpayer is engaged; the volume andamount of its net earnings; thenature of the expenditure itself; theintention of the taxpayer and thegeneral economic conditions. It is theinterplay of these, among otherfactors and properly weighed, thatwill yield a proper evaluation. We findthe subject expense for theadvertisement of a single product tobe inordinately large. Therefore,

NOTE:

Expenses allowableto

pr iva t eto the

educational institutions: In additionexpenses allowable as educational institution has the option to electeither:(a

)to deduct as expense those otherwiseconsidered as

capital outlays

ofdepreciable assets for the expansion ofschool facilitiesto capitalize asset & deduct allowance for depreciation

(b)

ii. Substantiationevidence (i.e.statements

Requirements: suficient

official receipts, other adequate records)

to

iv. Salaries,

wages &

other

forms

ofo Amount of expense deductedo Direct connection/relation of the expense

compensation for personal servicesactuallyrendered (including grossed-upmonetary value of FB); but thefinal tax should have been paid

Among the ordinary andnecessary expenses paid orincurred in carrying on any trade orbusiness may be included areasonable allowance for salariesor other compensation for personalservices actually rendered. Thetest of deductibility in the case ofcompensation payments is whether

to the development, managementoperation &/or conduct of the

trade,business or profession of the

iii. Classification of Expenses:Ordinary expense – normal or usual

[1]

inrelation to the taxpayer’s business and thesurrounding circumstance.

[2]

Necessary expense –appropriate andhelpful in the development oftaxpayer’s business and areintended to minimize losses or toincrease profits. These are the day

v. Travel expenses in pursuit of trade, business/profession

Traveling expenses include transportationexpenses and meals and lodging

While illegal income will form partof theincome of the taxpayer, expenses which constitute bribe, payment, beingpolicy are not income.

against law anddeductible

publicgros

vi.

Cost of materialsIn general, the cost of materials orsuppliesis deductible as expense whenconsumed or used in businessoperation during the taxableperiod. Unused supplies andsupplies not used for business

[3]

Business expense – expenditure related tothe business that is deductible in the year incurred, in the same

[4]

Capital expense – expenditureimproves or adds to the

thatyou

If the materials or supplies areused directlyor indirectly in the production ofthe product, the related cost shallfor part of the cost of the productand will be deductible as suchwhen the products are sold.

property or equipment. Not immediatelydeductible. It is deductible over time, such as in the form of

TAXATION LAW REVIEWER

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EXPENSES TO BE DEDUCTIBLE:1. Amount must be reasonable.2. Amount must be substantiated.3. It is not contrary to law, public policy or morals.4. Tax required to be withheld must have been paid to the

vii.

Rentals &/or other payments as lessee, useror possessor

On the accrual basis, rent isdeductible as expense whenliability is incurred during theperiod of use. While on cash basis,

o 0.50% of net sales (gross salesless salesreturns/allowances & salesdiscounts) for taxpayers engagedin sale of goods or properties;1% of net revenue (gross revenueless discounts) for thoseengaged in sale of services,including exercise of profession

o

An advance payment is not deductibleexpense of the lessee until the period isused, although the lessor may be

10 -02]

xii. Political campaign expenses

viii. Repairs and maintenance

xiii. Training expensesIncidental (minor) repairs –

deductible fromgross income; does notmaterially add tothe value of the property norappreciably prolong its life, but

(b) Interesti. Requisites for deductibility, as

implementedby Rev. Reg. 13-2000:

There must be anindebtednessThere should be an interest expense paid or incurred upon suchindebtedness Indebtedness must be that of the taxpayer Indebtedness must be connected with the taxpayer’s trade, business or exercise of professionInterest expense must have beenpaid or incurred during the taxableyearInterest must have beenstipulated in writingInterest must belegally dueInterest payment arrangementmust not be between relatedtaxpayersInterest must not be incurred tofinancepetroleumoperations

[1][2 Majo

rrepairs

(replacement)

– notdeductible since it prolongs the

life of theasset; should be capitalized.

[3][4

ix.

Expenses under lease agreements [5

]x. Expenses for professionalsThe cost of supplies in the practiceof his profession, expenses paid inthe operation and repair oftransportation equipment used inmaking professional calls, dues toprofessional societies andsubscriptions to professionaljournals, the rent paid forofice rooms, the expenses of thefuel, light, water, telephone, etc.;

[6][7][8[9]

[10]

Amounts currently expended forbooks,furniture, and professionalinstruments and equipment, theuseful life of which is short, may be

[11]

But amounts expended for books, furniture,

NOTE: Gen er al Ru le On D edu cti o nan

dprofessional

instruments

and

The amount of interest expense paid orincurredwithin a taxable year of indebtednessin connection with the taxpayer’s trade,business, or exercise of profession shallbe allowed as a deduction from the

equipment of a permanent character arenot allowable as deductions.

xi.

Entertainment, amusement & recreationexpenses directly connected to the devt., mgt.& operation & conduct of trade, business/profession

Directly connected to the

Subject to a limit of

TAXATION LAW REVIEWER

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LIMITATION ON DEDUCTIONInterest expense shall be reduced by an amount

If indebtedness is payable inperiodicamortizations, int. is deducted inproportion of the amt. of theprincipal paid.

equal to the followingsubjected to fnal

% of interest

income

1/1/001/1/06

38%42%

[2]

Payments made:Between members of a family (include

only

brothers

& sisters, spouse,ancestors, & lineal descendants)

Between an individual & acorp. more than 50% in value ofoutstanding stock is owned bysuch individual (except in case ofdistributions in liquidation)Between 2 corps. More than 50%in value of outstanding stockowned by same individual, ifeither one is a personal holdingco. or a foreign holding co. duringthe taxable yr. preceding thedate of sale/exchangeBetween grantor & fduciary of any trust Between fiduciary of a trust & the fiduciary of another if same person is a grantor to each trustBetween fiduciary & a beneficiary of a trustIndebtedness is incurred by a service contractor to fnance petroleum corp. Interest on preferred stock which in reality is dividendInterest on unpaid salaries and bonuses Interest calculated for cost keeping on account of capital or surplus invested in business which does not represent charges arising

Example: Year 2012Interest expense = P2,000Interest income subject to fnal tax = P1,500Deductible interest expense = P1,505 [P2,000 – (P1,500 x

The objective of the limitation is todiscourage taxarbitrage on back-to-back loans, theproceeds of which are invested inincome earning interest that is subject to

TAX

ARBITRAGE -is a method of borrowingwithou

tentering

into

a debtor/creditorrelationship,

oftento resolve financing andexchange control problems. In tax

cases, back-to-back loan is used to take advantage ofthe lower rate of tax on interest incomeand a higher rate of tax on interest

ii. Deductible Interest Expense:

Interest on taxes, such as thosepaid for deficiency or delinquency,since taxes are consideredindebtedness (provided that the taxis a deductible tax, except in thecase of income tax). However,fines, penalties, and surcharges onaccount of taxes are not

[1]

tax sh all no t b e sub ject ed to th e limi tationo n d edu ction o f 42%/ 33%.[2

]Interest paid by a corporation on scripdividends.Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on such interest was withheld. Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said corporation is the

iv. Interest subject to specialrules

Interest paid in advanceInterest periodically amortizedInterest incurred to acquire property used in trade or business

[1][2]

[3]

[4]

At the option of taxpayer, the interest may beallowed as:

as expense (outright deduction) capital expenditure

(subject todepreciatio

n)iii. Non-deductible Interest

Expense:(c) Taxes

The term “taxes” refers to national and localtaxes, and means TAXES PROPER, hence, no deductions are allowed for:

[1] Interest paid in advance through discount

or otherwise (in case of cash basis taxpayer) Allowed as deduction in the year

TAXATION LAW REVIEWER

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[1][2]

Interests*SurchargesPenalties or fines incident to delinquency(Sec. 80, Rev. Reg. 2)

Exceptions to the rule that only suchpersons on whom the tax is imposed by law can claim

(a)

Taxes of shareholder upon hisinterestas such and paid by thecorporation withoutreimbursement from him, canbe claimed by the corporationas deduction.A corporation paying the taxfor theholder its bonds or otherobligation containing a tax-free

* Interest incurred or paid by a taxpayer

on all unpaid business-related taxesshall befully deductible from gross incomeand shall not be subject to thelimitation on deduction of 42%/33%

(b)

i. Deductible TaxesAll taxes, national, or local, paid orincurred during the taxable year in connection with thetaxpayer’s profession, trade ordeductible from gross

business,

are

iv. Limitations onDeductions

In case of a nonresident alienindividual engaged in trade/businessin the Philippines, taxes to bededucted shall be allowed only if & tothe extent that they are connected

ii. Requisites for DeductibilityIt must be paid or incurred taxable yearIt must be paid or incurred in

[1]

within

the

[2]

connectionwith the taxpayer’s trade,

profession orbusinessIt must be imposed directly on the taxpayer It must not be specifically excluded by law from being deducted from the

v. Tax Credit – a right of an incometaxpayer todeduct from income tax payable theforeign income tax he has paid to hisforeign country subject to limitation.

[3][4

[1]

Who can Claim?[a

][b][c

CitizenDomestic CorporationMember of GPPBeneficiary of an estate or trust

iii. Non-Deductible Taxes:[a] Philippine income tax (but FBT

can be deducted from gross incomeas provided for in RR 8-98)

[b] Income tax imposed by authority of any

foreign country (except when thetaxpayer signifies his desire to availof the tax credit for taxes of foreigncountries)

[c] Estate & donor’s taxes[d] Taxes assessed against local

benefits of a kind tending toincrease the value of the propertyassessed

[e] Final taxes, being in the nature

[2] Who cannot claim?[a

]Alien individual (except resident aliensderiving income from within & without thePhils., if there is reciprocity)

[b]

[3]

Substantiation Requirements – Thetax creditshall be allowed only if thetaxpayer establishes to thesatisfaction of the Commissioner[a

]The total amount of the incomederivedfrom sources without thePhilippines;The amount of income derived fromeach country, the tax paid orincurred to which is claimed as acredit under said paragraph, suchamount to be determined underrules and regulations prescribed bythe Secretary of Finance; andAll other information necessary for

Taxes, when refunded or credited, shall be

included as part of gross income in the yearof receipt to the extent of

[b]

For NRAETB and RFC, taxes paid or incurred [c

]extent that they are connectedincome within the Philippines.

from

TAXATION LAW REVIEWER

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[4] What amount may be taken as tax credit:

The amount of tax credit allowed isequivalent to the tax paid or incurredto a foreign country during thetaxable year but NOT TO EXCEEDTHE FOLLOWING LIMITS:

[a] Per Country Limitation –Amount of credit to taxpaid/incurred to any country shall

E XAM PLE :

Country

Limi

T I p er co un tr y (ou tsid e) Philippine= x

TI from all sources

Income Tax

A. PER COUNTRY LIMITATIONCountry A :Country

[b] Global Limitation – Totalamount of credit

shall not exceed same proportion of tax

** maximum tax credit limit

B. GLOBAL LGlob

alLimi

To tal T I fro m ou tsid e Philippine

[(90,000/200,000 x 60,000)] = P27,700

= xTI from all sources

Income Tax Computation of Allowable

tax creditNOTE: Allowable Tax Credit shall be the LOWERof the actual tax paid to the foreign country, per country limitation and

Less: Allowable Foreign TaxCredit

[5] When Credit for Taxes may be Taken:

The credit for taxes provided bySection34(C)(3) to (7) may ordinarily betaken eitherin the return for the year in which thetaxes accrued or on which the taxeswere paid, dependent upon whetherthe accounts of the taxpayer are

** Cannot exceed maximum tax credit limitactual; Counlower than ttotal of

(d) Lossesvi

.Tax Credit v. Deduction

Deduction: included in the but later

i.[1][2]

Requisites for deductibility of ordinary lossLoss must be of the taxpayerActually sustained during the taxableyearNot compensated for by insurance or other forms of indemnityIncurred in trade, business or

gross income

Tax Credit: paid deducted from the tax liabilitytaxpayer.

of the

[4]

profession lost

through

fires,

storm,shipwreck, or other casualties

OR fromrobbery, theft orembezzlementEvidenced by a completedtransactionNot claimed as a deduction forestate taxpurposes

[5][6[7]

TAXATION LAW REVIEWER

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Par ti c ul a rs Net A c t ua l Fo re i g nP h i l I n c o me

Inco me Tax Pai d i n Tax d ue atCountry

A CountryBPhil-source incomeTot NI –all

A. PERCOUCountryA :CountryB :

** maxi

B.GLOBALL

[(90,000/

Computato Tax Due on P Less: Allow

P50,000 P18,00040,000 P11,000110,000

P200,000 P29,000 P60,000

[(50,000/200,000 x 60,000)] = 15,000 [(40,000/200,000 x 60,000)] = 12,000

IMITATION

200,000P60,000

P15,00011,000 26,000

P34 , 000

mitation A, Country A, 15K is lowerthan the try B, 11K (actual) is thelower amount; get the er countryamounts. For limitation B, 27.7K is

The taxpayer’s failure to record in his books thealleged loss proves that the loss had not been sufered, hence, not

There is no substantial change in theownership of the business when:Domi ng

o]- not < 75% in nominal

value ofoutstanding issued shares is held by same persons

not < 75% of paid up capital of corp. is held by same

ii.[1]

Category and Types of LossesOrdinary Losses

-

incurred in trade or business, orpractice ofprofessionof property connected with thetrade, business, or profession, if theloss arises from fires, storms,shipwreck or other casualties, or

NOTE: No actual change inownership isinvolved in when: (1) in case thetransfer involves change from directownership to indirect ownership (2)merger of the subsidiary into the

[3] Special Types of LossesNOTE: Rev. Reg. No. 12-77

requires that adeclaration of loss should be filedwith the BIRwithin 45 days after the occurrenceof the casualty, robbery, etc. Failureto submit the declaration within 45

[a]

Capital Losses – deductionsallowed only tothe extent of the gains from suchsales or exchanges of capitalassets (does not apply to banksand trust companies)

losses from sale or exchange ofcapital assetslosses resulting from securities becoming worthless and which are capital assets losses from short sales of property

[2]

Net Operating LossCarry-over

Refers to the of

allowabledeductions over gross income

of thebusiness for any taxable year,which has not been previouslyofset as deduction from gross

[b] Losses from wash sales of stock or securities 30 days before and after the

date of thesale, the taxpayer has acquired or has entered into a

The net operating loss of abusiness shall becarried over as deductionfrom grossincome for the next 3 consecutivetaxable years immediately

acquire,

sub stan tially id en ticalsto ck/ secur iti es

Ge n e r al ru l e : NOT deductible unless claim

is made by a dealer in stock/securities &made in ordinary course of

The 3 year period shallcontinue to runnotwithstanding that thecorporation paid its taxes underMCIT, or that the individual availed

[c]

Wagering Losses - allowed only to theextent of the gains from such

For min es o th er th an o il & g as wells , if

[d]

Abandonment LossesIn case of abandoned petroleumoperations, accumulatedexpenditures incurred prior to1/1/79 allowed as deduction onlyfrom income derived from

loss incurred in any of the 1st 10yrs. ofoperation, carry-over for the next 5

Requirements:

[a]

the taxpayer was notexempt fromincome tax in the year ofsuch netoperatingloss;the loss was not incurred in ataxable year during which thetaxpayer was exempt fromincome tax, and

same

contract

area; notice ofabandonment shall be

filed withCommissionerIn case of abandoned producingwell, unamortized cost &undepreciated costs of

[b]

[c]

TAXATION LAW REVIEWER

Page 45 of165

[e]

Losses from Illegal Transactions - NOTdeductible

ii. Ascertainment of Worthlessness (proof of two

facts):[f] Losses due to voluntary removal of buildingincident to renewal or replacements –

Taxpayer did in fact ascertain the debt to beworthless in the year for which the deduction was Go odr ich]That in so doing, he acted in good faith[ C oll e c to r v . G o o d r i c h ]

[g]

Loss of useful value of capital assets due tocharges in business conditions – deductible

Depends upon the factsand thecircumstances of thecaseGood faith does not require thatthe taxpayer be an incorrigibleoptimist but on the other hand, he

sustained

(after

adjustment

forimprovement, depreciation, and salvagevalue)

[h]

Losses from sales or exchanges of propertybetween

related

taxpayers

– NOTdeductible as provided under

Section 36 ofthe NIRC but the gains are taxable

(f) DepreciationGradual diminution in the service oruseful value of tangible property duefrom exhaustion, wear and tear andnormal obsolescence. Also applies toamortization of intangible assets, theuse of which in trade or business is oflimited duration.

(e) Bad DebtsDebts due to the

taxpayeractually

ascertained to be worthless and charged ofduring the year may be claimed as [1

]The allowance for depreciationmust bereasonable.It must be for propertyused foremployment in trade or businessor out of its not being usedtemporarily during the year.The allowance must be

“Actually ascertained to be worthless” –Worthlessness is not determined by an

[2]

upon the exercisejudgment. The

of sound businessdetermination of

[3][4

particular facts and circumstances of the case.It must be uncollectible even in the future.Co., [ 21 SC RA 1336]

ii. Methods ofDepreciation

[1] Straight-linei.[1]

Requisites for Deductibility:Existing indebtedness due to the taxpayer

co st - salva ge v alu e

Depreciation

Expens

=which

must

be valid

and

legally

estimated lifedemandable,

Connected with the taxpayer’sbusiness or practice of

[2]

trade,

Example: cost=15,000; SV=5,000; est. life=5years[3

]Must not be sustained in atransactionentered into between relatedparties,Actually ascertained to beworthless and uncollectible as ofthe end of the taxable year, andActually charged of in thebooks of accounts of the

15,000 - 5,000 = 2,00

0[4]

5 years

[5]

[2] Declining balance method:

co st - ac cu m. d ep .

Depreciation

Expens

x Rate =estimated

lifeNOTE: Tax Benefit Rule - Recovery ofbad debtspreviously allowed as deduction in thepreceding yrs. shall be included as partof gross income in the yr. of recovery tothe extent of the income tax benefit of

Example: cost = 15,000; SV = 5,000; est. life = 5years; depreciation rate 200%

TAXATION LAW REVIEWER

Page 46 of165

Year1:

15,000 - 0

The BIR and the taxpayer may agree inwriting on theuseful life of the property to bedepreciated. The agreed rate may bemodified if justified by facts orcircumstances. The change shall not beefective before the taxable year on whichnotice in writing by certified mail or

x 200% =

6,0005

Year2:

15,000 - x 200% =

3,6005

(g) Depletion of oil and gas wells and mines

The reduction of cost or value ofnatural resources such as oil & gaswells, & mines as the resources are

[3] Sum of years digits method:

n th p er iod

Depreciation

Expens

x cost - sv*

=sum of year *sv = salvage

value No further allowance is granted if the allowanceExample: cost = 15,000; SV = 5,000;

est. life = 5yearsSum of years = 5 + 4 + 3 + 2 + 1 = 15

i. Intangible exploration & development drilling

cost: deduct in the yr. incurred if incurred forno n - p ro d u c i n g we l l s & m i n e s

Year 1: deduct in full OR capitalize &

amortize ifincurred for pr odu cin g wells &

5 x 15,000 -

5,000= 3,333.

3315 same contract

areaYear 2: ii. Election to deduct exploration &

developmentexpenditures for mining operations:

4 15,000-5,000

x = 2,666.671

5 [1][2

deduct as costdeduct as adjusted basis provided, totalamt. deductible shall not exceed 25% of net income

iii. Special Types of Depreciation

[1] Petroleum Depreciation of all properties

directly actual exploration & development

expendituresnet of 25% of NI shall be carried forward to succeeding yrs. until fully

related to production of petroleum shallbe allowed under straight-line or declining-balance (DB) methodMay shift from DB method to SL method Useful life: 10 yrs. or shorter life as may be permitted

exploration expenditures =incurred for thepurpose of ascertaining the existence,location,extent, or quality of any deposit ofore/other mineral & pd/incurred before

yrs. under straight-line method

[2] Mining operations depreciation on all properties

development expenditures = incurred duringdevelopment stage of the mine or other natural

operations

other

than

petroleumoperations at the normal rate if

expectedlife is 10 yrs or less.

if expected life is > 10 yrs.,

depreciate

NOTE: Depletion of Oil and Gas wellsand minesdeductible by a non-resident alien orforeign corporation only in respect of oiland gas wells or mines located in the

NOTE: Depreciation is deductible by non-residentaliens engaged in trade/business or non-residentcorporation only when such property is

TAXATION LAW REVIEWER

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(h)

Charitable & other contributions

[2]

Donations to certain foreigninstitutions orinternational organizations - incompliance with agreements,treaties, or commitments entered

i.[1]

Requisites for Deductibility:The contribution or gift must be actually paidIt must be given to the organizations specified in the codeThe net income of the institution must not

[2]

foreignorganizations

institutions/international

[3] inure to the

benefitstockholder or

of any

private

[3]

Donations to accredited NGOsOrganized & operated exclusivelyfor scientific, educational,character-building& youth & sports development,health, social welfare, cultural orcharitable purposes orcombination thereof (no part ofnet income inures to the benefit

ii. ValuationThe amount of any charitable contribution ofproperty other than money shall be based on the ac q ui si t i o n c o s t of

iii.[1]

Contributions subject tolimitations:Contributions or gifts actually paidor made w/in the taxable yearTo or for the use of thegovernment or its agencies or anypolitical subdivision, exclusively forpublic purpose, orTo accredited domestic

Must be utilized within 15th of the 3rdmonth after the close of the taxable year, directly for the

[2] constituti

ngthe

purpose

of theorganization, unless period is

extended[3] Administrative expense should

not begreater than 30% of total

[a][b][c][d]

ReligiousCharitableScientificYouth & sports development Cultural or educational purposes For the rehabilitation of veterans To social welfare

Upon dissolution, assetswould bedistributed to another nonprofitdomestic corp. organized forsimilar purpose or to the state forpublic purpose or to another org.to be used in same purpose as

[4]

To NGOs No part of NI inures to the

benefit of any (i) Research andDevelopment

Paid or incurred by a taxpayer duringthe taxableyr. in connection with his trade,business or profession as ordinary &necessary expenses which are notchargeable to capital account; allowedas deduction during the taxable year

iv. Limitation[1] For individual:

taxable

not more than

10% ofbefore deducting

thecharitable contributions

[2] For corporation: not more than 5 % oftaxable income

beforecharitable

deducting

the

Paid or incurred during the taxable yearOrdinary and necessary

[1][2 connecti

onprofessio

with

trade

business

orv. Contributions deductible in full[1] Donations to the govt. – to

finance, to provide for, or to beused in undertaking priorityactivities in education, health,youth& sports development, humansettlements, science & culture & ineconomic development accordingto National Priority Plan determinedby NEDA

If not in accordance w/

Not chargeable to capital account

[3]

ii. Requisites for amortization of certain R&D

expenditures(treated as deferred expenses):[1]

paid/incurred by the taxpayer in connectionw/ his trade/businessnot treated as expensechargeable to capital acct. but notchargeable to property of a

[2][3

TAXATION LAW REVIEWER

Page 48 of165

[4] amortized over a period of not < 60 months

as may be elected by the taxpayer

subject to the control anddisposition of theemployer;The payment has not yet beenallowed as a deduction; andThe deduction is apportioned inequal parts over a period of 10consecutive years beginning with

[5]iii. This subsection on research and

developmentcost is not applicable to:

[6][1

]Any expenditure for theacquisition orimprovement of land, or for theimportantof prop. to be used in connectionwith R&D of a character subject todepreciation and depletionAny expenditure paid/incurred forthe purpose of ascertaining theexistence, location, extent, orquality of any deposit of ore or

ii. Summary rules on Retirement Benefits

Plan/Pension Trust:[2] EXEMPT FROM INCOME TAX –

employees’trust under Sec.60(B)EXCLUSION FROM GROSS INCOME –amount received by the employeefrom the fund upon compliance ofcertain conditions under Sec. 32(B)

(j) Pension trusts (Past Service Cost)Pension Trust Contributions – adeduction applicable only to theemployer on account of itscontribution to a private pension planfor the benefit of its employee. Thisdeduction is purely business in

NOTE: Amounts contributed by theemployer duringthe taxable year into the pension plan tocover the pension liability accruing duringthe year – considered as ordinary andnecessary expenses under Sec. 34(A)(1).

Established or maintained by employer toprovide for the payment of reasonable pensions to his

1/10 of the reasonable amountpaid by theemployer to cover pension liabilityapplicable to the years prior to thetaxable year, or so paid to place the trustin a sound financial basis – deductible

Normal Cost – the contributionsduring thetaxable year to cover the pensionliability accruing during the taxableyear. Allowed as a deduction underSec. 34(A)(1) as “expenses in

(k) Premium

payments

on health and/orhospitalization insurance

An amount of premium on healthand or hospitalization paid by an indi v i d u al t a xp a y er

Past Service Cost – amount in excess of theabove contribution (covering pension liability pertaining to old

(head of family or married), for himself andmembers of his family during the taxable year. i. Requisites for

during

the

years

previous

to theestablishment of the pension trust);

allowedas deduction only if:

[1][2

Insurance must have actuallybeen taken;The amount of premiumdeductible from gross income doesnot exceed P2,400 per family orP200 per month during thetaxable year;That said family had a grossincome of notmore than P250,000 for thetaxable year;

o such amount not been allowed as adeductionapportioned in equal parts over 10consecutive years beginning with

o

[3]

i. Requisites for Deductibility of PastServiceCost

The employer must haveestablished apension or retirement plan toprovide for the payment of

[4]

[1]

ii. Who may avail of this deduction?[1]

Individual

taxpayers

earning

purelycompensation income during the

year.Individual taxpayers earning businessincome or in practice of his

[2]

The pension plan is reasonableactuarially sound;It must be funded by the

and [2

][3][4

The amount contributed must be no longer

TAXATION LAW REVIEWER

Page 49 of165

standard deductions during the year.

generally be the husband,except if thehusband is (1) unemployed (2)working abroad like an OFW orseaman (3) husband waived his right

(4) Optional standard deduction (OSD) [Asamended

by R.A. 9504 which took effect July 6, 2008]

(a) An individual, other than anonresident alien, may elect astandard deduction of 40% of his grosssales or gross receipts. (prior to RA9504, rate is 10% of gross income)

(b) In the case of a corporation, itmay elect s standard deduction of

For legally separated spouses, theadditional

exemption may be claimed only by However, the total amount of

additionalexemption that may be claimed by bothshall notexceed 4.NOTE: Parents, brothers, and sistersmay notentitle the taxpayer to the additional exemption of P25,000.

Such election should be signified in shall be irrevocable for the taxablewhich the return was made

year

for

Non-resident aliens engaged intrade or

business (NRAETB) may be entitled to personalexemptions (but not additional

(5) Personal and Additional Exemption

(a) Basic Personal ExemptionPursuant to amendments

RA No. 9504, i. The country from which he is a

citizen hasan income taxlaw; andThe income tax law of his countryallows personal exemption tocitizens of the Philippines notresiding therein but deriving

there shall be allowed personalexemptionsamounting to P50,000 for eachindividual taxpayer regardless ofwhether he is single, head of the family

ii.

Note: Prior to R.A. 9504, personal exemptions areP20,000 for Single, P25,000 for Head of the Family and P32,000 for each Married o The personal exemption shall be

equal tothat allowed by the income tax lawof the country to a citizen of thePhilippines not residing therein, orthe amount provided in the NIRC,

(b)

Additional Exemptions for TaxpayersDependents

with

There shall also be allowed an additionalexemption of P25,000 for each “dependent” NOTE: Non-resident aliens not

engaged in tradeor business cannot claim any personal or

Note: Prior to R.A. 9504, additional exemptionamounted to only P8,000 each

(c)

Individuals not entitled to personal andadditional exemptions:i. Non-resident alien NOT engaged in

trade or businessii. Alien individual employed by Regional or Area

Headquarters of MultinationalCompanies

iii.Alien Individual employed by Ofshore

A “dependent” means:o A legitimate, illegitimate or legally

adoptedchildChiefly dependent upon and livingwith the taxpayerNot married, not gainfullyemployed, notmore than 21 yearsof age

o

o

o

(d)

Status-at-the-end-of-the-year-rulei. The death of the taxpayer during

the taxable year shall not afect theamount of personal and additionalexemptions his estate can claim,as if he died at the end of such year

ii. If the taxpayer got married or

In case of married individuals, the additionalexemption shall be claimed by only

one of thespouses.The proper claimant of the

exemption wouldTAXATION LAW REVIEWER

Page 50 of165

additional dependent (child bornwithin theyear) during the taxable year, hemay claim the correspondingpersonal exemptions in full for suchyear

iii.If the spouse should die or any of thedependents become twenty oneyears of age, or become gainfullyemployed during the taxable year,

j. Exempt CorporationsIncome received by the following corporations shall be exempted from tax:

(1)(2)

Government educationalinstitutionsNon-stock non-profit educationalinstitutionsNon-profit labor, agricultural orhorticultural organizationsAssociation of farmers, fruit growers, andthe like whose primary function is tomarket the product of their membersOrganizations with a purely localoperation whose income is derived onlyfrom assessments, dues and feescollected from their members to meetoperational expensesNon-stock corporation or associationorganizedand operated exclusively for religious,charitable, scientific, athletic or culturalpurposes, or for the rehabilitation ofveterans; provided that no individualperson owns its assets or no individualperson receives benefit on its earningsNon-stock/non-profit mutual savings

(4)

twenty one years old or becameemployed at the close of

gainfully (5

)(6) Items not

deductible

(a) GeneralRules:

An expense will only be allowed asdeduction only if the tax required to be

(6)

(b) Specific Items enumerated under Section 36:i.

ii.Personal, living or familyexpensesAmounts paid out for new buildingsor for permanent improvements orbetterments made to increase thevalue of any property or estate (notapplicable to intangible drilling anddevelopment costs incurred inpetroleum operation)Amounts expended in restoringproperty or inmaking good the exhaustion thereoffor w/c an allowance is or has beenmadePremiums on life insurance policy

(7)(8)(9)

Cemetery

company

owned

and

operatedexclusively for the benefit of its

members(10) Non-profit business league, chamber of

commerce, or board of trade

iii.

(11) Associations, orders,

beneficiary societiesoperating for the exclusive benefits

of theirmembers

iv.

10. Taxation of Resident Citizens, Non-resident Citizens andResident Aliens

v.Sales

or Exchanges

of Propertydirectly/indirectly:

Between members of a family(include only brothers and sisters,spouse, ancestors, & linealdescendants)Between an individual and acorporation more than 50% invalue of outstanding stock isowned by such individual (except incase of distributions in liquidation)Between 2 corporations more than50% in value of outstanding stockowned by same individual, if eitherone is a personal holding companyor a foreign holding companyduring the taxable year precedingthe date of sale/exchangeBetween grantor & fduciary ofany trust

a.

General Rule

[1] (1

)Resident Citizen – citizen of the Philippines residingtherein is taxable on all income derived from sources within and without

[2]

(2)

Nonresident Citizen – citizen of thePhilippineswho are taxable only on his income fromsources within the Philippines if hequalifes as a non- resident citizen.

[3]

(3)

Resident Alien – an individual whoseresidence iswithin the Philippines and who is not acitizen thereof is taxable only onincome derived from sources within the

[4][5 b

.Taxation on Compensation Income

(1) Inclusions(a) Monetary benefits

TAXATION LAW REVIEWER

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i. Salaries, wages, emoluments and honoraria,allowances, commissions (e.g. transportation, representation, entertainment and the like); Fees

[3][4

Living with the taxpayer, andNot married, not gainfully employed, not more than 21 years oldii. E xcep t: If such dependent,

regardless of age,is incapable of self-support because of mental or physical

at the same time, an employeeemployer/corporation;Taxable pensions and retirement pay;

of the

iii.iv. iii. In the case of married

individuals, theadditional exemption can be claimedonly by

(b) Non-monetaryi. Taxable bonuses and fringe benefits

except those which are subject to thefringe benefits tax under Sec. 33 ofthe Code;

iv. As a rule, the husband claims the exemption,except if the husband

Expressly waives in favor of the wifeHas no income

[1][2]

(2) Exclusions(a) Fringe Benefit Subject to FBT

Any good, service, or other benefit

furnishedor granted by an employer in cash orin kind,in addition to basic salaries, to a managerial or a supervisory employee

Subject to a final tax of 32%

v. If legally separated, the spouse who hascustody of the dependent can claim the additional exemption.

vi.

Resident aliens are qualifed todeductadditional exemptions ONLY if the qualifeddependent children are living with

(b)

De minimisbenefits

Benefits which are exempt from thefringe benefit tax shall, in general, belimited to facilities or privilegesfurnished or ofered by an employer tohis employees that are of relativelysmall value and are ofered or furnished

(b) Health and Hospitalization InsuranceThe actual premium payments forhealth and hospital insurance taken byan individual for himself or for his familyare allowed as deduction.

i. Requisites:[1] Amount deductible should not

exceed P2,400 per family or P200per month whichever is LOWERduring the year.

[2] The gross family income does not exceed

goodwill, contentment, or eficiencyemployees. All other benefits given

ofbyin

histheenumeration under RR No. 05-11,

shall no t beconsidered “de minimis” benefits.

(c)

13th month pay and other benefits13

th month pay & other benefits (i.e.

productivityincentives & Christmas bonus) the totalof which does not exceed P30,000

If the benefit exceeds P30,000, only

the excess

NOTE: The spouse claiming the additionalexemptions for dependents shall be the one to

(c) Taxation of Compensation Income of aMinimum

Wage Earner (MWE)Compensation income of MWEs shall beexemptfrom income tax and consequently from the withholding tax on compensation if they work:

In the private sector and being paid

the SMW

(3) Deductions(a) Personal exemptions

i. Basic Exemption – P50,000ii. Additional Exemption – P25,000

for every qualifed dependent children not to exceed 4

NOTE:A dependent

means a[1] Legitimate, illegitimate or legally adopted

child,

ii.

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Refers to the rate fixed by the Regional TripartiteWage andLabor and Employment Statistics (BLES) of the Departmentregion

shall

determine

the

wage

rates

in the

different

e. Taxation of Capital Gains

Stock Not Traded in the Stock Exchange

5%

Local Stock Exchange (Stock

HIGHER

NOTE:Capital gains from sale/disposition of

principalresidence by natural persons may be EXEMPT provided that:i.

Proceedswere

fully

utilized

inacquiring/constructing a new principal residencewithin 18 mos. from date of sale.

ii. Historical cost/adjusted basis of soldprop be carried to the new principalresidence built/acquired

iii.Commissioner duly notified within 30days from sale

iv.Tax exemption can only be availed once every 10

yearsv. If no full utilization of proceeds of

c.

Taxation of Business Income/Income from Practice ofProfessionPlease refer to the discussion under Gross

d.

Taxation of Passive Income

Capital gains from other capital assets are subject tothe holding period. The reportable capital gain would be:

i. 100% if the asset was held for one year or less.

There is a net capital loss carryover on thenet capitalloss provided that the amount of loss doesnot exceed the income before exemptions atthe year the loss was sustained to berecognized immediately succeeding the year

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TAXBASE

TAX RATERoyalties, except on books, other literary works and musical composition

20%

Prizes and other Winnings more thanP10,000

20%

Interest Income from Long-Term Deposit or investment (held for 5 years or more)

In case of pre-termination: if heldfor

4 years to less than 5 years3 years to less than 4 yearsLess than 3 years

Exempt

5%12%20Interest from Deposits and

Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and

TAXBASE

TAX RATECapital Gains from Sale of

Shares of

Net Capital Gains:Not over P100,000On any amount in excessof

Final taxof

10%Sale of shares of stocks traded in

the

Transaction Tax)

½ of 1%

Capital gains on sale of Real Property situated in the Philippines

Selling Price or FMV whichever is

Final tax of 6%

Income from the sale, exchange or other disposition of capital assets

Graduated

Income Tax

S TAT U T O R Y MIN I M U M W A G E ( S M W )

Productivity Board (RTWPB), as defined by the

Bureau of of Labor and Employment (DOLE).

The RTWPB of each

regions based on established criteria and shall be the basis of exemption from income tax for this purpose.

Note: Holiday pay, overtime pay, night shift

differential payand hazard pay earned by MWE shalllikewise becovered by the aboveexemption.

MWEs receiving other income, such as

income from theconduct of trade, business, or practice ofprofession,EXCEPT income subject to final tax, inaddition to compensation income are NOTexempted from income tax on their entireincome earned during the taxable year BURthe SMW, Holiday pay, overtime pay, nightshift differential pay and hazard pay shallstill be EXEMPT FROM WITHHOLDING TAX.

MWEs who receives/earns additional

compensation

TAXBASE

TAX RATEInterest income earned

from deposit NOT FCDU

Interest income earned fromdeposit FCDU

20%

7.5%

Cash and/or Property Dividends 10%

11. Taxation of Non-resident Aliens Engaged in Trade orBusinessa. General rules

the regular income tax rate on its taxablecompensation income. To qualify for the preferential 15% rate,

the Filipinos(1)

A nonresident alien individual who shallcome tothe Philippines and stay therein for anaggregate period of more than 180 daysduring any calendar year.

i. Position and Function Test – must occupy amanagerial position or technical position AND must actually exercise such function. Compensation Threshold Test – must have received or is due to receive a gross annual taxable compensation of at least P975,000. Exclusivity Test – must be exclusively working for the

ii.(2)

Shall be taxed on income earned within thePhilippines, in the same manner as an individual citizen or a resident alien.

iii.

(3)

Except Cinematographic Film owner – Taxable at25% of Gross Income. 13. Individual Taxpayers Exempt

from Income Taxa.

Senior citizens (SCs)(1) A Senior Citizen is

(a) Any resident of the Philippines(b) At least 60 years old

Generally, qualifed Senior Citizensderiving incomeduring the taxable year are required to fileand pay their income tax returns, exceptIf the income earned is fromcompensation incomequalifed as a MWE, the income isexemptIf the aggregate amount of gross income

12. Exclude Non-resident Aliens Not Engaged in Trade orBusiness

a. G e n eral r ul e: Taxable at a rate ofGROSS INCOME WITHIN

b. E xcept: The said exemption does not extend to

income subjectto Final Tax (i.e. Interest income fromdeposit, dividends, share from partnership)and Capital Gains Tax.

(2) Compliance Requirements:(a) SCs must be qualifed as such by the

CIR of the RDO by submitting acertified true copy of his OSCA ID.

(b) Must file a Sworn Statement onor before January 31 of every yearthat his annual taxable income doesnot exceed the poverty level.

NOTE: b

.Exemptions granted under international agreements

The same tax treatment shall also applyto Filipinosemployed and occupying the samepositions as those of the alien employeesmentioned above.Only the income earned as an employee ofthe said entities is subject to thepreferential 15% rate; income earnedfrom other sources (i.e. rent) shall betaxable in the same manner as a ResidentAlien or NRA-ETB.Filipinos employed by ROHQs or

14.a.

Taxation of Domestic CorporationsTax payable

(1) Regular Corporate Income Tax (RCIT) The use of regular

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YEAR APPLICABLE

TAX RATE2009 onwards 30

%2006-2008 35%Before 2006 32%

TAXPAYER TAXAlien Individual Employed byOfshore Banking Units

15% of gross income earned as such employeeAlien Individual

Employed byPetroleum Service Contractor and

15% of gross income earned as such employee

Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of

15% of gross income earned as such employee

INCOME EARNED TAX RATECash and/or Property Dividends 20

%Capital Gains from Sale of Shares of Stock NotTraded in the Stock Exchange

Net Capital Gains:Not over P100,000On any amount in excess of

5%10%

(2) Minimum Corporate IncomeTax (MCIT)

M CIT Ra t e = 2% of grossE xamp le:

When to begin/apply MCIT?

Beginning on the 4thtaxable year immediately fo llo wing the year in

The following dates are available for X Corp:

SEC RegistrationBIR Registration

December 17, 2004January 4, 2005January 1, 2006NOTE: Commencement of Business

Operation:Upon Issuance of BIR Certificate of

The MCIT will be imposed on X Corp starting taxableyear 2009.When will a corporation be liable

for MCIT? If2% of the corporation’s gross income is greater

[1]

Computation ofRCIT

Rationale: This is designedto preventcorporations from escaping beingtaxed by including frivolous expensesin their statement of income (Ex. Overstatement of depreciation expense)

(a)

Carry Forward of Excess Minimum TaxExcess of MCIT ov er th e nor mal in co me

ta x shall becarried forward & credited against normal incometax for the 3 succeeding years [2

]Computation of MCITNOTE: You can deduct MCIT Carry

Forward only ifRegular Income Tax is greater than MCIT.

(b) Relief from MCITMCIT may be suspended by the Sec of Finance when corporation’s losses aredue to:

NOTE: The MCIT is not applicable in 2008 since it hasnot yet reached the “fourth taxable year”

i.ii.iii.

prolonged labor disputeforce majeurelegitimate business [3

]Determination of Tax Due and Payable

(c) Gross Income (for purposes of applying MCIT) Gross income shall mean gross

sales (–) salesreturns, discounts and allowances (–)cost of goods sold.Cost of goods sold shall mean allbusiness expenses directly incurred toproduct the merchandise to bringthem to their present location anduse.For taxpayers engaged in the sale ofservices, gross income shall meangross receipts (–) sales returns,discounts and allowances (–) cost ofservicesCost of services shall mean all direct

[4]

Determination of Excess of MCIT over RCIT

b.

Allowable deductions

(1) Itemized DeductionsItems under Sec. 34 of the NIRC as discussed underDeductions from Gross Income.

NOTE: Pursuant to RR No. 12-07, MCIT shall applyat the time of the filing of the quarterly corporate income tax.TAXATION LAW REVIEWER

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2009 MCIT P 40,000Less: 2009 RCIT 30,00

0Excess of MCIT over RCIT

P 10,000

2008 2009 2010RCIT orMCIT(whichever is

P 17,500

P 40,000

P 120,000

Less: Excess ofMCIT over RCIT - - 10,00

0Tax Due andPayable P

17,500P 30,000

P 110,000

2009

2010Gross Income P

2,000,000P 2,500,000MCIT Rate 2% 2%

MCIT P 40,000

P 50,000

2008 2009 2010Gross Sales P

3,000,000P 4,000,000

P 5,000,000Cost of Goods

Sold1,500,000

2,000,000

2,500,000

Gross Income P 1,500,000

P 2,000,000

P 2,500,000Operating

Expenses1,450,000

1,900,000

2,100,000

Net TaxableIncome

P 50,000

P 100,000

P 400,000

RCIT Rate 35% 30% 30%RCIT P

17,500P 30,000

P 120,000

(2) Optional Standard Deduction An amount not exceeding forty percent

(40%) ofgrossincome.Gross Income shall mean the gross salesless sales returns, discounts andallowances and cost of goods sold.A taxpayer who elected to avail of theOSD shall signify in his/its return suchintention, otherwise he/it shall beconsidered as having availed himself ofthe itemized deductions.Once the election to avail the OSD is

e.

Tax on proprietary-educational institutions andhospitals which are non-profit

c.

Taxation of capital gains

Proprietary educational institution –any privateschool maintained & administered byprivate individuals or groups with anissued permit to operate from DECS, or

Taxable at 10% on TAXABLE INCOME, except oncertain passive income (which are subject

Predominance Test: if gross income from unrelatedtrade/business/other activity > 50% of the total gross income from all sources, E N T IREbe subject to the REGULAR corporate tax rate of 30%(35% - 2006-2008)

Distinguish from non-profit non-stockeducationalinstitutions which are exempt from tax onrevenues and assets Actually, Directlyand Exclusively used for educationalpurposes (Sec 30 (H), NIRC; RMC 76-

d.

Taxation of Other Passive Income

f. Tax on GOCCs, agencies and instrumentalities

(1) Gen er al Ru le: all corporations, agencies, orinstrumentalities owned or controlled by

the govt.are taxable.

(2) E xcep tion s:(a

)(b)(c

GSISSSSPHICPCS

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TAX RATE BASIS30%

(2009onwards

)35% (2006-

Same tax rate upon their taxable income in a similar business, industry, or activity

TAXBASE

TAX RATEInterest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties

Interest income earnedfrom deposit NOT FCDU

20%

7.5%

Income Derived under the ExpandedForeign Currency Deposit System

Income derived by a depository bank under the FCDU system from foreign currency transactions with local commercial banks (i.e. branches of foreign banksauthorized by the BSP to

10%

TAXBASE

TAX RATECapital Gains from Sale of SharesofStock Not Traded in the Stock Exchange

Net Capital Gains:Not over P100,000On any amount in excess

FinalTax5%10%Sale of shares of stocks traded

in the local stock exchange (Stock Transaction Tax)

Selling price½ of 1%

Capital gains on sale orexchange of lands and orbuildings located in thePhilippines

Selling Price or FMV whicheveris

FinalTax6%

Net Capital gains on sales or exchange or disposition of other capital assets

Regular Corp. Tax(30%)

TAX RATE BASIS10

%On related trade, business or activity;

30% (2009onwards)

35% (2006-2008)

IF total gross income from unrelated trade, business, oractivity exceed 50% of total income

Interest income from foreign currency loansgranted by depositorybanks under the FCDUsystem to residents.Intercorporate Dividends Exempt

15.a.

Taxation of Resident Foreign Corporations

General rulesThe rest is the same rules as Domestic

originating from the Philippinesin acontinuous

and

uninterrupted

flight,irrespective of the place of sale or

issue andthe place of payment of the ticket orpassage

Provided, tickets revalidated,exchangedand/or indorsed to anotherinternational airline form part of theGPB if the passenger boards a planein a port or point in the Philippineso If the ticket is indorsed to another

airline, the GPB will be charged to

b.

Minimum corporate income tax

Same rules as Domestic c.

Tax on certain income

Provided, for a flight whichoriginates in thePhilippines but transshipment(transfer) ofpassenger takes place at any portoutside the Philippine on anotherairline, only the aliquot portion of thecost of the ticket corresponding tothe leg flown from the Philippines too NOTE: Tr an sfer o f air lin e

co mp an y , nottransfer of aircraft

GPB rule in the NIRC is a departure from theold rule which emphasized where tickets were bought.

Now we adopt the originating rulemeaningto form part of GPB, passenger/cargo must

Does not apply to domestic corporations (Ex.PAL)

Carrier must be an alien resident corporation;if it’s not, then it will be subject to 30% (35%2006-2008) tax on gross income

Does not apply to ofline carrierso Online carriers: those with

landing rightsin the PhilippinesOfline carriers: those without landing rights but may nevertheless be sellingtickets in the Phil sale of tickets

NOTE: Any income of nonresidents, whetherindividualsor corporations, from transactions withdepository banks under the expandedsystem shall be exempt from income tax.

o

d.

Exclude:(1) International Carrier

Doing business in the Philippines shall paya tax of 21/2% on its Gross Philippine Billings defined as:

(a) International Air Carrier

What’s controlling is the amount stated in theticket and not the actual purchase

In order that a foreign corporation may be o f p e r s on s, e x c e ss b agga g e , c a r go, a n d mail r egard ed

as do in g bu sin ess, th er emust beTAXATION LAW

REVIEWERPage 57 of165

TAXBASE

TAX RATEInterest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties (from sources within)

Interest income earnedfrom deposit NOT FCDU

Interest income earned from

20%

7.5%

Income Derived under the ExpandedForeign Currency Deposit System

Income derived by a depository bank under theFCDU system from foreign currency transactions with local commercial banks (i.e. branches of foreign banks authorized by the BSP to transact business with FCDU).

Interest income fromforeign

currency loans

10%

Capital Gains from Sale of SharesofStock Not Traded in the Stock Exchange

Net Capital Gains:Not over P100,000On any amount in excess

5%10%

Intercorporate Dividends Exempt

On taxable income from all sources w ith i n the Philippines.

30% (2009onwards)

35% (2006-

continuity of conduct and intention to establish

its gross income from within taxable at 30%(35% 2006-2008)

a continuous

business,

such

as

theappointment of a local agent, and not

one of atemporary character. In other words,a foreignairline company selling tickets in thePhilippines through their local agents,whether liaison ofices, agencies orbranches, as in the case at bar, shallbe considered as resident foreigncorporation engaged in trade orbusiness in that country for suchactivities show continuity ofcommercial dealings orarrangements and performance ofacts or works or the exercise of some

Branch will first be subjected to ordinarycorporate

tax as a resident foreigncorporation (35%).Afterwards, the profits for remittanceshall then be subject to 15% BPRT.(Because branch assumes personalityo Any remittance, so long as you

can trace itfrom a branch to the foreign parentcorporation subject to BPRTEx. X foreign corp. has bothregionalheadquarters and branch inPhilippines. Instead of remittingstraight to X, branch pays amountto regional headquarterssupposedly for administrativesupportservices The amount paid for the

6572, D ecember 2 2, 2004]

(b) International ShippingGross revenue whether for passenger,cargo or mail originating from thePhilippines up to final destination,regardless of the place of sale orpayments of the passage or freight

o E xception:royalties,

Interest,

including

dividends, rents,remunerati

onfor

(2) Ofshore Banking Units

salaries,

wages,premiums, annuities, emoluments

or otherfixed or determinable annual,periodic orcasual gains, profits, income andcapital gains received by aforeign corporation from allsame ar e efec tively conn ect ed with th econdu ct o f its tr ad e o r bu sin essin th ePh ilipp in es.

Difference between Home Ofice (HO) – Branch

(3) Branch Profit Remittance(BPRT)

BPRT shall be imposed on any profit

Distinguish between a branch and a oo

If branch, subject to BPRTIf subsidiary amounts received bynon-resident foreign corporation

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HO-BRANCH PARENT-SUBSIDIARYBranch is

classified as a Resident Foreign Corporation

Subsidiary is classifed as aDomestic Corporation

HO is classified as a residentForeign Corporation

Parent Company is classifedas a Non-Resident ForeignHO and Branch are

taxed on taxable income within the Philippines

Subsidiary is taxed on taxable income within and without the Philippines while Parent Company is taxed on gross income within the Income repatriation by

Branch to HO is referred to as Branch profit remittances

Income repatriation by aSubsidiary to Parent Company is referred to as dividends

TAX RATE BASIS

10%

Any interest income derived from foreign currency loans granted to residents other than ofshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with

Exempt

Income derived by ofshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other ofshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business

companies engaged in any of the followingservices:i.ii.iii.

General administration and planning;Business planning and coordination;Sourcing and procurement of raw materials and components;Corporate fnance advisory services;Marketing control and sales promotion; Training and personnel management; Logistic services;Research and development services and product

iv.v.vi.vii.viii

ix.x.xi

16. Taxation of Non-resident Foreign Corporationsa.

Generalrule

A foreign corporation not engaged in trade orbusiness in the Philippines shall pay a taxequal to 30% (2009 onwards; 35% - 2006-2008; 32% - 2000 to 2005) of the grossincome received from all sources within the

b.

Tax on certain income(1) Interest on Foreign Loans

A final tax at the rate of 20% is imposedon the amount of interest on foreignloans contracted on or after August 1,1986.

(2) Intercorporate DividendsA final tax at the rate of 15% is imposedon the amount of cash and/or propertydividends received from a domesticcorporation subject to reciprocity.

(4) Regional or Area Headquarters

and Regional

Reciprocity rule:The country in which the nonresidentforeign corporation is domiciled, shallallow a credit against the tax due fromthe nonresident foreign corporationtaxes deemed to have been paid inthe Philippines equivalent to the regularincome tax on corporations and the 15%

Operating

Headquarters

of multinationalcompanies (RHQ and ROHQ)

Regional or area headquarters established in the Philippines by

(3) Capital gains from shares of stock not traded

through the Local StockExchange

A final tax on the NET CAPITAL GAINSrealized during the taxable year from thesale of shares of stock in a domestic

– A branchmultinatiocompanies and which headquarters do

not earnor derive income from the PhilippinesAct as supervisory, communications andcoordinating center

for their

affiliates, Rates of tax on the net

capital gains:Not over P100,000On any amount in excess ofP100,000

subsidiaries, or branches in the Asia-PacificRegion and other foreign markets.

5%10% Regional operating headquarters –

A branchestablished in the Philippines by

TAXATION LAW REVIEWER

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TAXPAYER TAX RATE

BASISRegional/Area

HeadquartersExempt

Regional OperatingHeadquarters of Multinational companies

10% On taxable income

Mar ub e n i v . CIR [ G . R .N o . 765 7 3 ]The general rule is that a foreign corporationis the samejuridical entity as its branch ofice in thePhilippines cannot apply here. This rule is basedon the premise that the business of the foreigncorporation is conducted through its branchofice, following the principal-agent relationshiptheory. It is understood that the branch becomesits agent here. So that when the foreigncorporation transacts business in thePhilippines independently of its branch, theprincipal-agent relationship is set aside. The

Branch profit remittances are subject to 15% tax on remittance of branch profits efectively connected to the conduct of Branch’s trade or business in

Dividends paid by Domestic Corporation to a Non- Resident ForeignCorporation is subject to the preferential rateof 15% subject to the tax sparing conditionHO and Branch are

considered as one and thesame corporate entity

Parent Company andSubsidiary are two separatelegal entitiesTax and other liability

of the Branch in the Philippines can be collected from the HO in foreign country as they are one and the same

Tax and other liability of the Subsidiary cannot be collected from the Parent Company in a foreign country as they are considered separate legal entities

c.

Exclude special nonresident foreigncorporations d

.Composition

The following constitute accumulation of earnings for the reasonable needs of the business: (ILL ABE) Allowance for the increase in the

accumulation ofearnings up to 100% of the paid-upcapital of the corporation as of BalanceSheet date, inclusive of accumulationstaken from other years;Earnings reserved for definite corporatee xpansion projects or programsrequiring considerable capitalexpenditure as approved by the Board ofDirectors or equivalent body;Earnings reserved for building,plants or equipment acquisition as

17.by

Improperly Accumulated Earnings Tax (ImplementedRR 2-2001 which prescribes rules

imposition of IAET)a.

Rule

There is imposed for each taxable year, inaddition to other taxes, a tax equal to 10% ofthe improperly accumulated taxableincome of domestic and closely- heldcorporations formed or availed of for thepurpose of avoiding the income tax withrespect to its shareholders or theshareholders of any other corporation, by

covenant or pre-existing obligation establishedunder a legitimate business agreement;Earnings required by law or applicable

to be retained by the corporation or inrespect ofwhich there is legal prohibitionagainst itsdistribution;In the case of subsidiaries of foreign

among or distributingHolding company).

them

to the

shareholders

(Ex.

Philippines as can be proven by corporate recordsand/or relevant documentary evidence.

b.

RationaleIf the earnings and

profits were

distributed,

theshareholders would then be liable for income

tax; if thedistribution were not made to them, theywould incur no tax in respect to theundistributed earnings and profits of thecorporation. It is a tax in the nature of apenalty to the corporation for the improperaccumulation of its earnings, and adeterrent to the avoidance of tax upon

e.

Covered corporationsOnly domestic AND closely-held corporations are liable for IAET.

Closely-held corporations are those:o At least 50% in value of the

outstanding capital stock; oro At least 50% of the total combined

voting power of all classes of stockentitled to vote is owned directly orindirectly by or for not more than 20individuals. Domestic corporations notfalling under the aforesaid definitionare, therefore, publicly-held

c.

Exception

The use of undistributed earnings andprofits for thereasonable needs of the business wouldnot generally make the accumulated orundistributed earnings subject to the tax.

f. Exempt corporationsThe IAET shall not apply to the following corporations:(BIG-PEN-T)

Immediacy Test – It states that the “reasonable needs ofthe business” are the

(1)

Banks

and

other

non-bank

financial

Immediate needs of the business; andReasonably anticipated needs (Ex.

intermediaries;Insurance companies;

(2)(3)(4)(5

Publicly-held corporations;Taxable partnerships;General professional partnerships; Non- taxable joint ventures; and E nterprises that are registered:

How to prove the “reasonable needs of the business”:The corporation should prove that there is An immediate need for the

accumulation of theearnings and profits; orA direct correlation of anticipated needs

o accu mu lation o f pro fits. (PE ZA ) u nd er R.A . 7916; TAXATION LAW REVIEWER

Page 60 of165

CLASSIFICATION APPLICABLE TAX –INCOME

Cinematographic FilmOwner, Lessor, Distributor

25% Gross Income

Lessor of Machinery, Equipment, Aircraftand Others

7 ½ % Gross Income

Lessor of Vessels chartered by Philippine Nationals

4 ½ % Gross Income

o Pursuant to the BasesConversion andDevelopment Act of 1992 underR.A. 7227;andUnder special economic zonesdeclared by law

1” rule. A Debt-to-Equity ratio (CurrentAssets overCurrent Liabilites) of 2:1 is indicative of theliquidity of a corporation, and furtheraccumulation would expose it to the IAET.

oJanuar y 20 , 2000 ]

18. Exemption from Tax on CorporationsPlease see page 48 on the discussion of ExemptCorporations.

g.

Period for payment ofdividend/iaet

The dividends must be declared and paid orissued not later than one year following theclose of the taxable year, otherwise, the IAET,if any, should be paid within fifteen (15) days

19. Taxation of Partnerships A general co-partnership is a

partnership whereinpart or all of its income is derived from the conduct of trade or business.h

.Determination of purpose toavoid income tax

The fact that a corporation is a mere holdingcompany or investment company shall beprima facie evidence of a purpose to avoidthe tax upon its shareholders or members

Guidelines of the tax liability of a generalpartnership:(1

)For taxation purposes, the general partnership isconsidered as a corporation liable to pay the corporate income tax.A general partnership is also subject to MCIT like acorporation.The profit distribution to the partners is treated as

A “holding or investment company” is acorporationhaving practically no activities exceptholding property, and collecting theincome therefrom or investing the same;

(2)(3)

Where the earnings or profits of a corporation arepermitted to accumulate beyond the reasonable needs of the business.

20. Taxation of General Professional Partnership (GPP) A GPP is one formed by two or several

persons forthe sole purpose of exercising theircommon profession of which no part ofincome is derived from engaging in any

i. Prima facie instances ofaccumulation of profitsbeyond the reasonable needs of abusiness and indicative of purpose toavoid income tax upon shareholders

The GPP is not a taxable entity forincome taxpurposes since it is only acting as a "pass-through" entity where its income isultimately taxed to the partners

(1)

Investment of substantial earnings and profits ofthe corporation in unrelated business or in stock or securities of unrelated

(2)

Investment in bonds and other long-termsecurities; and

Guidelines of the tax liability of GPPa. Who is

Liable?o A GPP, as an entity, shall not be subject to theincome tax.The partners in a GPP shall be liable forincome tax only in their

(3)

Accumulation of earnings in excess of100% ofpaid-up capital, not otherwise intendedfor the reasonable needs of the business.The controlling intention of thetaxpayer is that which is manifestedat the time of accumulation. Aspeculative and indefinite purpose willnot sufice. The mere recognition of afuture problem or the discussion ofpossible and alternative solutions is notsuficient. Definiteness of plan/s coupled

o

Each partner shall report his distributive share,actually or constructively received inthe netThe share of the partner shall be subject tocreditable withholding tax at 10%/15%.

Ideally, the working capital should equal the currentliabilities and there must be 2 units of current assets for

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b. How computed?

the will or trusto For purposes of computing the

distributiveshare of the partners, the net incomeof the partnership shall becomputed in the same manner as acorporation.All expenses, which are ordinaryand necessary, incurred or paid forthe practice of profession, areallowed as deductions.Since the taxable income is in thehands of thepartner, apart from the expensesclaimed by the GPP in determiningits net income, the individualpartner can still claim deductionsincurred or paid by him thatcontributed to the earning of theincome taxable to him.If the GPP availed of the itemizeddeduction =the partners may still claim itemizeddeductions from said share, however,they cannot claim the sameexpenses already claimed by theGPP.If the GPP availed of itemizeddeductions, the partners are notallowed to claim the OSD fromtheir share in the net income.If the GPP avails of OSD incomputing its netincome, the partners comprising itcan NO longer claim furtherdeduction from their share in thesaid net income.

(2) Income:(a

)To be distributed currently by the fiduciary tothe beneficiariesCollected by a guardian of an infant to be held or distributed as the court may

(b)

o

o (3)

Income received by estates of deceased personsduring the period of administration or settlement of the estate

(4)

Income which, in the discretion of the fiduciary,may be either distributed to beneficiaries or accumulated

o

b.

Exception

Employee’s trust which forms part of apension, stockbonus or profit-sharing plan of an employerfor the benefit of all or some of hisemployees:

If contributions are made to the trust by the

employer/employees, or both for the

o(1)

o

(2)

If under the trust instrument, it is impossible, at

any time prior to the satisfaction of allliabilities with respect to employees underthe trust, for any part of income to be usedfor/diverted to, purposes other than for theexclusive benefit of his employees (anyamount distributed to employees shall be

c.

Determination of tax(1) Consolidation of income of two or more trusts

(a) Requisites: Two or more trusts

deduction allowedpartners.

to the

GPP

and

its

The creator of each of the trust is the sameperson.The beneficiary of each of the trust is the same.

Compliance requirementsEvery GPP shall file in duplicate, a return of its income(except items excluded from gross incomeand shall set forth the following:

o The items of gross income and of deductionsallowedThe names, TIN, addresses and shares of each of the partners.

(b) Efects: The taxable income of all the trusts

shall beconsolidated.The tax provided shall be computedon such consolidated income.The proportion of said tax shall beassessed and collected from eachtrustee based on the taxable income

o

21.

Taxation of Estates and Trusts

a. Application

Applies to income of estates or of any kind of property held in trust (separate taxable entities), including:(1) Income accumulated in trust:

(a) For the benefit of unborn/ unascertained person(s) w/ contingent interests

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(2) Taxable incomeComputed in same manner & on the same basis asin the case of an ‘individual’, EXCEPT:

(a) Deduction allowed:

In short, it is a trust where the title canrevert backto the grantor anytime. It is nottaxable as a separate entity becausethe income forms part of the income of

i. Amount of income of the estate/trustfor thetaxable year which is to be distributed currently by the fiduciary to the beneficiaries& the amt. of the income collected by a guardian of an infant which is to be

NOTE: An estate is taxable as a separate

entity when itis already subject to a judicial

ii. A trust is taxable as a separate entityif the trustis irrevocable. This is because thegrantor has absolutely given up thecorpus and any incidents thereto. Inthis case, the grantor has no controlover the corpus of the trust. Thegrantor has transferred the incomeearning property to a beneficiary. Ifthere is a condition that provides thata portion shall be reserved for thegrantor’s medical expenses (forexample), this condition does not

computing the taxable income ofbeneficiaries, whether distributed or not

the

iii. thissubsection will not be allowed as

deductionunder (2) hereof

(b) Additional deduction:i. Amount of the income of the

estate/trust forits taxable year, properlypaid/credited during such year to anylegatee, heir or beneficiary may beclaimed as deduction. This applies incases of: Income received by estates of

deceasedperson during the period of administrationor settlement of the estate Income w/c, in the

discretion of thefiduciary, may be either

If the transfer is revocable, the entireincomeshall be taxable in the hands of the

(4)

Income for the benefit of thegrantor

Requisites: where any part of the incomeof a trustis, or in the discretion of the grantor/anyperson not having a substantial adverse

ii.

(a)

May be held/accumulated for futuredistributionto thegrantorMay be distributed to thegrantorMay be applied to the payment of

NOTE: For trust administered in aforeign country,the deductions in (1) and (2) above isnot allowed provided that the amount ofincome included in the return of saidtrust shall not be included in computing

(b)(c

Efect: such part of the income be included incomputing the taxable income of the

(c) Exemption Allowed to Estates and Trusts:

P20,000 (5) Meaning of “in the discretion of thegrantor”(3) Revocable Trusts

Requisites: the power to re-vest in the grantor titleto any part of the corpus of the trust is vested-

(a) In the grantor either alone or inconjunction with any person not havinga substantial adverse interest in thedisposition of such part of thecorpus/income

(b) In any person not having a substantial

In the discretion of the grantor, withregard to the“Income for the benefit of thegrantor”:Exercised either alone or in conjunctionwith any person not having asubstantial adverse interest in the

22.

WithholdingTaxa.

Concepts Withholding tax is a method of collecting income taxin advance from the taxable income of therecipient of income.

Efect: the income of such trust shall be included incomputing the taxable income of the TAXATION LAW REVIEWER

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of Large and Non-Large Taxpayers who fles through theElectronic Filing and Payment System (EFPS).

In the operation of the withholding taxsystem, thepayee is the taxpayer, the person onwhom the tax isimposed, while the payor, a separateentity, acts no more than an agent of thegovernment for the collection of the tax in

Consequences for Failure toWithhold

Liable for surcharge orpenaltiesLiable upon conviction to a penalty equalto the total amount of the tax not

i.ii.

Timing of WithholdingWithholding tax shall be deducted andwithheld by the withholding agent when theincome payment is paid or payable oraccrued or the income payment is accruedor recorded as an expense or asset,whichever is EARLIER.

iii.

Any income payment which is otherwisedeductible from the payor’s gross income will notbe allowed it is shown that the income tax required to be withheld is

b. Kinds

Withholding Agent (WA)A separate entity acting no more than anagent of the government for the collection oftax in order to ensure its payments.

He is merely a tax collector, NOT ataxpayer. If awithholding agent was assessed fordeficiency withholding tax under the Code,as such, it is being held liable in its capacityas a withholding agent and not itsMarch 10 , 1995]The following persons are constituted as withholdingagents:i. Juridical persons, whether or not engage

in tradeorbusinessIndividual, with respect to paymentsmade nconnection with his trade orbusiness

ii.

iii.

Returns and Payments of Taxes Withheldat Source

[ S ec. 58 ( A) o f t h e N I R C ]Taxes deducted and withheld bywithholding agentsshall be covered by a return and paid to,except in cases where the Commissionerotherwise permits, an authorized agentbank, Revenue District Oficer, CollectionAgent, or duly authorized Treasurer of thecity or municipality where the withholdingagent has his legal residence or principalplace of business, or where the withholding

The taxes deducted and withheld by the withholdingagent shall be held as a special fund in trust for theNote that the payment of taxes is simultaneous withthe filing of the returns (pay-as-you-file)

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FINAL WITHHOLDING CREDITABLE

TAX Amount of Tax Collected

Full and fnal payment of the income due from the payee on the said income

Intended to equal or at least approximate the tax due from the said payee on the said incomeWho is Primarily Liable

Liability rests primarily on the withholding agent

Liability rests primarily on the taxpayer

Need to File a Return

Payee is not required to fle an income tax return for the particular income

Income recipient is still required to fle an income tax return and/or pay the difference betweenthe tax withheld and the tax due on the income.

Coverage All income

subject to fnaltaxes (i.e.passiveincome,grossincome ofNRA-NETB)

Fringe benefit Informer’s

rewardto personsinstrumental tothe discovery of violations of the NIRC and

Those income payments covered by EWT [ R R 2-98] Examples:

Professional

fees,talentfees

Income

paymentsto partners of GPP

(1) Final withholding tax The amount of income tax

withheld by thewithholding agent is constituted as afull andfinal payment of the income tax due

The following are creditable o Expanded Withholding Tax (EWT)

on certainincome paymentsWithholding Tax on Wages (WTW) Withholding Tax on money payments to the Government

oo

The liability for payment of the tax rests primarily

on the payor as a withholding agent.Thus, incase of his failure to withhold the taxor in case of under withholding, the

c.

Withholding onwages

A method of collecting the income tax atsource upon receipt of the income. It appliesto all employed individuals whether citizensor aliens, deriving income from compensationfor services rendered in the Philippines. Theemployer is constituted as the withholding

The payee is not required to file an income tax

(1)

Requirement for WithholdingEvery employer must withhold from

compensation paid to its employees. The finality of the withholding tax is

limited only tothe payee’s income tax liability on theparticularincome. It does not extend to thepayee's other tax liability on saidincome, such as when the said

No withholding of tax shall be required on

payments to employees who areclassified as Minimum Wage Earners[earning only the Statutory MinimumFormula:

Gross IncomeMultiply by: Final Tax RateFinal Tax

Pxxx

x

An employee who

receives

additionalcompensation and benefits in

excess of theallowable statutory amount ofP30,000.00 other than the SMW theentire amount, including the SMW shall

P xxx NOTE: Deductions and/or personal

exemptions are NOTallowed.

(2)

Tax paid by recipientEvery person who is required to withhold

the tax from the compensation of anemployee is liable for the payment ofsuch tax to the BIR. Such liability stayseven if the employee subsequentlypays the tax.

(2) Fringe benefit tax A final withholding tax is imposed on

the grossed-up monetary value of fringe benefitfurnished,granted or paid by the employer to thenon-rank and file employees exceptwhen: (1) the fringe benefit is requiredby the nature of or necessary to thetrade, business or profession of the

The payment of the tax by the employeedoes not

relieve the employer from the liabilityfor penalties and/or additions to thetax for failure to deduct and withholdwithin the time prescribed by law or

The tax imposed under Sec. 33 of the NIRC shall be

treated as a final income tax on the employee,which shall be withheld and paid

The employer will not be relieved of his liability for

payment of the tax required to bewithheld unless he can show that thetax has been paid by the employee.

(3) Creditable Withholding Tax Taxes withheld on certain income

payments areintended to equal or at least (3)

Refunds or creditsWhen the total amount withheld exceeds

the annual tax due for theemployee, the excess shall becredited or refunded to the employeenot later than January 25 of the

The income recipient is still requiredto file an

income tax return to report the income and/orpay the difference between the tax

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penalties or additions to the tax from thedue dateof remittance until the date of payment.

In case of termination of employment before

December, the refund shall be given tothe employee at the payment of thelast compensation during the year.

For failure or refusal to file the said BIRForm 2305,the excess taxes withheld by theemployer, if any, shall not be refunded tothe employee but shall be forfeited in

The employer is entitled to deduct the amount

refunded from the remittable amountof taxes withheld from compensationincome in the current month in whichthe refund was made, and in thesucceeding months thereafter untilthe amount refunded by the employer

d.

Withholding value-added tax(1) O N P AYME N T S T O N O NR E S I DE N T S (creditablewithholding VAT)

Payments to non-residents, withrespect to lease or use of property orproperty rights in the Philippinesowned by such non-residents, aresubject to withholding VAT. The VATshall be based on the contract price.Other services rendered in thePhilippines by non-residents

(4)

Year-end Adjustment [ Sec. 2.79 .6 of R R 2 -98]On or before the end of the calendar year, and

prior to the payment of thecompensation for the last payrollperiod, the employer shall determinethe sum of the taxable regular andsupplementary compensation paid toeach employee for the entire year,including the last compensation to bepaid and compute for the amount of

General guidelines for Creditable WVAT: The party required to withhold is

the payor,regardless of whether or not he is VAT-registered.

The VAT is passed on to the resident

withholdingagent.

The payor shall claim this as input tax

upon filing ofhis own VAT return, subject to the

The taxable fringe benefits received by non-rank

and file employees shall be subject to a final fringe benefits tax.

(5)

Liability forTaxEmployerThe employer shall be responsible forthe withholding and remittance of thecorrect amount of tax required to be

(2) ON PAYME NT S BY GOVE R NME NT

(FinalWithholding VAT)

The Government or any of its politicalsubdivisions, instrumentalities oragencies, including government ownedor controlled corporations (GOCCs)shall, before making payment onaccount of its purchase of goodsand/or services taxed at 12% shalldeduct and withhold a fnal VAT of 5%of the gross payment. The five percent(5%) final VAT withholding rate shallrepresent the net VAT payable of theseller. The remaining seven percent(7%) effectively accounts for thestandard input VAT for sales of goodsor services to government or any of itspolitical subdivisions, instrumentalitiesor agencies including GOCCs, in lieu of

If the employer fails to withhold and remit thecorrect amount of tax, such tax shall becollected from the employer together Failure to refund excess withholding taxnot laterthan January 25 of the succeeding year,shall makethe employer liable to a penalty equal tothe total amount of refund which was not

EmployeeWhere an employee fails or refusesto file theApplication of Registration or Certificateof Update of Exemption and ofEmployer's and Employee's Information(BIR Form No. 2305) together with theattachments or willfully supplies false orinaccurate information thereunder afterdue written notice by the employer, theTAXATION LAW REVIEWER

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e. Deadlinewithhe

of

filing

of

return

and payment of

taxes

DEADLINE

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TYPE OF WITHHOLDING TAX

FILING AND PAYMENT

Final Withholding Tax (FWT)

On or before thetenth (10th) day ofthe monthfollowing themonth in whichwithholding wasFringe Benefit Tax (FBT) On or before the 10th

day of the month following thec al e nd ar qu a r te r in which the fringe benefits were Withholding Tax on

Wages(WTW)

On or before thetenth (10th) day ofthe monthfollowing themonth in whichwithholding wasmade.

Except for taxes withheldfor December which shall be

Expanded Withholding Tax

On or before thetenth (10th) day ofthe monthfollowing themonth in whichwithholding wasmade.

Except for taxes withheldfor December which shall be filed/paid on

Withholding Value-AddedTax (WVAT)

On or before thetenth (10th) day ofthe monthfollowing themonth in whichwithholding was

6. Classification of decedent/Composition of gross estate

======================================TOPIC UNDER THE SYLLABUS:II. NATIONAL INTERNAL REVENUE CODE B. Estate Tax=======================

RE SIDE NT S A ND CIT IZE NSThe gross estate of a decedent shall becomprised of the allproperties, real or personal, tangible orintangible, wherever situated and interesttherein at the time of his death, includingrevocable transfers and transfers for insuficient

1. Basic principlesACCRUA L OF E ST AT E T A X

NON-RE SIDE NT A LIE NSThe estate tax accrues as of the death of the

decedent andthe accrual of the tax is distinct from theobligation to pay the same. Upon the death ofthe decedent, succession takes place and theright of the State to tax the privilege to transmit

The gross estate of a decedent shall be comprised only ofproperties situated in the Philippines provided, that, withrespect to intangible personal property, its 7. Gross estate vis-à-vis net estateGOVE RNING

LAWEstate taxation is governed by the statute in force at thetime of death of the decedent.

E ST AT E T AX FORMU LA

Gross Estate (Sec. 85)RE SIDE N

CEFor estate tax purposes, residence refers to thepermanenthome, the place to which whenever absent, forbusiness or pleasure, one intends to return, anddepends on facts and circumstances, in the

Less:

(1) Deduction (Sec. 86)(2) Net share of the surviving spouse-------------------------------------------------

---------Net Taxable EstateX Tax rate (Sec. 84)----------------------------------------------------------Estate Tax dueLess: Tax Credit (if any) Sec. 86 [E] or 110 [B]

2. NatureA tax imposed upon the pr ivil e ge t o t r a n smit prop e r t y at thetime o f d eath ; the tax should not be construed as a directtax on the property of the decedent although the tax isbased thereon.

GROSS E ST AT E OF T HE DE CEDENT(Sec. 85) Includes the value at the time of his

death of allproperty, real or personal, tangible orintangible, wherever situated.In the case of nonresident citizen, only thatpart of the gross estate which is situated inthe Philippines shall be included in his

3. DefinitioAn EXCISE TAX on the rights of transmittingproperty at thetime of death and on the privilege that a personis given in controlling to a certain extent thedisposition of his property to take effect upon

8. Determination of gross estate and net estate4. Purpose or

ObjectVA LUAT ION5. Time and transfer of

properties Real

PropertyFMV as determined by the Commissioner ORthe FMV shown in schedule of values fixedby the assessors, whichever is HIGHERa. No zonal value: use the FMV in the

latest tax declaration.

The properties and rights are transferred to the successorsat the time of death. [ Ar t . 777 o f t h e C iv i l However, the Register of Deeds shall not transferthe title tothe properties without the Certificate of Authority toRegister (CAR) issued by the RDO evidencing Shares of

Stock2002] Listed shares: average of the highest

and lowestquotation at date of death (or the datenearest to the date of death, if noquotation is available at the time of

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c.d.

Revocable TransferProperty Passing Under General Power ofAppointmentProceeds of Life InsurancePrior InterestsTransfers for Insuficient Consideration

Unlisted Shares –––

Common stocks: use BOOK VALUEPreferred stocks: use PAR e.

f.g.

Personal Property Valued at

FMVNOTE: The capital of the surviving spouse of the decedentshall not be deemed part of his gross estate.

SPE CIAL RU LES ON INT ANGIBLE P ROPE RT IE SIntangible personal properties with situs in thePhilippines(Section 104) a

.Decedent’s Interest Franchise, which must be

exercisedPhilippines.Shares, obligations or bonds

in the i. To the extent of the interest therein of the

decedent atthe time of his death.

by anycorporation or sociedad anonima

organized orconstituted in the Philippines inaccordance withitslaws,Shares, obligations or bonds issued byany foreign corporation 85% of thebusiness of which is located in thePhilippines,

b.

Transfer in Contemplationof Death

Transfers impelled by the thought of animpendingdeath (i.e., the motivating factor orcontrolling motive is the thought of death),without regard of the state of health of thetransferor.Transfers made before the decedent’s

a. the possession or enjoyment of, or theright to theincome of theproperty;the right either alone or in conjunctionwith any person, to designate the personwho shall possess or enjoy the property

Shares, rights in any partnershipindustry established in the

business

or

b.

RE CIPROCIT Y CLAU SEIntangible personal property of a decedent

who is non-resident alien, with a situs in the Philippines

(Section 104) money or money’s worthThe intangibles shall not form part of the

gross estate if: c.

Revocable Transfer

1. The decedent at that time of his death was a citizen andresident of a foreign country which at the time of his deatha. Did not impose a transfer tax or death tax of any

characterb. In respect of the intangible personal property of

Transfers made by the decedent by trust orotherwise,where the enjoyment was subject at thedate of his death to any change through theexercise of a power by the decedent alone orin conjunction with any other person, toalter, amend, revoke, or terminate, or whereany such power is relinquished in

2. The law of the foreign country of which thedecedentwas a citizen and resident at the time ofhis death:Allow a similar exemptions from transfertaxes or deathtaxes of everycharacter

The power to alter, amend or revokeshall beconsidered to exist at the date of the decedent’s death

a.

– The

exercise

is subject

to the

b.requirement of giving priornoticeThe alteration, amendment orrevocation takes effect only onthe expiration of a stated periodafter the exercise of the power.

–

9. Composition of the gross estate10. Items to be included in the gross estate Does not include bona fide sales for an

adequate andfull consideration in money or money’s

ITEM S OF G ROSS E ST AT E:a. Decedent's Interest

b. Tr a n sf e r i n C on t e m p la t ion o f De a t h

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d.

Property

Passing

Under

General

Power

of

(b)

Judicial expenses of the testamentary or intestateproceedingsClaims against the estateClaims against insolvent persons included in thegross estateUnpaid mortgages or indebtedness upon property

Appointment (GPA) (c

)(d

GPA is the

power to designate, wi thou tr estr ictions , the persons who shall

receive, succeedto, possess or enjoy the property or its income received from the estate of a

(e)(f)(g The GPA is

exercised by: Transfers for Public Use-to the government of theRepublic of the Philippines or any political subdivision thereof, exclusively for public purposesVanishing deductionsFamily Home - Fair value but not to exceed P1,000,000Standard Deduction -- P1,000,000Medical Expenses – Not to exceed P500,000Amount Received by Heirs under RA 4917

a.b.c.

WillDeed executed in contemplationof deathDeed under which he has retainedfor his life or for any period which

The possession or enjoyment of, or theright to theincome from, theproperty orThe right, either alone or in conjunctionwith any person to designate the personswho shall possess or enjoy the property or

in money or money’s worth

a.

Ordinary Deductions

e.

Proceeds of Life Insurance

i. Fun er al exp en ses

Proceeds from life insurance form part of the grossestate only when:

Actual funeral expenses or in amount equal to 5% of thegross estate, whichever is lower, but in no caseto exceed

- The beneficiary is theadministrator, whether

estate, executorthe

oris

FUNERAL EXPENSES are costs which are actuallyincurred in connection with the interment orburial of

- The beneficiary is other than the estate,executoror administrator and the designation is

f. Prior Interests

Examples of DEDUCTIBLE funeral expenses: The mourning apparel of the surviving

spouse andunmarried minor children of the deceased bought and used on the occasion of the burial;Expenses for the deceased’s wake, including food and drinks;Publication charges for death notices; Telecommunication expenses incurred in informing relatives of the deceased;Cost of burial plot, tombstones,

Except as otherwise provided, theprovisions on (1)transfer in contemplation of death, (2)revocable transfers and (3) proceeds of lifeinsurance shall apply to the transfers, trusts,etc., whether made before or after the

g.

Transfers for Insufficient Consideration

The amount includible in the gross estate is the excessof the FMV at the time of death over the value of the consideration received.

owns a family estate or several burial lots, only

thevalue corresponding to the plot where he is

buried isdeductible;Interment and/or cremation fees and charges; andAll other expenses incurred for the

11. Deductions fromestate

DEDU CT IONS FOR E ST AT E OF A CIT IZE N OR A RE SIDE NT[ Revenue Reg ula ti ons 2 -2003 a nd Sec. 8 6] : Examples of NON-DEDUCTIBLE funeral

expenses: Expenses, Losses, Indebtedness, and Taxes (ELIT):(a) Actual funeral expenses or five percent

(5%) of the gross estate whichever islower (not exceeding P200,000)

Expenses incurred after the interment, such as forprayers, masses, entertainment, or the like are not deductible.

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Any portion of the funeral and burial expenses borne ordefrayed by relatives and friends of the deceased are not deductible.

Must not have been condoned by the creditors or theaction must not have prescribed. Duly

Substantiation REQUIREMENTS:The expenses must be duly supported by receipts or invoicesor other evidence to show that they were actually incurred

Substantiation REQUIREMENTS: no tar ized at the time incurred, except

loans fromfinancial institutions where notarization not part of business practice or policyA s t a te m e n t und e r o a t h executed by the

ii. Jud icial E xpen ses

or executor of the estate reflecting thedisposition ofthe proceeds of the loan if said loan wascontracted within three (3) years prior tothe death of the decedent

Judicial Expenses are expenses incurred during thesettlement of the estate but no t b e y o n dd ay pr escr ib ed by law , or the extensionthereof,for the fling of the estate tax return.

iv. Claims a gain st In so lven t P er son s

Judicial Expenses should be supported by a sworn statementof account iss u e d an d si g n e d b y t h e c r e d i t o r .

Condition for DEDUCTIBILITY:The claim against the insolvent person should beincluded as part of the gross estate of the decedent.Examples of judicial

expenses(1)(2)(3)(4)(5

Fees of executor or administratorAttorney’s feesCourt fees; Accountant’s fee; Appraiser’s fee; Clerk hire;Cost of preserving and distributing the

v. Unp aid Mor tgageConditions for DEDUCTIBILITY: The value of the decedent’s interest over

the propertyencumbered is included as part of the grossestate undiminished by the amount ofmortgageThe deduction shall be limited to the extentthat the mortgage was contracted bona

Expenses incurred in the extrajudicial settlement of theestate must be necessary costs toward the settlement of the

Other Rules Determine who is the recipient or

beneficiary of theloan which must beverified;If merely an accommodation made bydecedent in favor of another person, thenbalance of loan considered as receivablefrom that person and part of gross estateIf there is a legal impediment to recognizethe same as receivable of the estate, the

Attorney’s fees to be deductible should essential to thecollection of assets, payment of debts or the distribution of the estate. C I R v. CA [ 328 S C R A

iii. Claims a gain st th e E sta te

Claims against the Estate are debts

or demands of apecuniary nature which could have been

enforced againstthe deceased in his lifetime and could have beenreduced to

vi.

T axes

What taxes are deductible?Income taxes, real estate or property taxes du e a t

Requisites for DEDUCTIBILITY: A personal obligation of the deceased

existing a thetime of his death except unpaid obligationsincurred incident to his death such as unpaidfuneral expenses and unpaid medicalexpenses which are classified under adifferent category of deductions,Contracted in good faith and for adequateand full consideration in money or money'sworth,

th e ti me o f d ea th which were unpaid as of thetime of death

Taxes NOT DEDUCTIBLE:

Estate taxesIncome tax on income received after deathProperty taxes not accrued before

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vii. Losses

d. Family Home

Requisites for DEDUCTIBILITY:

FMV of the family home but not to exceed P1,000,000. Losses should arise

fromfire, storm, shipwreck, orother casualty, robbery, theft or

embezzlement;Losses should not be compensated by insurance otherwise;

Family Home is the dwelling house, includingthe land onwhich it is situated, where the husband andwife, or a head of the family, and members oftheir family reside as certified by Barangay

or

Losses should not be claimed asdeduction in theincome tax return of thetaxable estate;The losses should occur during thesettlement of the estate; AND thatThe losses should occur before the lastday for the payment of the estate tax (last

The family home is deemed constituted on thehouse andlot from the time it is actually occupied as afamily residence and is considered as such foras long as any of its beneficiaries actually

Actual occupancy of the house or house andlot as thefamily residence shall not be consideredinterrupted or abandoned in such cases as thetemporary absence from the constituted familyhome due to travel or studies or work abroad,

b.

Transfer for Public Use

Requisites for DEDUCTIBILITY:

the disposition is in the last will and testamentto take effect after deathin favor of the government of the Philippines or any political subdivision thereofexclusive for public purposethe value of property given is included in

The family home is generally characterized by permanency,that is, the place to which, whenever absent for business or pleasure, one still intends to return.

Conditions for the allowance of FAMILY HOME asDEDUCTION from the gross estate- The family home must be the a ctu al

r esid en tial ho me ofThe transfertransfers to

also contemplates bequests, devices, orsocial welfare, cultural and

the decedent and his family at the time of his death, ascer tifi ed b y th e Baran gay Cap tain of the the family home issituated;The total value of the family home must beincluded as part of the gross estate of thedecedent; andAllowable deduction must be in an amountequivalent to the current fair market value of

c. Vanishing Deductions (Property Previously Taxed)

Nature and PurposeVANISHING DEDUCTIONS are deductionsallowed

forproperties which were already subjected totransfer taxes(e.g., estate and donor’s tax). The purpose isto minimize the efect of double taxationwithin a short period of time since the sameproperty will be again subjected to tax in the

o f th e d ec ed en t’s in ter est

(whetherconjugal/community or exclusive property),

whicheveris lower, but not exceeding P1,000,000.

NOTE: The family home must be part of the

properties of theabsolute community or of the conjugalpartnership, orof the exclusive properties of either spouse,depending upon the classifcation of theproperty (family home), and the propertyrelations prevailing on the properties of thehusband and wife. It may also be constitutedby an unmarried head of a family on his orher own property.For purposes of availing of a family home

Requisites for DEDUCTIBILITY: Present decedent acquired the property by

inheritanceor donation within 5 yrs prior to his deathThe property must have formed part of the gross estate of previous decedent or the taxable gift of the donor Estate tax on the prior estate or the donor’s tax must have been paidIt must be the same property received from previous decedent or donorEstate of previous decedent or donor

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e. Standard Deduction

favor of another beneficiary inaccordance with thedesire of thetestatorAll bequests, devises, legacies, or transfersto social welfare, cultural or charitableinstitutionsProvided, not more than 30% of the valuegiven is used for administrative purposesProceeds from life insurance where thebeneficiary is other than estate, executor oradministrator AND the designation isirrevocableSSS deathbenefitsProperties held in trust by the

A deduction in the amount of P1,000,000 shall be allowed asadditional deductions withou t n eed o f Full amount shall be allowed as deduction for the benefit ofthe decedent

f. Medical Expenses

Requisites for DEDUCTIBILITY

Medical cost incurred within the one yearUp to a maximum amount of P500,000, whichever is lowerAny excess over P500,000 cannot be reclassifed and deducted as claims against the estateIt must be duly substantiated with oficial receipts for services rendered

13. Tax credit for estate taxes paid in a foreign countryESTATE TAX CREDIT is a remedy against internationaldouble taxation to minimize the onerous efect of taxing the same property twice

g.

Amount Received by Heirs under R.A. 4917

Amount received by the heirs from the decedent’s employeras a consequence of death of the decedent employee in

WHO M AY A VA IL OF T AX CRED IT S?Only the estate of a citizen or resident alien at the time ofthe death can claim tax credit for any estate taxes paid to a

h. Net Share of the surviving spouse

Property

in the

Conjugal

WHAT AM OU NT OF T AX C RED IT M AY BE CLAIM ED ?DEDU CT IONS FOR NONRE SIDE NT

A LIE NSThe estate tax imposed by the Philippines shall be creditedwith the amounts of any estate tax imposed by theauthority of a foreign country, subject to

(for property situated in the Philippines) Expenses, Losses, Indebtedness and

Taxes (ELIT)Only the proportion of the total

lossesindebtedness and taxes which the value of

such partbears to the value of his entire GE wherever

PE R COU NT RY LIM IT AT I ON – net estate within a foreigncountry

Property Previously TaxedTransfers for Public

Net es tat e, for eign x Phil. Estate Tax = max amt. of creditNet estate, worldNet

ShareProperty

of the

surviving

spouse

in the

Conjugal GLOBA L

LIM IT AT IONNOTE:To be allowed

To tal n et esta te ou tsid e X Phil. Estate tax = max amt. ofdeductions for a non-resident

alien,credit

Net estate, world

executor/administrator/any heir must include in the returnto be filed, the value of the gross estate not situated in the The final allowable amount shall be the lower of

the countryand global limitation amounts.12. Exclusions from

GROSS estate14. Exemption of certain acquisitions and transmissions[ Sec. 84 and 8 7 of t he NIRC]

Acquisitions and transfers expressly declared as exempt:

Merger of the usufruct in the owner of the naked titleTransmission or delivery of the inheritance orlegacy by the fduciary heirs or legatee to the fduciary Transmission from the first

a. First P200,000.00 value of the net estate

b. Merger of usufruct in the owner of the naked title

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E xamp le:A died leaving a fishpond; naked title to B,his son, and usufruct to C, another son, forlife. C died a year later. The fishpond will beincluded in the gross estate of A, being theowner. Upon the death of C, the usufruct willbe merged into the owner of the naked title Bwho shall become the absolute owner thereof.

knows of the acceptance of the donee (exception:donations of immovable

1 properties); d o n or ’

s tax Donation mortis causa: a donation which takes efectupon the death of the donor; s ub je c t t o

APP LICABILIT Y OF LAW S GOVE RNING T HE IM PO SIT ION O F D ONOR’ ST A X The donor’s tax applies to a completed gift.The transfer isperfected from the moment the donorsknows of theacceptance by the donee; it is completed by thedelivery, either actual or constructively, of thedonated property to the donee. The law in forceat the time of the perfection/completion of the

c. Transmission or delivery of the inheritance orlegacy bythe fduciary heir or legatee to the The substitution must not go beyond

one degreefrom the heir originally institutedThe fiduciary or first heir must be both living at the

A gift that is incomplete because of reserved powers,becomes complete when either:

E xampleA dies and leaves in his will a lot to hisbrother B who isentrusted with the obligation to transfer thelot to C, a son of A when A reaches legal age.B is the fiduciary heir and C is thefideicommissary. The transfer from A to B issubject to estate tax. But the transmission or

The donor renounces thepower; orHis right to exercise ceased because of thehappening of some event or contingency orthe fulfillment of some condition, other than

SPE CIAL RU LES ON HUS BA ND A ND WIFEHusband and wife are considered as separate and distincttaxpayer’s for purposes of the donor’s tax.d. Transmission from the first heir, legatee or

donee infavor of another beneficiary, in accordance with the desire of the

However, if what was donated is a conjugal orcommunityproperty and only the husband signed the deedof donation, there is only one donor for donor’stax purposes, without prejudice to the right ofthe wife to question the validity of the donationwithout her consent pursuant to the pertinentprovisions of the Civil Code of the Philippines

e. Bequests, devises, legacies or transfers to

social welfare, cultural and charitableinstitutions,no part of the net income of which inuresto the benefit of any individual:Provided not more than 30% of thetransfers shall be used by suchinstitutions for administration purposes

NE T G IFTThe net economic benefit from the transfer that accrues tothe donee.15

.Filing of notice of death (see F. Compliance Accordingly, if a mortgaged property is

transferred as a gift,but imposing upon the donee the obligationto pay the mortgage liability, then the netgift is measured by deducting from the fairmarket value of the property the amount of

requirements)16. Estate tax return (see F. Compliance requirements)======================================TOPIC UNDER THE SYLLABUS:II. NATIONAL INTERNAL REVENUE CODEC. Donor’s Tax

2. DefinitioDonor’s Tax is a tax on the privilege of transmitting one’sproperty or property rights to another or others without1. Basic

principles

KIND S OF D ONAT IONS : Donation inter vivos: a donation made

between livingpersons; perfection is at the moment when

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See Estate of Fidel Reyes, CTA Case No. 6747,January 16, 2006 where the repudiationby the heirs of an inheritance was held

3.Nature

The subject of donor’s tax is the gift or donation.Article 725of the Civil Code defines a gift or donation as “an act ofliberality whereby a person disposes

7. Transfers for less than adequate and full consideration

Where property, other than a real propertythat has beensubjected to the final capital gains tax, istransferred for lessthan an adequate and full consideration inmoney or money’s worth, then the amount bywhich the fair market value of the propertyat the time of the execution of the Contractto Sell or execution of the Deed of Sale which isnot preceded by a Contract to Sell exceededthe value of the agreed or actual

4. Purpose or object

The purpose of donor’s tax is to complement estate tax bypreventing tax-free depletion of the transferor’s estateIt is also to prevent avoidance of income taxthrough thedevice of splitting income among numerousdonees, who are usually members of a familyor into many trusts, with the donor therebyescaping the effect of the progressive rates of

NOTE: In the case of real propertiesconsidered as capitalassets, the difference between the FMV and theactual valuereceived in transfers for less than the adequateor full consideration shall not be subject todonor’s tax. The rationale is that underSection 24 (d), the FMV itself, if higher thanthe gross selling price, is the base for thecomputation of capital gains tax. In essence,

5. Requisites of valid gift or donation (CIDA)

Capacity of the donorIntent to donateDelivery of theconstructive

subject

gift, whether

actual

or

Acceptance by the donee 8. Classification of

donor6. Transfers which may be constituted as donation

Resident citizenNon-resident citizenResident alienNon-resident

a. Debt condoned or remitted [ Sec. 50 of R R 02 - 40]

If a creditor merely desires to benefit adebtor andwithout any consideration thereforecancels the debt, the amount of thedebt is a gift from the creditor to thedebtor and need not be included in the

9. Determination of gross Gift

Gross gift refers to all property, real or personal, tangible orintangible, that is given by the donor to the donee by way ofb. Transfers made in trust for another

person10. Composition of Gross Giftc. Renunciation by the surviving spouse of

his/her share inthe conjugal partnership or absolute community afterthe dissolution of the marriage in favor of

RE SIDE NT CIT IZE N/ NON -RE SID ENT CIT IZE N/ RES IDE NT ALIE N

Real property within and without the PhilippinesTangible personal property within and without thePhilippinesIntangible personal property within and

However, a gen er al r enun ci ation by an heir, including the surviving spouse, ofhis/her share inthe hereditary estate left by thedecedent is no t subject to donor’s tax,u n l e ss specifically and categoricallydone in favor of identified heir/s to theexclusion or disadvantage of the other

NON-RE SIDE NT A LIE N

Real property within the PhilippinesTangible personal property within the PhilippinesIntangible personal property within the

2003]

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SPE CIAL RU LES ON INT ANGIBLE P ROPE RT IE S

FORMU LAIntangible personal properties with situs in the

Philippines(Section 104)

- Limitation A (per country):

Net gi fts, for eign coun tr y X Phil. donor’s tax Franchise, which must be

exercisedPhilippines.Shares, obligations or bonds

in the

Net gifts, world

- Limitation B (by total):

by anycorporation or sociedad anonima

organized orconstituted in the Philippines in accordance with its laws,Shares, obligations or bonds issued byany foreign corporation 85% of thebusiness of which is located in thePhilippines,Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or bonds have acquired a business situs in the Philippines, Shares,

Net gi fts, for eign coun tr y X Phil. donor’s taxNet gifts,

world

13.

Exemption of gifts from donor’s tax (Sec. 101)

The exemptions are not to be treated asexclusionsfrom the gross gifts of the donor. Theypartake the nature of deductions and aretherefore, deductible from the gross giftin order to arrive at the net taxable gift.

RE CIPROCIT Y CLAU SEIntangible personal property of a decedent who is non-resident alien, with a situs in the Philippines

M AD E BY A RE SIDE NT(a)

Dowries or gifts made on account ofmarriage before itscelebration or within one year thereafter byparents to each of their legitimate,recognized natural, or adopted children t o

The intangibles shall not form part of the gross gift if:1. The donor at that time of his death was a

citizen and resident of a foreign countrywhich at the time of his deatha. Did not impose a transfer tax or death

tax of any characterb. In respect of the intangible personal

property of citizens of the Philippines notresiding in that foreign country; or

NOTE: Both parents may make dowries andgifts made onaccount of marriage. Each parent shall beentitled to the exemption above. This has theeffect of splitting the value of the gift into halffor both spouses so each spouse can claim theexemption. However, both spouses must fileseparate returns because the husband and wife

2. The law of the foreign country of which thedonor was

a citizen and resident at the time of his death:a. Allow a similar exemptions from transfer

taxes or death taxes of every characterc. In respect of the intangible personal

property owned by citizens of the

(b)

Gifts made to the National Government orany entitycreated by any of its agencies which is notconducted for profit, or to any politicalsubdivision of the said Government

(c)

Gifts in favor of a non-profiteducational and/orcharitable, religious, cultural orsocial welfarecorporation, institution accredited non-government organization, trust orphilanthropic organization or researchinstitution or organization; provided, not

11. Valuation of gifts made in property

Personal property: FMV at the time of donationReal Property: FMV as

theCommissioner or the FMV in the latest

schedule ofvalues of the provincial or city assessor, whichever is NON-

PROFITEDUCATIONAL

AND/OR

CHARITABLECORPORATION is one which is incorporated as

a non-stockentity paying no dividends, governed bytrustees who received no compensation, anddevoting all its income to the accomplishmentand promotion of the purposes enumerated in

12. Tax credit for donor’s taxes paid in foreign country

WHO A RE E NT IT LED T O CLAIM CRED ITS :Only resident or citizen donors

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(d)

Encumbrances on the property donated if assumed bythe donee in the deed of donation

administration purposes

14. Person liable(e

)Donations made to entities as exempted under speciallaws.

Any person, resident or nonresident, transferring theproperty by gift.(f) Donations not exceeding P100,000 per year

(Sec. 99[A]) 15. Tax BasisNOTE: To be exempt from donor’s tax and

to claim fulldeduction of the donation given to qualifeddonee institutions duly accredited by thePhilippine Council for NGO Certification, Inc.(PCNC), the donor engaged in businessshall give a notice of donation on every donationworth at least Fifty Thousand Pesos(P50,000) to the Revenue District Office(RDO)which has jurisdiction over his place of business

COM PUT AT ION OF T AX A ND P ERSON LIA BLE(Applicable only on donations made to a person who is no t astranger.)On the 1st donation of the year

Gross GiftLess: deductionsNet giftMultiply by: tax rateDonor’s tax

xx

xxDon ation , which shall be attached to thesaid Notice ofDonation, stating that not more than thirtypercent (30%) of the said donation/gifts for thetaxable year shall be used by such qualifed-donee institution for administration purposespursuant to the provisions of Section 101(A)

xx

xxxx======

====On subsequent donation during the year

Gross GiftLess: deductionsNet giftAdd: prior net gift Aggregate net gifts Multiply by: tax rateDonor’s tax on aggregate gift Less:

xx

xx

Donative intent is a creature of the mind. Itcannot beperceived except by the material andtangible acts which manifest its presence.This being the case, donative intent ispresumed present when one gives a part ofone’s patrimony to another withoutconsideration. Second, donative intent is notnegated when the person donating hasother intentions, motives or purposes whichdo not contradict donative intent. TheCourt was not convinced that since thepurpose of the contribution was to help electa candidate, there was no donative intent.Petitioners’ contribution of money withoutany material consideration evinces animusdonandi. The fact that their purpose fordonating was to aid in the election of the

xx

xxxx

xxxx

xx xx======

====T AX RATE S1. Donee is a Stranger to the Donor

Rate: 30%

A Stranger is a person who is not a:1) Brother, sister (whether by whole or

half-blood),spouse, ancestor and lineal descendantRelative by consanguinity in the collateral line

M AD E BY A NONRE SIDE N T ALIEN

2)

(a)

Gifts made to the National Government or any entitycreated by any of its agencies which is not conductedfor profit, or to any political subdivision

A legally adopted child is entitled to all the rightsand obligations provided by law to legitimate children, and therefore, donation to him shall not be considered as donation made to stranger. Donation made between business organizations and those made between an individual and a business organizationshall be considered as donation

(b)

Gifts in favor of an non-profiteducational and/orcharitable, religious, cultural or socialwelfare corporation, institution accreditednon-government organization, trust orphilanthropic organization or researchinstitution or organization; provided, not

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2. Donee is NOT a Stranger to the Donor

Rate: Graduated Rates

======================================TOPIC UNDER THE SYLLABUS:II. NATIONAL INTERNAL REVENUE CODE D. Value-Added Tax

2. IMPACT OFTAX Originally, the tax is imposed against the

seller of goodsproperties or services.

1. NATURE AND CHARACTERISTIC 3. INCIDENCE

OF TAX VAT is a tax on consumption levied on the sale, barter,exchange or lease of goods or properties andservices in the Philippines and on importation of goods into the PhilippinesSeller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. In the case of

The tax is shifted to the buyer of the goods,propertiesorservices.VAT is an indirect tax levied on goods andservices; not on persons, and ultimately paid

4. DESTINATIONPRINCIPLEDESTINATION PRINCIPLE: VAT is imposed in thecountry in which the products or services areactually consumed or used. Exports exempt,

Actual shipment of the goods from thePhilippines to aforeign country is a precondition of an exportsale following the destination principle beingadhered to by our VAT system.

ORIGIN PRINCIPLE: only national taxpayerswould beexposed to the tax, without distinguishingbetween transactions “consumed” locally orabroad. Exports taxable, imports exempt. Situs:

CROSS-BORDER DOCTRINE: No VAT shall be imposed toform part of the cost of goods sold destined forconsumption outside of the territorial border of

6185, Ma y 17, 2007]reimbursed by Sony International does not render the same

questioned transaction. Neither was there an exchange of

misplaced. In the above ruling, COMASERCO renderedservices rendered to its affiliates. Thus, the SC held that

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So n y P h i l i p p i n es v . CI R , [ CTA E B C a s e N o . 90C TA C a s e N o .

The fact that the advertising expense is

subsidized or automatically subject to output

VAT. There was no sale,barter or exchange of goods or

properties from the service.

The CIR’s reliance on the case of CIR v.

COMASERCO is services to its affiliates. What

was being taxed were these COMASERCO is

[ CIR v. Ame r i can Ex p re ss , G .R . N o . 1526 0 9, J un e 29, 2 005] As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the countrywhere they are consumed.

However, our VAT law itself provides for a clearexception, under which the supply of serviceshall be zero-rated when the followingrequirements are met: (1) the service isperformed in the Philippines; (2) the service fallsunder any of the categories provided in Section102(b) of the Tax Code; and (3) it is paid for in

[ CIR v. CO M A S E R C O , G . R . N o . 125355, M a rch 3 0 , 2000] VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and in the performance of services, e v e n in t h e a b se n c e o f pro f i t a tt r i bu t a b le t h e r et o . The term “in the course of trade or business” requires the regular conduct or pursuit of a commercial or an economic activity,regardless of whether or not the entity is profit-oriented.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payment for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of

Considering that there are no sale, barter orexchange ofgoods or properties in the instant case, theimposition of output VAT on subsidizedadvertising expense has no leg to stand on.(NOTE: Basically, in order that VAT may beimposed, there must be the existence of a

5. PERSONS LIABLE [ Sec. 105]

6. VAT ON SALE OF GOOD OR PROPERTIES [ Sec. 106 ]

Any person who, in the course of trade or business

Every sale, barter or exchange of goods or properties shallbe subject to 12% VAT based on the gross selling price or

Sells, barters, or exchanges goods or properties (selleror transferor)Leases goods or properties (lessor) Renders services (service provider)Imports goods (importer), whether or not

Goods: all tangible and intangible objects whichare capableof pecuniary estimation. Real properties held primarily for sale to

customers orheld for lease in the ordinary course ofbusinessthe right or the privilege to use patent,copyright, design or model, plan, secretformula or process, goodwill, trademark,trade brand or other like property or rightthe right or the privilege to use in thePhilippines of any industrial, commercial orscientific equipmentthe right or the privilege to use motionpicture films, film tapes and disc

D efin ition o f “in th e co u r se o f tr ad e o r b u sin ess” (Ru le o f Regu lar ity) The regular conduct or pursuit of a

commercial or aneconomic activity, including transactionsincidental thereto, by any person regardlessof whether or not the person engagedtherein is a non-stock, nonprofit privateorganization or government entityNon-resident persons who perform servicesin the Philippines are deemed to bemaking sales in the course of trade or

Gross Selling Price: the total amount ofmoney or itsequivalent which the purchaser pays or isobligated to pay to the seller in consideration ofsale, barter or exchange of the goods orproperties, excluding the VAT. The excise tax, ifany, of such goods or properties shall form

The consideration stated in the salesdocument, orThe fair market value (FMV) as determinedby the Commissioner (zonal value) or FMV asshown in the schedule of values of theProvincial and City Assessors, whichever is

NOTE: If the VAT is not billed separately, the

selling pricestated in the sales document shall bedeemed to be inclusive of VATIf the gross selling price is based on thezonal value or market value of the property,the zonal or market value shall be deemedexclusive of VAT. Thus, the zonal/marketvalue, net of the output VAT, should still behigher than the consideration in the

E xcep tion s to th e ru le o f r egu lar ity Any business where the gro ss sales o r

r eceip t d o no t Sale of Real Properties

exc eed P100, 000 during any 12-month period shall be sale of real properties held primarily

for sale tocustomers or held for lease in the ordinary course of trade or business of the seller shall

considered principally for subsistence orlivelihood andnot in the course of trade orbusinessServices rendered in the Philippines by non-resident foreign persons shall be considered

sale of real properties may either be on an installmentbasis or deferred-payment basis.

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CS G ar m e nt s v. C I R , [ CTA ca s e no . 65 2 0,4 J a nu a r y 200 7 ]A transaction will be characterized as havingbeen entered into by a person in the course oftrade or business if it is (1)regularly conducted; and (2) undertaken inpursuit of a commercial or economic activity areconsidered as entered into in the course of tradeor business. “Incidental” means something elseas primary; s o m et h i n g n ece ss ar y, a pp e r t ai n i n gt o , o r d e p e nd i n g upo n a no t h e r , w h i c h iste r m e d t h e pr i nc i p al. Hence, an isolatedtransaction is not necessarily disqualifed frombeing made incidentally in the course of trade orbusiness. Therefore, the sale of motor vehicle

CIR v. M a g s a y s ay Lin e s , [G . R . N o . 14698 4 , J u l y 2 8 , 2006]The term “course of business” or “doing business” connotesregularity of activity. Any sale, barter, exchange of goods or

a. sale of real property on installmentplan: sale ofreal property by a real-estate dealer,the initial payments of which in theyear of sale do not exceed 25% of the

7. ZERO-RATED SALES OF GOODS OR PROPERTIES, ANDEFFECTIVELY ZERO RATED SALES OF GOODS OR PROPERTIES

th e VA T sh all b e co llec ted o n th e in stallmen t

(a) The following sales by V AT - RE GISTE RE D persons shall besubject to 0% rate:

p ay men ts.Initial payments: Covers any down payment made

E xpor t Salesan

dincludes

all payments

actually

or a. The sale and actual shipment of goods from thePhilippines to a foreign country

constructively received during the yearof sale. Itexcludes amount of mortgage on the realproperty sold except when suchmortgage exceeds the cost or otherbasis of the property to the seller, inwhich case the excess shall beconsidered part if the initial payments. Italso excludes notes or other evidence of

i.ii.

Irrespective of any shipping arrangementPaid for in acceptable foreign currency or its

equivalent in goods or servicesAccounted for in accordance with

iii.

b. Sale of raw materials or packaging materialsby a VAT-registered entity to a nonresident buyeri. for delivery to a resident local export-

orientedenterprise

Used in the manufacturing,processing, packing, repacking in thePhilippines of the said buyer’s goods

Paid for in acceptable foreign currencyAccounted for in accordance with

b. sale on the deferred-payment basis: thetransaction shall be treated as cash sale which makes the e n t i r e se l l i n g pr i c e

ii.

o f sale (sale of real property where the initialpayment exceeds 25% of the gross selling price.

iii.iv.

The real estate dealer shall be subject toVAT on theinstallment payments, including interest andpenalties, actually and/or constructivelyreceived by the seller. Correspondingly,the buyer can claim the input tax in thesame period that the seller recognized the

c. Sale of raw materials or packaging materialsto export-oriented enterprise whose export sales exceed 70% of total annual productionSale of gold to the BSPThose considered export sales under theOmnibus

d.e.- “Real estate dealer” includes any

person engagedin the business of buying,developing, selling,exchanging real properties as principaland holding himself out as a full or

Under Omnibus InvestmentCode:i. the Philippine port F.O.B. value

determined frominvoices, bills of lading, inward lettersof credit, landing certificates, and othercommercial documents, of exportproducts exported directly by aregistered export producer, orthe net selling price of export productssold by a registered export producer toanother export producer, or to an exporttrader that subsequently exports thesame;Provided, that sales of export productsto anotherproducer or to an export trader shall only

Sale of residential lot with gross selling priceexceedingP1.5 million, residential house and lotor other dwellings with gross sellingprice exceeding P2.5 million, where theinstrument (whether the instrument isnominated as a deed of absolute sale, deedof conditional sale, or otherwise) is executedon or after November 1, 2005 shall be

ii.

iii.- Where the instrument of sale was

executed priorto November 1, 2005,exceed P1 million of

the price needs only tothe installment sale of lot or dwellings to be subject to 10% VAT

Transmission of property to a trustee shallnot be subject to VAT if the property is to bemerely held in trust for the trustor and/orbeneficiary. However, is the propertytransferred is one for sale, lease or use inthe ordinary course of trade or business andthe transfer constitutes a complete gift, thetransfer is subject to VAT as a deemed sale

Constructive Exports:

i. sales to bonded manufacturing

warehouses ofexport-orientedmanufacturers;sales to export processingzonessale to enterprises duly registered and

ii.iii.

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iv. sales to registered export tradersoperatingbonded trading warehouses supplyingraw materials in the manufacture ofexport products under guidelines to beset by the Board in consultation with theBureau of Internal Revenue (BIR) and theBureau of Customs (BOC);sales to diplomatic missions andother agenciesand/or instrumentalities granted taximmunities, of locally manufactured,

(b) Automatic vs. Efectively Zero-Rated SaleAlthough both are taxed similarly, automaticzero-ratedtransactions differ from efectively zero-rated transactions

v. An au to matically zer o -r ated sale refers toa sale ofgoods, properties and services by a VAT-registeredseller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section

NOTE:

An efectiv ely zer o -r ated sale, on the other hand, refers For purposes of zero-rating export sales of

registeredexport traders shall include commission income. Exportation of goods on

to the local sale of goods, properties andservices by aVAT-registered person to an entity thatwas granted indirect tax exemption underspecial laws or international agreements.Since the buyer is exempt from indirecttax, the seller cannot pass on the VAT andtherefore, the exemption enjoyed by thebuyer shall extend to the seller, making the

deemed export sales until theexportconsigned are in fact sold by the

products

Provided, finally, that sales of goods, properties

orservices made by a VAT-registered supplierto a BOI-registered manufacturer/ producer whose products are100% exported are considered export sales.

A certification to this effect must beissued by the Board of Investment (BOI)which shall be good for one year unlesssubsequently re-issued by the BOI.

The sale of goods, supplies, equipment

Automatic zero-rated transactionsgenerally refer tothe export sale of goods and supply ofservices. The tax rate is set at zero. Whenapplied to the tax base, such rate obviouslyresults in no tax chargeable against thepurchaser. The seller of such transactionscharges no output tax, but can claim arefund of tax credit certificate for the VATpreviously charged by supplier. Efectivelyzero-rated transactions, however, refer tosale of goods or supply of services to personsor entities whose exemption under speciallaws or international agreements to whichthe Philippines is a signatory efectivelysubjects such transactions to zero-rate.Again, as applied to the tax base, such ratedoes not yield any tax chargeable against

NOTE: Limited to goods, supplies,equipment and fuelpertaining to or attributable to the transportof goods and passengers from a port in thePhilippines directly to a foreign port withoutdocking or stopping at any other ports in the

For eign Curr en cy D eno min ated Sale (in ter n al expor ts) Sale to a non-resident of goods,

except thosementioned in Section 149 (automobiles) and150 (non- essential goods)Assembled or manufactured in the PhilippinesFor delivery to a resident in the PhilippinesPaid for in acceptable foreign currency and

No. 15386 6, Fe bruar y 11, 20 05 ]

8. TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO12% VAT)Sales to p er son s o r en tities wh o se exemp tion

und er sp ecial For transactions deemed sales, the output taxshall be basedon the market value of goods deemed sold as ofthe time ofthe occurrence of the transaction. In thecase of a sale where the gross selling price isunreasonably lower than the fair market value,

laws o r in tern ation al agr eemen ts to wh ich th e Ph ilipp in es isa sign ator y efect ively sub jects su ch sales to zer o -r ate. Refer to exemptions granted under

special laws ortreaties which are extended not only to the grantee but also to its supplier

NOTE: The gross selling price is “unreasonably lower” thanthe fair market value if it is lower by more than

TAXATION LAW REVIEWER

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actual market value. [ Revenue Reg ula ti ons 16 -2005 ;

voluntarily registered despite beingexempt underSec 109 (2) of the TaxCodeapproval of a request for cancellationof registration of one who commencedbusiness with the expectation of grosssales or receipt exceeding P1,500,000

Reven ue Reg ula ti ons 4 -2 007] (4

)a. Transfer, use or consumption not in the course ofbusiness of goods or properties originally intended for sale or for use in the course of Transfer of goods or properties not in the

course ofbusiness can take place when VAT- b. not subject to 12%

output VATperson withdraws goodspersonal use

from

his

business

for(1)

change of control of a corporationby theacquisition of the controlling interest ofsuch corporation by anotherstockholder or group of stockholders

b. Distribution or transfer to: Shareholders or

investorsVAT-registered

share

in the profits of i. The goods or properties used in

business orthose comprising the stock-in-trade of thecorporation, having a change incorporate control, will not beconsidered sold, bartered orexchanged despite the change in

Property dividends which constitutestocks in tradeor property primarily held for saleor lease declared out of RetainedEarnings on or after Jan.1,1996 and distributed by the company toits shareholders shall be subject to VATbased on the zonal value or fairmarket value at the time of

ii. Exchange of property by corporationacquiring control for the shares of stocks of the target corporation is

(2)

change in the trade or corporate name of thebusinessmerger or consolidation of corporations

c. Consignment of goods if actual sale is not made within60 days following the date such goods were (3

) Consigned goods returned by the

consignee withinthe 60-day period are not deemed sold

i. The unused input tax of thedissolvedcorporation, as of the date of mergeror consolidation, shall be absorbedby the surviving or new corporation.

d. Retirement from or cessation of business, with respectto inventories of taxable goods existing as of such retirement or cessation. 10. VAT ON IMPORTATION OF

GOODS [ Sec. 107] Change of ownership of the business

(when asingle

proprietorship

incorporates

or the VAT is imposed on goods brought into the

Philippines,whether for use in business or not. TheVAT shall be paid by the importer prior tothe release of such goods from customs

proprietor of a single proprietorship sells his entirebusinessDissolution of a partnership and creationof a new partnership which takes over

Importer: refers to any person who bringsgoods intothe Philippines, whether or not made in thecourse of his trade or business. Includesnon-exempt persons or entities who acquiretax-free imported goods from exempt

NOTE: For retirement or cessation of business, the taxbase shall be the acquisition cost or the current market price of the goods or

9.

CHANGES IN OR CESSATION

OF

STATUS

OF

A VATREGISTERED

PERSON Tax base = total value used by BOC indetermining tariffand customs duties, plus custom duties,excise tax, and if any, other charges(postage, commission, and similar charges,prior to the release of the goods from

a. subject to 12% output VAT(1

)change of business activity from VAT taxable statusto VAT-exempt status(2

)approval of a request for cancellationregistration due to reversion to exempt status approval of a

of

If the valuation used is based on volume orquantity ofthe imported goods, the landed cost shallbe the basis for computing VAT. Landedcost = invoice amount, customs duties,freight, insurance and other charges

(3)

ofregistration due to a desire to revert toexemptstatus after the lapse of 3 consecutive years from

TAXATION LAW REVIEWER

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a. Sale, transfer, or exchange of imported goods by tax-exempt persons: In the case of goods

Gros s Rece ip ts : total amount of money or its equivalentexempt persons, entities or

agencies whichsubsequently sold, transferred or exchange inPhilippines to non-exempt persons or

aretheth

representing the contract price, compensation,service fee,rental or royalty, including the amount chargedfor materialssupplied with the services and deposits appliedas payments for services rendered and advancepayments actually or constructively receivedduring the taxable period for the services

shall be liable for VAT due on suchimportation. The taxdue on such importation shall constitute alien on the goods, superior to allcharges/liens, irrespective of the possessor Gross Receipts exclude amounts earmarked for

payment tounrelated third (3rd) party, and amounts received asreimbursement for advance payment on behalf

11. VAT ON SALE OF SERVICES AND USE OR LEASE OFPROPERTIESSale or exchange of service, as well as the useor lease ofproperties shall be subject to 12% VAT

Cons tr uct ive rece ip t: occurs when the money considerationa. Sale or Exchange of Service: the

performance of all kindof services in the Philippines for others for a fee,remuneration or consideration, whether in

or its equivalent is placed at the control of the person whorendered the service without restrictions by the Deposit in banks which are made available

to the sellerof service withoutrestrictionsIssuance by the debtor of a notice to ofsetany debt or obligation and acceptancethereof by the seller as payment for servicesrendered

Sale or exchange of service shall also include:i. Lease or the use of or the right or

privilege to useany copyright, patent, design ormodel, plan, secret formula or process,goodwill, trademark, trade brand, orother like property or rightThe lease or the use of, or the right to

ii. Advan ce pay men ts made b y le ss ee for leas e of proper ty:Advance payments may be in theform of:iii. The supply of scientific, technical,

industrialcommercial knowledge or information

or i.ii.iii.

A loan to the lessor from the lessee, orAn option money for the property, orA security deposit to insure the faithful performance ofcertain obligations of the lessee to the lessor, or

iv. The supply of any assistance that isancillary andsubsidiary to and furnished as a meansof enablingthe application or enjoyment of any suchproperty, or right as is mentioned insubparagraph (b) hereof or any suchknowledge or information as ismentioned in subparagraph (c) hereofThe supply of services by a non-residentperson orhis employee in connection withthe use of property or rights belongingto, or the installation or operation ofany brand, machinery, or otherapparatus purchased from suchnonresident personThe supply of technical advise,assistance orservices rendered in connection withtechnical management oradministration of any scientific,industrial or commercial undertaking,

iv.

If the advance payment is for the faithful performanceof certain obligations of the lessee, it is not subject toVATA security deposit that is applied to

v.

If the advance payment constitutes a pre-paidrental, thensuch payment is taxable to the lessor in themonth when received, irrespective of theaccounting method employed by the lessor

vi.

12. ZERO-RATED SALES OF SERVICEThe following services performed in the Philippines by aV AT-RE GIS TE RE D person shall be subject to 0%

vii.viii.

a. processing, manufacturing, or repacking goods forother persons doing business outside the i.ii.

which goods are subsequently exportedwhere the services are paid for in acceptable foreign currencyb. Lessors of property – all forms of property

for lease,whether real or personal, are liable to VAT

TAXATION LAW REVIEWER

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iii. accounted for in accordance with the rules and

regulations of the BSP

13. VAT EXEMPT TRANSACTIONS [ Sec. 109]

b. services other thanrepacking

processing, manufacturing, or

(Refer to the sale of goods or properties and/or services andthe use or lease of properties that is not subject to VAT and

i. rendered to a

person engaged in businessconducted outside the Philippines or

to a non-resident person not engaged in business who isoutside the Philippines when the

The following are VAT-exempt transactions:a. sale or importation of agricultural and

marine foodproducts in their original state, livestock andpoultry of a kind generally used as, oryielding or producing foods for humanconsumption; and breeding stock and

153205, Ja nuar y 22, 2007 re q uire perf orma nce ofs ervices to n on res iden t t o qu al ify as zero -rate d.]ii. The consideration of which is paid for in acceptableforeign currencyaccounted for in accordance with the rules and regulations of the BSP

iii. Livestock: cows, bulls and calves, pigs,sheep, goatsandrabbitsPoultry: fowls, ducks, geeseand turkeyDoes not include fighting cocks, racehorses, zoo animals and other animalsgenerally considered as petsMarine food products: fish andcrustaceans, such as but not limited to,eels, trout, lobster, shrimps, prawns,oysters, mussels and clamsMeat, fruit, vegetables and otheragricultural and marine food productsare considered in their original stateeven if hey undergone the simpleprocess of preparation or preservationfor the market : freezing, drying, salting,broiling, roasting, smoking or stripping,shrink wrappings in plastic, vacuumpacking, tetra-pack, and other similarpackaging methodsPolished and/or husked rice, corn gritsand raw cane sugar and molasses,ordinary salt and copra shall beconsidered as agricultural product intheir original state

c. services rendered to persons or

entities whoseexemptions under special laws orinternationalagreements to which the Philippines is asignatory efectively subjects the supply ofsuch services to zero percent rateservices rendered to persons engaged ininternational shipping or air transport

d.

NOTE: shall not pertain to those madeto commoncarriers by air and sea relative to theirtransport of passengers, goods or cargoesfrom one place in the Philippines toanother place in the Philippines (subject to

e. servic

esperformed

by

subcontractors

and/orcontractors in processing, converting, or

manufacturinggoods for an enterprise whose export sales exceed 70%of the total annual productiontransport of passengers and cargo by

f.

NOTE: Gross receipts of international air carriers doingbusiness in the Philippines and international seacarriers doing business in the Philippines are

b. sale or importation of fertilizers, seeds,seedlings andfingerlings, fish, prawn, livestock and poultryfeeds, including ingredients, whether locallyproduced or imported, used in themanufacture of finished feeds (exceptspecialty feeds for race horses, fightingcocks, aquarium fishes, zoo animals andother animals generally considered as

g. sale of power or fuel generated throughrenewablesources of energy such as, but not limitedto, biomass,solar, wind, hydropower, geothermal andsteam, ocean energy, and other emerging

c. belonging to residents of the Philippines

returningfrom abroad and non-resident citizens coming to resettle in the Philippinessuch goods are exempt from customs duties under the Tariff and Customs

NOTE: Zero rating shall apply strictly tothe sale ofpower or fuel generated through renewablesources ofenergy, and shall not extend to the saleof services related to the maintenance or

d. Importation of

professional

instruments

andimplements, wearing apparel, domestic

animals, and p er son al hou seho ld efects ( ex cept a ny vehi cle, vessel,TAXATION LAW REVIEWER

Page 84 of165

aircraft, machinery and other goods for use in the

i. Services rendered by individualspursuant to anemployer-employeerelationshipServices rendered by regional or area HQestablished in the RP by multinationalcorporations which act as supervisory,communications and coordinating centers fortheir affiliates, subsidiaries or branches inthe Asia Pacific Region and do not earn orderive income from the PhilippinesTransactions which are exempt under

manufacture and merchandisecommercial quantity)

of

any

kind

in j.

Belonging to personsPhilippines

coming to settle inthe

For their ownexchange,

use and not for sale, barter or

Accompanying such persons or arrivingwithin 90days before or after theirarrivalUpon the production of evidencesatisfactory to the CIR that such personsare actually coming to settle in the

k.

Concess io naires u nder t he Pe tr oleu m Act of 1949 ]l. sales by agricultural cooperatives dulyregistered and ingood standing with the CDA to theirmembers, as well as sale for their produce,whether in its original state or processedform, to non-members their importation ofdirect farm inputs, machineries andequipment, including spare parts thereof, tobe used directly and exclusively in the

e.f.

services subject to percentage taxservices by agricultural contract growers andmilling forothers of palay into rice, corn into grits and sugar into raw sugar BIR has clarified that toll

processing or tolldressing, which are covered by the VAT exemption of services by agricultural contract growers under Section 109(F) ofthe Tax Code of 1997, pertain to toll processing services for clients from which growing of animals were contracted. Thus, the activity of preparing and packaging hogs/chicken ready for delivery after producing or growing is considered within the purview of agricultural contract growing, which is exempt from VAT under Section 109(F) of the Tax Code of 1997, as amended. However, if the toll processing/toll dressing/toll manufacturing service is performed independently from growing poultry, livestock, or other agricultural and marine food products, the activity

Sale by agricultural cooperatives to non-memberscan only be exempted from VAT if theproducer of the agricultural productssold is the cooperative itself. If thecooperative is not the producer (e.g.,trader), then only those sales to itsmembers shall be exempted from VAT;However, the sale or importation ofagricultural food products in their original

m. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the CDASales by non-agricultural, non-electric and non-creditcooperatives duly registered with and in

n.

Share capital contribution of eachmember doesnot exceed 15,000 and regardless of theaggregate capital and net surplus ratablydistributed among the membersImportation of machineries andequipment, including spare parts thereof,to be used by them are subject to VAT

De cember 21, 201 0 ]

g. medical, dental, hospital and veterinary services, exceptthose rendered by professionals

Laboratory services areexemptedIf the hospital or clinic operates apharmacy or drug store, the sale ofdrugs and merchandise is subject to VAT.However, sales of drugs to in- patientsof hospitals are considered part of

o.p.

Export sales by persons who are not VAT-registeredThe following sales of real properties are exempt from Not primarily held for sale to customers

or held forlease in the ordinary course of trade or business

h. Educational services rendered by privateeducationalinstitutions duly accredited by the DepED,CHED and TESDA and those rendered bygovernment educational institutions

– A subdivision or a condominium

registeredand licensed by the HLURBUndertaken by the gov’t or private

– Does not include seminars, in-servicetraining,review classes and other similar servicesrendered by persons who are notaccredited by the DepED, the CHED

Utilized for socialized housingResidential lot valued at 1.5M and below,or house and lot and other residential dwellings valued at2.5M and belowTAXATION LAW

REVIEWERPage 85 of165

– Instrument must be executed on orafter July1,2005.Provided, That not later than January31, 2009 and every three (3) yearsthereafter, the amounts stated hereinshall be adjusted to its present valueusing the Consumer Price Index, as

plates and other metal plates includingmarine-gradealuminum plates to be used in theconstruction, repair, renovation or alterationof any merchant marine vessel operated orto be operated in the domestic trade.Provided, that the exemption shall besubject to the provisions of Section 19 ofRepublic Act No. 9295, otherwise known as‘The Domestic Shipping Development Act of2004';Importation of fuel, goods and supplies

–

shall

be published

through

revenue

v.regulations to be issued not laterthan March31 of eachyear.If two or more adjacent residentiallots aresold or disposed in favor of onebuyer, for the purpose of utilizing thelots as one residential lot, the sale

– Shall be used exclusively or shallpertain to thetransport of goods and/or passengersfrom a port in the Philippines directly toa foreign port without stopping at anyw. Services of banks, non-bank financial

intermediariesperforming quasi-banking functions, andother non- bank financial intermediariessubject to percentage tax such as moneychangers and pawnshopsSale or lease of goods or properties or theperformance of services other than thetransaction mentioned in the preceding

q. Lease of residential units

Monthly RENTAL: not exceedingP10,000Gross receipts from rentals exceedingP10,000 per month per unit shall besubject to VAT if the aggregate annualgross receipts from said units only(not including the gross receipts fromunits leased for not more than P10,000)

x.

For purposes of the threshold of 1.5M, thehusband and wife shall be consideredseparate taxpayer.The aggregation rule for each taxpayer shall apply For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, thesame shall be combined for purposes of determining whether the threshold

r. Sale, importation, printing or publication of books andany newspaper, magazine, review, or

which appears at regular intervalswith fxed prices for subscription and salewhich is not devoted principally to the publication of paid advertisements

s. Sale, importation, or lease of passenger orcargo vesselsand aircraft, including engine, equipmentand spare parts thereof for domestic orinternational transport operations A VA T -r egister ed p er so n may, elec t th at th at th e

ex emp tion Limited to 150 tons and above,

including engineand spare parts of saidvesselsComply with the age limit requirement,at the time of acquisition counted from

sh all no t app ly to h is sales o f good s o r serv ices o r prop er ties wh ich is irr evo cab le fo r a p er iod o f 3 y ear s.

–––

Passenger/cargo vessel: 15 years oldTankers: 10 years oldHigh-speed passenger crafts: 5 Exemption shall be subject to the

provisions of“The Domestic Shipping Development t. Importation of life-saving equipment, safety

and rescueequipment and communication and navigational safetyequipment, steel plates and othermetal plates including marine-gradealuminum plates, used for shipping transportoperations; Provided, that the exemptionshall be subject to the provisions of Section4 of Republic Act No. 9295, otherwise known as 'The Domestic Shipping

u.

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Zero-Rated vs. VAT-Exempt TransactionCIR v. Ceb u To yo C orp orat io n, [ G.R. No . 149073 , Febr uar y16, 2005]

A zero-rated transaction differs from VAT-exempt transaction on the following points:

a. a zero-rated sale is a taxable transactionbut does not result in an output tax while anexempted transaction is not subject tooutput tax.

b. The input tax on purchases of a VAT-registered person with zero-rated sales maybe allowed as tax credits or refunded whilethe seller in an exempt transaction is not

v) For use in trade or business for which deduction

for depreciation or amortization is allowed under the Tax Code

Purchase of real properties for which a VAT has actually

b.

c. Purchases of services in which a VAT has actually beenpaid

d. Transactions deemedsale

e. Transitional inputtax A person who becomes liable to VAT or

any personwho elects to be a VAT-registered personshall be allowed to claim input tax on hisbeginning inventory of goods, materialsand supplies equivalent to 2 % o f t h eth e actu al VA T p aid o n su ch good s, mater ials an dsupp lies, wh ich ev er is h igh er .

f. Presumptive input taxCovered: Persons or firms engaged in the processing ofsardines, mackerel, and milk and in the manufacturingrefined sugar, cooking oil and packed The term “processing” shall meanpasteurization,canning and activities which throughphysical orchemical process alter the exterior texture orform or inner substance of a product in suchmanner as to prepare it for special use to

14. INPUT VAT AND OUTPUT VAT DEFINEDInput tax means the VAT paid by a VAT-registered person inthe course of his trade or business onimportation of goods or local purchase of goodsor services, including lease or use of property,from a VAT-registered person. It shall alsoinclude the transitional input tax determined in

Rate: 4% of the gross value in money of their purchasesof primary agricultural products which are used as inputs to their production

amende d b y R.A. 7 716; F ort Bon ifac io De vt. Cor p. v. CI R,G.R. N os . 158885 a nd 17 0680, April 2, 2009; B IR W ebsi te ] g. Transitional input tax credits allowed

under thetransitory and other provisions of these

Output tax means the VAT due on thesale, lease orexchange of taxable goods or properties orservices by any person registered or required toregister under section 236 of the Tax Code.

h. Creditable Withholding VAT on paymentsto non-residents

16. PERSONS WHO CAN AVAIL OF THE INPUT TAX15. SOURCES OF

INPUT TAXa. Purchase or impartation of goodsi)

ii)For sale;orFor conversion into or intended to formpart of a finished product for sale,including packaging materials; orFor use as supplies I the course ofbusiness; orFor use as raw materials supplied in the

iii)iv)

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TAXPAYER TIME TO CLAIM INPUT TAXTo the importer Upon payment of VAT prior to the release of goods from customs custodyTo the purchaser

of the domestic goods or properties

Upon consummation of the sale

To the purchaser of services or the lessee or licensee

Upon payment of the compensation,

Exempt Transaction vs.Exempt Party

The object of exemption from the VAT mayeither be the transaction itself or the parties tothe transaction.

An exempt transaction, on the one hand,involves goods or services which, by theirnature, are specifically listed and expresslyexempted from the VAT under the Tax Code,without regard to the tax status (VAT exempt ornot) of the party to the transaction. Suchtransaction is not subject to VAT, but the seller isnot allowed any tax refund of or credit for anyinput taxes paid.

An exempt party, on the other hand, is a personor entity granted VAT exemption under the TaxCode, a special law or an internationalagreement to which the Philippines is asignatory, and by virtue of which its taxabletransactions become exempt from VAT. Suchparty is also not subject to VAT, but may be

c. Persons engaged in transactions which arezero-rated, being subject to VAT, arerequired to register while registration isoptional for VAT-exempt persons.

Input tax arising from qualifed transactions in thecurrent month or quarterInput tax carried-over from the preceding month or quarter

Reduction in Creditable Input Tax Amount of claim for VAT refund or

Tax CreditCertificate (whether filed with the BIR, theDepartment of Finance, the Board ofInvestments or the BOC)Other adjustments, such as purchase returnsor allowances, input tax attributable toexempt sales and input tax attributable to

NOTE: Even if the said events have already transpired butthe required documents are not on hand, the input taxes may not be claimed.17. DETERMINATION OF THE INPUT/OUTPUTPAYABLE; EXCESS INPUT TAX

TAX;

VAT

Cr ed its for Inpu t Tax The VAT due on or paid by a VAT-registered

person onimportation of goods or local purchases of goods,properties, or services, including lease or use of properties, in the course of tradeor businessInclude the transitional and the presumptive input tax Includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input taxes which cannot be directly attributed to

a. Computation of output taxi. Goods or properties: Gross selling pricex VAT rate

Allo wab le d edu ction s fro m gro ss sellin g pr ice(1)

discounts determined and granted atthe timeof sale (expressly indicated in theinvoice, amount thereof shouldform part of gross sales dulyrecorded in the books, and thegranting of the discount does notdepend on the happening of thefuture event)

(2)

Claim for Inpu t T ax on D epr eciab le Good s

month or quarter to the buyer forpreviously recorded as taxable

sales

i.

Requisites:A VAT-registered person purchases orimports capital goods (which are depreciablegoods for income tax purposes)If aggregate acquisition cost of all capitalgoods (exclusive of VAT) in a calendar monthexceeds P1 million, the input tax cannot beclaimed outright but should be subject toamortization over a period of 5 years oruseful life of the capital goods, whichever islower.If the aggregate acquisition cost of all capitalgoods in a calendar month does not exceedP1 million, the input tax may be claimed

ii. Sellers of service: Gross receipts x VAT rate

b. Determination of input tax

creditD eter min ation o f Inpu t T ax Cr ed it dur in g a taxab lemon th o r qu ar terAll creditable input taxes during the month or quarter + any amount of input taxes carried-

over frompreceding month/quarter(claim for VAT refund or tax credit certificate) (other adjustments – purchase returns)(input tax attributable to exempt sales)(input tax on capital goods purchased during the month/quarter subject to amortization)

---- Aggregate acquisition cost refers to the

total priceagreed upon for one or more assets acquired and notthe payments actually made during

+/-+ (cr ed itab l e VA T withh el d o n p aymen ts to no n - ii. Manner of claiming input tax of more than

P1 millionr esid en t s)

= Input Tax

(1)

estimated useful life of a capital good is 5 years ormore: input tax spread evenly over a

period of 60months

NOTE: Adjustments to Input TaxAddition to Creditable

TAXATION LAW REVIEWER

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royalty or fee.

To the purchaser ofreal property under:

Cash/Deferred PaymentBasis

Upon consummation of sale

Upon every installment

VAT payable computation:

Output Tax- I n p u t T a x

commenced in the calendar month when thecapital good is acquired

VAT payable

(2) estimated useful life is less than 5 years: input tax spread evenly on monthly

basis bythe actual number of months comprising theestimated useful life of the capital good commenced in the calendar

VA T P ay ab le (E xcess Ou tpu t) o r E xcessInpu t T ax If at the end of any taxable quarter the

output taxexceeds the input tax, the excess shall be paid by theVAT-registered person.If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to zero-rated sales by a VAT-registered person may at his option be

If the depreciable capital good issold/transferred within theperiod of 5 years or prior to theexhaustion of theamortizable input tax thereon: entireunamortized input tax on the capital goods sold,can be claimed as input tax credit during the

18.

SUBSTANTIATION REQUIREMENTS OF INPUT TAXCREDI

TSc. Allocation of input tax on mixed transactions

Requ ir ed Su ppor tin g Do cu men ts for claimin gInpu t VAT

A VAT-registered person who is also engaged in transactionsnot subject to VAT shall be allowed to recognize input tax

i. all the input taxes that can be directly attributed to

transactions subject to VAT may be recognized for input tax credit input taxes which are directly

attributable toVAT taxable sales of goods andservices from the Government or anyof its political subdivisions,instrumentalities or agencies,including GOCCs shall not be creditedagainst output taxes arising fromii. if any input tax cannot be directly

attributed toeither a VAT taxable or VAT-exempt transaction,the input tax shall be pro-rated to the only the ratable portion

pertaining totransactions subject to VAT may be recognized for input tax

NOTE: input tax attributable to VAT-exempt sales

shall not beallowed as credit against the output tax butshould be treated as part of cost of goodssoldfor persons engaged in both zero-rated salesand non- zero rated sales, the aggregateinput taxes shall be allocated ratably

d. Determination of the output tax and VAT payable andcomputation of VAT payable or excess tax

TAXATION LAW REVIEWER

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TRANSACTIONS REQUIRED SUPPORTOn domestic

purchases of goods or properties made in thecourse of trade or business

VAT Invoice

On purchases of real property

Cash/Deferred PaymentBasis

Installment Basis

Public Instrument (i.e.,deed of absolute sale, deed of conditional sale, contract/agreement tosell, etc.) together with the VAT Invoice for the entire selling price and Non-VAT ORsfor the initial and succeeding payments

Public Instrument On domestic purchase of services

VAT OR

On importation of goods

Import entry or other equivalent document showing actual payment of VAT on the imported goods and BOC OR.On transitional input

taxInventory of goods as shown in a detailed listto be submitted to the BIR.On “deemed sale”

transactionsRequired invoices

On payments made tonon- residents

Monthly Remittance Return of Value Added Tax Withheld (BIR Form1600) fled by the resident payor in behalf

of input VAT. In case of full or partialdenial by theCIR, the taxpayer’s recourse is to filean appeal before the CTA within 30 daysfrom receipt of the decision of the CIR.Otherwise, if after the 120-day period,the CIR fails to act on the applicationfor tax refund/credit, the remedy of thetaxpayer is to appeal the inaction of theCIR to CTA within 30 days. Hence, iffiled with CTA before the 120-day periodexpires, CTA will dismiss for prematurity.If filed with CTA after the 150-day (120 +

A cash register machine tape issued to a registered buyershall constitute valid proof of substantiation of tax credit only if it shows the information required under Sec. 113 and19. CLAIMS FOR REFUND/TAX CREDIT CERTIFICATE OFINPUT TAX

Compa ny , [ G.R. No. 184823, October 6, 2011]

d. Manner of giving refund

a. Zero-rated and efectively zero-rated sales of goods,properties or services

Refund shall be made upon warrantsdrawn by theCIR or by his duly authorizedrepresentative without the necessity ofbeing countersigned by the Chairman ofCOARefunds under this paragraph shall be

Any VAT-registered person whose sales are zero-rated or efectively zero-rated may after the close of the taxable quarterwhen thesales were made, apply for the issuanceof a tax credit certificate or refund of thecreditable input tax due or paidattributable to such sale.The creditable input tax allowed to berefunded does not include transitionalinput tax.In case the taxpayer is engaged in zero-rated and also in taxable or exempt sale,and the amount of creditable input taxdue or paid cannot be directly and

20. INVOICING REQUIREMENTS

a. Invoicing requirements in generali. A VAT-registered person

shall issue:

A VAT Invoice for sale of goods or propertiesA VAT Oficial Receipt for sale of services or lease of goods or ii. The following information shall appear in

the VATInvoice or VAT Official Receipt:b. Cancellation of VAT

registration A statement that the seller is a VAT-

registeredperson followed bythe TINThe amount of tax shown as a separate item The word “VAT-Exempt Sale” written or printed prominently if sale is VAT-exemptThe word “Zero-Rated Sale” writtenor printedprominently if sale is VAT-exempt.Date of transaction, quantity, unitcost and description of the goods orproperties or the nature of service

A person whose VAT registration

has been

cancelled due to retirement from orcessation ofbusiness, or due to changes in orcessation of status, may within 2 yearsfrom the date of cancellation, apply forthe issuance of tax credit certificate for

c. Period within which refund or TCC of input

taxes shallbe made The Commissioner shall grant a

TCC/refund forcreditable input taxes within 120 days from thedate of submission of complete documents in support of the applicationTaxpayer may appeal to the CTA within30 days from receipt of said denialIf no action on the claim for refund has been taken by the CIR after the 120 day period from the date of submission of the application with complete documents, the taxpayer ,may appeal to the CTA within 30 days from the laps

b. Consequences of issuing erroneous VAT

invoice or VAToficial receipt

If a person who is not a VAT-registeredperson issues aninvoice or receipt showing his TaxIdentification Number (TIN), followed by theword “VAT”, the issuer shall, in addition toany liability for other percentage taxes, be

wh ich to gran t o r d en y th e clai m for r efund/ cr ed it

TAXATION LAW REVIEWER

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the non-resident evidencing remittance of VAT due which was withheld by the payor.Advance VAT on Sugar Payment order showing payment of the advance VAT

i. VAT without the benefit of any input tax credit,andA 50% surcharge on the VAT payableIf the invoice/receipts contain the

NOTE: For the electronic payment of taxfor returnsrequired to be filed earlier under thestaggered filing system, the taxpayer, upon e-filing, shall, still using the facilities of EFPS,likewise give instructions to the AuthorizedAgent Bank (AAB) to debit its account for theamount of tax on or before the due date for

ii.iii.

information, purchaser shall be allowedrecognize an input tax credit.

to

If a VAT-registered person issues a VAT invoice

orb.

Withholding VAT Return (BIR Form 1600)F i l i n g a n d P a yme n t D e a d l i n e : 10 days from the end of

oficial receipt for a VAT-exempttransaction, but failsto display prominently on the invoice orreceipt thewords “VAT-EXEMPT SALE”, the transactionsshall become taxable and the issuer shall beliable to pay the VAT thereon. The

the month

c.

Quarterly VAT Return (BIR Form 2550Q)F i l i n g a n d P a yme n t D e a d l i n e : 25 days following theclose of each taxablequarterThe quarterly returns shall reflect thecumulative totals of the sales, purchases,output tax and input tax for the3 months of the applicablequarterThe VAT payable (Output Tax less Input Tax)for each quarter shall be reduced by the

VAT invoices and oficial receipts cannotbe usedinterchangeably for purposes ofsubstantiating input VAT. In supportingclaims for input VAT on purchase of goods orproperties, the law requires that a VATinvoice be presented while a VAT oficialreceipt is necessary to substantiate claimsfor input VAT involving the purchase ofservices. Citing the case of CIR v. ManilaMining Corporation, where an invoice isdistinguished from a receipt, the SC clarifiedthat the VAT invoice is the seller’s best proofof sale of goods or services to the buyerwhile the VAT receipt is the buyer’sbest evidence of the payment of goods orservices received from the seller. Asexplained by the SC, even though VATinvoices and receipts are normally issued bythe supplier/seller alone, the VAT invoicesand receipts, taken collectively, arenecessary to substantiate the actualamount or quantity of goods sold andtheir selling price (proof of transaction), andthe best means to prove the payments of

22. WITHHOLDING OF VATa. On Payments to Nonresidents (creditablewithholding

VAT)(Rule applies to payments by government orany of its political subdivisions, instrumentalitiesor agencies, including GOCCs, as well as privatecorporations, individuals, estates and trusts,

i. Payments to non-residents, with respectto leaseor use of property or property Ph ilipp in es owned by such non-residents, aresubject to withholding VAT. The VAT shallbe based on the contract price.

Comm iss ioner of In terna l R evenu e, [G .R. 181 858 ,

ii. Other services rendered in the Philippines by non-residents

Novem ber 24, 2010]

21. FILING OF RETURN AND PAYMENT

Services rendered in the Philippines,such asproviding assistance in establishingtender price ofa project and designing materials, by anon- resident, shall be subject to the

a.

Monthly VAT Declarations (BIR Form No. 2550M)Refers to frst 2 months of taxpayer’s quartersthe month, except for Electronic Filing andPaymentSystem (EFPS) taxpayers

NOTE: Filin g D ead lin e for

E FPS:Deadline depends onthe

The party required to withhold is the payor,regardlessof whether or not he is VAT-registered.The VAT is passed on to the residentwithholding agent. The payor shall claim thisas input tax upon filing of his own VAT

industry classifcation of the taxpayer but applicableonly for fling the monthly VAT returnP a yme n t D e a d l i n e for E F PS: 25 days from

the month

TAXATION LAW REVIEWER

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(2)

Individuals earning purely compensation incomewhether locally or abroad; Overseas Workers;GAIs, in the discharge of their governmentalfunctions;Marginal Income Earners;LGUs, in the discharge of their governmentalfunctions;Tax exempt persons such as those enumerated

VAT withheld and paid for the non-residentrecipient,which VAT is passed on to the residentwithholding agent by the non-residentrecipient of the income, may be claimed asinput tax by said VAT-registered withholdingagent upon filing his own VAT return, subjectto the rule on allocation of input tax amongtaxable sales, zero-rated sales and exemptsales.If the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by thenon-resident recipient of the income, shallform part of the cost of purchased services,which may be treated either as an “asset” or“expense,” whichever is applicable, of the

(3)(4(5)(6(7)

(8)(9)

Persons

subject

to tax

under

one-time

transactions; and

(10) Facility/ies where no sales transactions occur.b. On Payments by Government (final

withholding VAT) Registr at ion o f E ach T yp e o f In tern al Rev enu e T ax Every person who is required to register

with the BIRshall register each type of internalrevenue tax for which he/it is obligatedto OR is expected to periodically file areturn, pay taxes due thereon, and updatesuch record of any changes in theregistration information.Note that the registration of one tax typedoes not automatically register the other type of taxes (e.g. registered for income tax is not registered for VAT) Generally, registration of tax types/fees by a business

The Government or any of its politicalsubdivisions,instrumentalities or agencies, includinggovernment owned or controlledcorporations (GOCCs) shall, before makingpayment on account of its purchase of goodsand/or services taxed at 12% shall deductand withhold a final VAT of 5% of the grosspayment.The five percent (5%) final VAT withholdingrate shall represent the net VAT payable ofthe seller.The remaining seven percent (7%)efectively accounts for the standard inputVAT for sales of goods or services togovernment or any of its politicalsubdivisions, instrumentalities or agenciesincluding GOCCs, in lieu of the actual inputVAT directly attributable or ratablyapportioned to such sales.

(a)(b)(c

Income tax;VAT and/or percentage tax; Withholding tax on compensation;Creditable withholding tax at source on certain income payments;Final withholding tax on certain income payments;Documentary stamp tax; Excise

(e)(f)(g)

If actual input VAT attributable to sale to government is lessthan 7% of gross payment, the difference must expen se o r co st

Tr an sfer o f Registr ation

Registration Requirements It shall be duty of the taxpayer to

inform the RDOwhere he is registered by filing theprescribed BIR Form specifying the RDOwhere he is intending to transfer.In case of transfer of registration ofindividuals earning purely compensationincome due to change of employer, it shallbe the responsibility of the RDO havingjurisdiction of the new employer to effect thetransfer of employee's registration.It shall be the duty of the old RDO totransfer the accountabilities of the taxpayerto the new RDO where he is transferring.The old RDO can still institute collection on

1. ADMINISTRATIVE REQUIREMENTS

a. Registration Requirements (see RR 11-08)

Annu al Registr ation Fee (R F) Fee of (P500.00) for every

separateor distinctestablishment or place of business shall be

paid uponregistration and every year thereafter on orbefore January 31 by every person subject toany internal revenue tax.The following are exempt from the Annual RF: (1) Cooperatives duly

TAXATION LAW REVIEWER

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within six (6) months from the date oftransfer.The filing of tax returns and payment oftaxes to the new RDO shall commence atthe time the transfer is efected by the oldRDO.Both the new and the old RDO shall beresponsible in notifying the taxpayerconcerned that the transfer of registrationhas already been effected.Transfer of head ofice of taxpayersengaged in business during the interimperiod shall only be oficially efected inthe records of the BIR by the end of the year.The taxpayer may be allowed to physicallytransfer its business to the intended RDO,however, the filing of its returns andpayment of taxes in the new RDO shall stillbear the RDO Code of the old RDO until theend of the year and without imposition ofany surcharge for "wrong-venue fling ofreturn"Request for transfer of registration ofbranch/facility, which has no registered taxtypes in the RDO where it is registered, shall

a) Death of an individual;b) Dissolution, merger or consolidation

of juridical person;c) Discovery of a taxpayer having multiple TINs;d) Payment of estate tax by the heirs,

administrator or executor or upon fullsettlement of the tax liabilities of theestate.

The cancellation of business registration may be granted on the following instances:a) Closure/Cessation of business operation;b) Dissolution of corporation/partnership;

Po wer o f Commission er to su s p en d th e bu sin ess op er ation so f an y p er so n wh o fails to r egister Suspension of business operations: In

addition to otheradministrative and penal sanctions providedfor in the Tax Code and implementingregulations, the CIR or his duly authorizedrepresentative may order suspension orclosure of a business establishment for a

a)b)

Failure to issue receipts and invoicesFailure to file VAT return as required under theprovisions of Sec. 114 of the Tax CodeUnderstatement of taxable sales or receipts by30% or more of his correct taxable sales or receiptfor the taxable quarter

new RDO once theemployer is

transfer

of registration

of the

c)Oth er Upd ates Any person

registeredshall,

whenever applicable, d)update his registration information with the

RDO wherehe is registered under any of the following a)b)

A person's business has becomeexemptA change in the nature of the businessitself, i.e. from sale of taxable goods andservices to exemptA person whose transactions are exemptfrom VAT but voluntarily registeredunder VAT system applies forcancellation of his VAT registration afterthe lapse of 3 years after his registrationNOTE: optional registration as a VATtaxpayer of afranchise grantee of radio and/ortelevision broadcasting whose grossreceipts for the preceding year didnot exceed P10,000,000.00 shall beirrevocable;A VAT-registered person whose gross

b. Persons Required to Register for VAT

M and ato ry VA T r egistr ation

c) Any person who, in the course of trade or

business,sells, barters or exchanges goods orproperties or engages in the sale orexchange of services shall be liable toi. His gross sales or receipts for the past

12 months,other than those that are exempt underSec. 109(1)(A) to (U) of the Tax Code, haveexceeded P1.5 million; orThere are reasonable grounds tobelieve that hisgross sales or receipts for the nexttwelve (12) months, other than those

d) ii.

e)information

previously

supplied, including cancellation or change in any

tax types.Franchise grantees of radio and televisionbroadcasting,whose gross annual receipt for the precedingtaxable year exceeded P10 million, shallregister within thirty (30) days from the end

Can cellat ion o f Registr ation

Either cancellation of business registration and/or TIN.The cancellation of business registration shall not automatically cancel the TIN of the TIN is can celled upon :

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NOTE: If he fails to register, he is liable to output VAT butcannot claim input VAT, for the period in which not properly registered.

from the BIR an authority to print receiptsor sales orcommercial invoices before a printer canprint the same.No authority to print receipts or sales orcommercial invoices shall be granted unlessthe receipts or invoices to be printed are

Op tion al VAT Registr ation Taxpayers may apply for VAT registration not

later than10 days before the beginning of the taxable quarter andshall pay the P500 registration fee, unless

a)b)c)

the namebusiness styleTaxpayer Identification Number (TIN)business address of the person or entity to use thesame,other information that may be required

The Commissioner of Internal Revenue may,administrative reason deny any application registration.

forfor

e) Once registered as a VAT person, the

taxpayer shall beliable to output tax and be entitled to inputtax credit beginning on the first day of themonth following registration.

Invo icin g r equ ir emen ts for VAT A VAT-registered person

shall issue:a) A VAT invoice for every sale, barter orexchange of

goods or properties;and

b) A VAT oficial receipt for every lease ofgoods or properties, and for every sale,barter or exchange of services.

Only VAT-registered persons are required toprint their TIN followed by the word "VAT" intheir invoice or oficial receipts.All purchases covered by invoices/receipts

Can cellat ion o f VAT Registr ation If he makes a written application and can

demonstrateto the commissioner’s satisfaction that hisgross salesor receipts for the following twelve (12)months, other than those that are exemptunder Section 109 (A) to (U), will notexceed one million five hundred thousandpesos (P1,500,000); orIf he has ceased to carry on his trade or

In for mation con tain ed in th e VAT invo iceNOTE: The cancellation for registration will be

effective fromthe first day of the following month the cancellation was approved.

A statement that the seller is a VAT-registered person,followed by his TIN;The total amount to be paid with the indication that such amount includes the

c.

SupplyingTINAny person required to make, render or file areturn, statement or other document shallbe supplied with or assigned a TaxpayerIdentification Number (TIN) which he shallindicated in such return statement ordocument fled with the BIR for his properidentification for tax purposes.In case a registered taxpayer dies, theadministrator or executor shall register theestate of the decedent a new TIN.In case of a nonresident decedent, theexecutor or administrator of the estateshall register the estate with the RDOwhere he is registered BUT if theexecutor or administrator is not registered,registration shall be made with the RDO

(a)(b

The amount of tax shall be aseparate itemIf the sale is exempt from VAT, the term"VAT- exempt sale" shall be written orprinted prominently on the invoice orreceipt;If the sale is subject to zero percent (0%)VAT, the term "zero-rated sale" shall bewritten or printed prominently on theinvoice or receipt;If the sale involves goods, properties orservices some of which are subject toand some of which are VAT zero-rated orVAT-exempt, the invoice or receipt shallclearly indicate the break-down of thesale price between its taxable, exemptand zero- rated components, and thecalculation of the VAT on each portion ofthe sale shall be shown on the invoice orreceipt.

(c)

(d)

In the case of sales of P1,000.00 or morewhere the saleor transfer is made to a VAT-registeredperson, thename, business style, if any, address andTIN of the purchaser, customer or client,

d. Issuance of Receipts or sales or commercial invoices

Pr in tin g o f r eceip ts o r sales o r co mmer cial invo ices All persons who are engaged in business

shall secureTAXATION LAW REVIEWER

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Con sequ en ces o f issu in g err on eou s VA T invo ice o r ORs

Gross receipts of common carriers derived fromincoming and outgoing freight is not subject to local taxes under the LocalGovernment Code (LGC).Covers cars for rent or hire driven by the lessee, transportation contractors, including persons who transport passengers for hire, and other domestic carriers by land, air or water, for the transport of passengers, and keepers of garages

(Please refer to 22. Invoicing Requirements under the VATSection for further discussion)e.

Exhibition of certificate of payment at placeof businessThe original copy of Certificate ofRegistration and the duly validated AnnualRegistration Fee Return a r e r e qu i r e d t o b e

th e h ead o fice, br an ch o fice, stor age p lace o r p lace o fpro du ction . [ RMC No. 39-95 da ted D ecember 1 , 1995 ]

f.

Continuation of business ofdeceased personIf during the year, the owner of a businessdies, the business is continued, and theannual registration fee has been duly paid,NO ADDITIONAL PAYMENT shall be requiredfor the remainder of the year.However, the persons interested in theestate of the deceased owner shall submit tothe BIR, within 30 days from the death, a listof the inventories of goods or stocks of thebusiness at the time of death.

g.

Removal of Business to anotherlocationAny business for which the annualregistration fee has been paid may beremoved and continued in any other placewithout the payment of additional tax duringthe term for which the payment was madesubject to the rules and regulations

======================================TOPIC UNDER THE SYLLABUS:II. NATIONAL INTERNAL REVENUE CODE E. Percentage Tax=======================

A.

TAX ON INTERNATIONAL CARRIERS

3% of their quarterly gross receiptsCovers International air carriers andshipping carriers doing business in the Philippines

A. TAX ON PERSONS EXEMPT FROM VAT

3% of gross quarterly sales or receiptsAny person who is exempt from VAT and who is not a VAT-registered person.– Those who gross annual sales

andreceipts does not exceed P1.5 million are exempted from VAT. Cooperatives shall be exempt from the

3% grossreceipts tax (GRT)Those earning less than P100,000 whichis neither covered by percentage tax

B. TAX ON DOMESTIC CARRIERS ANDKEEPERS OFGARAGES 3% of quarterly gross

receiptsTAXATION LAW REVIEWER

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COMMON CARRIE

TRANSPORTING

KIND OF CARRI

TAX LIABILITYBy Land Persons Domestic 3%

Percentage Tax

Goods/cargo Domestic 12% VATBy Sea Whether

transporting personor goods/cargo

Domestic Domestic Trip – 12% VATInternational Trip – Zero- ratedInternation

al3% Percentage Tax

By Air Domestic Domestic

MINIMUM QUARTERLY GROSS RECEIPTS:Jeepneys

Manila and other cities

P 2,400

Provincial 1,200Public Utility Bus

Not exceeding 30Passengers

P 3,600

More than 30 butnot more than 50 passengers

6,000

More than 50Passengers

7,200

TaxisManila and

other citiesP 3,600

Provincial 2,400Cars for hire

With chaufer P 3,000Without chaufer 1,800

Tax on gross receipts derived from sources withinthe Philippines by all banks and non-banks financial intermediaries

B. TAX ON FRANCHISES1. Franchises on radio and broadcasting companies whose annual gross receipts of the preceding year does not exceed P10 million 3% tax on the gross receipts derived

from thebusiness covered by law granting thefranchiseRadio and television broadcastinghas an irrevocable option to be

2 Gas and water utilities 2% tax on the gross receipts derived

from thebusiness covered by the law granting the franchise NOTE:

1. The term “banks” refer to entities engaged in thelending of funds obtained in the form of deposits. [ RA

NOTE: Electric companies are now subject to VAT and notpercentage taxC.

OVE RSE AS CO MMU NICATIO NS TAX Covers every overseas dispatch,

message orconversation transmitted from thePhilippines by telephone, telegraph,telewriter exchange, wireless and eithercommunication equipment services10% on the amount paid for servicesrenderedPaid by the person paying for theservices rendered to the personrendering the services

2. “Quasi-bank” refers to a non-bank financialinstitution authorized by BSP to engage in

quasi-bankingfunctions and to borrow funds from morethan 19 lenders through the issuance,endorsement or assignment with recourse oracceptance of deposit substitutes.

3. The 20% final withholding tax on a bank’s passiveincome forms part of the taxable gross receipts for the

b. Diplomatic services

E.

TAX ON OTHE R N ON - BANK FIN ANCE INTE RME DIARIE S

c. International organizations

(based in the

Tax on gross receipts derived by othernon-bankfinance intermediaries, doingbusiness in thePhilippines, from interest, commissions,discounts from lending activities, incomefrom financial leasing, and all otheritems treated as gross incomeBased on the remaining maturities of the

Philippines and enjoying privileges, exemptionsand immunities pursuant to an international agreement)d. News services (which messages deal exclusivelywith the collection of news for

D.

TAX ON BANKS AND NON -BA NK FINANCIA LINTE RME DIARIE S PER FO RM ING QUA SI - BANKIN GFU NCTION S

TAXATION LAW REVIEWER

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MATURITY RATE5 years or less 5%More than 5 years

1%

RECEIPTS

RATEInterest, commission, discounts from lending activities and fnancial leasingbases on remaining maturitiesof instruments

Maturity period is 5 years or

less

5%1%

Dividends and equity shares in net income of subsidiaries

0%

Royalties, rentals of property (real/personal), profits from exchange and all other items treated as gross income underSection 32

7%

Net trading gains on foreigncurrency, debt securities,derivatives, and other similarfnancial instruments

7%

flight – 12% VATInternational flight –Zero-ratedInternation

al3% Percentage Tax

F. TAX ON LIFE INSU RANCE PRE M IU MS

operator of the amusement place, income fromtelevision, radio and motion picture 5% of total premiums collected

(whether paid inmoney, notes, credits or any substitute for money)by every person, company or corporationexcept

purely

cooperative

companies orassociations

Premiums not included in the taxablereceipts:

1. Premiums refunded within 6

months afterpayment on account of rejection of risksPremiums paid upon reinsurance by a company that has already paid the tax Premiums collected or received by any branch of a domestic corporation,firm or association doing business outside the Philippines on account of any life insurance of the insured who is a non-resident, ifany tax on such premiums is imposed by the foreign country where the branch is established Premiums collected or received on account of any reinsurance, if the insured of a personal insurance, resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has

2.

3.

Boxing exhibitions, wherein World or OrientalChampionships in any division is at stakehaving at least one (1) Filipino contender

I. TAX ON W INNING S

4.

5.

NOTE:“Cooperative companies or associations”are such asare conducted by the members thereof withthe money collected from among themselves NOT

E:The tax shall be withheld by the operator,manager or person in charge of the horse

races beforepaying the dividends or prizes

G.

TAX ON AGE NTS OF F ORE IG N I NSU RANCE C OMPANIE S 10% of total premiums collected by

every fire,J. TAX ON SALE , BE RTER , OR EX CH ANGE

OF SHA RE S O Fmarine

or miscellaneous

insurance

agent

STOCK LIS TE D AND TRADE D THROU GH THE LOCA Lauthorized to procure policies of

insurance as hemay have previously been legallyauthorized to transact on risks located inthe Philippines for companies notauthorized to transact business in thePhilippinesDoes not cover premiums paid onreinsuranceIn cases where owners or property

EX CH ANGE OR THROU GH INI TIAL PU BLIC O FFE RIN G( IPO)A. Through Local Stock

Exchange ½ of 1% of the Gross Selling Priceor GrossValue in Money of the shares ofstocks sold, bartered, exchanged orotherwise disposed of through thelocal stock exchange other than thesale by a dealer in securities

H.

AMU SE ME NT TAXE S For purposes of amusement tax,

gross receiptsinclude all receipts of the proprietor, TAXATION LAW REVIEWER

Page 97 of165

SOURCE

RATE PERSON LIABLWinnings or

dividends based onthe actual amount paid to winner for every winning ticket after deducting the cost

10% Every person who wins in horse races

Winnings from double, forecast/quinella and trifecta bets

4%

Prizes of owners of winning horses

10% Owner of winning race horses

SOURCE

RATECockpits 18%Cabarets, night or day clubs 18%Boxing exhibitions 10%Professional basketball games (in lieu of all other percentage taxes)

15%

Jai-alai and racetracks (whether or not they charge for admissions)

30%

B. Through Initial Public Offering (IPO)

======================================TOPIC UNDER THE SYLLABUS:II. NATIONAL INTERNAL REVENUE CODE F. Compliance Requirements=======================

Imposed on the sale, barter,exchange ofshares of stock of closely heldcorporations in proportion to the totaloutstanding shares after the listing inthe local stock exchangeTax based on the Gross Selling Priceor Gross Value in Money shall be paidby the issuing corporation in the

h. Registration Requirements (see RR 11-08)

Annu al Registr ation Fee (R F) Fee of (P500.00) for every separate

or distinctestablishment or place of business shall bepaid upon registration and every yearthereafter on or before January 31 by everyperson subject to any internal revenue tax.The following are exempt from the Annual RF: (11) Cooperatives duly registered with the CDA;(12) Individuals earning purely

compensation income whether locally orabroad;

(13) OverseasWorkers;(14) GAIs, in the discharge of their

governmental functions;(15) Marginal IncomeEarners;(16) LGUs, in the discharge of their

governmental functions;(17) Tax exempt persons such as those

enumerated under Section 30 of the

C. Return on Capital Gains Realized from Shares of Stock

s Includes both return on capital gainsrealizedfrom sale of shares of stock listedand traded in the local stockexchange and return on public

II. PAYME NT OF PE RCE NTAGE TAX Persons subject to percentage

tax shallfile aquarterly return of the amount of his

gross sales,receipts or earnings and pay the tax duewithin 25 days after the end of eachtaxable quarterIn case of a person whose VAT registration is cancelled and who becomes liable to percentage tax, the tax shall accrue from the date of cancellation Persons retiring from business subject to percentage tax shall file his return and paythe tax due within 20 days after closing the businessEvery person liable may, at his option, filea separate return for each branch or placeof business or a consolidated return for allbranches or places of business with theauthorized agent bank, revenue districtoficer, collection agent or duly authorizedtreasurer of the city or municipality wherethe said business or principal place ofbusiness is locatedThe Commissioner may, by rules andregulations, prescribe the time for filingthe return and manner of payment, anda minimum amount of gross receipts,sales and taxable base when it is found

(19) Persons

subject

to tax

under

one-time

transactions; and(20) Facility/ies where no sales transactions occur.

Registr at ion o f E ach T yp e o f In tern al Rev enu e T ax Every person who is required to register

with the BIRshall register each type of internalrevenue tax for which he/it is obligatedto OR is expected to periodically file areturn, pay taxes due thereon, and updatesuch record of any changes in theregistration information.Note that the registration of one tax typedoes not automatically register the other type of taxes (e.g. registered for income tax is not registered for VAT) Generally, registration of tax types/fees by a business

(i)(j)(k)

Income tax;VAT and/or percentage tax; Withholding tax on compensation;Creditable withholding tax at source on certain(m) Final withholding tax on certain income

payments;(n) Documentary stamp tax;

TAXATION LAW REVIEWER

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NUMBER OF SHARES RATESUp to 25% of all shares 4%Over 25% but not over 33 ⅓%

2%Over 33 ⅓% 1%

(o) Excise tax; and(p) Annual registration fee.

the lapse of 3 years after hisregistrationNOTE: optional registration as a VATtaxpayer of a franchise grantee of radioand/or television broadcasting whosegross receipts for the preceding yeardid not exceed P10,000,000.00 shall beirrevocable;A VAT-registered person whose grosssales orreceipts for three consecutive years didnot exceed P1,500,000.00. Upon

Tr an sfer o f Registr ation It shall be duty of the taxpayer to

inform the RDOwhere he is registered by filing theprescribed BIR Form specifying the RDOwhere he is intending to transfer.In case of transfer of registration ofindividuals earning purely compensationincome due to change of employer, it shallbe the responsibility of the RDO havingjurisdiction of the new employer to effect thetransfer of employee's registration.It shall be the duty of the old RDO totransfer the accountabilities of the taxpayerto the new RDO where he is transferring.The old RDO can still institute collection onconcluded audit cases at the time of transferof registration. The old RDO shall terminateaudit cases that are prescribing within six (6)months from the date of transfer.The filing of tax returns and payment oftaxes to the new RDO shall commence atthe time the transfer is efected by the oldRDO.Both the new and the old RDO shall beresponsible in notifying the taxpayerconcerned that the transfer of registrationhas already been effected.Transfer of head ofice of taxpayersengaged in business during the interimperiod shall only be oficially efected inthe records of the BIR by the end of the year.The taxpayer may be allowed to physicallytransfer its business to the intended RDO,however, the filing of its returns andpayment of taxes in the new RDO shall still

i)

j)information

previously

supplied, including cancellation or change in any

tax types.Can cellat ion o f Registr ation

Either cancellation of business registration and/or TIN.The cancellation of business registration shall not automatically cancel the TIN of theperson.TIN is cancelled upon:e) Death of an individual;f) Dissolution, merger or consolidation

of juridical person;g) Discovery of a taxpayer having multiple TINs;h) Payment of estate tax by the heirs,

administrator or executor or upon fullsettlement of the tax liabilities of theestate.

The cancellation of business registration may be granted on the following instances:

Po wer o f Commission er to su s p en d th e bu sin ess op er ation so f an y p er so n wh o fails to r egister Suspension of business operations: In

addition to otheradministrative and penal sanctions providedfor in theTax Code and implementing regulations, theCIR or his duly authorized representativemay order suspension or closure of a

registered, shall immediatelyconcerned old RDO. Registration of employees employers

be efected by the

of the transferringbe transferred to

the e)f)

Failure to issue receipts and invoicesFailure to file VAT return as required under theprovisions of Sec. 114 of the Tax CodeUnderstatement of taxable sales or receipts by30% or more of his correct taxable sales or receiptfor the taxable quarter

new RDO once theemployer is

transfer

of registration

of the

g)

Oth er Upd ates Any person

registeredshall,

whenever applicable,update his registration information with the

RDO wherehe is registered under any of the following

h)

f)g)

A person's business has become exemptA change in the nature of the business itself, i.e. from sale of taxable goods and services to exemptA person whose transactions are exempt from VATbut voluntarily registered under

i. Persons Required to Register for VATh)

M an d ato ry VA T r egistr ation Any person who, in the course of trade or

business, sells, b ar ter s o r exch an ges good s or pro perties orTAXATION LAW REVIEWER

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engages in the sale or exchange of services shall beliable to register if:iii. His gross sales or receipts for the past

12 months, other than those that areexempt under Sec. 109 (1)(A) to (U) ofthe Tax Code, have exceeded P1.5million; or

iv. There are reasonable grounds to believe that his

gross sales or receipts for the nexttwelve (12) months, other than those

document fled with the BIR for his properidentificationfor taxpurposes.In case a registered taxpayer dies, theadministrator or executor shall register theestate of the decedent a new TIN.In case of a nonresident decedent, theexecutor or administrator of the estateshall register the estate with the RDOwhere he is registered BUT if theexecutor or administrator is not registered,registration shall be made with the RDO

Franchise grantees of radio and television

broadcasting,whose gross annual receipt for the precedingtaxable year exceeded P10 million, shallregister within thirty (30) days from the end

k. Issuance of Receipts or sales or commercial invoices

Pr in tin g o f r eceip ts o r sales o r co mmer cial invo ices All persons who are engaged in business

shall securefrom the BIR an authority to print receipts orsales or commercial invoices before aprinter can print the same.No authority to print receipts or sales orcommercial invoices shall be granted unlessthe receipts or invoices to be printed are

NOTE: If he fails to register, he is liable to output VAT butcannot claim input VAT, for the period in which not properly registered. Op tion al VAT Registr ation Taxpayers may apply for VAT registration not

later than10 days before the beginning of the taxable quarter andshall pay the P500 registration fee, unless

f)g)h)i)

the namebusiness styleTaxpayer Identification Number (TIN)business address of the person or entity to use the same,other information that may be required

The Commissioner ofadministrative reason

Internal Revenue may,deny any

forfor

j) Once registered as a VAT person, the

taxpayer shall beliable to output tax and be entitled to input

Invo icin g r equ ir emen ts for VATbeginning on the

first dayregistration.

of the

month

following

A VAT-registered person shall issue:c) A VAT invoice for every sale, barter or

exchange ofgoods orproperties; andA VAT oficial receipt for every lease ofgoods or properties, and for every sale,

Can cellat ion o f VAT Registr ation

d) If he makes a written application and can

demonstrateto the commissioner’s satisfaction that hisgross salesor receipts for the following twelve (12)months, other than those that are exemptunder Section 109 (A) to (U), will notexceed one million five hundred thousandpesos (P1,500,000); orIf he has ceased to carry on his trade or

Only VAT-registered persons are required toprint theirTIN followed by the word "VAT" in theirinvoice or oficial receipts.All purchases covered by invoices/receiptsother than VAT Invoice/VAT Oficial Receiptshall not give rise to any input tax.

In for mation con tain ed in th e VAT invo iceNOTE: The cancellation for registration will be

effective fromthe first day of the following month the cancellation was approved.

A statement that the seller is a VAT-registered person,followed by his TIN;The total amount to be paid with the indication that such amount includes the

j.

SupplyingTINAny person required to make, render or file areturn, statement or other document shallbe supplied with or assigned a TaxpayerIdentification Number (TIN) which he shall

(e)(f)

The amount of tax shall be aseparate itemIf the sale is exempt from VAT, the term"VAT- exempt sale" shall be written orprinted prominently on the invoice or

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(g)

If the sale is subject to zero percent(0%) VAT, theterm "zero-rated sale" shall be written orprinted prominently on the invoice orreceipt;If the sale involves goods, properties orservicessome of which are subject to and someof which are VAT zero-rated or VAT-exempt, the invoice or receipt shallclearly indicate the break-down of thesale price between its taxable, exemptand zero- rated components, and thecalculation of the VAT on each portion ofthe sale shall be shown on the invoice or

2. Tax Returnsa.

Income tax returns(h

) (1)(a

Individual Tax ReturnsFiling of individual tax returnsi. Who are required

to fleHusb an d an d Wife Married individuals shall file a return

for thetaxable year to include the incomeof both spouses, computing separatelytheir individual income tax based ontheir respective total taxable income.Where it is impracticable for thespouses to file one return, each spousemay file a separate return of income.If any income cannot be definitelyattributed to or identified as incomeexclusively earned or realized by eitherof the spouses, the same shall be dividedequally between the spouses for the

In the case of sales of P1,000.00 or more

where the saleor transfer is made to a VAT-registered person, the name, business style, if any,

purchaser, customer or client, shall be indicatedaddition to the information required.

in

Con sequ en ces o f issu in g err on eou s VA T invo ice o r ORs(Please refer to 22. Invoicing Requirements under the VATSection for further discussion)

Retur n o f Par en t to in clud e in co me o f Ch ildr en The income of unmarried minors

derived fromproperty received from a living parentshall be included in the return of the parent

l.

Exhibition of certificate of payment at placeof businessThe original copy of Certificate ofRegistration and the duly validated AnnualRegistration Fee Return a r e r e qu i r e d t o b e

(i) when the donor’s tax has been paid

on suchproperty,when the transfer of such property is

th e h ead o fice, br an ch o fice, stor age p lace o r p lace o fpro du ction . [ RMC No. 39-95 da ted D ecember 1 , 1995]

(ii)

m.

Continuation of business ofdeceased personIf during the year, the owner of a businessdies, the business is continued, and theannual registration fee has been duly paid,NO ADDITIONAL PAYMENT shall be requiredfor the remainder of the year.However, the persons interested in theestate of the deceased owner shall submit tothe BIR, within 30 days from the death, a listof the inventories of goods or stocks of thebusiness at the time of death.

Retur n o f p er son s with d isab ility If the taxpayer is unable to make his

own return,the return may be made:(i) b

yhis

duly authorized

agent

orrepresentative orby the guardian or other person chargedwith the careof his person or property,

(ii)(iii) Where the principal and hisrepresentative orguardian assuming the responsibility ofmaking the return and incurringpenalties provided for erroneous, false or

n.

Removal of Business to anotherlocationAny business for which the annualregistration fee has been paid may beremoved and continued in any other placewithout the payment of additional tax duringthe term for which the payment was madesubject to the rules and regulations

ii.

Who are not requiredto fleAn individual whose gross income doesnot exceed his total personal andadditional exemptions for dependentsHowever, a citizen of the Philippines andany alien individual engaged in businessor practice of profession within thePhilippines shall file an income taxreturn, regardless of the amount of

TAXATION LAW REVIEWER

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Ofice where the taxpayer isrequired toregister/which has jurisdiction over thelocation of the principal ofice of the“CORPORATION” filing the return.In places where there are no AABs – withthe Revenue Collection Oficer or dulyAuthorized City or Municipal Treasurerwithin the Revenue District Ofice wherethe taxpayer is required to register/whichhas jurisdiction over the location of theprincipal ofice of the “CORPORATION”

An individual with respect to purecompensationincome derived from sources withinthe Philippines and the income tax hasbeen correctly withheldHowever, if an individual derivescompensation concurrently from two ormore employers at any time during thetaxable year shall file an income taxreturnAn individual whose sole income hasbeen subjected to final withholding taxpursuant to Section 57(A) of this Code;An individual who is exempt from incometax pursuant to the provisions of thisCode and other laws, general or special.

T ime o f flin gWithin sixty (60) days following the close of each of thefirst three (3) quarters of the taxable year whether calendar or fscal year.

NOTE: Any individual not required to file an income taxreturn may be required to fle an information

ii. Final adjustment returnPlace o f f l i n g Any Authorized Agent Bank (AAB)

located withinthe territorial jurisdiction of the RevenueDistrict Ofice where the taxpayer isrequired to register/which hasjurisdiction over the location of theprincipal ofice of the “CORPORATION”filing the return.In places where there are no AABs – withthe Revenue Collection Officer or DulyAuthorized City or Municipal Treasurer ofthe municipality or city under thejurisdiction of the Revenue DistrictOfice where the taxpayer is required toregister/which has jurisdiction over the

(b)

Where tofleWith any Authorized Agent Bank (AAB)located within the territorial jurisdiction ofthe Revenue District Ofice where thetaxpayer is required to register/where thetaxpayer has his legal residence or place ofbusiness in the Philippines.In places where there are no AABs, thereturns shall be filed with the RevenueCollection Oficer or duly Authorized City orMunicipal Treasurer of the Revenue DistrictOffice where the taxpayer is required toregister/where the taxpayer has his legalresidence or place of business in thePhilippines.In case taxpayer has no legal residence orplace of business in the Philippines, the

T ime o f flin gOn or before the 15th day of the fourth monthfollowing the close of the taxpayer's taxable year.

(c)

When to fleFor the quarterly income tax return:First Quarter – On or before April 15 of the current taxable yearSecond Quarter – On or before August 15 of the currenttaxable yearThird Quarter – On or before November 15 of the current taxable year

iii.

Taxable year ofcorporationsA corporation may employ eithercalendar year or fiscal year as a basis forfiling its annual income tax return.The corporation shall not change theaccounting period employed withoutprior approval from the Commissioner inaccordance with the provisions of Section

For the annual income tax return:On or before April 15 of the next succeeding year. iv. Extension of time to file

returnThe Commissioner may, in meritoriouscases, grant a reasonable extension oftime for filing returns of income, subjectto the provisions of Section 56 of this

(2)(a

Corporate ReturnsRequirement for fling returnsi. Declaration of quarterly corporate

income taxPlace o f flin g Any Authorized Agent Bank (AAB)

located withinthe territorial jurisdiction of the

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(b)

Return of corporation contemplating dissolution orreorganization

(4)

Returns of general partnerships Every general professional partnership

shall file areturn of its income, except exemptincome setting forth the items of grossincome and of deductions allowed by thisTitle, and the names, TaxpayerIdentification Numbers (TIN), addresses

Every corporation shall, within thirty(30) daysafter the adoption by thecorporation of aresolution or plan for its dissolution,or for the liquidation of the whole orany part of its capital stock, including acorporation which has been notified ofpossible involuntary dissolution by theSecurities and Exchange Commission, orfor its reorganization, render a correctreturn to the Commissioner, verifiedunder oath, setting forth the terms ofsuch resolution or plan and suchother information as the Secretary ofFinance, upon recommendation of theCommissioner, shall, by rules andregulations, prescribe.The dissolving or reorganizingcorporation shall, prior to theissuance by the Securities andExchange Commission of the Certificateof Dissolution or Reorganization, as maybe defined by rules and regulationsprescribed by the Secretary of

(5)

Fiduciary returns

b.

Estate tax returns

Per son s liab le to p ay est ate taxThe person primarily liable is the estate itself,through theexecutor and administrator. When there are 2 or moreexecutors or administrators, all of them are

The heir or beneficiary has a subsidiaryliability for thepayment of that portion of the estate which hisdistributiveshare bears to the value of the net estate. Theextent of his liability shall not, however, exceed(1) Notice of death to be fled(c

)Return on capital gains realized from sale ofshares ofstock not traded in the local stock exchange

WHO files: the executor, administrator or any of the legalheirs,

Every corporation deriving capital gains from thesale or exchange of shares of stock not traded thru a local stock exchange shall:

WHEN to file: within 2 months after the decedent's death,or within a like period after qualifying as such executor or

i. file a return within thirty (30) daysafter eachtransactionfile a final consolidated return of alltransactions during the taxable yearon or before the fifteenth (15th) dayof the fourth (4th) month following

ii.TO WHOM filed: Commissioner.(2) Estate tax returnsWHEN to file: within six (6) months from the decedent'sdeath; except, the Commissioner, in meritorious cases,grants a reasonable extension not exceeding

(3)

ReturnsAssignees

of Receivers, Trustees in Bankruptcy or

In cases wherein receivers, trustees inbankruptcyor assignees are operating theproperty or business of a corporation,subject to the tax imposed by this Title,such receivers, trustees or assigneesshall make returns of net income as andfor such corporation, in the samemanner and form as required from theorganizationAny tax due on the income as

MANDATORY filing of estate tax returns in all cases of:i.ii.

transfers subject to the taximposed hereintransfers though exempt from tax, wherethe grossvalue of the estate exceedsP200,000regardless of the gross value, the estateconsists of registered or registrable property

iii.

directly against the organizationsbusinesses or properties they have control.

of whose WHERE to

fle:custody

ori.ii.

Authorized agent bankRevenue district

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iii. Duly authorized city or municipal treasurer of the placeof decedent’s domicileIf there is no legal residence in the country, with the

c. Donor’s Tax Return

iv. Wh o a r e liab le to fle d o n o r ’ s tax r etu r n ? Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer (3

)

Discharge ofliabilitiesIf the executor or administrator makes awritten application to the Commissioner fordetermination of the amount of the estatetax and discharge from personal liability, theCommissioner as soon as possible, and inany event within one (1) year after themaking of such application, or if theapplication is made before the return isfiled, then within one (1) year after thereturn is filed, but not after the expiration ofthe period prescribed for the assessment ofthe tax shall notify the executor oradministrator of the amount of the tax.The executor or administrator, uponpayment of the amount of which he is

(1)

RequirementsAny individual who makes any transfer bygift (except those which are exempt shall,for the purpose of the said tax, make areturn under oath in duplicate. The returni. Each gift made during the

calendar yearwhich is to be included in computing net gifts;The deductions claimed and allowable;Any previous net gifts made during the same calendar year;The name of the donee; andSuch further information as may be

ii.iii.

iv.v.

(2)

Time and placeflingThe donor’s tax return shall be filed within30 days afterthe date the gift ismadeFiled with any Authorized Agent Bank (AAB)of the RDO having jurisdiction over the placeof the domicile of the donor at the time ofthe transfer. In places where there are noAAB, the return will be filed directly with theRevenue Collection Oficer or duly

D istr ibu tion o f E stateUpon payment, thedistributive

administrator shall

deliver the

the inheritance to any heir orbeneficiary. The estate tax clearance

issued by theCommissioner or the Revenue DistrictOficer havingjurisdiction over the estate will serve as theauthority to distribute theIn case of installment payments, the clearance shall be

Quezon

City.released only with

respectcorresponding tax has

to the

property

the In the case of gifts made by a non-resident

alien, thereturn may be fled with Revenue District No.39 - South Quezon City, or with thePhilippine Embassy or Consulate in thecountry where donor is domiciled at the

(a)

Definition ofdeficiencyThe amount by which the tax imposed bythis Chapter exceeds the amount shown asthe tax by the executor, administrator orany of the heirs upon his return; but theamount so shown on the return shall first beincreased by the amounts previouslyassessed (or collected without assessment)as a deficiency and decreased by theamounts previously abated, refunded orotherwise repaid in respect of such tax; orIf no amount is shown as the tax by theexecutor, administrator or any of the heirsupon his return, or if no return is made bythe executor, administrator, or any heir,then the amount by which the tax exceedsthe amounts previously assessed (orcollected without assessment) as adeficiency; but such amounts previouslyassessed or collected without assessment

d.

VAT Return

(1)a.

In GeneralMonthly VAT Declaration (BIR Form No. 2550M) andPayment of VATRefers to frst 2 months of taxpayer’s quarters

••

the month, except for Electronic Filing andPaymentSystem (EFPS) taxpayersF i l i n g d e a d l i n e for E F P S : Deadline

•industry classifcation of the taxpayer – butapplicableonly for fling of the monthly VATreturn.NOTE: For the electronic payment of tax forthe returns required to be filed earlier underthe staggered filing system, the taxpayer

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Authorized Agent Bank (AAB) to debit its account for

twenty five (25) days after the end of each month.

The return for final withholding taxeson interest from any currency bankdeposit and yield or any other monetarybenefit from deposit substitutes and fromtrust funds and similar arrangementsshall be filed and the payment madewithin twenty five (25) days from the

the amount of tax on or before the

due date for

iii.payment

thereof

as

prescribed

under

theprevailing/applicable laws/regulations.

P a yme n t d e a d l i n e for E F P S : 25 days from theend of the

•month

b.•

Withholding VAT Return (BIR Form 1600)Deadline of filing and payment: 10th

day

of the (2

)

Annual InformationReturnThe payor is required to file with theCommissioner, Revenue Regional Director,Revenue District Oficer, Collection Agent inthe city or municipality where the payor hashis legal residence or principal place ofbusiness, where the government ofice islocated in the case of a government agency,an Annual Information Return of IncomeTax Withheld at Source (Form No.1604), showing among others thefollowinginformation:i. Name, address and taxpayer's,identification number

(TIN); andii. Nature of income payments, gross

amount and amount of tax withheldfrom each payee and such otherinformation as may be required by theCommissioner.

On or before January 31 of the following yearin which payments were made.If the payor is the Government of the

c.•

Quarterly VAT Return (BIR Form No. 2550Q)D e a d l i n e for f i l i n g a n d p a yme n t : S hou ld b e f i l e d w i t h in25 d ay s follo win g th e clos e o f e ach taxab le qu ar ter .• The quarterly return shall reflect the cumulative totalsof the sales, purchases, output tax and inputtax for the three (3) months of the applicablequarter.The VAT payable (output tax less input tax) for eachquarter shall be reduced by the total amount

•

•

(2)

Where to fle the returnThe returns/declarations must be filed

with anyAuthorized Agent Bank (AAB) within the

jurisdiction ofthe Revenue District Ofice where thetaxpayer is required to register. In placeswhere there are no Authorized Agent Bank(AAB), the returns/declarations shall be filedwith the Revenue Collection Oficer or duly

within the revenue districtrequired to register.Taxpayers with

where

the

taxpayer is

shall

file

only oneconsolidated return/declaration for his

principal placeof business or head ofice and all branches.

3. Tax Payments

e.(1)

Withholding TaxReturnsQuarterly returns and payment of taxeswithheldTaxes deducted and withheld bywithholding agents shall be covered by areturn and paid to, except in cases wherethe Commissioner otherwise permits, anauthorized agent bank, Revenue DistrictOfficer, Collection Agent, or duly authorizedTreasurer of the city or municipality wherethe withholding agent has his legal residenceor principal place of business, or where thewithholding agent is a corporation, where

a.(i)

Income TaxesPayment, in general; time of payment

Pay as youfleIn the case of tramp vessels, theshipping agents and/or thehusbanding agents, and in theirabsence, the captains thereof arerequired to file the return herein

Upon failure of the said agents orcaptains to filethe return and pay the tax, the Bureauof Customs is hereby authorized tohold the vessel and prevent itsdeparture until proof of payment of thetax is presented or a suficient bond

i. Within ten (10) days after the end of each

month except for taxes withheld for Decemberwhich shall be filed on or before January 25 of the following year.

For large taxpayers, the filing of

(ii)

Installment paymentii. When the tax due is in excess of Two

thousandpesos (P2,000), the taxpayer OTHER

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CORPORATION may elect to pay the taxin two (2)equal installments: inwhich case,i. The first installment shall be paid at

the time the return is fledii. The second installment, on or before

July 15 following the close of the calendar year.

If any installment is not paid on or beforethe date fixed for its payment, the whole

not to exceed 5 years, in case the estate is settledthrough the courts; or2 years in case the estate is settled

In which case it shall be paid on or before expiration of theextension and running of the Statute of Limitations forassessment shall be suspended for the period

The Commissioner may require a bond notexceedingdouble the amount of the tax and with suchsureties as the Commissioner deems necessarywhen an extension for payment is granted.

(iii)

Payment of capital gains tax

Pay as youfleHowever, if the seller submitsproof of his intention to avail himselfof the benefit of exemption of capitalgains under existing special laws, no

Restr ic tion s as to E xten sio n o f Time to P ay :No extension shall be allowed when taxes are assessed byreason of:i.ii.iii.

negligenceintentional disregard of rules and regulations fraud on the part of the taxpayer

In case of failure to qualify forexemption undersuch special laws and implementingrules and regulations, the tax due on thegains realized from the originaltransaction shall immediately becomedue and payable, and subject to thepenalties prescribed under applicableprovisions of this Code:If the seller, having paid the tax,submits such proof of intent within six(6) months from the registration of thedocument transferring the real property,he shall be entitled to a refund of suchtax upon verification of his compliancewith the requirements for suchexemption.In case the taxpayer elects and isqualifed to report the gain byinstallments, the tax due from eachinstallment payment shall be paidwithin thirty (30) days from the receipt ofsuch payments. No registration of anydocument transferring real property shallbe efected by the Register of Deeds

(2)

Liability for payment

D isch ar ge o f liab ilities If the executor or administrator makes

a writtenapplication to the Commissioner fordetermination ofthe amount of the estate tax and dischargefrom personal liability, the Commissioner assoon as possible, and in any event within one(1) year after the making of suchapplication, or if the application is madebefore the return is filed, then within one (1)year after the return is filed, but not after theexpiration of the period prescribed for theassessment of the tax shall notify theexecutor or administrator of the amount ofthe tax.The executor or administrator, upon

D istr ibu tion o f E stateUpon payment, the administrator shalldeliver thedistributive share in the inheritance toany heir orbeneficiary. The estate tax clearance issued bythe Commissioner or the Revenue DistrictOficer having jurisdiction over the estate willserve as the authority to distribute the

b. Estate Taxes

(1)

Pa ymen t o f T ax : Time of PaymentGE NE RA L RU LE : at th e time th e r etur n

is filed bytheexecutor, administrator or the heirs but before

delivery ofthe distributive share in the inheritance to any heir or

In case of installment payments, the clearance shall bereleased only with respect to the property the corresponding tax has been paid.

E XCEPT ION: when the Commissioner finds that payment ondue date would i m po se undu e h a rd s h i p upon any of the heirs, he may extend the time for payment ofsuch tax:

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D efin ition o f d eficien cy

depositors. The amount by which the tax imposed by

this Chapterexceeds the amount shown as the tax by theexecutor, administrator or any of the heirsupon his return; but the amount so shown onthe return shall first be increased by theamounts previously assessed (or collectedwithout assessment) as a deficiency anddecreased by the amounts previouslyabated, refunded or otherwise repaid inrespect of such tax; orIf no amount is shown as the tax by theexecutor, administrator or any of the heirsupon his return, or if no return is made bythe executor, administrator, or any heir,then the amount by which the tax exceedsthe amounts previously assessed (orcollected without assessment) as adeficiency; but such amounts previously

(4)

Duties of certain oficers and debtors Registers of Deeds shall not register in

the Registryof Property any document transferringreal property or real rights therein or anychattel mortgage, by way of gifts intervivos or mortis causa, legacy orinheritance, unless a certification fromthe Commissioner that the tax fixed inthis Title and actually due thereon hadbeen paid is shown, and they shallimmediately notify the Commissioner,Regional Director, Revenue DistrictOficer or Revenue Collection Oficer orTreasurer of the city or municipalitywhere their ofices are located, of thenonpayment of the tax discovered by

creditor,

unless the

certification

of theCommissioner that the tax fixed in

this Chapterhad been paid is shown; but he may paythe executor or judicial administratorwithout said certification if the creditis included in the inventory of the

(3)

Payment before delivery by executor or administrator No judge shall authorize the executor

or judicialadministrator to deliver a distributiveshare to any party interested in theestate unless a certification from theCommissioner that the estate tax has

(5)

Restitution of tax upon satisfaction of outstandingobligationsPa ymen t o f tax ant ec ed en t to th e tr an sfer

o f sh ar es,If, after the payment of the estatetax, newobligations of the decedent shall appear,and the persons interested shall havesatisfied them by order of the court, theyshall have a right to the restitution of the

bond s o r r igh ts There shall not be transferred to any new

owner inthe books of any corporation, sociedadanonima,partnership, business, or industryorganized or established in thePhilippines any share, obligation, bond orright by way of gift inter vivos or mortiscausa, legacy or inheritance, unless acertification from the Commissioner thatthe taxes fixed in this Title and duethereon have been paid is shown.If a bank has knowledge of the death ofa person, who maintained a bank depositaccount alone, or jointly with another, itshall not allow any withdrawal from thesaid deposit account, unless the

c.

Donor’sTaxesWithin thirty days (30) after the date the gift(donation)ismade.A separate return will be filed for each gift(donation) made on the different dates

If the

gift

(donation)

involvesconjugal/community/property, each spouse

will fileseparate returns corresponding to his/ herrespectiveshare in the conjugal/community property.This rule will also apply in the case of co-

may, uponauthorization bywithdraw an amountnot thousand pesos(P20,000) certification.

the Commissioner,exceeding Twenty without

d. VAT(Please see discussion under TaxReturns)

For this purpose, all withdrawal slips shall containa statement to the effect that all of the joint depositors are still living at the

4. PenaltieSu sp en sio n o f bu sin ess op eration s : In addition to otherby any one of the joint

depositorsstatement shall be under

andth

suchsai

administrative and penal sanctions provided forin the TaxCode and implementing regulations, the

TAXATION LAW REVIEWER

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Internal Revenue or his duly authorized representative mayorder suspension or closure of a business

companies and regional operatingheadquarters ofmultinational companies, or on the share of anindividual in the distributable net income aftertax of a partnership (except a generalprofessional partnership) of which he is apartner, or on the share of an individual in thenet income after tax of an association, a jointaccount, or a joint venture or consortium

a period of not less than five (5) daysfollowing violations:

for any

of the

i.ii.

Failure to issue receipts and invoicesFailure to file VAT return as required provisions of Sec. 114 of

under

the

iii. Understatement of taxable sales or receipts by 30% ormore of his correct taxable sales or receipt for thetaxable quarterFailure of any person to register as required

Each partner shall report as gross income his distributiveshare constructively received in the net income of the partnership. ( S ec. 26)

iv.

Sur ch ar ge, in ter est an d o th er p en alties : The interest on

Assignment of Income Doctrine – Ex: A isentitled to hissalary of P10 Million but assigns it to B forunknown reasons. In this case, both A and Brealized income. A constructively receivedincome (because he was able to assign and thushas complete control/dominion over it) and Bactually received it. The income is taxable in the

unpaid amount of tax, civil penalties and criminal penaltiesimposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title

======================================TOPIC UNDER THE SYLLABUS:II. NATIONAL INTERNAL REVENUE CODE G. Tax remedies under the NIRC

c. Inve nt ory meth od f or i nc om e determi nat io ni.ii.

Basis: Revenue Memorandum CircularNo. 43-74The taxpayer’s net worth is determinedboth at thebeginning and end of thetaxable year.The increase or decrease in the net worth isadjusted by adding all non-deductibleitems and subtracting therefrom non-taxable receipts.The general theory is that the taxpayer’smoney and other assets in excess of

1. CONCEPT OF ASSESSMENT

iii.

What Constitutes an Assessment?– An assessment contains not only a

computation oftax liabilities but also a demand forpayment within the prescriptive period.There is no form for an assessment.It can bewritten anywhere as long as it is signedby the BIR. Any notice sent to the

iv.

–

Conditions of the Net Worth Method:1. Inadequate records as prerequisite - The

taxpayer’sbooks of account do not clearly reflect hisincome or he has no books, or if he hasbooks, he refuses to produce them;Need for evidence of source of income - Thatthere is evidence of possible source/ sourcesof income to account for the increases in thenet worth or expenditures;A definite starting point or opening networth - That there is a fixed starting pointor opening net worth (date beginning witha taxable year or prior to it when hisfinancial condition can be established withdefiniteness);Proper adjustments to conform with incometax laws - That the circumstances are suchthat the method does not reflect his incomewith accuracy and certainty and proper andjust additions of personal expenses andnon-deductible expenditures were made and

a. Req uis ites fo r val id ass ess mentThe law requires that the taxpayer shall be informed inwriting of the law and the facts on which the assessment is made; otherwise, the assessment

2.

b. Cons truc ti ve met ho ds of i nc ome de termi nat io n

3.

Doctrine of Constructive Receipt – an income

isconstructively received when it is credited, orsegregated infavor of a person. The person maywithdraw the saidaccount anytime without any substantiallimitations or conditions upon which payment or

4.

Examples: Cash and/or property dividends constructivelyreceived by an individual from a domestic from a jo in t sto ck co mp an y, in sur an ce o r mu tu al fu nd elimin atin g no n -taxab le i tems. TAXATION LAW

REVIEWERPage 108 of165

d. Jeo pard y ass ess ment

regular basis from:(a)

An y p er so n other than the person underA jeopardy assessment is a tax assessment

made by anauthorized Revenue Oficer without the benefitof complete or partial trial in light of theRevenue Oficer’s belief that assessment andcollection of tax will be jeopardized by the delaycaused by the taxpayer’s failure to 1) complywith audit and investigation requirements and

investigation orAny o fice or o ficer

(b)

of the national/localgovernme

nt,government

agencies

andinstrumentalities (Bangko Sentral,

GOCCs)To Summon

3)(a)

The person liable for tax or required to file a returnorAny oficer or employee of such person or

(b)(c

e. Tax del in quen cy an d ta x def icienc y 1.

2.The books ofaccountsAccounting records of entries relatingto the business of the person liablefor tax or any other person

Delinquency means:

Failure to 1.2.3.

tax due on any return required tobe fled, ortax due for which no return isrequired, orA deficiency tax, or any surchargeor interest thereon on the due

4) To Produce such books, papers, records and other dataand to give testimonyTo take the Testimony of the person concerned, underoath as may be relevant to the inquiryTo cause revenue oficers and employees

5)

6) Deficiency means:- The amount by which the tax

imposedexceeds the amount shown astax by thetaxpayer on his return. The amountshown on the return shall beincreased by the amounts previouslyassessed as a deficiency, anddecreased by the amount previouslyabated, credited, return or repaid.If no amount is shown as tax by the

Nothing in Section 5 shall be construedas grantingthe Commissioner the authority toinquire into bank deposits other thanas provided for under Sec. 6 (F) of theCode (authority to inquire into bank

Power to make assessments, prescribe requirements fortax administration and enforcement (Sec.

-

1) Examination of returns and determination of tax due -

previously assessedassessment) as a

(or collected withoutdeficiency, but such

(a)

After a r etur n h as b een filed the Commissioner orhis representative may authorizei. Examination of any taxpayer; andii. Assessment of the correct amount of tax;F ail ur e t o f i le a r et ur n shall not

assessment shall first be decreased by theamounts previously abated, credited, return

(b) Commissioner from authorizing the

examination ofany taxpayer;

2. POWER OF COMMISSIONER TO MAKE ASSESSMENTSAND PRESCRIBE ADDITIONAL REQUIREMENTS FOR TAX

Any tax or deficiency tax so assessed shallbe paid uponnotice and demand from the Commissioneror his representative.Any return, statement or declarationfiled in anyauthorized ofice shall not be withdrawn;but within THREE YEARS from date of filing,the same may be modified, changed oramended; provided that no notice foraudit or investigation of such return, has inthe meantime, been actually served upon

a. Power to obtain information, summon, examine andtake testimony of persons (Sec. 5)For the Commissioner to ascertain:(a

)Correctness of any return or in making a returnwhere none has been madeLiability of any person for any internal revenue tax or in correcting such liabilityTax compliance

(b)

2)(c)

(a)

If a person:

The Commissioner is authorized:1) To Examine any relevant Book, paper,

record or other data2) To Obtain any Information (costs, volume of

production, receipts, sales, gross income,

i. Fails to file a required return or report at thetime prescribed orWillfully or otherwise files a false o r

ii.fr au du len t return,

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(b) The Commissioner shall Make or Amend the return

from:

(b) Determine the fair market value of real properties

located in each zone or areai.ii.

His own knowledge orFrom such information as he can obtainthrough testimony or otherwise

For tax purposes, the value of the property shall bewhichever is higher of:iii. Which shall be prima

faciesuficient for all legal

correct and

(a)

Fair market value as determined by theCommissioner; orFair market value as shown in the schedule of values of the provincial and

(b)3) Inventory-taking, Surveillance, Presumptive

Gross Sales(a)

The Commissioner may, at any time during thetaxable year

6) Authority to Inquire into Bank Deposit –Notwithstanding R.A. 1405 (Bank SecrecyLaw) theCommissioner is authorized to inquire into the Bank deposits of:

v. Order the inv en tor y takin g of goods of anytaxpayer;orMay place thebusiness person(natural/juridical) o r

vi.

operations of anyunder

(a)(b

A d eced en t to determine hisgross estateA taxpayer who has filed an applicationto c o m pro m i se payment of tax liabilityby reason of financial incapacityA t ax p a y e r s ub je c t o f a r e qu e st for the

vii.

If there is reason to believe that suchperson isnot declaring his correct income,sales orreceipts for taxpurposes.The findings may be used as

(c)viii

.tax information from a foreign taxauthoritypursuant to an internationalconvention oragreement on tax matters to which thePhilippines is a signatory or a partyof: Provided, That the informationobtained from banks and financialinstitutions may be used by the BIR for

(b)

Commissioner may prescribe a min imu m amoun tof gross receipts, sales and taxable base (takinginto account the sales and income of other persons engaged in similar i. When a person has failed to is su e

r eceip ts asrequired by Sec. 113 (Invoice requirements forVAT-registered persons) and Sec. 237(Issuance of Receipts or Commercial Invoices);

The taxpayer’s application for compromise shall not beconsidered unless he w ai v e s in w r i t i n g under R.A. 1405 and other general or speciallaws. Suchwaiver shall authorize the Commissioner toinquire intohis bankdeposits.The Commissioner shall provide the taxinformation obtained from banks andfinancial institutions pursuant to aconvention or agreement upon request ofthe foreign tax authority when suchrequesting foreign tax authority hasprovided information to demonstrate therelevance of the information under R.A.10021.RMC No. 29-2010 publishes R.A. 10021entitled “An Act to Allow the Exchange of

ii.corr ectly r efl ec t the declarations made orrequired to be made in a return,

iii. Such minimum

amountcorrect

shall be prima facie

4) Terminate taxableperiod -Commissioner shall declare the tax period ofa taxpayer terminated and send notice tothe taxpayer of such decision with arequest for immediate payment of the tax,when it has come to the knowledge of the

(a)

That a taxpayer is R etiring from business subject totax orIs Intending to leave the Philippines or

(b)(c)(d

To Remove his property therefrom orTo Hide or conceal his property orIs performing any act

(a)

Authority of the Commissioner of Internal

Revenue to inquire into bank depositaccounts and related informationheld by financial institutions

Obstruct

the

(b) Allowing a Foreign Tax Authority to examine Income

Tax Returns of taxpayers in the Philippines

(c) Authority of the Commissioner of InternalRevenue

5) Prescribe Real Property Values -The Commissioner is authorized to:(a) Divide the Philippines into different zones or areas

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(d) Penalties, for willful refusal to supply information(e) Obligation to maintain confidentiality of

information received(f) Notice to taxpayers regarding respect forexchange

a. Pres crip tive peri od f or ass ess mentGE NE RAL RU LE – 3 years after the date the return is due orfiled, whichever is later (Sec 203)Note: A return filed before the last day prescribed by law for fling shall be considered as filed on the last day.- False, fraudulent, and non-filing of

7) Authority to Register tax agents -(a

)The Commissioner shall Accredit

and Register,individuals and general professional

partnershipsand their representatives who prepareand file tax returns and other papers orwho appear before the BIRThe Commissioner shall createnational and regional accreditation

EX CE PTIONS:1. Failure to file return: 10 years from

date ofdiscovery of the omission to file thereturn (Sec.222A)False or fraudulent return with intentionto evade the tax: 10 years from the dateof the discovery of the falsity or fraud(Sec 222A)a. Nothing in Sec 222A shall beconstrued to authorize the examinationand investigation or inquiry into any taxreturn filed in accordance with the

(b)

2.

Those who are denied accreditationmay appealthe same to the Sec. of Finance whoshall rule on the appeal within 60 daysfrom receipt of such appeal. Failure ofthe Sec. of Finance to rule on the appealwithin the said period shall be deemed

8) Authority to Prescribe Additional Requirements –

– intentional and substantialunderstatement ofthe tax liability by the taxpayer(substantial under declaration ofincome; >30% of that declared [Sec.248])intentional and substantialoverstatement of deductions ofexemptions (>30% of the actual

The Commissioner may prescribe the manner ofcompliancewith any documentary or procedural –submission or preparation ofaccompanying tax returns.

financial

statements

c.3. WHEN ASSESSMENT IS MADE due to mistake, carelessness or

ignorance.Sections 203 and 222 of the NIRC provide for astatute oflimitations on the assessment and collectionof internalrevenue taxes in order to safeguard the interestof the taxpayer against unreasonableinvestigation. Unreasonable investigationcontemplates cases where the period forassessment extends indefinitely because thisdeprives the taxpayer of the assurance that itwill no longer be subjected to furtherinvestigation for taxes after the expiration of areasonable period of time. As was held inRepublic of the Phils. vs. Ablaza: “…The law onprescription being a remedial measure should beinterpreted in a way conducive to bringing about

NOTE:1. Agreement in writing to the extension ofthe periodto assess between the CIR and the taxpayerbefore the expiration of the 3 year period.“Section 222 (b) of the NIRC provides that theperiod to assess and collect taxes may onlybe extended upon a written agreementbetween the CIR and the taxpayer executedbefore the expiration of the three-yearperiod... The waiver must be signed by thetaxpayer himself or his duly authorizedrepresentative. In the case of a corporation,the waiver must be signed by any of its178087, Ma y 5, 20 10]

2004]

2. Notice of the assessment must be released, mailedor sent to the taxpayer within the 3 year

Rules on Prescription1. When the tax law itself is silent on

prescription, the tax is imprescriptible2. When no return is required, tax is imprescriptible

r equ ir ed th at th e no tice b e r eceiv ed b y th etaxp ay erwith in th e pr escr ib ed p er iod . But the sending of thenotice must clearly be proven. Bas ilan Es tate v. CIR ,[ G.R. N o. L- 22492, Septe mber 5, 1967]

NOTE: Remedy of taxpayer is to fle a return

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Amendment of Return

Prima facie evidence of a false orfraudulent

return as determined by the Commissionerpursuant to the rules and

If the amended return is substantially different from theoriginal return, the prescriptive period shall be counted from the filing of the amended return.

1. substantial under declaration of taxablesales, receipts or income – failure to reportsales, receipts or income in an amount exceeding 30% of that declared per return substantial overstatement of deductions –

C o., [ L-1 9727, M ay 20 , 1965 ]

b. Sus pens io n of r un ni ng of s ta tute of l imi tat io ns 2.

1. when the CIR is prohibited from making theassessment or beginning the distraint orlevy or a proceeding in court, and for 60 days thereafter when the taxpayer requests for a reinvestigation which is granted by the CIRwhen the taxpayer cannot be locatedin the address given by him in thereturn, unless he informs the CIR of anychange in his addresswhen the warrant of distraint or levy is duly served and no property is located

b. In teres t

2.A) There shall be assessed and collected an

Interest at20% per annum on any unpaidamount of taxOR higher rate prescribed by rules andregulations from the date prescribedfor payment until the amount is fullypaid.

3.B)

4.C)5.

a)b)

Deficiency Interest in the tax dueDelinquency Interest – In case of failure topay:

4. GENERAL PROVISIONS ON ADDITIONS TO THE TAX 4. tax due on any return

required to befiled,ortax due for which no return isrequired, or A deficiency tax, orany surcharge or interest thereonon the due date appearing in the

a. Civi l pe nal ties 5.

6.A) Penalty: 25% of the amount due, in

addition to thetax required to be paid in case of the following:a) Failure to file any Return and pay

the tax onthe date prescribed; orFiling a return with an Internal

D) Interest shall form part of the tax.

b)other than those with whom the return isrequired to be filed, unless otherwiseauthorized by the Commissioner; orFailure to pay the Deficiency tax within thetime prescribed for its payment in the notice of assessment; orFailure to pay on or before the dateprescribed for its payment:1. the full or part of the amount

NOTE: Pursuant to Section 249 of the Tax Code, theimposition of interest on delinquency is ma n d a t or y .

c)is but a just compensation to the state forthe delay inthe payment of the tax, and for theconcomitant use by the taxpayer of fundsthat rightfully should be in the government's

d)

E) Interest on extended payment.a. any person who is qualifed and

elects to paythe tax on installment but fails topay the tax, or any installment, orany part on or before the dateprescribed; orwhere the Commissioner hasauthorized an extension of timewithin which to pay a tax or adeficiency tax or any part thereof,

B) Penalty: 50% of the tax or of the deficiency tax, incase any payment has been made on thebasis of areturn before the discovery of the falsityor fraud. In case of: [ FiF a ]a) Willful neglect to F ile the return within the

period prescribed; orb) F alse or fraudulent return is willfully

made, in case any payment has been

b.

c.

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5. ASSESSMENT PROCESS

d. No tice of in for mal c onfere n ce(see above)

a. Tax au di t

e. Iss uance of pre lim ina ry ass ess ment no tice (seeabove)b. No tice of in for mal

c onfere n ce– A written notice informing a taxpayerthat thefindings of the audit conducted on his accountingrecords indicate that additional taxes or deficiency assessment has tobe paid.

f. E xceptio ns to iss ua nce of p relim inar y ass ess mentnot iceInstances where a pre-assessment notice NEED NOT be– given

:–

METDCwhen the finding for deficiency tax is aresult of Mathematical error in the computation of tax appearing on the face of the return; or Discrepancy is determined between the tax withheld and the amount actually remitted by the withholding agenta taxpayer who opted to claim a refundor tax credit was determined to haveCarried over and applied the amountagainst succeeding tax liabilitiesExcise tax has notbeen paidan article locally purchased or

tax assessment,

this recommendation

iscommunicated by the BIR to the taxpayer duringan informal conference. The taxpayer shall have15 days from the receipt of the notice of

–

–c. Iss uance of p reli mi nary ass ess ment no tice– Communication issued by the BIR

informinga

taxpayer who has been audited of thefindings bythe BIR. The assessment shall be inwriting, andshould inform the taxpayer of the lawand the facts on which theassessment is made; otherwise, theassessment is void.There is a presumption of correctnessand good faith on the part of the CIR,thus, the burden lies on the taxpayer.Otherwise, the finding of the CIR will be

––

–g. Rep ly to prel imi nar y ass es sment no tice– If the taxpayer disagrees with the PAN,

he has 15days to file a written reply to contest the proposed assessment.

Sug ar M il li ng v. CA , [ G.R. N o. 122451 , Oct ober

h. Iss uance of f orm al le tter of deman d an d ass ess ment12,

2000]not ice/fi nal ass ess ment n ot ice– A notice of assessment is a formal

letter ofdemand where a declaration ofdeficiency taxes isissued to a taxpayer who fails torespond to a pre- assessment noticewithin the prescribed period of time, orwhose reply to the PAN was found to be

Indeed, Section 228 of the Tax Code clearlyrequires that thetaxpayer must first be informed that he isliable for deficiency taxes through the sendingof a PAN. He must be informed of the factsand the law upon which the assessment ismade. The law imposes a substantive, notmerely a formal, requirement. To proceedheedlessly with tax collection without firstestablishing a valid assessment is evidentlyviolative of the cardinal principle in

i. Dis pu ted ass ess mentj. Adm in is trat ive dec is io n o n a dis pu ted ass ess ment

From the provision [of RR 12-99] it is clear thatthe sendingof a PAN to taxpayer to inform him of theassessment made is but part of the "dueprocess requirement in the issuance of adeficiency tax assessment," the absence ofwhich renders nugatory any assessment made

6. PROTESTING ASSESSMENT

a. Protes t of ass ess me nt by t ax payer- Protested assessment

A protest is a vital document whichis a formaldeclaration of resistance of the taxpayer. Itis a repository of all arguments. It can beused in court in case of administrativeremedies have been exhausted. It is also

De cember 8, 2010]

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oficial actuations of the CIR. This is equivalent to apleading.

7. RENDITION OF DECISION BY COMMISSIONER

a. Denial of pr otes t- When to file a protest

File a request for reinvestigation or reconsideration within 30 da y s from receipt of the assessment

- Commissioner’s actions equivalent to denial of protest

If protest is denied, elevate the matter withthe CIR within 30 days from receipt of thedecision of the CIR’s duly authorized- Forms of

protesta. request for reinvestigation – a plea for re-evaluation of an assessment on the basis of n ew ly d is c ov e r e d o r

(a) Filing of criminal action against taxpayerCriminal action may be filed during thependency of anadministrative protestin the BIRIt is not a requirement for the filing thereofthat there be a precise computation andassessment of the tax, since what isinvolved in the criminal action is not thecollection of tax but a criminal prosecutionfor the violation of the NIRC. Provided,however, that there is a prima facie showingof a willful attempt to evade taxes. Anassessment of a deficiency is notnecessary to a criminal prosecution forwillful attempt to defeat and evade theincome tax. A crime is complete when theviolator has knowingly and willfully filed afraudulent return with intent to evade anddefeat the tax. The perpetration of thecrime is grounded upon knowledge on the

taxpayer

intends to

present in

the –reinvestigation. Involves a question

of fact orlaw or both.request for reconsideration – a pleafor re-evaluation of the assessment on the

b.

ev id en ce. Involves a question of fact or law orboth.

–

b. Su bm iss ion of d oc umen ts wi thi n 60 da ys fro m fil in gof pr otes tSubmission of documents within the 60

days period isoptional to the taxpayer. The relevantsupporting documents mentioned in the lawrefers to such documents which thetaxpayer feels would be necessary tosupport his protest and not what theCommissioner feels should be submitted,otherwise the taxpayer would always be atthe mercy of the BIR which may requireproduction of such documents which

– See also CI R v . Pas c or Real ty , [ G.R . N o. 1 28315 , J une29,1999] , which reached the same conclusion as inUngab.16,

2001] HOWEVER, in the case of CIR v. CA , CTA, & Fort uneAfter the company submitted its letter-

reply statingthat it would not comply with thepresentation of the proof of DST payment,no reply was then heard from the CIR. Thecompany has complied with the requisitesin disputing an assessment, whichprovides that in case the protest is notacted upon within 180-days from thesubmission of the documents, the taxpayeradversely afected may appeal to the CTAwithin 30- days from the lapse of the 180-

Tobac co [ G. R. N o. 119 761, A ug us t 29, 1 996) , the CIRheld a contrary positionb. Iss uin g a warra nt o f dist rain t and lev y- Inaction by commissioner

8. REMEDIES OF TAXPAYER TO ACTION BY COMMISSIONER

Appeal of Protest to the CTA (Judicial Relief)Grounds:a. In case of denial of protestb. In case of inaction by commissioner within 180 days from submission of documents

Pawns ho p Com pan y, I nc., [ G. R . No. 172045 -4 6, June16, 2009]

c. E ffect of fai lure topro tes t

Per iod to app eal:Within 60 days from

filingof protest, all relevant

a. within 30 days from receipt of decisiondenying the protest or30 days from the lapse of 180 day

supporting documents should have been submitted,otherwise, the assessment shall become FINAL (cannot be appealed).

b.

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c. Effect of failure to appealThe decision shall be final, executory anddemandable (NOTE: See the CTA case ofLascona which gives the taxpayer theoption either to appeal to the CTA after180 days or to await the decision of theCIR.)

- serving a copy of the warrant upon thetaxpayer AND upon the president, manager,treasurer or other responsible (c

)Debts and Credits1. leaving a copy of the warrant with

the personowing the debts or having in his possessionsuch credits or his agent.the warrant shall be suficient authority to the

B. COLLECTIO 2.1. REQUISITE2. PRESCRIPTIVE PERIODS

(d)

Bank accounts (garnishment)1. serve a warrant of garnishment

upon thetaxpayer AND upon the president,manager, treasurer or otherresponsible oficer of the bankbank shall turn over to theCommissioner so much of thebank accounts as may be

1. Local taxes, fees or charges – five (5) years from the

date they became due (sec. 194, LGC)2. When there is fraud or intent to evade the

payment of taxes, fees or charges – ten (10)years from discovery of fraud or intent to

2.

Local taxes, fees or charges may be collected within fiveyears from the date of assessment by administrative orjudicial action. No such action shall be

3) Posting of Notice [ Sec. 2 09](a)

Notice specifying the time and place ofsale andthe articlesdisdained.The posting shall be made in not lessthan 2 public places in the city ormunicipality where the distraint ismade.

(b)3. DISTRAINT OF PERSONAL

PROPERTY INCLUDINGGARNISHMENT (c

)a. Summary remedy of distraint of personal property- Procedure for distraint and 4) Sale of Property Distrained

- Sale of property distrained and disposition of proceeds

1) Report on the distraint (Commencement of distraint

proceedings)(a) by the distraining oficer – submitted

within 10 days from receipt of thewarrant to the Revenue District Oficer orRevenue Regional Officer.

(b) by the Revenue Regional Director - a

(a) Release of distrained property uponpayment priorto sale- Purchase by the government at sale upon distraint- Report of sale to the BIR- Constructive distraint to protect the

The order of distraint may be lifted byCommissioner or his representative

the –

–There may be no actual delinquency.Taxpayer is prohibited from disposing of the property and must preserve the same

2) Service of warrant of distraint.

respect to:

Procedures

with

(a) Goods, efects,

property

chattels and

other

personal 4. SUMMARY REMEDY ON REAL PROPERTY

a. Advertisement and saleAdvertisement of the time and place of sale, which shall contain:

1. a copy of

an account of the

propertydistrained, signed by the oficer,

shall be lefteither with the owner or the personfrom whom the property was taken orat the dwelling or place of business

a.b.c.

The amount of tax and penalties dueName of the taxpayerShort description of the property to

and with someone of suitablediscretiontogether with a statement of demanded

age

and

2. the

sum

The advertisement shall be made within 20 days afterthe levy, and the same shall be for a period of at least

3. and also a note of the time and place of sale(b) Stocks and other

Securitiesi. posting a notice at the main

entrance of theTAXATION LAW REVIEWER

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municipal building or the city hall and inpublic andconspicuous place in the barrio ordistrict where the property is located

ii. by publication once a week for 3 consecutive

weeks in newspaper of generalcirculation in the municipality or city

an accounting of the same shall rendered to theChairman of the Commission on Audit. [ S ec.c. When property to be sold ordestroyed– Forfeited property shall not be

destroyed until atleast 20 days from seizure.

d. Disposition of funds recovered in legal proceedingsor obtained from forfeiture

b. Redemption of property soldWithin 1 year from the date of sale, theproperty maybe redeemed by the delinquent taxpayeror any onefrom him, upon the payment of the taxes,penalties and interest thereon from the dateof delinquency to the date of sale togetherwith interest on purchase price at

The Revenue District Oficer or his dulyauthorizedrepresentative, other than the oficerreferred to inSection 208 of this Code shall, according torules and regulations prescribed by theSecretary of Finance, upon recommendationof the Commissioner, forthwith cause anotification to be exhibited in not less thantwo (2) public places in the municipality orcity where the distraint is made, specifying;the time and place of sale and the articlesdistrained. The time of sale shall not be lessthan twenty (20) days after notice. One place

The owner shall not be deprived of thepossession of thesaid property and shall be entitled to therents and other income thereof until theexpiration of the time allowed for its

c. Final deed of purchaserIf the property is not redeemed, a fnal deed of sale shall be issued to the purchaser. At the time and place fixed in such

notice, the saidrevenue oficer shall sell the goods, chattels,or effects,or other personal property, including stocksand other securities so distrained, at publicauction, to the highest bidder for cash, orwith the approval of the Commissioner,

5. FORFEITURE TO THE GOVERNMENT FOR WANT OFBIDDERForfeiture is the divestiture of property withoutcompensation, in consequence of a default

a. Remedy of enforcement offorfeitures- Action to contestforfeiture of chattelIn case of the seizure of personal propertyunder claim of forfeiture, the owner desiringto contest the validity of the forfeituremay, at any time before sale ordestruction of the property, bring an actionagainst the person seizing the property or

In the case of stocks and other securities,the officermaking the sale shall execute a bill of salewhich he shalldeliver to the buyer, and a copy thereoffurnished the corporation, company orassociation which issued the stocks or othersecurities. Upon receipt of the copy of thebill of sale, the corporation, company orassociation shall make the correspondingentry in its books, transfer the stocks or othersecurities sold in the name of the buyer, andissue, if required to do so, the correspondingcertificates of stock or other securities.Any residue over and above what is requiredto pay theentire claim, including expenses, shall bereturned to the owner of the property sold.The expenses chargeable upon each seizure

months, he may bring an action to recoverproceeds realized at the sale. [S ec.

the

net

b. Resale of real estatetaken for taxesThe Commissioner shall have charge of anyreal estate obtained by the Government ofthe Philippines in payment or satisfaction oftaxes, penalties or costs arising under thisCode or in compromise or adjustment of anyclaim therefore, and said Commissionermay, upon the giving of not less than twenty(20) days notice, sell and dispose of the sameof public auction or with prior approval of theSecretary of Finance, dispose of the same at

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6. FURTHER DISTRAINT OR LEVY

with or without the consent of the ProsecutorPe opl e v . M a gd a l u y o , [ G . R . The remedy of distraint and levy may

be repeatedif April 20,

1961]necessary until the full amount of the taxdelinquency dueincluding all expenses is collected from thetaxpayer. [ S ec.217]Otherwise, a clever taxpayer who is also ableto conceal

This is more so when the court hasrendered a final judgment. As agent

of the

Government,

theCommissioner is not authorized

to acceptanything less than what isadjudicated in favor of thegovernment by virtue of suchfinal judgment; the governmenthas already acquired a vestedrights.The BIR Commissioner maycompromisethe payment of tax liabilities onthe basis of the doubtful validityof the assessment if the

7. TAX LIENTax Lien is a legal claim or charge on property, either real orpersonal, established by law as a security in default of thethe property irrespective of ownership or transfer thereof Natur e: a lien in favor of the

Government of thePhilippines when a person liable to pay a tax neglects or refuses to do so upon demandDur a t io n : lien exists from the time assessment is made by the Commissioneruntil paid, with interests, penalties and costs that may accrue in addition thereto E x t e n t: upon all property and rights to property belonging to the taxpayer

9. CIVIL AND CRIMINAL ACTION

1.

Must be brought in the name of theGovernmentof thePhilippinesConducted by legal oficers ofthe BIRIn case of actions for recovery of taxes orenforcement of a fine, penalty or

2.3.

such lien is filed by the Commissioner in the Register ofDeeds in the province/city wheresituated [ S ec. 219]

the property is a. Suit to recover tax based on false or

fraudulentreturnsPrima facie evidence of a false or fraudulentreturn asdetermined by the Commissioner pursuant

NOTE: A tax lien is

superiorperson.

to judgment

claim of private

a) substantial under declaration oftaxable sales,receipts or income – failure toreport sales, receipts or income in anamount exceeding 30% of that declaredper returnsubstantial overstatement of deductions– claim of deductions in an amount

Attaches not only from the time the warrant wasserved BUT from the time tax was due and demandable(from the time when the assessment was b)

8.COMPROMIS

Ea. Authority of the commissioner to compromise andabate taxes

C. REFUND1. GROUNDS AND REQUISITE FOR REFUND1. Before the complaint is filed

with theprosecutor’s ofice: the CIR has full discretion to compromise except those involving fraud After the complaint is filed with the prosecutor’s ofice but before the information is filed with the court: the CIR can still compromise provided the prosecutor must give consent

a) taxpayer

files

in writing

with

theCommissioner a claim for credit or

refund for:

Taxes erroneously or illegally receivedPenalties imposed without authorityAny sum alleged to have been excessively or in any manner wrongfully collected Refund the value of internal revenue

2.

3.

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wrongfully collected without authority, or ofany sumalleged to have been excessively or in anymanner wrongfully collected, until a claim forrefund or credit has been duly filed with theCommissioner; but such suit or proceedingmay be maintained, whether or not such tax,penalty, or sum has been paid under protest

Redeem or change unusedstampsrendered unfit for use and refundtheir value upon proof ofdestruction, in the discretion ofb) application must be filed within 2

yrs after thepayment of the tax or penalty(no suit orproceeding shall begun after theexpiration of the said 2 yrsregardless of any supervening causethat may arise after the payment)

a) a return filed showing an

4. Statutory basis for tax refund under the tax code

a. Scope of claims for refund

Taxes erroneously or illegallyreceivedPenalties imposed withoutauthorityAny sum alleged to have beenexcessively or in any mannerwrongfully collectedRefund the value of internalrevenue stamps when returned ingood condition by the purchaserRedeem or change unused stampsrendered unfit for use and refund their

2. Requirements for refund as laid down by cases

a. Necessity of written claim for refundb. Claim containing a categorical demand for reimbursementc. Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment

3. Legal basis of tax refundsBroadly speaking, tax refunds are based on the

legalprinciple of quasi-contracts or solutio indebiti.

The pertinentrules are found in Arts. 2142 and 2154 of the Civil Code:

Art. 2142. Certain lawful, voluntary andunilateral acts give rise to the juridicalrelation of quasi-contract to the end that noone shall be unjustly enriched or benefited atthe expense of another.Art. 2154. If something is received when there

b. Necessity of proof for claim or refundIt partakes of the nature of an exemption and is strictlyconstrued against the claimant. CIR v . Ltd ., [ 244 SC RA332] .c. Burden of proof for claim of refundThe burden of proof is on the taxpayer claiming the refund that he is entitled to the same CIR v. T o k y oShi pp in g L td. , [ 244 SCRA 3 32] .Particular references in the

NIRC: d. Nature of erroneously paidtax/illegally assessedcollectedTaxes are erroneously paid when a taxpayerpays undera mistake of fact, such as, he is not aware ofan existing exemption in his favor at the

Sec. 204 C. Credit or refund taxeserroneously or illegallyreceived or penalties imposed withoutauthority, refund the value of internal revenuestamps when they are returned in goodcondition by the purchaser, and, in hisdiscretion, redeem or change unused stampsthat have been rendered unfit for use andrefund their value upon proof of destruction.No credit or refund of taxes or penaltiesshall be allowed unless the taxpayer filesin writing with the Commissioner a claimfor credit or refund within two (2) years afterthe payment of the tax or penalty: Provided,

e. Tax refund vis-à-vis tax credit

Sec. 229. No suit or proceeding shall bemaintained inany court for the recovery of any nationalinternal revenue tax hereafter alleged tohave been erroneously or illegally assessedor collected, or of any penalty claimed tohave been collected without authority, of any

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TAX REFUND TAXCREDITTax refund takes

place when there is actually a reimbursement oftax.

The government issues a Tax Credit Certificate covering the amount determined to be reimbursable, which is applied after proper verification against any sum that may be due to the taxpayer.Tax Credit Certificate:

a) may be applied

Commencement of 2-year period

f. Essential requisites for claim of refunda) a claim for refund or credit has been

filed withtheCommissionerthe suit may be maintainedwhether or notsuch tax/penalty/sum has been paidunder protestin any case, suit must be filed incourt within 2yrs. from date of payment of thetax/penalty regardless of anysupervening cause that may ariseafter paymentthe Commissioner may, even

b)

c)

d)

5. WHO MAY CLAIM/APPLY FOR TAX REFUND/TAX CREDIT

a. Taxpayer/withholding agents of non-resident foreign

6. PRESCRIPTIVE PERIOD FOR RECOVERY OF TAXERRONEOULSY OR ILLEGALLY

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CASE

2-YEAR PERIOD

NOTES

If the tax sought to be refunded is illegally or erroneously collected

From date tax was paid[ CIR v. V i c t o r i as M i l li n g ]

If the tax is paidin installment or only in part

From date ofthe last or fnal installment or CIR v. Prieto, [G.R. No. L-13912,September

There is nopayment until the whole/entire tax liability is fully paid

If thetaxpayermerelymade adeposit

From conversion of the deposit to payment [U nio n G ar m e n t v. C oll ]

Merely makinga deposit is not equivalentto payment until the amount is actually applied to the purpose for which it was

If tax has been withheld fromsource(through thewithholdingtax system)

From date itfalls due at theend of thetaxable year Gibbs v. CIR, [G.R. No.L-

A taxpayer who contributes to thewithholding tax system performs and extinguishes his tax obligation for

Corporate taxpayer

At the earliest, on the date of the fling of the adjustedfnal return [ A C CPA v .

It is only then that the corporation can ascertain whether it made profits or incurred If tax was

not erroneouslyorillegally paid but the taxpayer became entitled to refund because of supervening circumstances

From the date the taxpayerbecomes entitled to refund and not from thedate of paymentCIR v. DonPedro Central Azucarera, [G.R. No.L-

Before the right to refund orcredit arises,there is absolutely no basis to fle a claim with the CIR or commence a suit in court

revenue tax, EXCEPTwithholding

taxes b) original copy is

surrendered to the revenue oficer

c) no tax refund will be

given resulting from availment of incentives

The following must be established:a) that there was an actual collection and

receipt of the government of the tax to be recovered and this requires actual proof; and

b) that there is a legal basis for granting the refund or credit including the verification of compliance with the statutory requirementsrelative to the fling of the claims within the

Forfeiture of cash refund/tax credit:a) Forfeiture of refund in favor of the

government when a refund check or warrant remains unclaimed or uncashed within 5 yrs. from date of mailing or delivery

b) Forfeiture of Tax Credit – a tax creditcertificate which remains unutilized after 5

A suit or proceedings for tax refund may bemaintained whether or not such tax, penalty or sum has been paid under protest or duress [ S ec.

Section 230 of the NIRC provides for a 2-yrprescriptiveperiod to be counted "from the date ofpayment of tax"for actions for refund of corporate incometax. Thus, the 2-yr period should bereckoned from the actual filing of theAdjustment Return or Annual ITR, because

Similarly, payment under protest is not necessaryin refund for local taxes. [ Sec. 196 payment under protest is necessary

is case of:(a) real property taxes [ Sec.

No. 11725 4, Ja nuar y 21, 1 999]

(b) custom duties [ Sec 2308 TCC]

If a Revenue Regulation provides for a prescriptive perioddifferent from the NIRC, then the regulation is invalid and

3. The Commissioner may, even without a writtenclaim, refund or credit a tax, where on the face ofthe return upon which payment was made, payment appears to be erroneous. (Sec. 229)

112024, Ja nua ry 28 , 1999]Suspension of the 2 yr Prescriptive Period

1. there is a pendinglitigation

between the

4.

2. The Commissioner in that litigated case agreed to

abide by the decision of the SC as to the collection

1961]in case taxes are payable ininstallments, the two- year period iscounted from the payment of the last

5.

Collec to r, [ May 28 ,19 58] Oct ober 29 ,

1966]7. OTHER CONSIDERATION AFFECTING TAX REFUNDS

6. If a taxpayer had lost his right todispute thevalidity of a tax assessment in view ofhis failure to appeal the Commissioner’sdecision to CTA, may he be granted a

1. Sec. 112 (A)

Zero-Rated or Efectively Zero-RatedSales. - anyVAT-registered person, whose sales arezero-rated or efectively zero-rated may,within two (2) years after the close ofthe taxable quarter when the saleswere made, apply for the issuance of atax credit certificate or refund ofcreditable input tax due or paidattributable to such sales, excepttransitional input tax, to the extent thatsuch input tax has not been appliedagainst output tax: Provided, however,That in the case of zero-rated salesunder Section 106(A)(2)(a)(1), (2) and (B)and Section 108 (B)(1) and (2), theacceptable foreign currency exchangeproceeds thereof had been dulyaccounted for in accordance with therules and regulations of the BangkoSentral ng Pilipinas (BSP): Provided,further, That where the taxpayer isengaged in zero-rated or efectively zero-rated sale and also in taxable or exemptsale of goods of properties or services,

NO. The expedient of an appeal from adenial of atax request for cancellation of warrant ofdistraintand levy cannot be utilized for thepurpose of testing the legality of anassessment, which had becomeconclusive and binding on the taxpayer,there being no appeal, the procedure setforth in Section 306 (now Sec. 204 C and229) of the National Internal RevenueCode is not available to revive the rightto contest the validity of an assessmentonce the same had been irretrievablyConcep ci on [ G. R. N o. L-2 3912, March 15 , 1968]

2. Payment Under Protest is NOT Necessary underNIRC

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2. Nature and Source of Taxing Power (CITE LAW)The 1987 Constitution provides

III. LOCAL GOVERNMENT CODE OF 1991,as amended======================================TOPIC UNDER THE SYLLABUS:

Article X Section 5. Each localgovernment unit shallhave the power to create its ownsources of revenues and to levy taxes,fees and charges subject to suchguidelines and limitations as the Congressmay provide, consistent with the basicpolicy of local autonomy. Such taxes, fees,1. Fundamental Principles

The fundamental principles governing the exercise of thetaxing and other revenue-raising powers of

The grant of taxing power to local government units is alsoembodied in the LGC:(a

)Taxation shall be U niform in each local governmentunit;Taxes, fees, charges and other impositions shall

Section 129. Power to Create Sources ofRevenue. -Each local government unit shall exerciseits power to create its own sources ofrevenue and to levy taxes, fees, andcharges subject to the provisions herein,consistent with the basic policy of localautonomy. Such taxes, fees, and charges

(b)

1) be E quitable and based as far as practicable on thetaxpayer's ability to pay;be levied and collected only for Public purposes;

2)3)

confiscatory;not be contrary to Law, public policy,national

Powe r t o Pres cri be Pena lti es for Tax Vi ola ti ons a nd

4)Lim ita ti ons There on

economic policy, or in the restraintof trade;

The collection of local taxes, fees, chargesand other

(c) 1. The Sanggunian is authorized to pr escr ib e

fn es o r o th erp en alties for violations of tax ordinances

person;The revenue collected shall Inure solely to the benefit

a. in no case shall fines be less than P1,000nor morethan P5,000nor shall the imprisonment be less than one month nor more than six months

(d) of the local government unit levying the tax,

fee, chargeor other imposition unless otherwise specificallyprovided herein; and,Each local government unit shall, as far as

b.

2. Such fine or other penalty shall be imposed at thediscretion of the court.The Sanggunian Barangay may prescribe a fine of not

(e)

3.

Equality and uniformity in local taxationmeans that alltaxable articles or kinds of property of thesame class shall be taxed at the same ratewithin the territorial jurisdiction of the taxingauthority or local government unit and notnecessarily in comparison with other unitsalthough belonging to the same politicalsubdivision. In fine, uniformity is required

Powe r t o Adj us t L ocal Ta x Ra te ( Sec. 191 LGC)LGUs are authorized to adjust the tax rates as prescribedherein not oftener than once every 5 years, andin no caseshall such adjustment exceed 10% of the rates Mani la, G.R. N o. L-4817 , May

2 6, 1954 ] Powe r t o Gra nt L oca l E xemp tio ns ( Sec. 192 LGC) A city can validly tax the sales to customers

outside thecity as long as the orders were booked andpaid for in the company’s branch ofice inthe city. A different interpretation woulddefeat the tax ordinance in question orencourage tax evasion by simply arrangingfor the delivery at the outskirts of the city.

LGUs, may through ordinances duly approved, grant taxexemptions, incentives or reliefs under such terms and conditions, as they may deem Tax exemptions shall be conferred through the issuance of anon-transferable tax exemption certificate.

Januar y 18 , 1978]

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Nature of the Ta xi ng P owe r of L ocal G over nmen t Un itsTax E xemp ti ons e xist in g bef or e the

E ffecti vit y of the L GC:(1987 Constitution Article X Section 5,LGCSec. 129) .

Unless otherwise provided by the LGC, taxexemptions orincentives granted to, or presently enjoyed byall persons, whether natural or juridical,including GOCCs are hereby withdrawn upon

1. not inherent E verett Ste ams hi p Cor p. v. M un ici pal it yof Me di na [ G. R. N o. L-2 1191, 3 0 Apri l 30, 1966]2

.exercised only if delegated to them by law orConstitution Mac tan Ce bu Marcos [ G.R . No. 1 20082, Sept ember 11, 19 96]1.

2.local water districts,cooperatives duly registered under RA 6938,non-stock and non-profit hospitals andeducational institutions.

3. not absolute subject to limitations provided for by lawMa n i l a E l ec t r i c C o m p a n y v . P r o v in ce o fNo. 13135 9, Ma y 5, 1995]3.

3. Local Taxing AuthorityTax E xemp ti ons n ot a pp lica ble to

Re gu lat or y Fee sThe power to grant tax exemptions, tax incentives and taxreliefs shall not apply to regulatory fees which are levied under the police power of the LGU.

a) Powe r to C rea te So urces of Reven ueEach local government unit has the power to:

Gui del ines for the Gra nt in g of Tax E xempt io ns , Tax

1.2.

create its own sources ofrevenue andlevy taxes, fees, and charges subject to theprovisions herein, consistent with the basicpolicy of local autonomy. [ S ec. 12 9 ]

Incen tives an d Tax Rel iefs(Art. 282 [B], Rules and Regulations Implementing the LGC)1. On the grant of tax exemptions or

tax reliefs:Such taxes, fees, and charges shall accrueexclusively to thelocal government units. (NOTE: Asdistinguished from internal revenue taxeswhich do not accrue exclusively to the nationalgovernment but are shared to the localgovernments in the form of internal revenue

a. the same may be granted in cases of naturalcalamities, civil disturbance,general failurecrops, or adverse economic conditionssuch substantial decrease in prices oragricultural agri-based products.The grant shall be through an

ofas or

b.c. Any exemption or relief granted to a

type or kindof business shall apply to all business similarlysituated.The same shall take efect only during the nextcalendar year for a period not exceeding 12 months as may be provided by the ordinance.

4. Residual Taxing Powers of the LGU (Sec. 186 LGC)LGUs have the power to levy taxes, fees or charges on anybase or subject NOT:

d.

a.b.

specifically enumerated in LGCtaxed under the provisions of the NIRC, asamendedother applicable laws

e.

c.

2. On the grant of tax incentives

Conditions:a. The same shall be granted only to new

investmentsin the locality and the ordinance shall prescribe theterms and conditions therefore.The grant shall be for a definite period of notexceeding 1 calendar year.The grant shall be by ordinance passed prior to the

a. That the taxes, fees or charges shall not be unjust,excessive, oppressive, confiscatory or contrary to declared national policy.The ordinance levying such taxes, fees or chargesshall not be enacted without any

b.b.

c.

d.Sou rces of Reve nues1.

Internal RevenueAllotment (IRA)National internal revenue collected and notapplied as hereinabove provided orotherwise specially disposed of by law shall

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be available for the generalpurposes of theGovernment, with the exception of theamounts set apart by way of allotment asprovided for under Republic Act No. 7160,otherwise known as the Local Government

a.b.

necessity of quorumsubmission for approval by the local chief executivethe matter of veto and overriding the samethe publication and afectivity

c.d.

3. Public hearings are required before any local taxordinance is enacted [ Sec. 187 , LGC ]

National internal revenue collected and notapplied ashereinabove provided or otherwise speciallydisposedof by law shall accrue to the NationalTreasury and shall be available for thegeneral purposes of the Government, withthe exception of the amounts set apart byway of allotment as provided for under

4. Within 10 days after their approval,publication in fullfor 3 consecutive days in a newspaperof generalcirculation. In absence of such newspaperin the province, city or municipality, then theordinance may be posted in at least two Local government units shall have a

share in thenational internal revenue taxes based on thecollection of the third fiscal year precedingthe current fiscal year as follows… (c) Onthe third year and thereafter, 40%... [ S e c.

4. Sco pe of Ta xi ngP owe r1.2.

Grant of tax power under existing law [ Sec. 129, LGC ]Power to prescribe penalties for tax violations andexemptions [ Sec. 516, L GC ]3.

4.5.

Power to grant local tax exemptions [ Sec. 192, L GC ]50% share in collections for the f: (2nd

par., Sec. 283, NIRC)Power to adjust local tax rates [ Sec.191, LGC ]

2.Residual taxing powers of local governments[ Sec. 186,LG C]

a. VAT on sale of goods or properties under Sec. 106,NIRCVAT on sale of services and use or lease ofproperties under Sec. 108,

Lim ita ti ons of the Res idua l Po we r

b.

1.2.3.

Constitutional limitations on taxing powerCommon limitations prescribed in Sec. 133 ofLGC Fundamental principles governing the exercise of the taxing power of the LGUs prescribed under Sec. 130 of the LGCThe ordinance levying such residual taxesshall not be enacted without any prior publichearing conducted for the purpose andThe principle of preemption

c.

b) Proced ure fo r app ro val a nd effectiv it y of tax o rd ina ncesThe power to impose a tax, fee or charge or to generaterevenue is exercised by the Sa n g g un ian of the LGU

4.

5.1. The procedure applicable to local gov’t ordinances in

general should be observed. [ S ec. 187, 2. Procedural details [ Secs . 54, 55, and 5 9 LGC] :

5. Specific Taxing Power of Local Government Unit (LGU)A. PROVINCE

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TYPE OF TAX RATE

EXCEPTIONS NOTESTax on Transfer of Real

Property Ownership. The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real

Not more than 50%of the1% of thetotalconsideration or ofthe fair market value,whichever is higher

Sale, transfer or other disposition of real property pursuant to R.A. No. 6657 (CARL)

It shall be the duty of the seller, donor, transferor or administrator to pay the tax imposed within 60 daysfrom the date of the execution of the deed or from the date of the Tax on Business of Printing

andPublication. The province may impose a tax on the business of persons engaged in the printing and/or publication of books,

Not exceeding 50% of 1%of the gross annual receipts for the preceding calendar year.

Newly startedbusiness,the tax shall notexceed1/20 of 1% of thecapital investment.School texts or

Provided, After pay menthe/she

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certifcates, receipts, pamphlets, and others of similar nature.

shall be exempt from the tax.

Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a

Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, withinits territorial

Newly started business, the tax shall not exceed1/20 of 1% of the capitalinvestment.Tax on Sand, Gravel and Other

Quarry Resources. The province may levy and collect taxes on ordinary stones, sand, gravel, earth, and other quarry resources extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction.

Not more than 10% of fairmarket value in the locality

The permit to extract resourcesshall be issued exclusively by the provincial governor,pursuant to the ordinance of the Sangguniang Panlalawigan. Proceeds distributed as follows: Province -30%Component City orMunicipality where thequarry resources are

Professional Tax. The province may levy an annual professional tax on each person engaged in the exercise or practice of his profession requiring government examination.To be paid on or before the 31

st day

of January. Any person frstbeginning to practice a profession after the month of January must, however,

At such amount and reasonable classifcation as the Sangguniang Panlalawigan may determine but shall inno case exceed P300.00.

Professionals exclusively employed in the government shall be exempt from thepayment of this tax.

To be paid to the province where he/she practices his/her profession or where he/she maintains principal office in case the practice is in several places

sha l l be e n t i t l ed to p r a c t ic e hi s/ h er p r o fess io n i n a n y pa r t o ft h e Ph il s. w/ o u t be in g su b jec t ed to a n y o t h er

Amusement Tax. The province may levy an amusement tax to becollected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement

Not more than 30% of the gross receipts fromadmission fees.

The holding of operas, concerts, dramas,recitals, painting and art exhibitions, fower shows, musical programs, literary and oratorical presentations, except pop, rock, orsimilar concerts

Sangguniang Panlalawigan may prescribe the time, manner, termsand conditions for the payment of tax. In case of fraud or failure to pay, the Sangguniang Panlalawigan may impose surcharges, interest and penalties. The proceeds from the amusement tax shall be shared equally by the

Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers,Wholesalers of, Dealers, or Retailers in, Certain Products. The province may levy an annual fxed tax for every truck or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery of distilled spirits, soft drinks, cigars and cigarettes, and other products as may be determined by the

Amount not exceedingP500.00.

B. C ITIE S

NOTES:

The city may levy the taxes, fees, andcharges whichthe province or municipalitymay impose.The tax rates that the city may levy mayexceed the maximum rates allowed forthe province or municipality by not more

Rates of Tax within the Metropolitan Manila Area shallnot exceed by 50% the maximum rates prescribed for a-

The Sanggunian concerned may prescribe a schedule ofgraduated tax rates but in no case shall exceed the rates prescribed in the LGC.The tax is payable for every separate or distinctestablishment or place where business is

C. MU NICIPALITI SCOPE: Municipalities may levy taxes, fees and charges nototherwise levied by provinces. [ S ec. 142] A tax that bears a direct relation to the

volume of salesor when there is a set ration on the volumeof sales and the amount of tax, such maynot be imposed by the local governmentsince these amounts to percentage tax on

I. Tax on BusinessThe municipality may impose taxes on thefollowing:a. On manufacturers, assemblers, repackers,

processors,brewers, distillers, rectifiers, andcompounders of liquors, distilled spirits, andwines or manufacturers of any article ofcommerce of whatever kind or nature.On wholesalers, distributors, or dealers inany article ofcommerce of whatever kind ornature.On exporters, and on manufacturers,

No. L- 24813 , Apri l 28, 1969]

However, if the tax is based on past quarterly sales,these could be valid. [ MMIC v. b.

II. Fees and Chargesc

. Municipalities may impose:a. The municipality may impose and

collect suchreasonable fees and charges on businessand occupation except professional taxesreserved for provinces. [ S ec 14 7 ]

LG C] Rice and corn;

Wheat or cassava

1.2.

flour, meat, dairy products,locally manufactured, processed or

preservedfood, sugar, salt and otheragricultural, marine, and fresh waterproducts, whether in their original stateor not;Cooking oil and

b. Reasonable fees for the sealing and licensingof weightsand measures. [ S ec 148]c. Fishery rentals, fees and charges,including theauthority to grant fishery privileges withinmunicipal waters, as well as issue licensesfor the operation of fishing vessels of three

3.4.5.

Agricultural implements, equipment andharvest facilities, fertilizers, pesticides and farm inputs;Poultry feeds and other animal feeds; School supplies;and

post-othe

III. Payment of Business Taxes:

6.7.8.

a. It shall be payable for every separateor distinctestablishment or place where the businesssubject to the tax is conducted and one lineof business does not become exempt bybeing conducted with some other businessfor which such tax has been paid.The tax on a business must be paid by theperson conducting the same.In cases where a person conducts oroperates 2 or

d.e.f.

On retailersOn contractors and other independent contractorsOn banks and other fnancial

b.

g. On peddlers engaged in the sale of anymerchandise orarticle ofcommerceOn any business, which the Sanggunianconcerned may deem proper to tax. Forbusinesses subject to the excise, value-added or percentage tax, the tax rate shall

c.

h.

1. If these are subject to the same rate oftax, the taxshall be computed on the combinedtotal gross sales or receipts of the said 2or more related businesses.If these are subject to different rates oftax, the gross sales or receipts of each

2.

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separately reported for the purpose of computingthe tax due from each business.

Rule 5: Where there are 2 or more factories,project ofices,plants, or plantations located in differentlocalities, the above mentioned 70% shallbe prorated among the localities where thefactories, project ofices, plants, andplantations are located in proportion to theirrespective volumes of production during the

IV. Situs of Local Taxationa. Situs According to the Cases:Excise Tax – not dependent on the domicile ofthe taxpayer,but on the place in which the act isperformed or theoccupation is engaged in; not upon thelocation of the ofice, but the place where the

NOTE: In case of manufacturers or producerswhich engagethe services of an independent contractor toproduce or manufacture some of their products,these rules shall apply except that the factory orplant and warehouse of the contractor utilizedfor the production and storage of themanufacturers’ products shall be considered as

Novem ber 21, 1984 ]Sales Tax – it is the place of the consummationof the sale,associated with the delivery of the thingswhich are the subject matter of the contractthat determines the situs of the contract forpurposes of taxation, and not merely the place

The city or municipality where the port ofloading is locatedshall not levy and collect reasonable feesunless theexporter maintains in said city or municipality itsprincipal ofice, a branch, sales ofice, orwarehouse, factory, plant or plantation in which

Mun ici pal it y of S ip oc ot, C a mar ines Sur , [ 105 Ph il 126 3]b. Situs According to Section 150 of LGC

D. BARANGAY

Rule 1: For purposes of collection of the taxesunder Section143 (tax on business), businesses maintainingor operating branch or sales outlet elsewhereshall record the sale in the branch or salesoutlet making the sale or transaction, and thetax thereon shall accrue and shall be paid to the

Scope of Taxing Powers: The barangays may levy thefollowing taxes and charges, which shall exclusively accrue to them: [ T O B S ](a)

Taxes - On stores or retailers with fixed businessestablishments with gross sales of receipts of thepreceding calendar year of P50,000.00 or less for cities and P30,000.00 or less, in thecase of municipalities, rate = not exceeding 1% on gross sales or receipts. Service Fees or Charges for services rendered in connection with the regulations or the use of barangay- owned properties or service facilities such as palay, copra, or tobacco dryers.Barangay Clearance. - No city ormunicipality may issue any license or permitfor any business or activity unless a

Rule 2: In case there is no branch or sales outlet in the cityor municipality where the sale is made, the sale shall berecorded in the principal ofice and the (b

)Rule 3: The following sales allocation for sales recorded inthe principal ofice of businessesofices, plants, and

with

factories,

project

(c) 30% of all sales recorded in the principal

ofice shall betaxable by the city or municipality where the principal ofice is located; and (d

) 70% of all sales recorded in the principal ofice shall betaxable by the city or municipality where the factory, project ofice, plant, or

1. On commercial breeding of fighting C ocks andcockpits;On places of Recreation which charge admission fees; and

2.Rule 4: Where the plantation located at a placeother thanthe place where the factory is located, the abovementioned

On Billboards, signboards, neon signs, and outdoor ads.(Sec. 152)

E . COMMON REVE NU E -RAISI NG POWER S O F LGUS ( Secs .

60% to the city or municipality where the factory islocated; and

153-155) [SPT ]a.b.

Service Fees and Charges for services renderedPubic Utility Charges for the operation of public utilities owned, operated and

40% to the city or municipality where the plantation islocated.

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jurisdiction.c. Toll Fees or Charges for the use of any public

road, pier, or wharf, waterway, bridge, ferryor telecommunication system funded andconstructed by the LGU concerned. Except:

The dividends received by a corporation shall, for thepurpose of the additional tax, be considered as part of the gross receipts or earnings of said

3) Those exempt from the community tax are:1. oficers and enlisted men of the AFP

and PNP onmission,post ofice personnel delivering mail,physically-handicapped, and disabled citizens who

1.2.

Diplomatic and consular representatives; andTransient visitors when their stay does not exceed 3 months.

2.3.

4) Place and time of PaymentF. COMMU NITY

TAX Place of Payment - place of residence of the individual,or in the place where the principal ofice of the juridical entity is located. [ S ec. 160]

Cities or municipalities may levy a community tax (Sec.156)

Time for Payment - accrues on the 1st dayof Jan. of each year which shall be paid not later than the last dayof Feb. of each year

1) Individuals Liable to Community Tax –[IE R]

a.b.c.

Inhabitant of the PhilippinesE ighteen years of ageor overRegularly employed on a wage or salarybasis for atleast 30 consecutive working days duringany calendar year, or who is engaged inbusiness or occupation, or who ownsreal property with an aggregate

Penalties for Delinquency. - An interest of24% perannum from the due date until it is paid shall be added on the amount due.

A community tax certificate may also be issued to anyperson or corporation not subject to the community tax upon payment of P1.00. Rate: P5.00 an d an annual additional tax of

P1.00 for everyP1,000.00 of income regardless of whether from business,exercise of profession or from property which

5) Presentation of Community Tax Certificate on

Certain Occasions: (Sec. 163, LGC)A. IndividuaIn the case of husband and wife, the tax

imposed shall bebased upon the total property owned by them and the total gross receipts or earnings derived

1. When an individual subject to the comm. taxacknowledges any document before a notary public;Takes the oath of ofice upon election orappointment to any position in the government service;Receives any license, certificate or permit from anypublic authority; Pays any tax or fee;Receives any money from any

2.2) Juridical Personalities(Sec. 158)

Corporations, no matter how created or organized, whetherdomestic or resident foreign, engaged in or doing businessin the Philippines are also liable to pay an annual

3.

4.5.6.7.Rate: P500.00 an d an annual additional tax,

which shall notexceed P10,000.00 in accordance with the following schedule: The presentation of the CTC shall not be

required inconnection with the registration of a voter.

a. For every P5,000.00 worth of real property in the

Philippines owned by it during the preceding yearbased on the valuation used for the payment of real property tax - P2.00; and

b. For every P5,000.00 of gross receipts derivedby it from its business in the Philippines

B. Corporatio1. receives any license, certificate or permit

from anypublic authority;pays any tax or fee;receives any money from any publicfund; or transacts other oficial

2.3.4.

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6. Common Limitations on the Taxing Powers of LGUs andcommon revenueLGUs CANNOT LEVY: [ IDECTA_BEV_TRELEBI ]

Class ificat io n of C omm on Li mit ati ons1. Taxes which are levied under the NIRC unless

otherwiseprovided by the LGC (*a, b, c, h, I, j)Taxes, fees, etc. which are imposed under the TCC (*d) Taxes, fees and charges where the imposition of which contravenes existing gov’tal policies or which are violative of the fundamental principles of taxation (*e, f, g, k, m, n, s)Taxes, fees and charges imposed under

(a)

Income tax, except on banks and other

financialinstitutio

ns;(NOTE: Since income tax is alreadyimposed by theNational Government under NIRC, LGUscannot impose the same even on banks andother fnancial institutions. The exception isreferring to the percentage tax on banks’

2.3.

4.(b)(c

E state Tax,acquisitions

inheritance,

gifts, legacies

and otherotherwis

mortis causa, except as

The imposition of 5% tax on the grossreceipts onrentals or lease of space in privately-ownedpublic markets are not income tax, rather,these constitutes as valid license fees forthe regulation of the business.

(d)

Customs duties, registration fees ofvessel andwharfage on wharves, tonnage dues, and allother kinds of customs fees, charges anddues, except wharfage on wharvesconstructed and maintained by the localgovernment unit concerned;Taxes, fees, and charges and otherimpositions upongoods carried into or out of, or passingthrough, the territorial jurisdictions of localgovernment units in the guise of charges forwharfage, tolls for bridges or otherwise,Taxes, fees or charges on A gricultural and aquatic products when sold by marginalfarmers or fshermen; Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for aperiod of 6 and 4 years, respectively from the date of registration;E xcise taxes on articles enumerated under

No. L- 36081 , Apri l 24, 1989 ]

(e)

Princ ip le of Pre em pt io n or E xc l us io nWhere the national government elects to tax aparticulararea, it impliedly withholds from the localgovernment the delegated power to tax thesame field. This doctrine principally rests on

(f)

(g)

Excluded impositions pursuant to the doctrine ofpreemption1. Taxes which are levied under the

NIRC, unlessotherwise provided by LGCof 1991;Taxes, fees, etc. which are imposedunder the TCC; Taxes, fees, etc. theimposition of which contravenes existing

(h) 2.

3.(i)

similar transactions onotherwise provided; Taxes

goods or

services except as A province may not levy excise taxes on

articles alreadytaxed by the NIRC. The current Tax Codealready imposes a tax on ALL quarry resources,regardless of origin, hence, the Province mayno longer impose any additional amounts

(j) receipts

of Transportationcontractors and persons engaged in the

transportationof passengers or freight by hire and commoncarriers by air, land or water, except as provided in the Code;Taxes on premiums paid by way of R e insurance or retrocession;Taxes, fees or charges for the

(k)

126232, N ove mber 27 , 1998 ]

(l) 7. Collection of Business Taxes

permits for the driving thereof, excepttricycles;Taxes, fees, or other charges onPhilippine products actually E xported,except as otherwise provided;Taxes, fees, or charges, on Countrysideand BarangayBusiness Enterprises and cooperatives dulyregistered under R.A. 6810 and R.A. 6938

Taxable Period – The tax period of all local taxes, fees andcharges shall be the ca l e nd ar y ear,

(m) provided in the

Code.(n) Accrual of Tax – All local taxes, fees, and

charges accrue onfirst day of January of each year, unless otherwise provided in the Code.(o

) Government, its agencies and Instrumentalities,local government units.

and

Time of Payment – ALL local taxes, fees, andcharges shallbe paid within the first twenty (20) days ofJanuary or of each subsequent quarter, as thecase may be, unless otherwise provided in the

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Surcharges and Penalties on UnpaidTaxes, Fees, orCharges – The Sanggunian may impose asurcharge not exceeding twenty five percent(25%) of the unpaid taxes, fees or charges notpaid on time. They may impose interest at therate not exceeding two percent (2%) per monthof the unpaid taxes, fees or charges includingsurcharges, until such amount is fully paid butin no case shall the total interest on the unpaid

entitled to a tax credit.

b) Protest of assessment (Sec. 195, LGC)1. The Local Treasurer or his duly

authorizedrepresentative shall issue a notice of assessment statingthe nature of the tax, fee, or charge, the amount of deficiency, surcharges, interests and penalties.Within 60 days from the receipt of the notice ofassessment, the taxpayer MAY file aWRITTEN PROTEST with the Local Treasurercontesting the assessment (otherwise theassessment shall become FINAL andEXECUTORY).The Local Treasurer shall decide the protest within 60days from the time of fling of the writtenprotest. a. IF the protest is found to be

2.

Interest on other unpaid revenues – On any other source ofrevenue, LGUs are authorized to impose an interest of amaximum of 2% per month, maximum of 36

3.

Collection of Revenues by the Local Treasurer –All local taxes, fees and charges shall be collected by theprovincial, city, municipal or barangay treasurer, or their duly authorized deputies.

i. The taxpayer has 30 days from the receipt ofthe denial of the protest or from thelapse ofthe sixty-day period prescribed herein within which to appeal with the court of competent jurisdiction (otherwise the assessment becomes

The provincial, city or municipal treasurer maydesignate thebarangay treasurer or his deputy to collect localtaxes, feesor charges. In case a bond is required for thepurpose, the provincial city or municipalgovernment shall pay premiums thereon in8. Taxpayer’s Remedies c) Claim for refund of tax credit for

erroneously or illegallycollected tax, free or charge

a) Periods of assessment and collection of local taxes, feesor charges 1. A WRITTEN claim for refund or credit

must be filedwith the Local Treasurer for the recovery ofany tax,fee, or charge erroneously or illegally collected.2. The claim must be filed within 2 years

I. Administrati1. Before assessmentProtest against a newly enacted ordinance – any questionon constitutionality or legality of tax ordinancewithin 30 days from efectivity thereof to 187, LGC) Such appeal shall not have

the effect of

9. Civil Remedies by the LGU for the Collection ofRevenues

suspending the efectivity of the ordinance and the accrualand payment of tax. a) Local government’s lien for delinquent

taxes, fees orcharges

2. After Assessment

a. Protest – within 60 days from receipt ofassessment (sec. 195, LGC). Pa ymen t

b). Civil Remedies, ingeneral

is no t n ecessary .

i) By

administrative

action—throughb. Payment and subsequent refund or tax

credit –within 2 years from payment of taxto localtreasurer (Sec. 196, LGC). It is to benoted that, unlike in internal revenuetaxes, the supervening cause applies inlocal taxation because the period for thefiling of the claims for refund or credit of

distraint of personal property and by levyupon real propertya.b.c.d.

Distraint of personal propertyLevy of real property, procedureFurther distraint or levyExemption of personal property from distraint or levyPenalty on local treasurer for

e.

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issue and execute warrant of distraintor levy

(ii) Levy of real property, procedure

ii)

Judicial action

NOTE: Either of these remedies or all may be pursuedconcurrently or simultaneously at the discretion of the LGU

c) Procedure for administrative action

(i) Distraint of personal property

than 3 public and conspicuous place, including the office of the

proceeds to the delinquency and expenses of sale and return of

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If property is not disposed of within 120 days fromdate of distraint, the property shall be consideredsold to the LGU concerned for the amount of theassessment made thereon by the Committee onAppraisal. The tax delinquency shall be cancelled

to the extent of such amount.

Disposition of the proceeds of the sale byapplication of such

the balance to the

If property redeemed, a certifcate of redemptionwill be issued.

If not redeemed, a final deed of sale shall beissued to the

purchaser.

The local treasurer shall purchase the property onbehalf of the

LGU if: (a) there is no bidder for the real property

Issuance of the certifcate of sale to the purchaser. The owner of the property has 1 year from date of sale to redeem.

The sale shall be scheduled in not less than 20 daysafter notice to the owner or possessor of theproperty and the publication and posting the

property shall be sold to the highest bidder. Thelocal treasurer shall make a report of theproceedings within 5 days from the sale.

Sale of levied property.

Posting of notices of the sale of distrainedproperties in not less

chief executive, in the territory of the LGU

Accounting for distrained goods

Advertisement of the sale of the property throughsale or auction within 30 days after levy. The

advertisement shall be efected by: (a) posting anotice in the main entrance of the municipal

building or city hall and a conspicuous place in thebarangay where the real property is located. (b)

publication once a week for 3 consecutive weeks ina newspaper of general circulation in the province,city or municipality where the property is located.

Seizure or confscation of personal propertybelonging to the person subject to tax or subjectto lien in sufficient quantity to satisfy the liability

Report on levy within 10 days from levy by the levying officer.

Defciency

Written notice of levy to the assessor, register ofdeeds of the province or city where the property

is located and the delinquent taxpayer.

Local treasurer shall prepare a duly authenticatedcertifcate showing the name of the taxpayer and

amount of tax, fee and penalty due him.

Local Government’s Lien – Local taxes, fees, chargesand other revenues, constitute a lien, superior to allliens, charges or encumbrances in favor of anyperson, enforceable by any appropriateadministrative or judicial action.

Levy of real property before, simultaneously or after distraint of personal property belonging to the delinquent taxpayer.

Defciency

(iii) Further distraint or levy

speedy and adequate remedy.

(iv) Exemption of personal property from distraint

2. Action for DeclaratoryReliefor

levy Injunction – if irreparable damage would be caused to thetaxpayer and no adequate remedy is available.

The following property shall be exempt from distraint

and the levy, attachment or execution thereoffor delinquency in the payment of any local tax,fee or charge, including the related surcharge

IV. Jurisdiction of Courts Over Local Taxation Cases1. With the amendment brought by R.A. No.

9282, theCourt of Tax Appeals now has appellatejurisdiction over local taxation cases decidedby the RTC in the exercise of its appellate or

(a) Tools and the implements necessarilyused by thedelinquent taxpayer in his trade oremployment;(b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation; (c) His necessary clothing, and that of all his family;(d) Household furniture and utensilsnecessary for housekeeping and used forthat purpose by the delinquent taxpayer,such as he may select, of a value notexceeding Ten thousand pesos (P10,000.00);(e) Provisions, including crops, actuallyprovided for individual or family usesuficient for four (4) months;(f) The professional libraries of doctors,engineers,

2. Regular judicial courts are not prohibited fromenjoining the collection of local taxes, subject to Rule

NOTE: Unlike the NIRC, the Local TaxCode does notcontain any specific provision prohibitingcourts from enjoining the collection of localtaxes. Such statutory lapse or intent mayhave allowed preliminary injunction wherelocal taxes are involved. But it cannot negatethe procedural rules and requirements under[ 1989]

======================================TOPIC UNDER THE SYLLABUS:III. LOCAL GOVERNMENT CODE OF 1991B. Real Property Taxation======================================

(v) Penalty on local treasurer for failure to issueand execute warrant of distraint or

The Local Treasurer who:1. Fails to issue or execute the warrant of distraint or levy after the expiration of the time prescribed, or2. Who is found guilty of abusing the exercise thereof

1.2.

CURRENT and fair market value is the basis of appraisalU NIFORMITY in classifcation in each local government unit should be observedACTUAL USE of the property should be the basis of classifcationAppraisal, assessment, levy and collection should NOTBE LET to any private person.

3.sh all be au to mati cally d ism isse d fro m th e s erv ice aft erdu e no tice an d h ear in g without prejudice to criminal 4.prosecution under the Revised Penal Code and otherapplicable laws. [ S ec. 177, LG C] 5.

d) Procedure for judicial action 2. Nature of Real

Property Tax1. Court action

a. within 30 days after receipt of decision or lapse of60 days of Secretary of Justice’s inaction LGC]within 30 days from receipt when protest of assessment is denied [ S ec. 195, LG C ]

b.

c. if no action is taken by the treasurer in refundcases and the two year period is about to lapsed. if remedies available does not provide plain,

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Real Property Tax is a direct tax on ownershipof lands and buildings or other improvementsthereon payable regardless of whether theproperty is used or not, although the value mayvary in accordance with such factor.

Real Property Taxation covers theadministration, appraisal, assessment, levy andcollection of Real Property Tax, i.e. tax on landand building and other structures andimprovements on it, including machineries.

Improvement – valuable addition made to aproperty oramelioration in its condition amounting tomore than a mere replacement of partsinvolving capital expenditures and labor.

automatic dispensing machines which are notdirectly andexclusively used to meet the needs of aparticular industry, business or activity shallnot be considered within the definition of

3. Imposition of Real Property Tax

Classification of Land for Purposes of Assessment - Sec218(a) [CARMITS]a. Power to Levy Real

Property Tax 1.2.3.

CommercialAgricultural Residential

6. Timberland7. Special

Characteristic of Real Property Tax [LIPAD]1.2.3.

Direct tax on the ownership of real propertyAd Valorem tax. The value is based on the tax base Proportion - the tax is calculatedon the basis of a certain percentage of thevalue assessedIndivisible single obligation

Special Classes of Real Property (Sec. 216)4.

5.1.2.3.4.

HospitalsCultural and scientificpurposesowned and used by local waterdistrictsGOCCs rendering essential public services

Local Tax

Properties Liable for Real Property TaxAccording to the Local Government Code, Real Propertyliable for Real Prop tax are: b. Properties Exempt from Real Property Tax

(Sec. 234)1.2.3.4.

LandBuildingsMachinery andOther improvements not otherwise exempted under said code [ S ec 232]

1. Owned by the REPUBLIC of the PHILS orits politicalsubdivisions. E x ce pt : when beneficial usehas been granted to a taxable personCharitable institutions, churches,parsonages, convents appurtenant thereto,mosques, non-profit or religious cemeteries,buildings and improvements actually directlyand exclusively used for religious, charitableor educational purposes.Machinery and Equipment actually, directly,and exclusively used by local Water districtsand GOCCs engaged in the supply anddistribution of water and/or generation andtransmission of electric powerReal property owned by duly registeredCooperatives under R.A. 6938Machinery & equipment for pollution

2.

NOTE: Although the term real propertyhas not beenexpressly defined in the LGC, early decisions ofthe SupremeCourt in Mindanao Bus Co. v. City Assessor ofCagayan de Oro; Board of AssessmentAppeals v. Meralco; Manila Electric Co. v.Board of Assessment Appeals, seem to

3.

4.

Machinery – embraces machines, equipment,mechanicalcontrivances, instruments, appliances orapparatus which may or may not be attached,permanently or temporarily, to the real property.It includes the physical facilities for production,the installations and appurtenant servicefacilities, those which are mobile, self-poweredor self- propelled, and those not permanentlyattached to the real property which are actually,directly, and exclusively used to meet theneeds of the particular industry, business oractivity and which by their very nature andpurpose are designed for, or necessary to its

5.

Exemptions previously granted, (not falling within the aboveenumeration) are withdrawn. Although powerless to grant RPT

exemption, LGU inMM can exempt the 5% ad valorem tax on idle lands.LGUs (within and outside MM) may

Proof of Tax Exemption:

Every person by or for whom real property isdeclared whoshall claim the exemption shall file with theprovincial, city or municipal assessor within30 days from date of declaration of realproperty suficient documentary evidence insupport of such claim (i.e. corporate charters,title of ownership, articles of incorporation,

Machinery which are of general purpose useincluding butnot limited to ofice equipment, typewriters,telephone equipment, breakable or easilydamaged containers (glass or cartons),microcomputers, facsimile machines, telexmachine, cash dispensers, furniture and fixtures,

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4. Appra is al an d Ass ess ment of RealPr oper ty Ta x Under Sec. 238 of the LGC, idle lands may be

exempt fromtax by reason of force majeure, civildisturbance, natural calamity or any causewhich physically or legally prevents the ownerof the property or person having legal interest

Actual Use of Property as Basis for Assessment (LGC Sec.217)Real property shall be classified, valued and assessed on thebasis of actual use regardless of where located, whoever owns it, and whoever uses it.

5. Col lecti on of Rea l Pr oper ty T ax

Unpaid realty taxes attach to theproperty and arechargeable against the person who had actualor beneficial use and possession of it regardlessof whether or not he is the owner. To impose theRPT on the subsequent owner which was neitherthe owner nor the beneficial user of the propertyduring the designated periods would not only be

Steps i n the Ass ess ment and C ollec ti on of R PT

1. Declared by Owner or Administrator (Secs. 202-203,LGC) If newly acquired property – file with the

assessorwithin 60 days from date of transfer asworn statement containing FMV anddescription of propertyIf improvement on real property – file w/in60 days upon completion or occupation(whichever is earlier) a sworn statement ofFMV and description of property

Mani la, [ G. R. N o. 90639 , Feb ru ary 21, 19 90]Types of Real Property Tax 1.2.

Basic real property taxSpecial levies:a. Special Education Fund (SEF) – 1%

additional realestate tax to finance the SEF [ S ec. within MM area onlyAdditional Ad Valorem on the Lands – notexceeding 5% of the assessed value of the property

2. Declared by Provincial / City / Municipal Assessor (Sec.204, LGC)

b.

This is done only when the person underSec 202c. For Public Works – on lands specially

benefited bypublic works, projects or improvements funded by the LGU

refuses or fails to make the

Declaration within theprescribed time. No oath by the assessor

is required. May be imposed even by

municipalitiesoutside MMprovided:Special levy shall not exceed 60% ofthe actual cost of such projects andimprovements, including the costs ofacquiring land and such other realproperty in connection therewithnot apply to lands exempt from basicreal property tax and the remainderof the land had been donated to

NOTE (1): If filing for exemption under Sec. 206 of LGC, theperson claiming exemptions must file with assessorsuficient documentary evidence to support

If the required evidence is not submitted within 30 days, theproperty will be listed as taxable.NOTE (2): If property is declared for the firsttime, Sec. 222of LGC states that the property shall beassessed for backtaxes for not mare than 10 years prior to thedate of initial assessment. The taxes shall becomputed on the basis of applicable schedule of

What Are Considered as Idle Lands: (Sec. 237, LGC)1. Agricultural lands – More than 1 hectare if

more than ½of which remain uncultivated or unimproved by theowner of the property or person having Not Idle Lands: Listing of all Real Property whether taxable

or exemptwithin the jurisdiction ofLGU.All declarations shall be kept and filed undera uniform classifcation system to be

1. Agricultur

allands planted to permanent orperennial crops with at least 50 trees to

a hectareLands actually used for grazing

2.

2. Non-Agricultural Lands – More than 1,000 sq.m. in areaif more than ½ of which remain uncultivatedor unimproved by the owner of the propertyor person having legal interest therein.

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STEP 2: LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS (Secs. 205, 207, LGC)

STEP 1 - DECLARATION OF REAL PROPERTY

PERIOD WITHIN WHICH TO COLLECT (LGC Sec 270):– within five (5) yrs from the date they

becomeduewithin ten (10) yrs. from discovery of fraud, in

–How to determine Fair Market Value:FOR LAND Period of prescription shall be SUSPENDED

when: (LGC Sec270)

1. Assessor of the province/city ormunicipality maysummon the owners of the properties to beaffected and may take depositionsconcerning the property, its ownership,

1.2.

local treasurer is legally prevented to collect taxthe owner of prop requests for reinvestigation and writes a waiver before expiration of period to collect

2. Assessor prepares a schedule of FMVclasses of propertiesSanggunian enacts an ordinance

for different 3.

3.4.

Remed ies of LGU s for the Co lle cti on of Real P ro pert y TaxThe schedule of FMV is published in a

newspaper ofgeneral circulation in the province, city ormunicipalityconcerned or in the absence thereof, shallbe posted in the provincial capitol city or

A. Administrati

A) Lien (Sec. 257, LGC) – superior to allliens, charges orencumbrances and is enforceable byadministrative or judicial action. It isextinguished only upon payment of tax andFOR

MAC HINE RY1. For brand new machinery:

acquisition cost2. In all other cases:

FMV is equivalent to

FMV = Remain in g eco . lif e X Replacement costEstimated eco.

life

Procedure1.2.3.

take the schedule of FMVAssessed value = FMV X Assessment levelTax = Assessed value X Tax

W HEN : January 1 of every year (Sec 246)HO W

a. basic real prop tax in 4 equal installments (Mar31, Jun 30, Sep 30, Dec 31)b. special levy - governed by ordinance

NOTE (1): Interest for late payment– two percent (2%) each month on

unpaid amt. until the delinquent amt ispaid.

– provided in no case shall the totalinterest

NOTE (2): Advance and prompt payment– advance payment - discount not

exceeding 20%of annual tax (Sec 251, LGC)prompt payment - discount not exceeding 10%

–

W HO COL LE CTS The provincial, city, municipalor barangaytreasurer

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STEP 5: PAYMENT AND COLLECTION OF TAX

STEP 4: DETERMINE ASSESSED VALUE (Sec 218)

STEP 3: APPRAISAL AND VALUATION OF REAL PROPERTY (Secs. 212-214, LGC For machineries: 224-225)

B) Levy (Sec. 258, LGC)

B. JudicialCivil Action (Secs. 266, 270, LGC) – filed by the localtreasurer within 5 or 10 years as provided in Sec. 270 of the 7. Taxpayer ’ s R e m e d ie s A. Administrati1.

Protest

certifcate of sale (containing the name of thepurchaser,

The proceeds of the sale in excess of thedelinquenttax, the interest due thereon and theexpenses of the sale shall be remitted tothe owner of real property or person having

C. Distraint (Sec. 254, LGC) - with noticeofdelinquency posted and published. Personal property may be distrained to

6. Cla im fo r Tax Refun d o r C red it (Sec 253, LGC)a. The taxpayer may file a written claim for

refund orcredit with the provincial or city treasurer within 2years from the date the taxpayer is entitled to such reduction or adjustment.Provincial or city treasurer should decide the claimwithin 60 days from receipt of the claim.

b.

c.

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Appeal to SC(within 15 daysfrom receipt of

adverse decision of

Appeal to CTA(within 30 days fromreceipt of adversedecision of CBAA)

Appeal with the CBAA(within 30 days fromreceipt of adversedecision of LBAA)

Purchase of property by local treasurer for want ofbidder in case there is no bidder for the realproperty advertised or if the highest bid isinsufficient to pay the RPT and other costs.

Appeal with the LBAA(in case of denial or

inaction of thetreasurer after the

lapse of 60

Apply for tax refund or tax credit

Issuance of Final Deed to purchaser (upon thedelinquent

taxpayer’s failure toredeem)

Denied

Approved

Redemption (within 1 year from date of sale)

Treasurer decides (within 60 days from receipt of protest)

Report of sale (within 30 days after sale).Preparation of

description of the property, amount of delinquenttax and its interest, expenses.

File written protest with local treasurer (within 30 days from payment of tax)

Sale

Pay the tax under protest

Advertise sale or auction (within 30 days after service of warrant) by posting and publication

Issuance of warrant by the LGU treasurer (on orbefore or simultaneously with the institution of

civil action for collection of delinquent tax)

2. Redemption of Real Property (Sec. 261, LGC)a. Within 1 year from the date of sale, the

owner ofthe delinquent real property, or person having legal interest or his representative, shall have the right to redeem the property upon payment to

–––

Amount of delinquent taxInterest thereonExpenses of sale from date of delinquency to date of the saleInterest of not more than 2% per month onthe purchase price from date of sale to date of redemption

–

b. A certificate of redemption shall be issued, and thecertificate of sale issued to the purchaser shall be invalidated.

B. Judicial1. Court Action – appeal of CBAA’s decision

to CTA enbanc;Suit assailing the validity of tax;Recovery of refund of taxes paid [ S ec.

2.3.4. Suit to declare invalidity of tax due to

irregularity inassessment and collection;Suit assailing the validity of tax sale

5.and Sec . 267,LGC ]

CONDONATI ON OF RE A L PR OP E RTY TAXE S1. By Sanggunian – RPT may be condoned

wholly orpartially in a given LGU when:a.b.

There is general failure of crops;There is substantial decrease in the price of agricultural or agri-based products; orThere is calamity.

c.

2. By the President of the Philippines - when publicinterest so requires

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Jurisdiction of Collector of Customs over Importation ofArticles

IV. TARIFF AND CUSTOMS CODE OF1978, as amended======================================TOPIC UNDER THE SYLLABUS:

1. Cause all articles for importation to be entered in thecustomhouseCause all such articles to be appraised and classifedAssess and collect the duties, taxes and other charges thereonHold possession of all imported articles until

2.3.

4.

1. TARIFF: Custom duties, toll or tribute payable uponmerchandise to government. Territorial Jurisdiction of

the BOC2. CUSTOMS DUTIES: Tax

assessedfrom or exported to a

upon merchandisecountry

Garcia v. 1. All the seas within the jurisdiction of the

Phils.2. All coasts, ports, airports, harbors, bays,rivers and

inland waters whether navigable or not

E xecuti ve Sec. , [ 211 SCRA 22 7, 1992]

======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987B. General Rule======================================All imported articles are subject to duty.

Other Types of Fees Charged by the BOC:1.2.

Arrastre chargeWharfage due- counterpart of license,charged not for the use of any wharf but fora special fund- Port Works FundBerthing fee Harborfee Tonnage

3.4.5.

BU RE AU OF CU ST OM SFunctions: ======================

================TOPIC UNDER THESYLLABUS:IV. TARIFF AND CUSTOMSCODE OF 1987C. Purpose forImposition======================

1. Assessment and collection of the lawfulrevenues fromimported articles and all other dues, fees,charges, finesand penalties accruing under the tariffand customs laws.Prevention and suppression of smugglingand other frauds upon the customs.Supervision and control over theentrance andclearance of vessels and aircraft engaged inforeign commerce.Enforcement of tariff and customs laws,rules andregulations relating to the tariff and customsadministration.Supervision and control over the handlingof foreignmails arriving in the Phils. For the purpose ofthe collection of the lawful duty on dutiablearticles thus imported and prevention ofsmuggling through the medium of such mailsSupervision and control all import andexport cargoes,landed or stored in piers, airports, terminal

2.

3.

Makas iar, [ 177 SC RA 27 ]4.

LIABILITY FOR CUSTOMS DUTIES

5. GE NE RAL RU LE : No exemptions from customs duties The provisions of general and special laws,

includingthose

granting franchises, to the

contrarynotwithstanding, there shall be no

exemptionswhatsoever from the payment of customs duties [ S e c .

6.

EX CE PTIONS:7

.1. If provided under the TCC (e.g.

conditionally-freeimportation)Exemptions granted to GOCCs with existingcontracts, commitments, agreements orobligations with foreign countries

2.

3.

TAX LAW REVIEWER

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organizations pursuant to agreements and special laws

4. Exemptions granted by the President of thePhils. Upon recommendation of NEDA in theinterest of national economic development.

of the NEDA in the interest of national economy, generalwelfare and national security.

Liability of Importer for Customs DutiesA personal debt due from the importer which can bedischarged only by payment in full of all duties

1. To increase, reduce or remove existing protective ratesof import duty (including any necessary change ina lien upon imported articles which may be

enforced while the existing rates may be increased or

decreasedto any level on one or several stages butin no case shall be higher than a maximum of 100% as valorem

they are in custody or subjectgovernment [ S e c. 1204]

to the

control

of the

Extend of Importer’s Liability

2. To establish import quota or to ban imports of anycommodity, as may be necessaryTo impose an additional duty on all imports not exceeding 10% ad

Limited to the value of the imported merchandise. In caseof forfeiture of the seized materials, the maximum civil

3.

791]

Limitation Imposed Regarding the Flexible Tariff Clause

Imported Goods Must be Entered in theCustomhouse

1. Conduct by the Tariff Commission of an investigation ina public hearing Imported goods must be entered in the

customhouse attheir port of entry otherwise they shall beconsidered as contraband and the importershall be liable for smuggling [ S e c. 1201]

a. The Commissioner shall also hear the views andrecommendations of any government ofice, agency or instrumentality concernedThe NEDA thereafter shall

b. Port of entry means a domestic port

open to bothforeign and coastwise trade including “airport of entry”.

2. The power of the President to increase or decrease therates of import duty within the abovementioned limits fixed in the Code shall include the modification in the form of duty.In such a case the corresponding ad valorem or specific equivalents of the duty with respect to the imports from the principal competing country for the most

All articles when imported from anycountry into thePhilippines shall be subject to duty uponeach importation, even though previouslyexported from the Phils. except asotherwise specifically provided for in the

3.

Preference on the Owner of Imported Articles for CustomsPurposes

All articles imported into the Philippines shall beheld to be the property of:

======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987E. Requirements for Importation

the person to whom the property isconsignedthe holder of the bill of lading duly endorsedby the consignee therein namedthe consignee if consigned to order by theconsignorthe underwriters of the abandoned articlessaved from a wreck at sea, along the coast

Application of the TCC TCC applies only after importation has

begun butbefore importation is terminated

======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987D. Flexible Tariff======================================

Importation Begins: when the conveying vessel oraircraft enters the jurisdiction of the Philippines with the intention to unload NOTE: If there is intention to unload, even ifcargo notyet unloaded, and there is

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Sec. 28, ART VI of the 1987 Constitution and Sec. 401, TCC. The President may fix tarif rates, import and export quotas, etc.under TCC

forfeiture may take place because importation hasalready begun.

Goods prohibited from beingImported1. Absolutely

prohibited Importation Terminates:1. Upon payment of the duties, taxes,

and other charges due upon thearticles, or secured to be paid at theport of entry and legal permit forwithdrawal shall have been granted

2. In case the articles are free of duties,

a.b.c.d.e.

Weapons of warImmoral/obscene or insidious articlesArticles for treason Prohibited drugs/narcoticsGambling paraphernalia/devicesThose prohibited under Special Laws

other charges until they havelegallyjurisdiction of customs [ S ec.

left

the TC

C ]RE QUIRE ME NT TO KEE P RE CORDS

2. Qualifedly prohibited(Sec. 3514 TCC, as amended

by R.A. 9135) Where such conditions as to warrants a lawfulimportationdo not exist, the legal effects of theimportation of qualifedly prohibited articles arethe same as those absolutely prohibited

All importers are required to keep at theirprincipal place ofbusiness, in the manner prescribed byregulations to beissued by the Commissioner of Customs and fora period three (3) years from the date ofimportation, all the records of theirimportations and/or books of accounts,business and computer systems and allcustoms commercial data including payment

SCRA 110]======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987G. Goods Conditionally-free from Tariff andCustoms Duties

All brokers are required to keep at theirprincipal place ofbusiness, in the manner prescribed byregulations to be issued by the Commissionerof Customs and for a period of three (3) yearsfrom the date of importation copies of the abovementioned records covering transactions that

1.2.

Those provided for in Sec. 105 of the TCC;Those granted to government agencies, GOCC withagreements with foreign countries;Those given to international institutions entitled to exemption by agreement or special law; and

======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987F. Importation in Violation of

3.

4.

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Exempt articles under Sec. 105

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ARTIC CONDITIOAnimals and plants For scientific, experimental, propagation,

botanical, breeding, zoological and national defense purposes

Aquatic products caught or gathered by vessels of Philippine registry Not have landed in foreign territory, or if landed,

solely forEquipment used for the salvage of vesselsor aircraft not available locally

Bond= 1 ½ x of ascertained duties, taxes and

chargesCosts of repair made in foreign country of Phil vessels or aircraft

Phil must not have adequate facilities to make repair Vessel was compelled by weather or casualty to go to

a foreignport of repair

Articles brought into the Philippines for repair, processing, or reconditioning

to be re-exported upon completion of the repair, processing or reconditioning

Bond = 1 ½ x of ascertained duties, taxes and charges

Trophies, prizes (medals, badges, cups) Thosereceived as honorary distinctionSamples in such quantity and of suchdimensions or constructions as to renderthem unsaleable or of no appreciablecommercial value,

models not adopted for practical use, and samples not for sale marked sample sale punishable by law for purpose of introducing new product imported by person duly registered and identified to

be engaged inthat trade Importations authorized by Sec of Finance

Personal and household effects of returning Phil residents

formally declared and listed before departure and identified under oath before the Collector of Customs when exported from the Phil by such returning residents upon their departure therefrom or during their stay abroad personal and household effects including wearing

apparel, articlesof personal adornment (except luxury items) toilet articles,instruments related to one’s profession and analogous personal or household effects, excluding vehicles, watercraft, aircraft and animals, purchased in foreign countries by residents of the Philippines which were necessary, appropriate and normally used for their comfort and convenience during their stay abroad, accompanying them on their return or arriving within a reasonable time which, barring unforeseen and fortuitous events, in no case shall exceed 60 days after the owner’s return, subject however to the following provisions:1. That the personal and household effects shall neither be in

commercial quantities nor intended for barter, sale or hire and that the total dutiable value of which shall not exceed P10,000

Wearing apparel, articles of personal adornment, toilet articles, portable tools and instruments, theatrical costumes and similar personal effects accompanying travelers or tourists in their baggage

arriving within a reasonable time, before or after the

owners, in use of and necessary and appropriate for the wear

or use of suchpersons according to their profession or position

Personal and household effects, vehicles of foreign

Accompany them or arrive at a reasonable time

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consultants and experts hired or rendering service togov’t, including staf and families

In quantities and kind necessary and suitable to the profession,

rank or position For their own use, NOT for sale, barter, hire

Professional instruments, tools of trade, wearing apparel, domestic animals, personal and household efects belongingto persons coming to settle in the Phil and OFW

In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Change of residence is bona fide Privilege of free entry was never granted to them

before orqualifes under LOI 105, 163, 210

Articles used exclusively for public entertainment;display in public expos; exhibition or competition for prizes; devices for projecting picture

Must fle bond Exported within 6 months Not exhibited for profit Otherwise, confiscation +penalty

Brought by foreign flm producers for making or recording motion pictures on location in Phil.

Photographic and cinematographic flms, undeveloped, exposed outside Phil by resident Filipinos or Phil.

Must fle a bond Exported within 6 months (unless extended by the

Collector foranother 6 months) Principal actors are Filipinos Afidavit by importer that the exposed flms are same

Importations used by foreign embassies, legations,agencies of foreign gov’t

Reciprocity: such foreign country must grant same

privilege to Phil.Articles for personal or family use of members and attaches of foreign embassies, legations, consular oficers and other reps of foreign gov’t

Such privileges must be accorded in a special

agreement betweenPhil and the foreign country Privilege may be granted only upon specific

Articles donated to or for account of relief organization

Org not for profit For free distribution to the needy

Containers, holders and similar receptacles Except those that are reusable for shipment or transportation of goods

Supplies of vessel or aircraft For use or consumption of passengers on board Any surplus or excess shall be dutiable

Articles and salvage after 2 years from filingprotest

Vessels must have been wrecked or abandoned in PhilCofins or urns containing human remains, bonesashes. Personal and household effects ofdeceased except vehicles

Not exceed P10,000

Economic, technical, vocational, scientific, philosophical, historical, andcultural books and publicationsPhil articles previously exported and returned without increasing value or improved condition.Foreign articles previously exported when returned after having been exported and loaned for use temporarily abroad solely for exhibition

Foreign container used in packing

Note that if a drawback or bounty was allowed to any Phil article

under this subsection, upon re-importation article shall be subjectto duty equal to the bounty or drawback

Articles and supplies imported by and for use of scheduled airlines operating under congressional franchise

Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations

Machineries, equipments, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals, transpo and

Such articles are not available locally in reasonable

quantity, qualityand price Necessary or incidental to proper operations

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facilities imported by and used by new mines and old mines

Aircrafts imported by agro industrial companies, spare parts and accessoriesSpare parts of vessels or aircrafts of foreign registry engaged in foreign trade

Brought to Phil as replacement or for

emergency repair Spare parts utilized to secure safety,

Articles for easy identification exported from Phil for repair and subsequently reimported

Cannot be repaired locally Cost of repair made on article shall pay 30% ad

valoremTrailer chassis imported by shipping companies for handling containerized cargo

Bond (1 ½ x) to cover 1 year Must be properly identified and registered with the

LTO Subject to customs supervision fee Deposited in Customs zone when not in use Upon expiration of period (1 year or as extended by

Personal and household effects (including one car) oficer or employee of DFA, attaché, staf assigned to Phil diplomatic mission abroad, personnel of Reparations Missions in Tokyo, AFP militarypersonnel in SEATO, AFP military personnel accordeddiplomatic rank on duty abroad

= returning from regular assignment, reassignment, dies, resigns or retires

Car must have been purchased or ordered before the

mission orconsulate received his order of recall

The value of personal and household effects shall not exceed 30%

of his total salary.

as a condition of sale of the goods to thebuyer;

The value of any part of theproceeds of any subsequent resale,disposal or use of the imported goods thataccrues directly or indirectly to the seller;The cost of transport of the imported goodsfrom theport of exportation to the port ofentry in thePhilippines;Loading, unloading and handling charges

======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987H. Classification of Duties======================================1. Ordinary/ Regular Duties- those which are imposed ordinarily as a

2.

3.

4.

a. Ad Valorem - this is a duty based on the value of theimported article

5.

Dutiable ImportationArticles although previously

All additions to the price actually paid or payable shall bemade only on the basis of objective and

exported from thePhilippines, become dutiable from the

entry of thevessel or aircraft into the Philippinejurisdiction until the payment of duties,taxes, and other charges and the issuanceof the permit for the withdrawal of said

No additions shall be made to the priceactually paid orpayable in determining the customs valueexcept as provided in this Section: Provided,That Method One shall not be used indetermining the dutiable value of importedMethods of Valuation/ Basis of Dutiable

Value (Sec. 201TCC, as amended by RA 9135)

a) There are restrictions as to the disposition oruse of thegoods by the buyer other than restrictions (A) Method One. – Transaction Value. - The

dutiable valueof an imported article subject to an ad valoremrate of dutyshall be the transaction value, which shall be theprice actually paid or payable for the goods

Are imposed or required by law or by Philippineauthorities;Limit the geographical area in which the goods may be resold; orDo not substantially afect the value of

1. The following to the extent that they are

incurred bythe buyer but are not included in the price actually paid

b) The sale or price is subject to somecondition orconsideration for which a value cannot bedetermined with respect to the goods beingvalued;Part of the proceeds of any subsequentresale, disposal or use of the goods by thebuyer will accrue directly or indirectly tothe seller, unless an appropriateadjustment can be made in accordance withthe provisions hereof; orThe buyer and the seller are related to

a. Commissions and brokeragebuying commissions);Cost of containers;

fees

(except c)

b.c. The cost of

packing,materials;

whether for laboror

d. The value, apportioned as appropriate, of thefollowing goods and services:

d)

components,

parts and

similar itemsincorporated in the imported

goods; tools;dies; moulds and similar items usedin the production of imported goods;materials consumed in the

They are oficers or directors of one another’sbusinesses;They are legally recognized partners in business; There exists an employer-employee relationship between them;Any person directly or indirectly owns,controls or holds five percent (5%) ormore of the outstanding voting stock orshares of both seller and buyer;One of them directly or indirectly controls the other;Both of them are directly or indirectly controlled by a third person;Together they directly or indirectly

good

s;and

engineering,

development,artwork, design work and plans and

sketchesundertaken elsewhere than in thePhilippines and necessary for theproduction of imported goods, wheresuch goods and services are supplieddirectly or indirectly by the buyerfree of charge or at a reduced costfor use in connection with theproduction and sale for export of theimported goods;The amount of royalties and

e.

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(5) cost of containers and packing, if their valuesare not included under (1).

They are members of the same family, includingthose related by affinity or consanguinityup to the fourth civil degree. (E) Method Five. – Fallback Value. –

determined by usingother reasonable means and on the basis of data available in the Philippines.

Persons who are associated in business with oneanother inthat one is the sole agent, sole distributor orsole concessionaire, however described, of theother shall be deemed to be related for thepurposes of this Act if they fall within any of the

b. Specific - this is duty based on the dutiable weight ofgoods (either the gross weight, legal weight or the net(B) Method Two. – Transaction Value of

Identical Goods. –Where the dutiable value cannot be determinedunder method one, the dutiable value shallbe the transaction value of identical goodssold for export to the Philippines and exportedat or about the same time as the goods beingvalued. "Identical goods" shall mean goodswhich are the same in all respects, includingphysical characteristics, quality and reputation.Minor differences in appearances shall not

2. SpecialDuties- those which are imposed and collected inaddition to ordinary duties usually to protectlocal industries against foreign competition:

SPECIAL DUTIES are:

(C) Method Three. – Transaction Value ofSimilar Goods. –Where the dutiable value cannot be determinedunder the preceding method, the dutiable valueshall be the transaction value of similar goodssold for export to the Philippines and exported ator about the same time as the goods beingvalued. "Similar goods" shall mean goodswhich, although not alike in all respects, havelike characteristics and like component materialswhich enable them to perform the samefunctions and to be commerciallyinterchangeable. The quality of the goods, their

If the dutiable value still cannot be determinedthrough thesuccessive application of the twoimmediately precedingmethods, the dutiable value shall be determinedunder method four or, when the dutiablevalue still cannot be determined under thatmethod, under method five, except that, at therequest of the importer, the order of applicationof methods four and five shall be reversed:Provided, however, That if the Commissioner ofCustoms deems that he will experience realdifficulties in determining the dutiable valueusing method five, the Commissioner of

(D) Method Four. – Computed Value. –– the computedvalue which is the sum of:

(1) cost or the value of materials and fabrication or other processing employed;(2) amount for profit and general expenses;(3) freight, insurance fees and other transportation expenses for the

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NATURE AMOUNT /RATE

IMPOSINGAUTHORIDUMPIN

GImposed on foreign articles:a. Being

imported into, sold or is likelyto be sold in the Phils.

b. At a price less than

its normal value The importation or sale of which might injure an industry

Differencebetween the actualpriceand the normalvalue of the article (extent of the underpricing)

Special Committee on Anti-dumping (Sec. of Finance- chairman; members: Sec.of DTI, Sec. ofAgriculture/ Sec. of Labor)

COUNTERVAILINGImposed upon

foreign goods enjoying subsidy thus allowing them to sell at lower prices to the detriment of local products similarly situated

Equivalentto the bounty, subsidy or subvention

Secretary ofFinance

MARKINImposed upon those not properly markedas to the place of origin of the

5% ad valorem of articles

Commissioner ofCustoms

DISCRIMINATORYImposed upon

goods coming from countries that discriminate against Philippine products

President of thePhilippines

Nature a nd P urp os e of S pecia l C us toms Du ties

======================================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987J. Tax Remedies under the

1. These are additional import duties imposed on specifickinds of imported articles under certain conditions These are imposed for the protection of consumers and manufacturers as well as Phil. Products from undue competition posed by foreign made products.These cannot be imposed without

2.

3.1. GovernmeI. Administrative/Extraj======================

================TOPIC UNDER THE SYLLABUS:IV. TARIFF AND CUSTOMS CODE OF 1987I. Drawback

1.

Tax Lien (Sec. 1508, TCC) Attaches on the goods, regardless of

ownership,while still in the custody or control of the Gov’t. Availed of when the importation is neither prohibited nor

2.

Administrative Fines and Forfeitures

Applied when the importation inunlawful;And it may be exercised even wherethe articles are not or no longer inCustom’s custody unless the importationis merely attempted in which case it maybe effected only while the goods are stillwithin the Custom’s jurisdiction or in theTCC ]Under Sec. 2530 (a) of the TCC, in orderto warrant forfeiture, it is notnecessary that the vessel or aircraftmust itself carry the contraband. Thecomplementary if collateral use of theCessna plane for smuggling operations issuficient for it to be deemed to have

Cond it io ns for G ran t of D raw b ack1. Imported material was actually used in the

productionof article to be exported.Refund or credit shall not exceed 100% of duties paid on the imported materialNo determination by NEDA of the requirement forcertification on non-availability of locally produced or manufactured competitive substitutes for the imported material (no local substitute for the materials) Exportationmust be made within 1 year after importation of material and claim for refundor credit must be made within 6 months from exportationWhen 2 or more result from the used of same imported material, apportionment shallbe made.

3.

Reduction of customs duties/compromise:

2.- Subject to approval of Sec. of

finance [ Secs .709, 2316 TCC]

3.

4.

Seizure, Search, Arrest [ Secs . 2205, 2210 , 2211 TCC ]

II. Judicial

4.

This remedy is normally availed of when the taxlien is lostby the release of the goods

5.

1. Civil action [ Sec. 1204 TCC ]

6.2. Criminal action7.2. TaxpayeI. Administrati1. Protest

-Any importer or interested partydissatisfiedwith published value within 15 daysfrom date of publication, or within 5days from the date the importer is

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IMP O R T E N T R Y: It is a declaration to theBOC showing particulars of the imported articlethat will enable the customs authorities todetermine the correct duties. An importer isrequired to file an import entry. It must beaccomplished at the moment the last cargo isdisembarked from the vessel.

D R A W B A C K: It is a device resorted to forenabling a commodity afected by taxes to beexported and sold in foreign markets upon thesame terms as if it had not been taxed at all.U y C h i aco S on s v . C o l l ec t o r of Cus t o ms,[ 24

rendered erroneous or illegal byeventsoccurring after the payment.Taxpayer - within 15 days from assessment. Payment under protestis necessary [ S ec s .

These are cases which are solely with liability for customsduties, fees, and other charges.

-

Before filing a protest there must first be a payment underprotest.2

.Refund

-A written claim for refund may be submittedby the importer in abatement cases on missing packages, deficiencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical

When Customs Protest Applicable

- The customs protest is required tobe filedonly in case the liability of thetaxpayer forduties, taxes, fees and other chargesis determined and the taxpayer-

When Customs Protest NOTRequired3. Settlement of any seizure by

payment of fine orredemption

- When there is no dispute, but theclaim forrefund arises by reason of thehappening ofsupervening events such as whenthe raw material imported is utilizedin the production of finished

- BUT this shall not be allowed inany casewhere importation is absolutelyprohibited or the release would becontrary to law or when there is anactual and intentional fraud [ S ec. Requirements for Making

a Protest4. Appeal

-1.2.

Must be inwritingMust point out the particular decision orruling of the Collector of Customs to which towhich exception is taken or objection made;Must state the grounds relied uponfor relief;Must be limited to the subject matterof a singleadjustment;Must be filed when the amount claimed

Within 15 days to Commissioner afternotification by collector of his decision [ Sec.II.

Judicial 3.4.1

.Appeal

-Within 30 days from receipt of decision of theCommissioner or Secretary of Finance to the

5.

1125, as amen ded b y Sec. 9R. A. 9282]

6.- Since Sec. 11 of RA 1125, as

amended by Sec.9 RA 9282 empowers the tax court toissue injunctions, it would appearthan an importer may appealwithout first paying the duties,

Procedure on Customs Protest Cases1. The Collector acting within his jurisdiction

shall causethe imported goods to be entered at the customhouse. The Collector shall assess, liquidate, and collect the duties thereon, or detain the said goods if the party liable does not pay the same.The party adversely afected may file awritten proteston his foregoing liability with the Collectorwithin 15 days after the liquidated amount(the payment under protest rule applies)Hearing within 15 days from receipt of the

2.

Action to question the legality of seizure

2.

3.

Abandonment (Sec. 1801 TCC)-

-i.

Expresslyimpliedlyfailure to file an import entry within30 daysfrom the discharge ofgoods or

3.

4.ii.

amende d b y R.A .76 51]

Two Ki nds of Procee din gs in th e BOCA. Customs Protest Cases

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3. The procedure of passing goods through the

customs house R od r i g u ez v. C A , 1995]

Evidence for Conviction in Smuggling Cases

- Mere possession of the article in questionUNLESS the defendant could explainthat hispossession is lawful to the - Payment of the tax due after apprehension isnot a valid defense Rod r i gu ez v.SCRA 288 ]

Things Subject to Confiscation in Smuggling CasesAnything that was used for smuggling is subject to confiscation, like the vessel, plane,

B. Seizure and Forfeiture Cases

of C us to ms, [ 1983]

These refer to matters involving smuggling. Itis civil andadministrative in nature and is directed againstthe res or imported articles and entails adetermination of the legality of theirimportation. These actions are in rem.Thus, it is of no defense that the owner of thevessel sought to be forfeited had no actualknowledge that his property was used illegally.The absence or lack of actual knowledge ofsuch use is a defense personal to the owner

E xcepti on: Common carriers that are not privatelychartered cannot be confiscated.

Right of Customs Officers to Effect Seizure & Arrest

[ 227 SCRA 317]

May seize any vessel. Aircraft, cargo,article, animal orother movable property when the same issubject to forfeiture or liable for any time asimposed under tariff and customs laws, rulesand regulations.May exercise such powers only in

SmugglingA. An act of any person who

shall:

Fraudulently import any article contrary to law, orAssist in so doing, orReceive, conceal, buy, sell, facilitate or transport such article knowing its illegal

Common Carriers – Forfeiture Common carriers are generally not subject

to forfeiturealthough if the owner has knowledge of itsuse in smuggling and was a consentingparty, it may also be forfeited.If a motor vehicle is hired to carry smuggledgoods but it has no Certificate of PublicConvenience (CPC), It is not a commoncarrier. It is thus subject to forfeiture andlack of personal knowledge of the owner or

Export contrary to law [ Sec. 3514 , TCC ]

B. The Philippines is divided into various ports of entry -entry other than thru port of entry will be

Properties Not Subject to Forfeiture in the Absence ofPrima Facie Evidence –

ALL articles imported into the Philippines whethersubject to duty or not shall becustoms house at a port of

entered

through

a

The forfeiture of the vehicle, vessel oraircraft shall notbe efected if it is established that the ownerthereof or his agent in charge of the meansof conveyance used as aforesaid has noknowledge of or participation in the unlawful

ENTRY in Customs lawmeans -

1. The documents filed at the Customs house2. The submission and acceptance of the

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Port of Entry: A domestic port open to bothforeign and coastwise trade including “airportof entry”. [ S ec. 3514, TC C ]

Contraband: Articles of prohibited importations or exportations. [ S ec. 351 4 , TC C ]

IF DECISION IS ADVERSE TO THE

IF DECISION IS ADVERSE TO THEGOVERNMENTAppeal with the

Commissioner within 15 days fromnotice

Automatic review byCommissioner

Appeal with CTA division

Automatic review by Sec. of

Appeal with the CTA en banc

If decision of Commissioner or Sec. is adverse to the protestant, he may appeal to the CTA and SC under the same Appeal by certiorari to

theSC within 15 days from notice

Persons Having Police Authority to Enforce the Tariff andCustoms Laws and Effect Searches,

Provided, however, that a prima facie presumptionshall exist against the vessel, vehicle or aircraft under any of the following 1. Oficials of the BOC, district collectors,

police oficers,agents, inspectors and guests of the BOC;Oficers of the Phil. Navy and other members of theAFP and national law enforcement agencies when authorized by the Comm. Of Customs;Oficials of the BIR on all cases falling within the regularperformances of their duties, when the payment of internal taxes are involved

1. If the conveyance has been used for smuggling atleast twice before;If the owner is not in the business for which the conveyance is generally used; andIf the owner is financially not in the

2.2.

3.3.

Doctrine of Hot Pursuit 4.Requisites:1. Over Vessels

a. An act is done in Phil. Waters which constitute a violation of the tariff and custom laws.

b. A pursuit of such vessel began within the jurisdictional waters whichi. may continue beyond the maritimezone, and ii. The vessel may be

Administrative and Judicial Procedures Relative to CustomsSeizures and Forfeitures1. Determination of probable cause and

issuance ofwarrant.Actual seizure of the articles.Listing of description, appraisal and classifcation of seized property.Report of seizure to Comm. Of Customsand theChairman, Comm. On Audit.Issuance by the Collector of warrant of detention.Notification to owner or

2.3.

2. Over Imported Articlesa. There is a violation of the tariff and customs laws.b. As a consequence, they may be pursued in the

Phils.c. With jurisdiction over them at

any place therein for the

4.

5.6.7.8.

Jurisdiction of RTC over seizure and forfeiture proceedings The RTC do not have jurisdiction over

seizure andforfeiture proceedings conducted by the BOCand to interfere with these proceedings.The Collector of Customs has exclusivejurisdiction over all questions touching onthe seizure and forfeiture of dutiablegoods.No petitions for certiorari, prohibition ormandamus filed with the RTC will liebecause these are in reality attempt toreview the Commissioner’s actuations.Neither replevin fled with the RTC will issue.Rationale: Doctrine of Primary Jurisdiction.Even if a Customs seizure is illegal, exclusive

Requ ireme nts for C us to ms For feiture1. The wrongful making by the owner, importer, exporter

or consignee of any declaration oraffidavit, or thewrongful making or delivery by the samepersons of any invoice, letter or paper -all touching on the importation orexportation of merchandise; and

Places Where Searches and Seizures May Be Conducted

Goods in Customs Custody Beyond Reachof Attachment

1.2.

Enclosuresdwelling house (there must be search warrant issued by a judge)vessels or aircrafts and persons or articles conveyed thereinvehicles, beasts or personspersons arriving from foreign countries

Goods in the customs custody pendingpayments ofcustoms duties are beyond the reach ofattachment. As long as the importation hasnot been terminated, the imported goodsremain under the jurisdiction of the Bureau

3.

4.5.

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IF DECISION ISNOT

FAVORABLETO THE

AGGRIEVED

IF DECISION ISNOT

FAVORABLETO THE

GOVERNMEAppeal by aggrieved owner or importer

Automatic review by Comm.

Burden of Proof in Seizure orForfeiture The reduction or non-imposition of customs

duties oncertain imported materials as a result of;

claimant [ Sec. 253 5, TCC ] –

–––

Damage incurred during voyage;Deficiency in contents package;Loss or destruction of articles after arrival; Death or injury of animals.

Requirements for ManifestA manifest in coastwise trade for cargo andpassengerstransported from one place or port in the Phils.to another is required when one or both of suchplaces is a port of entry. [ S ec. 906, TC C ]

Fraudulent Practices Considered As Criminal OffencesAgainst Customs Revenue Lawsa foreign port. [ Sec.

1005, TCC ] 1.2.

Unlawfulimportation;Entry of imported or exported article bymeans ofany false or fraudulent practices, invoice,declaration, afidavit or other documents;Entry of goods at less than their trueweights or measures or upon aclassifcation as to quality or value;

Query: Is Manifest Required Only for Imported Goods?No. Articles subject to seizure do not have to be importedgoods. Manifests are also required of articles found on vessels or aircrafts engaged

3.

Ro bles , [ 117 SC RA 780] 4.Unmanifested Cargo is Subject to ForfeitureWhether the act of smuggling is established ornot underthe principle of res ipsa loquitur. It is enoughthat the cargo is unmanifested and that therewas no showing that payment of dutiesthereon had been made for it to be subject

Settlement of Forfeiture CasesGeneral R ule: Settlement of cases by payment of fine orredemption of forfeited property is allowed.E xcepti ons :1.2.

The importation is absolutely prohibited orThe surrender of the property to the person ofering to redeem would be contrary to law, orWhere there is fraud [ S ec. 230 7 , TC C ]

3.

Acquittal in Criminal Charge Not Res Judicata in Seizure orForfeiture ProceedingsReasons: Criminal proceedings are actions in

personam whileseizure or forfeiture proceedings are actions in rem.Customs compromise does not

At any time prior to the sale, the delinquentimporter maysettle his obligations with the Bureau ofCustoms in which case the aforementionedarticles may be delivered upon payment of thecorresponding duties and taxes and complianceTCC]Abatement

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– Original jurisdiction over allcriminal ofensesarising from violation of the NIRC andTCC and other laws administered by BIRand BOC where the principal amount oftaxes and fees, exclusive of charges andpenalties claimed, is P1,000,000 ormore.Appellate jurisdiction over appealsfrom the judgments, resolutions or orderof the RTC in their original jurisdictionin criminal ofenses arising fromviolation of NIRC and TCC and other lawsadministered by BIR and BOC where theprincipal amount is less than P1,000,000or there is no specified amount.Over petitions for review of thedecisions of the RTC in the exercise of

V. Judicial Remedies; RepublicAct 1125 TheAct that Created the Court of TaxAppeals (CTA), as amended, andthe Revised Rules of the Court ofTax Appeals –

What is the new law governing the CTA? R.A. 9282, an act expanding the jurisdiction

of the CTA,and elevating it to the level of the Court of

What is the composition of the CTA and how may the CTArule? – CTA shall consist of a Presiding Justice

and five (5)Associate JusticeThey may rule as follows:1. En banc2. Sitting in 2 divisions, each division with

3 justices each

======================================TOPIC UNDER THE SYLLABUS:V. JUDICIAL REMEDIES B. Judicial Procedures

What is the quorum? The affirmative votes of 4 Justices for

sessions En Bancand 2 Justices for sessions of a Division shall be necessary for the rendition of a decision or resolution When the required quorum cannot be constituted, the Presiding Justice shall designate any

The CTA have jurisdiction over the following casesinvolving tax collection:– Original jurisdiction in tax collection

cases involvingfinal and executory assessments fortaxes, fees, charges and penalties wherethe principal amount of taxes and fees,exclusive of charges and penalties,claimed is P1,000,000 or more.Appellate jurisdiction over appealsfrom thejudgment, resolutions or orders of theRTC in tax collection cases originallydecided by them within their respectivejurisdiction.

======================================TOPIC UNDER THE SYLLABUS:V. JUDICIAL REMEDIESA. Jurisdiction of the Court of Tax Appeals=========================

–

– The CTA shall exercise exclusive appellate jurisdiction toreview by appeal:1.2.3.4.5.

Decisions of CIRInaction of CIRDecisions of RTC on local tax casesDecisions of Commissioner of Customs

What is the Procedure? (Sec. 9, R.A. 9282)1. Appeal within 30 days from receipt of

decision orperiod of inaction of CIR, COC, Secretary of Finance,Secretary of Trade and Industry or

appellatejurisdiction over RPT tax cases decided

by LBAA)Decisions of DOF on customs caseselevated to him on automatic reviewdue to adverse decision versus thegovernmentDecisions of DTI (on non-agriculturalproducts) and Department of Agriculture(on agricultural products) involving

6.

a.b.

Generally, appeal will be to aDivisionExcept: appeal by filing a petition forreview to En Banc in case of decisions ofCBAA or RTC in the exercise of its

7.

2. In case the decision of the Division is adverse:a. File MR with same Division within 15 days from

notice thereofIn case resolution of Division on the MR or new trial is still adverse:

Does the CTA have jurisdiction over criminal cases? 3.

Yes, the CTA have jurisdiction over the following casesinvolving criminal ofenses:

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4. In case the decision of the CTA En Banc is adverse, file a

review on certiorari with the SC pursuant to Rule 45 of

protested assessment. Thus, the taxpayer can file anappeal with the CTA. [ CIR v. I s a b e l a o Demand letter of the CIR - which

states awarning that in the event thetaxpayer fails topay, collection will be enforced -constitutes the order appealable to

Where can you appeal a decision of a local assessmentboard? (Sec. 9, R.A. 9282) To the Central Board of Assessment

Appeals (CBAA)and not yet to the CTA.It is only after the CBAA has ruled that an appeal may be made to the CTAIn which case, the appeal shall be by petitionfor review to the CTA En Banc

o The BIR should always indicate to thetaxpayerin clear and unequivocallanguage whatconstitutes final action on a disputedassessment. The object is to avoidrepeated requests forreconsideration by the taxpayer,thereby delaying the finality ofthe assessment, and consequently,the collection of the taxes due.This would also prevent the taxpayerfrom groping in the dark, speculatingas to which communication or actionof the BIR may be the decisionappealable to the CTA.Now, the BIR should make itclear to thetaxpayer that he can appeal if notsatisfied with the assessment.Since the power to make an

What is the rule on suspension of collection? o

Gen er al Ru le: no injunction to restrain collection oftaxesE x c e p t io n : Under Section 9 of R.A. 9282, suspension is allowed when the following conditions concur:

o

– It is an appeal to the CTA from adecision of CIR,COC or the RTC, provincial, municipaltreasurer, or the Secretary of Finance,Secretary of Trade and Industry orSecretary of Agriculture, as the casemay be; and

o

–aforementioned

government

agencies

may wherein the taxpayer failed to

appeal to theCTA within 30 days of receipt of the demandletter made by the Chief of the

jeopardize the interest of the Government and/ortaxpayer

In case of suspension, what is the taxpayerrequired to do? In this case, the

investigation wasstarted and concluded by thesame division.Sir asks, what if the CIRhimself starts theinvestigation, and thendelegates it to his deputy, doyou appeal it to the CIR or

The taxpayer will be required to either deposit the amountclaimed or file a surety bond for not more than double the

Gen er al ru le: No injunction to restrain collection oftaxes.E x c e p t io n : Suspension is allowed when thefollowing conditions concur:

The jurisdiction

include not only decisions or rulings but in action as wellof the CIR. [ R CBC v C I R]

1.2.

There is an appeal to the CTA, andIn the opinion of the court, the collection by the government agencies may jeopardize the interest of the Government and/or the taxpayer, and Taxpayer either to deposit the amount claimed or to file a surety bond for not more than the double the amount with

o In case the CIR fails to act on the disputedassessment within the 180-day period fromdate of submission of documents, a

3.1. File a petition for review with

the CTAwithin 30 days after the expiration of the2. Awai

tthe

finalor

decision of

the

Doctrine discussion Commissio

nerthe disputed

The jurisdiction of the CTA is

to review by appeal assessments and appeal

such finaldecision to the CTA within 30 days after receipt of a copy of such decision. However, these options are m u t u ally

e x c l u sive, and resort to one

decisions of the CIR on disputedassessments. When ataxpayer does not protest an assessment,and appeals the assessment itself to theCTA, his appeal is premature. [ CIR v. V i l l a] A final demand letter for payment of delinquent taxesmay be considered a decision on a

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After availing the first option, but filing it

out of time, a taxpayercannot successfully resort tothe second option (awaitingthe final decision of the CIRand appealing the same tothe CTA, on the pretext thatthere is yet no final decisionon the disputed assessmentbecause of the CIR’sinaction).

You can’t have your cake and eat it too. Remember that when a taxpayer protests an assessment, he is given 60 days to submit supporting documents. From the time he submits the documents, the 180-day period for the CIR to act on the protest starts. But what if the

submitted the additionaldocuments,since the 60-day period isgiven for the benefit of thetaxpayer, and it is his choicewhether or not to use thewhole period or not.

If he submits the add ition al documents

af te r the 60-day period andthere is no decision yet. The180-day period will start fromthe time he submitted thefirst documents, since it ismandatory that thesupporting documents have

period to appeal to the CTA. The 30-dayperiod toappeal to the CTA is still reckoned from thedate the taxpayer is notified of the denial ofthe CIR. [ Fi s h w e a lt h Can n i n g C o rp v .

Pawns ho p.In that case, the CIR was contending that

First Express did not submit therelevant documents. However, giventhat First Express submitted theirdocuments along with their protest,the Court said that the BIR c a n no td e ma n d w h at t y p e o f s u p por t i n g

Compare this to asking for a reinvestigation and it

being granted by the CIR.In that case, what is being

tolled is the time for the CIRperiod to appeal to the CTA. But canthe period to appeal to the CTA be extended?In Ci t y o f Ma n il a v.

should be submitted. Otherwise, a taxpayerwill be at the mercy of the BIR, which mayrequire the production of documents that a taxpayer cannot

Yes. [ 2009] , the Court stated

that inappeals to the CTA, theRules ofCourt are applicable. Since inthe Rules of Court, Rule 42allows e x t e n si on s to flepetitions for review to be filedwith Court of Appeals, thesame should be applicablein petitions for review withthe CTA.

Hence, the 30-day original period for filing aPetition for Review with the CTA may be

giv en for th e b en efit o f th e ta xpay er . He cantake up the entire 60 days ornot. Thetaxpayer has a choice of notutilizing theperiod, by immediately submittingthe documents, efectively startingthe 180-day period of the BIR to actmuch earlier.

The legal implication of this is when thetaxpayer appeals to the CTAbecause of the expiration of the180-day period, the taxpayer m u stall e ge that the supporting documentswere submitted along with theprotest. If not, the CTA may dismissthe case because it was filed stillwithin the 180-day period, and thus,prematurely fled.

The question is, how does the taxpayerknow if the documents are in fact,complete? What if the BIR asks himto submit additional documents tosubstantiate his claim?

If he doesn’t submit any

======================================TOPIC UNDER THE SYLLABUS:V. JUDICIAL REMEDIESC. Taxpayer’s Suit Impugning the Validity of TaxMeasures===========================Not every action filed by a taxpayer can qualify to challengethe legality of official acts done by the government. A

Pawns ho p, the BIR can’t demand forthe specific documents.

If he does submit moredocuments w i t h in the 60-dayperiod, then the 180-day

b ein g qu estion ed invo lve d isbur semen t o f pub lic fund s up onth e th eor y th at th e expend itur e o f pub lic fund s b y an o ficero f th e sta te for th e purpo se o f a d min ister in g anun con stitu tion al act con sti tut es a misapp lication o f su ch

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fund s, wh ich may b e en jo in ed at th e r equ est o f a taxp ay er .

(2) Petitioner is directly afected by the allegedultra viresact. A n t i - G raft L ea g u e v . S an J u an [ G . R .

[ De an Jos e C oya v . PCC G G. R. No. 96541 , Au gus t 24 , 1993] 1,

1996]A taxpayer’s suit is properly brought only when there is ane x e r c i s e o f t h e s p e nd i n g o r t axi n g po we r

CONCE PT OF LO CUS STAND IAuto moti ve Ind us try W orkers Allia nce v.

R om ul o [ G.R. No . Another requisite rooted in the very nature ofjudicial poweris locus standi or standing to sue. Thus,generally, a party will be allowed to litigate onlywhen he can demonstrate that:

157509. Ja nuar y 18, 2 005]2. DISTINGUISHED FROM CITIZEN’S SUITTaxpayers are allowed to sue, for example, where there is ac laim o f i l l e gal d is bur se m en t o f pub l i c f und s o r

(1) he has personally sufered some actual or threatenedinjury because of the allegedly illegal conduct of the government;

measur e is assailed as un con stitu tion al. Voters are allowedto question the validity of election laws because of theirobvious interest in the validity of such laws.Concerned citizens can bring suits if t h e

(2) the injury is fairly traceable to the challengedaction; andr aise is o f " tr an scend en tal impor tan ce"

which must be (3) the injury is likely to be redressed by the remedy beingsought O l iv er L o z a n o v . S p eak e r

settled early. Legislators are allowed to sue to question thevalidity of any oficial action which they claim infringes their

187883, J une 16 ,2009 ]

No. 11891 0, N ovem ber 16, 1995 ] DOCTRINE T RANSCE NDE TAL

I MPOR TANCEDeterminants whether a matter is of transcendentalimportance:

Case law in most jurisdictions now allows both "citizen" and"taxpayer" standing in public actions. De No. 19100 2, Marc h 17, 2 010] (1) the character of the funds or other assets

involved in thecase;

The distinction was frst laid down in Beaucha mp v. Si lk : The plaintiff in a taxpayer's suit is in

a differentcategory from the plaintiff in a citizen's suit.

(2) the presence of a clear case ofdisregard of aconstitutional or statutory prohibition by thepublic respondent agency or instrumentality ofthe government; and

In the former, the plaintiff is afected by theexpenditure of public funds, while in the latter, he is but the mere instrument of the

(3) the lack of any other party with a moredirect andspecific interest in the questions being raised.As held by the Ne w York Sup reme Cour t in

Peop le ex relCas e v. C oll ins :

(CREBA v. ERC and Meralco, G.R. No. 174697, 8July 2010;citing Senate of the Philippines vs. Ermita, G.R.No. 169777, April 20, 2006, 488 SCRA 1, 39-40;and Francisco v. Nagmamalasakit na mgaManggagawang Pilipino, Inc., G.R. No. 160261,November 10, 2003, 415 SCRA 44, 139, citingKilosbayan v. Guingona, G.R. No. 113375, May

In matter of mere public right, the peopleare the realparties…It is at least the right, if not theduty, of every citizen to interfere and seethat a public ofence be properly pursuedand punished, and that a public grievance

With respect to taxpayer's suits, Terr v. Jor dan held that:

RIPE NESS

The right of a citizen and a taxpayer to maintain anaction in courts to restrain the unlawful useof public funds to his injury cannot be

An aspect of the "case-or-controversy" requirement is therequisite of "ripeness."

3. REQUISITE

In the United States, courts are centrallyconcernedwith whether a case involves uncertaincontingent future events that may notoccur as anticipated, or indeed may not

To constitute a taxpayer's suit, two requisites must be met,namely, that:(1) Public funds are disbursed by a political subdivision orinstrumentality and in doing so, a law is violated or some irregularity is committed, and

Another approach is the evaluation of the twofoldaspect of ripeness:

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(1) the ftness of the issues for judicial decision; and(2), the hardship to the parties entailed by withholdingcourt consideration.

In our jurisdiction, the issue of ripeness is generally treatedin terms of actu al in jur y to th e p lain tiff. Hence, a ripe for adjudication when the act being challenged has hada direct adverse effect on the individual challenging it.16, 2009]

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TAXTAX OONN INDIINDIVVIIDUDUAALLSS**a nonresident alien engaged in trade or business is an individual who shall come to the Philippines & stay therein for

an aggregate period of more than 180 days during any calendaryear

NOT ENGAGED IN

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TYPE OFINCOME

TAX RATEFOR

RESIDENTCITIZE

RATE FORNON-

RESIDENTCITIZEN

TAX RATE FOR RESIDENT

NON-RESIDENTALIEN ENGAGED

IN TRADE /BUSINE

NON-RESIDENTALIEN

TRADE /Interest from any currency bank deposit& yield or any other monetary benefitfrom deposit substitutes & from trustfunds & similar arrangementsRoyalties (except on books & otherliterary works& musicalcompositions)Prizes >

20% F i n al T ax 20% F i n al T ax 20% F i n al T ax 20% F i n al T ax25% F i n al t a x

Royalties on books & other literary works &musical compositions

F i n al T ax of 10%

F i n al T ax of 10% F i n al T ax of 10%F i n al T ax of 10%25% F i n al t a x

Prizes < P10,000 Schedular rate Schedular rate Schedular rate Schedular rate25% F i n al t a x

Winnings from PCSO & Lotto exempt exempt Exempt Exempt25% F i n al t a xInterest Income received by anindividual (except a nonresidentindividual) from a depositary bank underthe expanded foreign currencydeposit system

7.5% F i n al T ax exempt 7.5% F i n al T ax ExemptExempt

Interest income from long termdeposit or investment in the form ofsavings, common or individual trust fund,deposit substitutes, investmentmanagement accounts & otherinvestments evidenced by certificationin such form prescribed by the BSP

E x e m p t from tax

E x e m p t from tax E x e m p t from taxE x e m p t from tax25% F i n al t a x

Pre-termination of such certificate beforethe 5th

year (i.e. 4 years to less than 5 years)

5% F i n al t a x on the e n t i r e i n c o m e

5% F i n al t ax onthe e n t i r e i n c o me

5% F i n al t ax onthe e n t i r e i n c o me

5% F i n al t ax onthe e n t i r e i n c o meN / A

3 years to less than 4 years 12% 12% 12% 12%N / Aless than 3 years 20% 20% 20% 20%N / A

Cash and/or Property Dividends froma domestic corp. or from a joint stockco., insurance or mutual fund companies& regional operating headquarters ofmultinational companies;Share of an individual in the distributable net income after tax of a partnership (except GPP); Share of an

10% F i n al T ax 10% F i n al T ax 10% F i n al T ax 20% F i n al T ax25% F i n al t a x

NOT ENGAGED IN

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TYPE OFINCOME

TAX RATEFOR

RESIDENTCITIZE

RATE FORNON-

RESIDENTCITIZEN

TAX RATE FOR RESIDENT

NON-RESIDENTALIEN ENGAGED

IN TRADE /BUSINE

NON-RESIDENTALIEN

TRADE /of an assn., a joint account or a jointventure or consortium taxable as a corp.of w/c he is a member/co-venturer

Capital gains from sale, barter,exchange or other disposition of sharesof stock (of domestic corp.) not tradedin the stock exchange

For the frst

5% F i n al t ax on net capital gains realized during the

5% F i n al t ax onnet capital gains realized during the taxable yr:

5% F i n al t ax on net capital gains realized during the taxable yr:

5% F i n al t ax on net capital gains realized during the taxable yr:

5% F i n al t ax on net capital gains realized during the taxable yr:

On any amount in excess of P100,000 10% 10% 10% 10%10%

Capital gains from sale, exchange orother disposition of real property locatedin Philippines, classifed as capital assets,including pacto de retro sales & otherforms of conditional sales

6% F i n al T axon the grossselling priceor currentfair marketvalue orzonal valuewhichever is

6% F i n al T ax onthe grossselling priceor current fairmarket valueor zonal valuewhichever ish i g h e r

6% F i n al T ax onthe grossselling price orcurrent fairmarket value orzonal valuewhichever ish i g h e r

6% F i n al T ax onthe gross sellingprice or currentfair marketvalue or zonalvalue whicheveris h i g h e r

6% F i n al T ax onthe gross sellingprice or currentfair marketvalue or zonalvalue whicheveris h i g h e r

CG from sale/disposition of principalresidence by natural persons, theproceeds of which is fully utilized inacquiring/constructing a new principalresidence w/in 18 mos. from date of sale,provided historical cost/adjusted basisof sold prop be carried to the newprincipal residence built/acquiredCommissioner. Duly notified w/in 30 daysfrom sale Tax exemption can only beavailed once every 10 years If nofull utilization of proceeds of sale,

E x e m p t f ro m CGtax

E x e m p t f ro m CG t ax

E x e m p t f ro m CG t ax

E x e m p t f ro m CG t axE x e m p t f ro m CG t ax

TAX ON C ORP O RATIO NS

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TYPE OFINCOME

DOMESTIC CORP RESIDENT FOREIGN CORP

NON-RESIDENT FOREIGNInterest on currency bank deposits & yield or any other

monetary benefit from deposit substitutes & from trustfunds & similar arrangementRoyalties (similar within thePhilippines)

20% F i n al T ax 20% F i n al T ax35%/30% I n c o m e T ax

Interest income from a depositary bank under the e xpa nd e d fo r e i g n c urr e n c y d e po sit sy s te m (EFCDS)

7.5% F i n al T ax 7.5% F i n al T axExempt from tax

CG from sale, barter, exchange or other disposition of shares of stock(of domestic corp.) not traded in the stock exchangeFor the frst P100,000

5% F i n al t ax on net capital gains realized during the taxable yr:

5% F i n al t ax on net capital gains realized during the taxable yr:

5% F i n al t ax on netcap.l gainsrealized during thetaxable yr:On any amount in excess of P100,000 10% 10%10%

Income derived by d ep o si t a r y b a n k under the EFCDSfrom foreign currency transactions with non-residents,ofshore banking unites in the Philippines, localcommercial banks including branches of foreign banksthat may be authorized by the BSP to transact businesswith FCDS units & other depositary banks under the

Exempt from Final tax – Part of gross incomesubject to35%/30% corp. incometax(RA 9294)

Exempt from Final tax – Part of gross incomesubject to35%/30% corp. income tax(RA 9294)

N/A

Interest income from foreign currency loans granted by such depository banks under said EFCDS to RESIDENTS

10% F i n al T ax 10% F i n al T axN/A

Inter-corporate dividends (from a domestic corp.) E x e m p t from tax E x e m p t from tax15% F i n alT ax* subject to the rule ontax credit for taxactually paid and taxdeemed paid.Otherwise, subject toregular income tax

CG from sale, exchange or other disposition of la n d sa nd / o r bu i l d i n g s which are not used in the business of acorp. & are treated as capital assets

6% F i n al t ax on grossselling price or FMV orzonal value, whicheveris higher

35%/30% income tax35%/30% income tax

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TYPE OF CORPORATETAXPAYER

TAXRATEInternational Air

CarrierGro ss Ph il. Billin gs = amount of gross revenue derived from carriage of persons, excessbaggage, cargo & mailoriginating from the Philippines in a continuous & uninterrupted flight, irrespective of the placeof sale/issue & the place of payment of the ticket or passage document; Includes ticketsrevalidated, exchanges &/or indorsed to another int’l airline if the passenger boards a plane ina port/point in the Philippines. For a flight which originates from the Philippines buttransshipment of passenger takes place at any port outside the Philippines on another airline,only the aliquot portion of the cost of the ticket corresponding to the leg flown fromthe Philippines to the point of transshipment shall form part of the GPB

International

2 ½% on Gross Phil Billings

Ofshore Banking Units Final Tax of 10% on gross income from transactions with residentsBranch

P ro f it s r e m it t e d (connected with the conduct of its trade/business in the Philippines.) = based on the total profits applied/earmarked for remittance without any deduction for the tax component thereof (except the PEZA-registered)

15% on branch profits remittance

Regional/Area Headquarters of Multinational Cos. = do not earn/derive income from thePhilippines. & w/c act as supervisory, communication & coordinating center for theiraffiliates, subsidiaries or branches in the Asia -Pacific Region & other foreign markets

Regional Operating Headquarters of Multinational Companies = engaged in any ofthe following services:a. General Administration & planning j.Technical support & maintenanceb. Business planning & coordination k. Data processing & communication c. Sourcing & procurement of raw materials & components l. Business developmentd. Corporate fnance advisoryservicese. Marketing control & sales promotion f. Training &

Exempt from tax

10% of taxable income** Multinational company = a foreign frm/entity engaged ininternational

trade with afiliates/subsidiaries/branch ofices in the Asia Pacific Region & other foreign markets.

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TYPE OFINCOME

TAX RATE FOR ALIEN INDIVIDUAL EMPLOYED BYRegional Or Area Headquarters& Regional OperatingHeadquarters of

Ofshore Banking UnitsPetroleum Service Contractor & Subcontractor

Gross Income = Salaries, Wages, Annuities, Compensation, Remuneration and Other Emoluments (i.e. honoraria & allowances) received from such cos. Provided, same tax treatment shall apply to Filipinos abroad employed & occupying same positions in these companies

15% of gross income 15% of gross income15% of gross income

Other income (that is income other than compensation from being employed by a RHQ/ROHQ, OBU or Petroleum Service Contractor & Subcontractor)

Subject to regular graduated tax rate

Subject to regular graduated tax rate

Subject to regular graduated tax rate

TYPE OFTAXPAYER

TAXRATE

Nonresident cinematographic film owner, lessor or distributor (NOTE: Even to individuals)

25% of gross incomeNonresident owner or lessor of vessels chartered by the Phil. Nationals4.5% of gross rentals, lease or charter feesNonresident owner or lessor of aircraft, machineries & other equipment7.5% of gross rentals or fees

PROCEDURE TO PROTEST CUSTOM COLLECTORS ASSESSMENT

2303, TCC)

days from promulgation or after

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No appeal assessment finalAppeal to SC w/in 15 days from notice (Rule 43, ROC)

w/in 15 days from notice

Commissioner of Customs fails torender decision w/in 30 days

Protest AffirmedProtest Denied

Automatic appeal to Sec. ofFinance reports elevated w/in 5

lapse of 30 days if no decision

If unfavorable, appeal to CTA w/in30 days from receipt of decision

(Sec. 7, RA 1125)Assessment final

CTA decides w/in30 days

Assessment final

Protest Affirmed

Automatic appeal to Sec. ofFinance

Assessment final

Protest Denied

Files written protest with ruling of Collector (Sec.

Within 15 days from receipt of assessmentNo protest considered unless amount due is paid

Collector schedules hearing of protestw/in 15 days from receipt of protest

Collector renders decision w/in 30days from termination of hearing

Protest Granted Protest Denied

Automatic appeal to CustomsCommissioner

(Sec. 2313, TCC)

Appeal to Customs Commissioner

(Sec. 2313, TCC)

Pays duties, taxes, etc.

Goods released

Taxpayer disagrees with assessmentTaxpayer agrees with assessment

Articles enter customs

Articles appraised, classified and assessed

REME DIE S O F G OVE RNME NT AND TAXP AYE R UNDE R NIRC, TCC a nd L GC

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NIRC

TCC

LGCGOVERNMENT REMEDIES

A. TO EFFECT TAX COLLECTION:1. Compromise (Sec. 204)2. Distraint (actual and constructive) (Sec. 205-

208) and Levy (Sec. 207-B)3. Tax Lien (Sec. 219)4. Civil Action (Sec. 220, 205-B)5. Criminal Action (Sec. 220, 221, 205-B)6. Forfeiture of Property (Sec. 224-225)7. Suspension of Business Operations in

Violation of VAT (Sec. 115)8. Enforcement of Administrative Fine

B. TO CANCEL TAX LIABILITY:1. Abatement (Sec. 204-B)

GOVERNMENT REMEDIES

A. TO EFFECT TAX COLLECTION:1. Tax Lien (Sec. 1204)2. Administrative Fines and Forfeitures (Sec.

2530,2531)

3. Reduction of customs duties/compromise –

subject to approval of Sec. of Finance (Sec.

709,2316)

4. Seizure, Search, Arrest (Sec. 2205, 2210, 2211)5. Civil Action (Sec. 1204)6. Criminal Action

B. TO CANCEL TAX LIABILITY:1. Abatement – reduction or non-

imposition of customs duties on certain imported materials (Sec. 1701-1708)

C. POWER/AUTHORITY TO ASSESS AND COLLECT ALL LAWFUL REVENUE FROM IMPORTED ARTICLES AND ALL OTHER DUTIES, FEES, CHARGES, FINES AND

PENALTIES ACCRUING UNDER TCC IS WITH

COMMISSIONER OF CUSTOMS. (Sec. 602)

NOTE: Au t o matic Appe a l – if the collector renders decision adverse to the government, it will be automatically elevated to the Commissioner. If affirmed by the latter, decision shall be reviewed automatically by the Secretary of Finance.

GOVERNMENT REMEDIES

LOCAL TAX

A. TO EFFECT TAX COLLECTION:1. Tax Lien (Sec. 173)2. Distraint and Levy (Sec. 174, 175)3. Civil Action (Sec. 183)4. Purchase of property by local

government units for want of bidder (Sec. 181)

Property distrained not disposed within 120 days from date of distraint – considered sold to the local government for the amount of assessment made and to that extent, the taxdelinquency shall be cancelled. (Sec.175)

B. TO CANCEL TAX LIABILITY:- May grant tax exemptions but may not

condone or remit taxes (Sec. 192)

REAL PROPERTY TAX

A. TO EFFECT TAX COLLECTION:1. Tax Lien (Sec. 246, 251)2. Distraint and Levy (Sec. 254)3. Civil Action – formal demand not required

(Sec.266)

4. Purchase of property by local treasurer for want of bidder (Sec. 263)

B. TO CANCEL TAX LIABILITY:Condonation or reduction of real propertytax by the President when public interestrequires or by the Sanggunian concernedin cases of general failure of crops, or PRESCRIPTIVE PERIOD OF ASSESSMENT AND

COLLECTION

1. Power/Authority to assess tax:Commissioner

of Internal Revenuea. 3 yrs – from fling of return or

PRESCRIPTIVE PERIOD OF ASSESSMENT AND

COLLECTION

LOCAL TAX

1. Assessment:a. 5 yrs – from the day they becomedue

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NIRC

TCC

LGC(Sec. 203)

b. 10 yrs – when (1) no return isfled, (2) the return is false orfraudulent with intent to evadetax (from date of discovery) (Sec.222)

2. Collection of tax:a. 5 yrs – from assessment or

within the period for collectionagreed upon in writing before expiration of the 5 yr. Period (Sec. 222)

3. Criminal Liabilitya. 5 yrs – from commission or discovery of

violation, whichever of later (Sec. 281)

GROUNDS FOR SUSPENSION OF THE RUNNING OF

THE STATUTE OF

LIMITATIONS:1. When the CIR is prohibited from making the

assessment or beginning the distraint or levy or a proceeding in court, and for sixty (60) days thereafter;

2. When the taxpayer requests for areconsideration which is granted by the CIR;

3. When the taxpayer cannot be located in the address given by him in the return, unless he informs the CIR of any change in his address;

4. When the warrant of distraint or levy is duly

served and no property is located;5. When the taxpayer is out of the Philippines.

(Sec. 223)

b. 10 yrs – in case of fraud or intent to

evade payment of taxes from discovery of fraud or intent to evade payment (Sec.194)

2. Collectiona. 5 yrs – from day of assessment by

administrative or judicial action (Sec. 194)

Local government may appeal to courts from adverse decision of Sanggunian on purely legal issue.

GROUNDS FOR SUSPENSION OF THE RUNNING

OF THE PERIODS OF PRESCRIPTION:1. When the treasurer is legally prevented from

making the assessment or collection;2. When the taxpayer requests for a

reinvestigation and executes a waiver in writing before expiration ofthe period within which to assess or collect; and

3. When the taxpayer is out of the country or

otherwise cannot be located.

REAL PROPERTY TAX

1. Collection:a. 5 yrs – from the date they become due

(Sec. 270)b. 10 yrs – in case of fraud or with intent to

evade payment from the discovery of fraud or intent to evade payment

GROUNDS FOR SUSPENSION OF THE RUNNING

OF THE PERIODS OF PRESCRIPTION WITHIN

TAX LAW REVIEWER

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LGChaving legal interest therein is

out of the country or otherwise cannot be located.

TAXPAYER REMEDIES

A. ADMINISTRATIVE:1. Before Payment

a. Protest – fling a petition for reconsideration or reinvestigation within30 days from receipt ofassessment (Sec.228)

b. Entering into a compromise (Sec. 204)

2. After Paymenta. Filing a claim for refund or tax credit –

within 2 years from date ofpayment regardless of anysupervening cause (Sec.229)

Note the suspension of the 2-year

period(Panay Electric Co. v. Collector; May 28, 1958)

Note that payment under protest is no t

nec essa ry Note that the taxpayer is given the

right ofredemption within 1 year from the date of saleor forfeiture (Sec. 215)

B. JUDICIAL:1. Civil Action

a. Appeal – within 30 days from receipt of

decision on the protest or fromthe lapse of 180 days inaction ofthe Commissioner to the CTA

TAXPAYER REMEDIES

A.ADMINISTRATIVE:

1. Protesta. Any importer or interested party

if dissatisfed with published valuewithin 15 days from date of publication or within 5 days from the date the importer is entitled torefund if payment is renderederroneous or illegal by events occurring after the payment

b. Taxpayer – within 15 days from assessment. Payment under protest is necessary (Sec. 2308, 2210)

2. Refunda. A written claim for refund may

be submitted by the importer in abatement cases on missing packages, defciencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical errors; and

b. Drawback cases where the goods are re-

exported. (Sec. 1701-1708)3. Settlement of any seizure by payment of fine

or redemption – BUT this shall not be allowed in any case where importation is absolutely prohibited, or the release would be contrary to law, or when there is an actual and intentional fraud (Sec. 2307)

4. Appeal – within 15 days to Commissioner after notifcation by collector of his decision (Sec.

TAXPAYER REMEDIES

LOCAL TAX

A. ADMINISTRATIVE:1. Before Payment

a. Appeal – any question onconstitutionality or legality of taxordinance within 30 days from efectivity thereof to Secretary ofJustice (Sec. 187)

b. Declaratory relief whenever applicable

2. After assessmenta. Protest – within 60 days from

receipt of assessment (Sec. 195). Payment under protest not necessary.

b. Payment and subsequent refund or tax

credit – within 2 yrs from payment of tax to local treasurer(Sec. 196)

c. Right of redemption – 1 yr from the date

of forfeiture (Sec. 181)

Real Property Tax1. Protest – payment under protest is required.

Filed within 30 days (From date of payment) to provincial, city or municipal treasurer

2. Refund or tax credit – within 2 years from the date the taxpayer is entitledthereto (Sec. 253)

3. Redemption of real property within 1yr from date of sale (Sec. 261)

4. Appeal – within 60 days from assessment of

provincial, city or municipal assessor to LBAA (Sec. 226)

- Within 30 days fromreceipt of decision of LBAA

TAX LAW REVIEWER

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LGC3. Abandonment (Sec. 1801) protest of assessment is denied

- If no action is taken by the treasurer in refund cases and the two year periodis about to lapse (Sec. 195)

- If remedies available do not provide plain, speedy and adequate remedy.

2. Action for declaratory relief3. Injunction – if irreparable damage would be

caused to the taxpayer and no adequate remedy is available.

REAL PROPERTY TAX

1. Court Action – appeal of CBAA’s decision to

CTA2. Suit assailing validity of tax; recovery

of refund of taxes paid (Sec. 64 PD 464)

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