I. General Principles

A. Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens.

As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the protection that the citizens get from the government, taxes are paid.1

B. Nature of Taxation

1. It is an inherent attribute of sovereignty2. It is legislative in character

C. Characteristics of Taxation

1.The power of taxation is an incident of sovereignty as it isinherent in the State,belonging as a matter of right to every independent government. It does needconstitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading, and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it.2

2.The power to tax is inherent in the State, and the State is free to select the object of taxation,such power being exclusively vested in the legislature, except where the Constitution provides otherwise.3

The Congress may by law authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.

1Commissioner of Internal Revenue vsAllegre, Inc.,et al., L-28896, Feb. 17, 19882Churchill and Tait v. Concepcion, 34 Phil 9693Art. VI, Sec, 28 (2); Art. X, Sec. 5].Art. VI, Sec. 28. par. 2.

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Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.4

3. It is subject toConstitutional and inherent limitations; hence, it is not an absolute power that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power2. Power of Eminent Domain

Taxation Police Power Eminent Domain

Purpose- levied for the purpose of raising revenue

- exercised to promote public welfare thru regulations

- taking of property for public use

Amount of exaction- no limit - limited to the

cost of regulations, issuance of the license or surveillance

- no exaction, compensation paid by the government

Benefits received- no special or direct benefits received but the enjoyment of the privileges of living in an organized society

- no direct benefits but a healthy economic standard of society or “damnumabsqueinjuria” is attained

- direct benefit results in the form of just compensation

Non-impairment of contracts- the - contract may - contracts

4Art. X, Sec. 5

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impairment rule subsist

be impaired may be impaired

Transfer of property rights- taxes paid become part of public funds

- no transfer but only restraint on the exercise of property right exists

- property is taken by the gov’t upon payment of just compensation

Scope- affects all persons, property and excise

- affects all persons, property, privileges, and even rights

- affects only the particular property comprehended

Basis- public necessity

- public necessity and the right of the state and the public to self-protection and self-preservation

-public necessity, private property is taken for public use

Authority which exercises the power- only by the government or its political subdivisions

- only by the government or its political subdivisions

- may be granted to public service, companies, or public utilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare and protection of its citizens.

2.Non-revenue/special or regulatory

a. Promotion of General Welfare – Taxation may be used as an implement of police power in order to promote the general welfare of the people.5

5see Lutz vsAraneta, 98 Phil 148 and OsmeňavsOrbos, G.R. No. 99886, Mar. 31, 1993

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b. Regulation – As in the case of taxes levied on excises and privileges like those imposed in tobacco or alcoholic products or amusement places like night clubs, cabarets, cockpits, etc.6

c.Reduction of Social Inequality – this is made possible through the progressive system of taxation where the objective is to prevent the under-concentration of wealth in the hands of few individuals.

d. Encourage Economic Growth – in the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the country’s economic growth.

e. Protectionism – in some important sectors of the economy, as in the case of foreign importations, taxes sometimes provide protection to local industries like protective tariffs and customs.

F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate the needs of government expenditure. Neither an excess nor a deficiency of revenue vis-à-vis the needs of government would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayer’s ability to pay7. The 1987 Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1. Lifeblood Theory

6In the case of Caltex Phils. Inc. vs COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public industry like the oil industry.7ability-to-pay principle

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Taxes are the lifeblood of the government, being such, their prompt and certain availability is an imperious need.8 Without taxes, the government would be paralyzed for lack of motive power to activate and operate it.

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has the right to compel all citizens and properties within its limits to contribute.9

3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Rules:

a) Tax laws cannot operate beyond a State’s territorial limits.b) The government cannot tax a particular object of taxation

which is notwithin its territorial jurisdiction.c) Property outside ones jurisdiction does not receive any

protection of the State.d) If a law is passed by Congress, Congress must always see to

it that the object or subject of taxation is within the territorial jurisdiction of the taxing authority.

H.Doctrines in Taxation

1. Prospectivity of tax laws

General Rule:

8Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 19659 In a case, the Supreme Court held that: Taxation is a power emanating from necessity. It is a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come with the State’s territory and facilities, and protection which a government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA 775)10 Symbiotic Relationship

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Taxes must only be imposed prospectively.

Exception:

The language of the statute clearly demands or express that it shall have a retroactive effect.

2. Imprescriptibility

General Rule:

Taxes are imprescriptible.

Exception:

When provided otherwise by the tax law itself.11

3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, double taxation means:

1. Taxing twice;2. by the same taxing authority;3. within the same jurisdiction or taxing district;4. for the same purpose;5. in the same year or taxing period;6. some of the property in the territory

b. Broad sense

Referred to as indirect double taxation, double taxation is taxation other than direct duplicate taxation. It extends to all cases in which there is a burden of two or more impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit double taxation.

11Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein imposed. The law on prescription, being a remedial measure, should be liberally construed to afford protection as a corollary, the exceptions to the law on prescription be strictly construed. (CIR vs CA. G.R. No. 104171, Feb. 24, 1999)

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However, while it is not forbidden, it is something not favored. Such taxation should, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of the constitutional precepts of equal protection and uniformity in taxation.

The argument against double taxation may not be invoked where one tax is imposed by the State and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or activity by both the State and a political subdivision thereof. And where the statute or ordinance in question, there is no infringement of the rule on equality.12

d. Modes of eliminating double taxation

To eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief on order to avoid double taxation.

There are two methods of relief

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

2. In the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the

12City of Baguio v. De Leon, 25 SCRA 938.

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exemption method, the focus is on the income or capital, whereas the credit method focuses upon the tax.

4. Escape from taxation

a. Shifting of tax burden13

1) Ways of shifting the tax burden

a. Forward shifting

When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer.14

b. Backward shifting

When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production.15

c. Onward shifting

When the tax is shifted two or more times either forward or backward.16

2) Taxes that can be shifted

Only indirect taxes may be shifted;17 direct taxes18cannot be shifted.

13 The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else.Process by which such tax burden is transferred from statutory taxpayer to another without violating the law. What is transferred is not the payment of the tax, but the burden of the tax14 Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer15 Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer16 Example: Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all.17e.g. VAT18e.g. Income tax

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3) Meaning of impact and incidence of taxation

Impact of taxation is the point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax.

Incidence of taxation is that point on which the tax burden finally rests or settle down. It takes place when shifting has been effected from the statutory taxpayer to another.

b. Tax avoidance19

The exploitation of the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability.

c. Tax evasion20

The use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.

5. Exemption from taxation

a. Meaning of exemption from taxation

19 also known as “tax minimization”; it is not punished by law20 also known as “tax dodging”; it is punishable by law Elements of tax evasion:1) The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that tax is due2) An accompanying state of mind which is described as being “evil”, “in bad faith”, “willful”, or “deliberate” and not “accidental”3) A course of action (or failure of action) which is unlawful Indicia of fraud in tax evasion:1) Failure to declare for taxation purposes true and actual income derived from business for two (2) consecutive years; or2) Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years coupled with unintentional overstatement of deductions Evidence to prove tax evasion: Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the circumstances of the case. Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of its due taxes.(Republic vs. Gonzales, 13 SCRA 638)

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It is 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. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected.21

b. Nature of tax exemption

1) It is a mere personal privilege of the grantee.

2) It is generally revocable by the government unless the exemption is founded on a contract which is contract which is protected from impairment.

3) It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is prejudicial thereto.

4) It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.

5) It is not transferable except if the law expressly provides so.

c. Kinds of tax exemption

1) Express22

When certain persons, property or transactions are, by express provision, exempted from all certain taxes, either entirely or in part.

2) Implied23

When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.

Every tax statute makes exemptions because of omissions.

3) Contractual

21 Exemption is allowed only if there is a clear provision there for. It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis. Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation is the exemption.22or affirmative exemption23or exemption by omissionNo tax exemption by implication It must be expressed in clear and unmistakable language

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Agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptions:

Its avowed purpose is some public benefit or interests which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.

The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is not based on the idea of lessening the burden of the individual owners of property.

Grounds for granting tax exemptions:

1) May be based on contract. In such a case, the public, which is represented by the government is supposed to receive a full equivalent therefor, i.e. charter of a corporation.

2) May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption.

3) May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation.24

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless there are restrictions. Since taxation is the rule and taxation therefrom is the exception, the exemption may be withdrawn by the taxing authority.25

6. Compensation and Set-off26

24Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.25Mactan Cebu International Airport Authority vs, Marcos, 261 SCRA 667.26 Requisites of Compensation in taxation (Domingo v. Garlitos) 1. That the tax assessed and the claim against the government be fully liquidated. 2. That the tax assessed and the claim against the government is due and demandable, and3. That the government had already appropriated funds for the payment of the claim

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General Rule:

Taxes are not subject to set-off or legal compensation. The government and the taxpayer are not creditors and debtors or each other. Obligations in the nature of debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity.27

Exception:

Where both the claims of the government and the taxpayer against each other have already become due and demandable as well as fully liquated.28

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced.29

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue to collect what otherwise would be due it and, in this sense, prejudicial thereto.30

27Philex Mining Corp. vs CIR, 294 SCRA 687; Republic vsMambulao Lumber Co., 6 SCRA 62228see Domingo vsGarlitos, L-18904, June 29, 196329Art. 2028, New Civil Code Requisites: 1. Taxpayer must have a tax liability. 2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer. 3. There must be acceptance of the offer in settlement of the original claim. When taxes may be compromised: 1.A reasonable doubt as to the validity if the claim against the taxpayer exists; 2 .The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. 3 .Criminal violations, except: a. Those already filed in court b. Those involving fraud.30 Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must be construed strictly against the taxpayer, who must show compliance with the law. The government is not estopped from questioning the tax liability even if amnesty tax payments were already received

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b. Distinguished from tax exemption

A tax amnesty, being a general pardon or intentional overlooking by the Statute of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it and, in this sense, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to reform are given a chance to do so and therefore become a part of the society with a clean slate.

Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is granted by statute. The terms of the amnesty must be strictly construed against the taxpayer and literally in favor of the government. Unlike a tax exemption, however, a tax amnesty has limited applicability as to cover a particular taxing period or transaction only.

Tax exemption, on the other hand, is the grant of immunity to particular persons or corporations of a particular class from a tax of which persons and corporations generally within the same state or taxing district are obliged to pay. Tax exemptions are not favored and are construed strictissimijurisagainst the taxpayer.

Tax amnesty Tax exemption

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

Immunity from civil liability only

Applies only to past tax periods, hence retroactive application

Prospective application

9. Construction and Interpretation of:

a. Tax laws

1) General Rule

Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors by its agents.

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Tax laws are liberally interpreted in favor of the taxpayer and strictly against the government.

2) Exception

Liberal interpretation does not apply to tax exemptions which should be construed instrictissimijurisagainst the taxpayer.31

b. Tax exemption and exclusion

1) General Rule

In the construction of tax statutes, exemptions are not favored and are construed strictissimijuris against the taxpayer.32 The fundamental theory is that all taxable property should bear its share in the cost and expense of the government.

Taxation is the rule and exemption. He who claims exemption must be able to justify his claim or right thereto by a grant express in terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly mentioned in the law, it must be at least within its purview by clear legislative intent.

2) Exceptions

1. When the law itself expressly provides for a liberal construction thereof.

2. In cases of exemptions granted to religious, charitable and educational institutions or to the government or its agencies or to public property because the general rule is that they are exempted from tax.

c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers.33

31 Reason: Lifeblood doctrine32Strict interpretation does not apply to the government and its agenciesPetitioner cannot invoke the rule of strictissimijuriswith respect to the interpretation of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]33 Sec. 246

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d. Penal provisions of tax laws

Tax laws are civil and not penal in nature, although there are penalties provided for their violation.

The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive.

I.Scope and Limitation of Taxation

1. Inherent Limitations

a. Public Purpose34

The tax must be used:

1) for the support of the state or2) for some recognized objects of governments or

3) directly to promote the welfare of the community35

34 Test in determining Public Purposes in tax: a. Duty Test – whether the thing to be threatened by the appropriation of public revenue is something which is the duty of the State, as a government. b. Promotion of General Welfare Test – whether the law providing the tax directly promotes the welfare of the community in equal measure.35taxation as an implement of police power

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b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. This limitation arises from the doctrine of separation of powers among the three branches of government.

2) Exceptions

a) Delegation to local governments36

The power of local government units to impose taxes and fees is always subject to the limitations which the Congress may provide, the former having no inherent power to tax.37

Municipal corporations are mere creations of Congress which has the power to create and abolish municipal corporations. Congress therefore, has the power of control over local government units. If Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for exemptions or even to take back the power.

The power to tax is primarily vested in the Congress, however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation but pursuant to direct authority conferred by Section 5, Article X of the1987 Constitution, subject to guidelines and limitations which Congress may provide which must be consistent with the basic policy of local autonomy.38

b) Delegation to the President39

The power granted to Congress under this constitutional provision to authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff

The term “public purpose” is synonymous with “governmental purpose”; a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. A tax levied for a private purpose constitutes a taking of property without due process of law. The purposes to be accomplished by taxation need not be exclusively public. Although private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental. The test is not as to who receives the money, but the character of the purpose for which it is expended; not the immediate result of the expenditure but rather the ultimate. In the imposition of taxes, public purpose is presumed.36Art. X. Sec. 5, 1987 Constitution37Basco v. PAGCOR38MCIAA v.Marcos, 261 SCRA 66739Art.VI, Sec. 28(2), 1987 Constitution

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rates and other duties and imposts include tariffs rates even for revenue purposes only. Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are frequently imposed for both revenue-raising and regulatory purposes.40

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.41

For the delegation to be constitutionally valid, the law must be complete in itself and must set forth sufficient standards.

c. Territorial

1) Situs of Taxation42

a) Meaning

Literally means “the place of taxation.”

State where the subject to be taxed has a situs may rightfully levy and collect the tax

The place or the authority that has the power to collect taxes. It is premised upon the symbiotic relation between the taxpayer and the State.

The place that gives protection is the place that has the right to demand that it be supported in the form of taxes so it could continually give protection.

40Garcia vs Executive Secretary, et. al., G.R. No. 101273, July 3, 199241example: assessment and collectionCertain aspects of the taxing process that are not really legislative in nature are vested in administrative agencies. In these cases, there really is no delegation, to wit:a) power to value property b) power to assess and collect taxes c) power to perform details of computation, appraisement or adjustments.42 “It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise within the territory of the taxing power because: 1) Tax laws do not operate beyond a country’s territorial limit. 2) Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation. However, the fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing state, where there is between him and the taxing state, a privity of relationship justifying the levy.

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b) Situs of Income Tax43

1)From sources within the Philippines

i. Interests derived from sources within the Philippines, and interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise

ii. Dividends

iii. Compensation for labor or personal services performed in the Philippines

iv. Rentals and royalties from property located inthe Philippines or from any interest in such property, including rentals or royalties for:

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process,goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge orinformation;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any suchequipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand,

43 Sec. 42 Theories: A) domicillary theory- the location where the income earner resides is the situs of taxation B) nationality theory- the country where the income earner is a citizen is the situs of taxation C) source rule- the country which is the source of the income or where the activity that produced the income took place is the situs of taxation.

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machinery or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;(ii) Films or video tapes for use in connection with

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

(h)Gains, profits and income from the sale of real property located in the Philippines

(i) Gains, profits and income from the sale of personal property

2)From sources without the Philippines

(1) Interests other than those derived from sources within the Philippines as provided in 1) (i).

(2) Dividends other than those derived from sources within the Philippines as provided in 1) (ii).

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas,goodwill, trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines

3) Income partly within and partly without the Philippines

Allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

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For the purposeof computing the taxable income therefrom, where items of gross income are separately allocated to sources within the Philippines, there shall be deducted:

(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income.The remainder, if any, shall be included in full as taxable income from sources within the Philippines.

c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located because it is that place that gives protection. The applicable concept is lexsitusor lexreisitae.44

(2) Taxes on Personal Property

- Mobiliasequnturpersonam45

Rules:

1) Tangible personal property

- Where located, usually the owner’s domicile

2) Intangiblle personal property

General Rule – Domicile of the owner

Exception: The situs location not domicile46

44We can only impose property tax on the properties of a person whose residence is in the Philippines.45 movables follow the owner movables follow the domicile of the owner46 Where the intangible personal property has acquired a business situs in another jurisdiction The principle of “MobiliaSequnturPersonam” is only for purposes of convenience. It must yield to the actual situs of such property. Personal intangible properties which acquires business situs here in the Philippines 1) Franchise which is exercised within the Philippines 2) Shares, obligations, bonds issued by a domestic corporation

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d) Situs of Excise Tax

The place where the privilege is exercised because it is that place that gives protection.47

(1) Estate Tax

Determined by the nationality and residence of the taxpayer and the place where the property is located.

(2) Donor’s Tax48

e) Situs of Business Tax

(1) Sale of Real Property

The tax situs is the place or location of the real property.49

(2)Sale of Personal Property

In determining the tax situs, one should consider the place of sale.

(3) VAT

The tax situs is where the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippineswas performed.

d. International Comity

3) Shares, obligations, bonds issued by a foreign corporation, 85% of its business is conducted in the Philippines 4) Shares, obligations, bonds issued by a foreign corporation which shares of stock or bonds acquire situs here 5) Rights, interest in a partnership, business or industry established in the Philippines These intangible properties acquire business situs here in the Philippines, you cannot apply the principle of “MobiliaSequnturPersonam” because the properties have acquired situs here.47where the transaction performed.The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the exercise, nor upon the physical location of the property or in connection with the act or occupation taxed, but depends upon the place on which the act is performed or occupation engaged in.Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)48 ibid49 So, if the property sold is situated within the Phils., the income derived from such sale is considered as income within.

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The property of a foreign state or government may not be taxed by another.50

e. Exemption of Government Entities, Agencies, and Instrumentalities

Agencies performing governmental functions

- tax exempt51

Agencies performing proprietary functions

- subject to tax

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation52

1) Prohibition against imprisonment for non-payment of poll tax

No person shall be imprisoned for debt or non-payment of poll tax.53

2) Uniformity and equality of taxation

50 The grounds for the above are: 1) sovereign equality among states 2) usage among states that when one enter into the territory of another, there is an implied understanding that the power does not intend to degrade its dignity by placing itself under the jurisdiction of the latter 3) foreign government may not be sued without its consent so that it is useless to assess the tax since it cannot be collected 4) reciprocity among states51The exemption applies only to governmental entities through which the government immediately and directly exercises its sovereign powers. Tax exemption of property owned by the Republic of the Philippines refers to the property owned by the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City) Those created by special charter (incorporated agencies) are not covered by the exemption52 under the 1987 constitution53Sec. 20, Art. III The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec. 161, LGC) The prohibition is against “imprisonment” for “non-payment of poll tax”. Thus, a person is subject to imprisonment for violation of the community tax law other than for non-payment of the tax and for non-payment of other taxes as prescribed by law. The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate or non-payment of other taxes.

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The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.54

3) Grant by Congress of authority to the President to impose tariff rates

x xx The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.55

4) Prohibition against taxation of religious, charitable entities, and educational entities

Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.56

54Sec. 28(1), Art. VI Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every place where the subject of it is found. Equitable means fair, just, reasonable and proportionate to one’s ability to pay. Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers’ ability to pay Inequality which results in singling out one particular class for taxation or exemption infringes no constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27) The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable.55 Requisites for exemption:1) It must be a private educational institution2) It must be non-stock and non-profit3) It’s assets (property) and revenues (income) must be used actually, directly and exclusively for educational purposes Rules: 1) If the first requisite is absent (meaning, it’s a government educational institution), it is nonetheless exempt from income tax 2) If the second requirement is absent (meaning, it is stock and profit) as long as the third requirement is present, it is nonetheless exempt from real estate tax 3) If the third requirement is absent, as long as it is non-stock and non-profit, it is nonetheless exempt from income tax 4) If the third requirement is absent, but it is private and non-profit, it is subject to income tax, but at the preferential rate of ten percent (10%) Under the present tax code, for a private educational institution to be exempt from the payment of income tax, all it has to be is non-stock and non-profit. However, a governmental educational institution is exempt from income tax without any condition Exemption does not extend to: 1) Income derived by these educational institutions from their property, real or personal, and 2) From activities conducted by them for profit regardless of the disposition made on such income56 Sec. 4(4), Art. XIV.

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5) Prohibition against taxation of non-stock, non-profit institutions

All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.57

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress.58

7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned the balance, if any, shall be transferred to the general funds of the government.59

The exemption granted to non-stock, non-profit educational institution covers income, property, and donor’s taxes, and custom duties. To be exempt from tax or duty, the revenue, assets, property or donation must be used actually, directly and exclusively for educational purpose. In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax. The said constitutional provision granting tax exemption to non-stock, non-profit educational institution is self-executing. Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative implementation. Their tax exemption is not self-executing. Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed are exempt from property tax, whether the educational institution is proprietary or non-profit57Sec. 4 (3), Art. XIV Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because the transaction was an isolated one(Manila Polo Club vs. CTA) Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax because the operation of those entities was merely incidental to the primary purpose of the exempt corporation(St. Paul Hospital of Iloilo vs. CIR) Where the educational institution is private and non-profit (but a stock corporation), it is subject to income tax but at the preferential rate of ten percent (10%)58Sec. 28(4), Art. VIThe provision requires the concurrence of a majority not of attendees constituting a quorum but of all members of the Congress.59Sec. 29(3), Art. VIAn example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of imported crude oil. In a decide case, it was held that where under an executive order of the President, this special fund is transferred from the general fund to a “trust liability account,” the constitutional mandate is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit

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8) President’s veto power on appropriation, revenue, tariff bills

The President shall have the power to veto any particular item or items in an Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which he does not object.60

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Sec. 5 hereof.61

The Supreme Court shall have the following powers: x xx(2) Review, revise, modify or affirm on appeal or certiorari x xx final judgments and orders of lower courts in x xx all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto.62

10) Grant of power to the local government units to create its own sources of revenue

Each local government unit has the power to create its own revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide.63

11) Flexible tariff clause

(OsmeňavsOrbos, et al., G.R. No. 99886, Mar. 31, 1993)60Sec. 27(2), Art. VI61Sec. 5 (2), Art. VIII62Sec. 5 (2b), id.Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final arbiter of tax cases.63Sec 5, Art. XLocal government units have no power to further delegate said constitutional grant to raise revenue, because what is delegated is not the enactment or the imposition of a tax, it is the administrative implementation. The power of local government units to impose taxes and fees is always subject to the limitations which Congress may provide, the former having no inherent power to tax. Municipal corporations are mere creatures of Congress which has the power to create and abolish municipal corporations. Congress therefore has the power to control over local government units. If Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for exemptions or even take back the power(Basco vs. PAGCOR)

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In the interest of national economy, general welfare and/or national security, the President upon the recommendation of the National Economic and Development Authority is empowered:

1) To increase, reduce or remove existing protective rates of import duty, provided that the increase should not be higher than 100% ad valorem

2) To establish import quota or to ban imports of any commodity3) To impose additional duty on all imports not exceeding 10% ad

valorem.64

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.65

13) No appropriation or use of public money for religious purposes

No public money or property shall be appropriated, applied, paid or employed, directly or indirectly for the use, benefit, support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.66

64 Sec. 401, TCC65Sec. 28(3), Art. VI Lest of the tax exemption: the use and not ownership of the property To be tax-exempt, the property must be actually, directly and exclusively used for the purposes mentioned. The word “exclusively” means “primarily’. The exemption is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The constitutional exemption applies only to property tax. However, it would seem that under existing law, gifts made in favor or religious charitable and educational organizations would nevertheless qualify for donor’s gift tax exemption. (Sec. 101(9)(3), NIRC)The constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)66Sec. 29(2), Art. VI Public property may be leased to a religious group provided that the lease will be totally under the same conditions as that to private persons (amount of rent). Congress is without power to appropriate funds for a private purpose.

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b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process of law67 x xx.

2) Equal protection

xxx Nor shall any person be denied the equal protection of the laws.68

3) Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall be forever allowed.69 x xx

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.70

J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes (strictly speaking, such refers to taxation)

2. Assessment and Collection

67Sec. 1, Art. III68 Ibid.69Sec. 5 Art. III License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the nature of a condition or permit of the exercise of the right. However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentinovs Secretary of Finance, 235 SCRA 630)70Sec. 10, Art. III A law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation. The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires.

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Consists of the manner of enforcement of the obligation on the part of those who are taxed.71

The two processes together constitute the “taxation system.”

3. Payment

The act of the taxpayer in settling his obligations.

4. Refund

The actual reimbursement of tax to the taxpayer by the government.

K. Definition, Nature, and Characteristics of Taxes

Definition

Taxesare the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs.

Nature

They are not arbitrary exactions but contributions levied by authority of law, and bysome rule of proportion which is intended to ensure uniformity of contribution and ajust apportionment of the burdens of government.

Essential Characteristic of Taxes

1) It is levied by the law-making body of the State.72

2) It is an enforced contribution.73

3) It is generally payable in money.74

4) It is proportionate in character.75

5) It is levied on persons or property.76

71this includes payment by the taxpayer and is referred to as tax administration72The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.73A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.74Tax is a pecuniary burden – an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment of taxes.75It is ordinarily based on the taxpayer’s ability to pay.76A tax may also be imposed on acts, transactions, rights or privileges.

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6) It is levied for public purpose or purposes.77

7) It is levied by the State which has jurisdiction over the persons or property.78

L. Requisites of a valid tax

1) It should be for a public purpose2) The rule of taxation should be uniform3) That either the person or property taxed be within the

jurisdiction of the taxing authority4) That the assessment and collection be in consonance with the

due process clause5) The tax must not infringe on the inherent and constitutional

limitations of the power of taxation.79

M.Tax as distinguished from other forms of exactions

1. Tariff

It may be used in 3 senses:

a. As a book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same.

b. As duties payable on goods imported or exported.80

c. As the system or principle of imposing duties on the importation/exportation of goods.

2. Toll

Sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of the like, of a public nature.

Tax vs Toll1. demand of sovereignty

1. demand of proprietorship

77Taxation involves, and a tax constitutes, a burden to provide income for public purposes.78The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.79Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But their collection should not be tainted with arbitrariness80 PD No. 230

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2. paid for the support of the government

2. paid for the use of another’s property

3. generally, no limit as to amount imposed

3. amount depends on the cost of construction or maintenance of the public improvement used

4. imposed only by the government

4. imposed by the government or private individuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation.81

Tax vsLicense/Permit Fee1. enforced contribution

1. legal compensation or

81 Three kinds of licenses are recognized in the law: 1. Licenses for the regulation of useful occupations. 2. Licenses for the regulation or restriction of non-useful occupations or enterprises 3. Licenses for revenue only Importance of the distinctions between tax and license fee: 1. Some limitations apply only to one and not to the other, and that exemption from taxes may not include exemption from license fees. 2. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases) 3. An extraction, however, maybe considered both a tax and a license fee. 4. But a tax may have only a regulatory purpose. 5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon City, 172 SCRA 629)

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assessed by sovereign authority to defray public expenses

reward of an officer for specific purposes

2. for revenue purposes

2. for regulation purposes

3. an exercise of the taxing power

3. an exercise of the police power

4. generally no limit in the amount of tax to be paid

4. amount is limited to the necessary expenses of inspection and regulation

5. imposed also on persons and property

5. imposed on the right to exercise privilege

6. non-payment does not necessarily make the act or business illegal

6. non-payment makes the act or business illegal

4. Special assessment

An enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements.82

Tax vs Special Assessment1. imposed on persons, property and excise

1. levied only on land

2. personal liability of the person assessed

2. not a personal liability of the person assessed, i.e. his liability is limited only to the land involved

3. based on necessity as well as on benefits received

3. based wholly on benefits

82 Since special assessments are not taxes within the constitutional or statutory provisions on tax exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to special assessments. However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which are actually, directly and exclusively used for religious, charitable and educational purposes are not exactly exempt from real property taxes but are exempt from the imposition of special assessments as well. (see Aban) The general rule is that an exemption from taxation does not include exemption from special assessment.

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4. general application (see Apostolic Prefect vs Treas. Of Baguio, 71 Phil 547)

4. exceptional both as time and place

5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts between parties for their private interest or resulting from their own acts or omissions.

Tax vs Debt1. based on law 1. based on

contracts, express or implied

2. generally, cannot be assigned

2. assignable

3. generally payable in money

3. may be paid in kind

4. generally not subject to set-off or compensation

4. may be subject to set-off or compensation

5. imprisonment is a sanction for non-payment of tax except poll tax

5. no imprisonment for non-payment of debt

6. governed by special prescriptive periods provided for in the Tax Code

6. governed by the ordinary periods of prescriptions

7. does not draw interest except only when delinquent

7. draws interest when so stipulated, or in case of default

N. Kinds of Taxes

1. As to object

a. Personal, capitation, or poll tax

Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their

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property or the occupation or business in which they may be engaged.83

b. Property tax

Tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment.

c. Privilege tax

A charge imposed upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation.

2. As to burden or incidence

a. Direct

A direct tax is demanded from the person who also shoulders the burden of the tax. It is a tax which the taxpayer is directly or primarily liable and which he or she cannot shift to another.

b. Indirect

An indirect tax is demanded from a person in the expectation and intention that he or she shall indemnify himself or herself at the expense of another, falling finally upon the ultimate purchaser or consumer. A tax which the taxpayer can shift to another.

3. As to tax rates

a. Specific

The computation of the tax or the rates of the tax is already provided for by law.

b. Ad valorem

Tax upon the value of the article or thing subject to taxation; the intervention of another party is needed for the computation of the tax.

c. Mixed

Tax rates are partly progressiveand partly regressive.

83i.e. community tax.

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4. As to purposes

a. General or fiscal

Imposed for the purpose of raising public funds for the service of the government.

b. Special, regulatory, or sumptuary

Imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the purpose of raising public funds.

5. As to scope or authority to impose

a. National – internal revenue taxes

Imposed by the National Government

b. Local – real property tax, municipal tax

Imposed by the municipal corporations or local government units

6. As to graduation

a. Progressive

Rate or amount of tax increases as the amount of the income or earning to be taxed increases.

b. Regressive

Tax rate decreases as the amount of income to be taxed increases.

b. Proportionate

Tax based on a fixed percentage of the amount of the property receipts or other basis to be taxed.84

II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

84Example: real estate tax.

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1. Income Tax Systems

a. Global Tax System

One where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer

b. Schedular Tax System

One where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer.85

c. Semi-schedular or semi-global tax system86

Partly schedular, and partly global. The schedular approach is used in taxation of individuals, while the global approach is used in the taxation of corporations.

2. Features of the Philippine Income Tax Law

a. Direct tax

One assessed upon the property, person, business income, etc. of those who pay them.

b. Progressive

The tax rates increase as the tax base increases. In certain cases, however, final taxes are imposed on passive income.87

c. Comprehensive

The Philippine Income tax law adopted the so-called “comprehensive tax situs” – Comprehensive in the sense that it practically applies all possible rules of tax situs.

85Schedular system and Global system 1. Under the schedular treatment, there are different tax rates, while under the global treatment, there is a single tax rate 2. Under the schedular system, there are different categories of taxable income, whileunder the global system, there is no need for classification as all taxpayers aresubjected to a single tax rate.3. The scheduler treatment is usually used in the income taxation of individuals whilethe global treatment is usually applied to corporations.86Approach used in the Philippines87The individual income tax system, in the main, is progressive in nature

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d. Semi-schedular or semi-global tax system88

3. Criteria in Imposing Philippine Income Tax

a. Citizenship Principle

A citizen of the Philippines is subject to Philippine income tax

(a) on his worldwide income, if he resides in the Philippines, or (b) only on his income from sources within the Philippines, if he

qualifies as nonresident citizen.

b. Residence Principle

Resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines.

c. Source Principle

An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on his income from sources within the Philippines such as dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

4. Types of Philippine Income Tax

a) Net income taxb) Gross income taxc) Final income taxd) Minimum corporate income tax of 2% of the gross incomee) Improperly Accumulated Earnings tax of 10% on improperly

accumulated earningsf) Optional Corporate Income Tax of 15% on Gross Income.

5. Taxable Period

a. Calendar Period

This covers the period of 12 months commencing from January 1 and ending December 31.

b. Fiscal Period

88 supra

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An accounting period of 12 months ending on the last day of any month other than December.89

c. Short Period

A period of less than twelve (12) months.

6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens90

Those residing in the Philippinesunless he qualifies as a non-resident under Sec. 22 (E)of the NIRC.91

b) Non-resident citizens92

Those not residing in the Philippines.

A “non-resident citizens” means

1. One who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a definite intention to reside therein.

2. A citizen of the Phils. who leaves the country during the taxable year to reside abroad, either as immigrant or for employment or on permanent basis.

3. A citizen of the Phils. who works and derive from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

4. A citizen who has been previously considered as non-resident citizen and who arrives in the Phils. at any time during the taxable year to reside permanently in the country.93

89ex. Feb 1 to Jan 3190 taxable for income derived from all sources based on taxable (i.e., net) income91 infra92 taxable for income derived within the Philippines based on taxable (i.e., net) income93He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his income derived from sources abroad until the date of his arrival in the Phils.

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5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end of the year.94

2) Aliens95

a) Resident aliens

Those residing in the Philippines though not a citizen thereof.

Those who are actually present in the Phils. and who are not mere transients or sojourners.96

94 Sec. 22 (E)

The continuity of residence abroad is not essential. If physical presence is established, such physical presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73, November 26, 1973) An overseas contract worker is taxable only on income from sources within the Philippines. (Sec. 23 (c). A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as member of the complement of a vessel engaged exclusively in international trade is treated as an overseas contract worker. Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence abroad, however, need not be continuous. [RR1-79]95 What makes an alien a resident or non-resident alien is his intention with regard to the length and nature of his stay. Thus: a. One who comes to the Philippines for a definite purpose which in its very nature maybe promptly accomplished is not a resident citizen. b. One who comes to the Philippines for a definite purpose which in its very nature would require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (Sec. 5, RR 2) Length of stay is indicative of intention. An alien who shall have stayed in the Philippines for more than one year by the end of the taxable year is a resident alien An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred eighty days during a calendar year shall be considered a non-resident alien in business, or in the practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the Philippines, regardless of whether he owns 1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work in Process Inventory, Office Supplies Inventory) 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (example: Merchandise Inventory) 3. Property used in the trade or business which is subject to the allowance for depreciation (example: Office Equipment) actually engages in trade or business therein. (Mamalateo)96A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. For tax purposes a resident alien is; 1) An alien who lives in the Phils. with no definite intention to stay as a resident.

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b) Non-resident aliens97

Those not residing in the Phils. and who is not a citizen thereof.

(1) Engaged in trade or business

Taxable for income derived within the Philippines based on taxable98income.

(2) Not engaged in trade or business

Taxable for income derived within the Philippines based on gross income.

(3) Special Class of Individual Employees

a) Minimum wage earner

Refers to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.99

By virtue of the passage of R.A. 9504, minimum wage earners are exempted from the payment of the net income tax,100 thus: “xxx, That minimum wage earnersshall be exempt from the payment of income tax on their taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.”

b) Corporations101

2) One who comes in the Phils.for definite purposes which in its very nature would require an extended stay and to that end, makes his home temporarily in the Phils. 3) An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.97A “non-resident alien” individual who came to the Phils.and stayed therein for an aggregate period of more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.98 i.e., net99 Sec. 22 (HH), as amended by R.A. 9504100They are not required to file an income tax return101The term shall include partnership, no matter how created or organized, joint stock companies, joint accounts, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to operating or consortium agreement under a service contract with the government.(Sec. 24(b))

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1) Domestic corporations

Those created or organized in the Phils. or under its laws.

2) Foreign corporations

Those created, organized or existing under any laws other than those of the Phils.

(1)Resident

Those foreign corporation engaged in trade or business102 within the Phils.

(2)Non-resident

Those foreign corporation not engaged in trade or business within the Phils.

c. Partnerships103

Partnership is a contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade & business.104

102 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 insistent to and in the progressive prosecution of commercial gain or for the purpose and the object of the business organization (Comm. vs. British Overseas Airways Corporation – BOAC case 149 S 395)103 An ordinary business partnership is considered as a corporation and is thus subject to tax as such.Partners are considered stockholders and, therefore, profits distributed to them by the partnership are considered as dividends.104 What are taxable unregistered partnerships? The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even associations or joint accounts which have no legal personalities apart from their individual members. Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1] Sec. 22 (b)e. g. Law firm

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e. Estates and Trusts

Estate is the mass of property, rights and obligations left behind by the decedent upon his death.105

Trust is an arrangement created by will or co-agreement under which title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus (principal) to be distributed in accordance with the directions of the creator as expressed in the governing instrument.106

f. Co-ownerships107

105 Estates may be classified as follows: 1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership. - The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs shall include in their respective returns their distributive shares of the net income of the estate. 2. Estates under judicial settlement - are subject to income tax in the same manner as individual. - Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor, trustee, and administrator). - The return should be filed by executor or administrator of the trust.106 2 Kinds of Trust : 1. Irrevocable Trust - is considered as a separate taxpayer. 2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpus of the trust is vested: (a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or (b) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom. The tax shall be imposed on taxable income of the grantor.107 General rule: Co-ownership is exempt from income tax because the activities of the co-owners are usually limited to the “preservation” of the properties owned in common and the collection of the income therefrom. Exceptions: (When co-ownership is subject to tax). (1) When the income of the co-ownership is invested by the co-owners in other income-producing properties or income-producing activities, and (2) When there is no attempt to divide inherited property for more than ten (10) years and the said property was not under any administration proceedings nor held in trust, an unregistered partnership is deemed to exist. Tax liability of co-owners: The co-owners in exempt co-ownership shall be liable for income tax only in their separate and individual capacity. Filing of return: The owners shall report and include in their respective personal income tax returns their shares of the net income of the co-ownership. Test to determine whether co-ownership is a taxable unregistered partnership: Find out whether the heirs have made substantial improvements on the inherited property. If so, the implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-ownership will be taxed as an unregistered partnership.

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It is created whenever the ownership of an undivided thing or right belongs to different persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, professions, trades or offices.

A tax on the net income or the entire income realized in one taxable year.

b. Nature

Direct tax – the tax burden is borne by the income recipient upon whom the tax is imposed.

Progressive tax – the tax base increases as the tax rate increases.

Excise tax108 – a tax on the right to earn incomec. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within the Philippines.

3. An individual citizen of the Philippines, who is working and deriving income from abroad as an overseas contract worker, is taxable only on income derived from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker.

4. An alien individual, whether or not a resident of the Philippines, is taxable only on income derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within and without the Philippines.

108privilege tax

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6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

8. Income

a. Definition

It denotes the amount of money or property received by a person or corporation within a specified time, whether as payment for services, interests, or profits from investments.109

Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of exchange transactions.

b. Nature

All wealth which flows to the taxpayer other than a mere return of capital

It is an amount of money coming to a person/corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwisespecified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor.110

Income includes earnings, lawfully or unlawfully acquired, without consensualrecognition, express or implied, of an obligation to repay and without restriction as their disposition.

c. When income is taxable

1) Existence of income

There must be gain – there must be a value received in the form of cash or its equivalent as a result of rendition of service or earnings in excess of capital invested.111

109Fisher vs. Trinidad, 43 Phil 973110Conwi v. Court of Tax Appeals111 A mere expectation of profits is not an income A transaction where- by nothing of exchangeable value comes to or is received by the taxpayer does not give rise to or create taxable income. Items or amounts received which do not add to the taxpayer’s net worth or redound to his benefits such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. Tours specialist, 183 SCRA 402).

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2) Realization of income

a) Tests of Realization

General rule:

A mere increase in the value of property without actual realization, either through sale or other disposition, is not taxable. The increase in value is a mere unrealized increase in capital.

Exception:

That even without the sale or other disposition if by reason of appraisal, the cost 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.112

b) Actual vis-à-vis Constructive receipt

The gain must actuallybe or constructively realized or received.113

An income is constructively received by a person when - it is credited to the amount of or segregated in his favor and which may be drawn by him at any time without any limitations, e. g.:

Interest credited on savings bank depositsDividends applied by the corporation against the indebted- ness of

stockholderShare in the profit of a partner in General Professional Partnership.

3) Recognition of income

a. there is income, gain or profit

Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of T’s indebtedness, or gain from exchange of property.112Economic benefit principle (BIR Ruling No. 029 – 98, March 19, 1998)113Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at anytime is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. The income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made.

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b. the income, gain or profit is received or realized during the taxable year

c. the income gain or profit is not exempt from income tax

4) Methods of accounting

a) Cash method vis-à-vis Accrual method

Cash method - recognition of income and expense dependent on inflow or outflow of cash (meaning, you recognize the income when you actually receive the cash payment for the sale, and you recognize the expense when you actually pay cash for the expense)

Accrual method - method under which income, gains and profits are included in gross income when earned whether received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income

b) Installment payment vis-à-vis Deferred payment vis-àvis Percentage completion114

1. Sales of dealers in personalproperty

Under Rules and Regulations (R&R) prescribed by the Sec. of Finance, upon recommendation of the Commissioner: a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the contract price.115

2. Sales of realty and casual sales of personalty

a) in cases of:

114 in long term contracts115 Example: Sale in 1997 payable in 2 equal annual installments. How to compute for income: Contract Price/ Installments Receivable P100,000 Cost 75,000 (GP) P 25,000* installments payable in 2 equal annual installmentsGP/Contract Price ratio = 25T/100T = 25%Collections in 1997 = P50TIncome for 1997 = P50T x 25% = P12,500

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(i) casual sale or other casual disposition of personal property (other than inventory on hand of the taxpayer at the close of the taxable year) for a price > P1,000, or

(ii) sale or other disposition of real property, if in either case the initial payments do not exceed 25% of the selling price

b) how may income be returned: same as in sales of dealer in personal property above

3.Sales of real property considered as capital asset by individuals

a) individual who sells of disposes of real property, considered as capital asset & is otherwise qualified to report the gain under (2) above may pay the capital gains tax in installments under R&R to be promulgated by the Sec. of Finance, upon recommendation of the Commissioner

b) capital asset: property held by the taxpayer (whether or not connected with his trade or business) but does not include:

(1) stock in trade of taxpayer(2) property which would properly be included in inventory, if

on hand(3) merchandise inventory(4)depreciable assets used in the trade/business(5) real property used in trade/business

d. Tests in determining whether income is earned for tax purposes

1) Realization test

No taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.

2) Claim of right doctrine or Doctrine of ownership, command, or control

3) Economic benefit test, Doctrine of proprietary interest

Any economic benefit to the employee that increases his net worth is taxable.

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4) Severance test

There is no taxable income until there is a separation from capital of something which is of exchangeable value116 thereby supplying the realization or transmutation which would result in the receipt of income. Thus, income is not taxable unless separated or severed from the capital or labor that bore it.

9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source, whether legal or illegal, including117 the following items:

1. Gross income derived from the conduct of trade or business or the exercise of a profession.

2. Rents3. Interests4. Prizes and winnings5. Compensation for services in whatever form paid, including,

but not limited to fees, salaries, wages, commissions, and similar items

6. Annuities7. Royalties8. Dividends9. Gains derived from dealings in property10. Pensions11. Partner's distributive share from the net income of the general

professional partnership.

b. Concept of income from whatever source derived

The term “derived fromwhatever source” implies the inclusion of all income under the law, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains.

It includes illegal gains arising from – gambling, betting, lotteries extortion and fraud.

116Eisner vs. Macomer, 252 US 189117but not limited to

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c. Gross Income vis-à-vis Net Income vis-à-vis Taxable Income118

d. Classification of Income as to Source

1) Gross income and taxable income from sources within the Philippines

1) Interests:

a) Interests derived from sources withinthe Phils.b) Interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise.119

2) Dividends:

a.) From a domestic corporation, andb.) From a foreign corporation 50% or more of the gross income of which for the 3-year period ending with the close of the taxable year preceding the declaration of such dividends (or for such part of such period as the corporation within the Phils.120has been in existence) was derived from sources. It must be only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

3) Compensation for labor or personal services performed in the Phils.121

4) Rentals and Royalties from property located in the Phils. or from any interest in such property, including rentals or royalties for –

a.) The use of, or the right or privilege to use inthe Phils. any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or night;

b.) The use of, or the right to use in the Phils. any industrial, commercial or scientific equipment;

c.) The supply of scientific, technical, industrial or commercial knowledge or information;

d.) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in

118 See definition of gross income, supra119 Sec. 42, (A)( 1)120 Id. (A)(2)121 Id. (A)(3)

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paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

e.) The supply of services by a nonresident 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;

f.) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and

g.) The use of, or the right to use:

1. Motion picture films;2. films or video tapes for use in connection with television;

and3. tapes for use in connection with radio broadcasting

5) Gains, profits, and income from the sale of real property located in the Phils. and

6) Gains, profits, and income from sale of personal property, treated as derived entirely from the country where it is sold.122

2) Gross income and taxable income from sources without the Philippines

1) Interest other than that derived from sources within the Phils.

2) Dividends other than those derived from sources within the Phils.

a. Dividends from foreign corporations in general; and

122 Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treated as derived entirely from sources within the Phils. regardless of where the shares are sold. Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination of where and when the title to the goods passes from the seller to the buyer is decisive.Enumeration in Section 42 not all-inclusive. In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the Supreme Court held: “xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Phils. a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered xxx” The Supreme Court further held: “xxxThe absence of flight operations to and from the Phils. is not determination of the source of income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the source, and the source of an income is that activity xxx which produced the income. Unquestionably the passage documentations in these cases were sold in the Phils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils. xxx”

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b. Dividends derived from foreign corporations, 50% or more of the gross income of which for the 3-year period preceding the declaration of dividends (or for such part of such period as the corporation has been in existence was derived from foreign sources)

3) Compensation for labor or personal services performed outside the Phils.

4) Rentals or royalties from property located outside the Phils. or from any interest in such property including rentals or royalties for the use of or for the privilege of using outside the Phils., patents, etc.

5) Gains, profits and income from the sale of real property located outside the Phils.

6) Gains, profits and income from the sale of personal property located outside the Phils., and

7) Income derived from the purchase of personal property within and its sale outside the Phils.123

3) Income partly within or partly without the Philippines

1) Income from transportation such as foreign steamship companies whose vessel touch the Phil. ports124 and other services rendered partly within and partly outside the Phils. such as foreign corporations carrying on the business of transmission of telegraph and cable messages between points outside the Phils.125

2) Income from the sale of personal property produced in whole or in part by the taxpayer within and sold outside the Phils. orproduced, in whole or in part, by the taxpayer outside and sold within the Phils.

e. Sources of income subject to tax

1) Compensation Income126

123 Sec. 42124 Sec. 163, Regulations125Sec. 164, id.126Forms of Compensation a. money b. in kind Compensation paid to an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid to the employee in cash. Living quarters furnished to the employee in addition to cash salary. The rental value should be reported as income. Meals given to employee, the value thereof substitutes income.

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All income payments, in money or in kind, “arising from personal” services under an employer - employee relationship.

The gain derived from labor especially employment such as salaries and commission.

All remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash.127

2) Fringe Benefits128

a) Special treatment of fringe benefits

The special treatment of fringe benefits shall be applied to fringe benefits given or furnished to managerial or supervising employees and not to the rank and file.129

b) Definition

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 employee.

c) Taxable and non-taxable fringe benefits

Taxable fringe benefits:

127 Sec. 78(A) It includes: 1. Salaries and wages 2. Commissions 3. Tips 4. Allowances 5. Bonuses 6. Fringe Benefits of rank and file employees It does not include remuneration paid: For agricultural labor paid entirely in products of the farm where the labor is performed, or For domestic service in a private home, or For casual labor not in the course of the employer's trade or business, orFor services by a citizen or resident of the Philippines for a foreign gov’t or an int’l organization.128 Sec. 33The fringe benefit covered refers to those enjoyed by managerial and supervisory employees129Pursuant to Revenue Regulations No. 3 – 98 (dated May 21, 1998) implementing section 33 of the Tax Code.

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1) HousingPrivileges

(a) Lease of residential property for the use of the employee as his usual place of residence.

(b) Residential Property owned by employer and assigned to employee as his usual place of residence.

(c) Residential property purchased by employer on installment basis for the use of employer as his usual place of residence.

(d) Residential property purchased by ER and ownership is transferred to EE as his usual place of residence.

(e) Residential property transferred to employee at less than employer’s acquisition cost.130

2) Household Expenses– refer to expenses of the employee paid by the employer for household personnel or other personal expenses, which shall include:

(a) salaries of household helper(b) personal driver of the employee(c) Payment for homeowner assoc., etc.

3) Interest on loan at less than market rate131

4) Expenses for Foreign Travel

General rule:

Expenses for foreign travel insured by the employee and/or family members of the employee borne by the employer shall be treated as taxable fringe benefits of the employee.

Except:

Where the expenses for foreign travel paid by the employer for the employee are for the purpose of attending business meeting or convention. The exemption covers only the following expenses:

130 Non – taxable Housing Fringe Benefits (a) Housing privilege of military officials of AFP (b) Housing unit, which is situated inside or adjacent to the premise of a business or factory. A housing unit is considered adjacent if it is located within the maximum 50 meters from the perimeter of the business premises. (c) Housing benefit granted to employees on a temporary basis not exceeding three (3) months131 If the employer lends money to his employee: Free of interest or at a rate lower than 12% (or prevailing market rate) the interest foregone by the employer or the difference of the interest assumed by the employer and the 12% rate shall be treated as taxable fringe benefit.Applicable to installment payment or loan with interest rate lower than 12% starting January 1, 1998.

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a) Inland travel expenses except lodging cost in hotel averaging US$ 300 or less per day;132 and

b) Cost of economy or business class airline ticket.133

5) Membership fees, dues and other expenses borne by the employer for his employee, in social or athletic clubs or other similar organizations.134

6) Life or Health Insurance -

General rule:

The cost of life or health insurance and other non – life insurance premiums or similar amounts in excess of what the law allows borne by the employer for his employees shall be treated as taxable fringe benefits.

Except:

a) Contribution of the employer for the benefits of the employee pursuant to existing laws.135

b) The cost of premium borne by the employer for the group insurance of his employees.

7) Holidays and Vacation Expense

8) Motor Vehicle

a) Motor vehicle purchased by employer in name of employee.b) “cash for the purchased provided by the employer, the ownership is

placed in the name of the employeec) Purchase on “Installment” basis, the ownership is placed in the

name of the employeed) “Portion” of purchased price shouldered by employere) Fleet of motor vehicle “leased” by the employerf) Fleet of Motor vehicles owned and maintained by employer.136

132Travel expenses should be supported by documents proving the actual occurrences of the meetings or conventions. Likewise, documents and evidence showing the business purpose of the employees’ travel must be presented otherwise, the entire cost will be considered taxable fringe benefit.133However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to a fringe benefit tax.134These are treated as taxable Fringe Benefits of the employee in full.135such as RA 8287 (SSS) or RA 8291 (GSIS).136 In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the personal purpose of the employee and partly for the benefit of his employer, the monetary value shall be the entire value of the benefit.

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9) Expense Account

a) Expenses incurred by the employee but paid by his employer.b) Expenses paid by the employee but reimbursed by his employer.137

10) Educational Assistance

General Rule: The cost of the educational assistance to the employee or his dependents which are borne by the employer shall be treated as Taxable Fringe Benefits.

Exception:

a) Education granted to employee138

b) Educational Assistance granted to the dependents of the employee in the nature of educational assistance to the dependents of the employee through a competitive scheme under a scholarship program of the company.

Non-taxable fringe benefits:

1) Contributions of employer for the benefits of employee to retirement, insurance, and hospitalization benefits plans.

2) Benefits given to rank- and -file employees whether granted under CBA or not.

3) Fringe Benefits which are exempted from income tax under the tax code or other special laws.

Under letters e and f, the fleet of motor vehicles is for the use of the business and the employees. The value of the benefit shall be the rental payments (e) or the acquisition cost (f) of all motor vehicles not normally used for sales, freight, delivery service and non-personal use. The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit – the value of the benefit shall be measured based on the depreciation of the Yacht at an estimated useful life of 20 yrs. The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as “business use” and not subject to FBT.137Expense account not subject to FBT. a) expenses duly receipted for in the name of the employer and b) The expenditures do not partake the nature of personal expenses attributable to the employee. Personal expenses of the employee(like groceries) paid for or reimbursed by the employer are taxable fringe benefits, whether or not duly receipted for in the name of the EE. Representation and Transportation Allowances (RATA) refers to fixed amounts which are regularly received by the employees as part of their monthly compensation income. They are not treated as Taxable Fringe Benefits but the same are treated as Taxable Compensation Income.138 Requisites: (1) Educational grant whereby the study is directly connected with the trade, business or profession of the ER. (2) And there is a written contract obligating the EE to remain under the employment for a certain period.

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4) Fringe Benefits which are required by the nature of, or necessary to the trade, business or profession of the employer.

5) Fringe Benefits granted for the convenience or advantage of the employer.

6)De minimis benefits139 as may be defined by the Secretary of Finance.

3) Professional Income

Any other income that is not derived from personal services or not related to an employer – employee relationship and is generally subject to tax on net income basis.

The value derived from an exercise of profession, business or utilization of capital assets.140

4) Income from Business

Gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and long- term construction contracts.

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

Refer to properties held by the taxpayer in the pursuit of his profession, trade or business, they are:

i. Stock in Trade;ii. Property of a kind which would properly be included in the

inventory if on hand at the close of the taxable year;iii. Property held by the taxpayer primarily for sale to customers in

the ordinary course of trade or business;iv. Property used in trade or business which in subject to the

allowance for depreciation; andv. Real property used in trade or business.141

(2) Capital assets142

139infra140e.g. income derived from sale of assets used in trade or business141Sec. 39, [A], NIRC142 Specific Examples of Properties classified as capital assets

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Property held by the taxpayer143but does not include:

i. Stock in trade;ii. Property of a kind which would properly be included in the

inventory if on hand at the close of the taxable year;iii. Property held by the taxpayer primarily for sale to customers in

the ordinary course of trade or business;iv. Property used in trade or business which in subject to the

allowance for depreciation; andv. Real property used in trade or business.144

b) Types of Gains from dealings in property

(1) Ordinary income vis-à-vis Capital gain

Includes any gain from the sale or exchange of property which is not a capital asset.145

(2) Actual gain vis-à-vis Presumed gain

(3) Long term capital gain vis-à-vis Short term capital gain

(4) Net capital gain, Net capital loss

Net Capital gainis the excess of the gains from sales or exchange of capital assets over the losses from such sales or exchanges.146

Net capital Lossis the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.147

Capital assets include personal property (not used in trade or business) such as movables in one’s residence, personal vehicles, appliances and furniture for personal use, jewelries etc. as well as real property (not used in trade or business) such as residential land, idle land not used in business operations and residential house.143whether or not connected with his trade or business144Sec. 39, [A], NIRCThis is an enumeration by exclusion, all others not enumerated are capital assets.145 Sec. 22, [Z]146Sec. 39, [A, 2], id.147Sec. 39, [A, 3], id.

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(5) Computation of the amount of gain or loss

The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property148received.149

(a) Cost or basis of the property sold

The basis of property shall be - 

(1)If such was acquired by purchase, it isthe cost of the property.

(2) If the property sold was acquired by inheritance; the fair market price or value as of the date of acquisition.

(3) If the property sold was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift.

(4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property.150

(b) Cost or basis of the property exchanged in corporate readjustment

[1] Merger[2] Consolidation

148other than money149 Sec. 40 (A)150 Id., (B)

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A merger or consolidation has income tax consequences to the corporation which is aparty tothe merger or consolidation, to its stockholders, and to its security holders. To the corporation, or to its stockholders, or to its security holders, loss is not recognized from the merger or consolidation.151

Gain will be recognized only if, on the exchange under the merger or consolidation, the taxpayer received cash or property. The gain to be recognized should not exceed the sum of money and the fair market value of the property received.

[3] Transfer to a controlled corporation152

When a taxpayer transfers property to a corporation, in consideration of stock received for the transfer, as a result of which transfer, the taxpayer153 gains control of the corporation, no loss is recognized on the transfer of property.154

(c) Recognition of gain or loss in exchange of property

[1] General rule

Upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized.155

[a] Where no gain or loss shall be recognized

a) Exchange solely in kind156in legitimate mergers or consolidations.

151 Id., (C)152 tax-free exchanges153alone or together with others not exceeding four [or a total of five]154 Id., (C)(2)(c), last par. Suppose the transfer resulted in a gain to the transferor, will the gain be recognized? Gain will be recognized only if on the transfer, the taxpayer received cash or property in addition to the shares received. The gain to be recognized shall not exceed the sum of money and fair market value of the property received. If before the transfer to the corporation, the transferor already had control over the corporation, the gain or loss on the transfer will be recognized155 Id., (C) (1)156exchange of property solely for stocks

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1) A corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation;

2) A corporation which is a party to a merger or consolidation receives in exchange for property not only stock of another corporation but also money and/or other property and distributes it in pursuance of the plan of merger or consolidation.

3) A shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation.

4) A security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stockor securities in another corporation, a party to the merger or consolidation.

b) Transfer or exchange of property for stock resulting in acquisition of corporate control.157

[2] Exceptions

[a] Meaning of merger, consolidation, control securities

"Merger" or "consolidation shall be understood to mean:

(i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all

the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a

157 A person exchanges his property for stock or unit of participation in a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation “Control” means ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stock entitled to vote. The items enumerated above are also called “tax-exempt exchanges.”

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bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor.

The term "control” shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.158

[b] Transfer of a controlled corporation159

(6) Income tax treatment of capital loss

(a) Capital loss limitation rule160

Provides thatcapital lossesare deductible only to the extent of capital gains.

(b) Net loss carry-over rule161

Net Capital Loss Carry Over (NCLCO)means that:

i. If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss;

ii. Such net capital loss cannot be deducted from ordinary income due to the loss limitation rule;

iii. Such loss could be carried over to the next taxable year162as a deduction against net capital gain in an amount not in excess of the taxable income163in the year the loss was sustained; and

158 Id., (C)(6)159 See (5)(b)(3), supra160applicable to both corporations and individuals161applicable only to individuals162 not thereafter163i.e. net income before exemptions

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iv. Such loss shall be treated as a loss from the sale or exchange of capital assets held for not more than twelve (12) months.164

(7) Dealings in real property situated in the Philippines165

On sale, exchange, or other disposition of real property in the Philippines, held as acapital asset - on the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of 6%.166

(8) Dealings in shares of stock of Philippine corporations

(a) Shares listed and traded in the stock exchange

This is not subject to income tax but subject to percentage tax of ½ of 1% of the gross selling price.

(b) Shares not listed and traded in the stock exchange

164Sec. 39 [D]165The real property involved must be considered capital asset.A capital asset is property held by the taxpayer whether or not connected in his trade or business except:1. Stock in trade or other property of any kind which would be included in the inventory of the taxpayer if on hand at the end of the taxable year.2. Property primarily held for sale to customers in the ordinary course of trade or business.3. Property used in trade or business subject to depreciation.4. Real property used in trade or business.166 Sec. 24 (D)

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The provisions of Section 39(B)167 notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000……………………………........ 5%

On any amount in excess of P100,000……………. 10%

(9) Sale of principal residence168

Not liable for capital gains tax when:

a. There is a sale or disposition of their principal residence by natural persons.

b. The proceeds of the sale are fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or disposition.

c. The Commissioner shall have been duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption.

d. A deposit is made of the 6% capital gain tax otherwise due, in cash or manager’s check, in an interest-bearing account with an Authorized Agent Bank (AAB), under an Escrow Agreement between the taxpayer and the Bureau of Internal Revenue that the same shall be released to the taxpayer when the proceeds of the sale shall have been utilized as intended.

e. The tax exemption can only be availed of once every 10 years.167 In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months168Conditions for tax exemption of gain from the sale or exchange of principal residence:1. Proceeds are fully utilized in acquiring or constructing a new principal residence within18 months from the date of sale or disposition;2. Historical cost or adjusted basis or the real property sold or disposed shall be carried over to the new principal residence built or acquired;3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30) days from the date of sale or disposition; and4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax

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If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax (CGT). The GSP or FMV at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion..169

6) Passive Investment Income

a) Interest Income

An earning derived from depositing or lending of money, goods or credits.170

b) Dividend Income171

(1) Cash dividend

A dividend paid in cash and is taxable to the extent of the cash received.

(2) Stock dividend

Involves the transfer of a portion of retained earnings to capital stock by action of stockholders. it simply means the capitalization of retained earnings.172

169 Sec. 24 (D)(2)170 General rule: Interest received by a taxpayer, whether usurious or not, is subject to income tax. Except: When interest income is exempted by law from income tax.171Dividends means any distributions made by a stock corporation to its stockholders (SHs)) out of its earnings or profits and payable to its SHs in money or other property.172General rule: A mere issuance of stock dividends is not subject to income tax, because it merely represents capital and it does not constitute income to its recipient. Before disposition thereof, stock dividends are nothing but a representation of interest in the corporate entity.Exceptions: When stock dividends are subject to tax; a) These shares are later redeemed for a consideration by the corporation or otherwise conveyed by the stockholder to the extent of such contribution. Under the NIRC, if a corporation, after the distribution of a non-taxable stock dividend, proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a tax of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent that it represents a distribution of earnings or profits. (Sec.73 (B), NIRC). Depending on the circumstances, corporate earnings may be distributed under the guise of initial capitalization by declaring the stock dividends previously issued and later redeem or cancel said dividends by paying cash to the stockholder. This process amounts to distribution of taxable dividends which is just delayed so as to escape the tax. (CIR vs. CA, 301 SCRA 152) b) The recipient is other than the stockholder. (Bachrach vs. Seifert, 57 PHIL 483) c) A change in the stockholder’s equity results by virtue of the stock dividend issuance.

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(3) Property dividend

A dividend paid in property of a corporation such as stock investment, bands or securities held by the corporation and to the extent of the FMV of the property received at the time of the distribution.

(4) Liquidating dividend

A dividend distributed to the shareholders upon dissolution of the corporation.

c) Royalty Income

These are the compensations or payments for the use of property and are paid to the owner of a right.

d) Rental Income173

Refers to earning derived from leasing real estate as well as personal property. It includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor.

(1) Lease of personal property(2) Lease of real property

(3) Tax treatment of

(a) Leasehold improvements by lessee

The lease can be drawn up to grant a credit to the renter toward any amounts he might spend in leasehold improvements. This would benefit the landlord in that the taxable income for rent will be reduced. The amounts spent for these improvements can be deducted from any capital gains on the future sale of the leased building.174

(b) VAT added to rental/paid by the lessee

173Taxes paid by the tenant (lessee) to or for a lessor for a business property are additional rent and constitute income taxable to the lessor. 174 e.How.com

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If VAT registered, the lessee is able to treat the full amount of the VAT charged on the rentals as input tax and to claim a credit in the normal way. However, non-registered lessees (including most small enterprises), and those classified as exempt cannot claim a VAT refund and hence have to bear the cost.175

(c) Advance rental/long term lease

(a) If the advanced rental is a SecurityDeposit which restricts the lessor as to its use - such amount shall be “excluded”in the determination of rental income.

(b) If the advance rental is prepaid rental received without restriction as to its use – the entire amount is “taxable” in the year it is received.

7) Annuities, Proceeds from life insurance or other types of insurance

Annuities - amounts payable yearly or at other regular intervals for a certain or uncertain period.They also represent as installment payments for life insurance sold by insurance companies.176

Proceeds of life insurance paid by reason of the death of the insured to his estate or to any beneficiary,177 directly or in trust.

Return of insurance premium178

8) Prizes and awards

Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor.

The exceptions are as follows:

175practicalaction.org176 If the part of annuity payments represent “interest” = taxable income.If the annuity is a mere return of premium = not taxable.177individual, partnership, or corporation, but not a transferee for a valuable consideration. If the proceeds are retained by the insurer, the interest thereon is taxable;178If such amounts (when added to amounts already received before the taxable year under such contracts) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in the gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation. No loss is realized on surrender of a life insurance policy for its surrender value.

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Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are exclusions from gross income if:

a. The recipient was selected without any action on his part to enter a contest or proceedings; and

b. The recipient is not required to render substantial future services as a condition to receiving the prize or award.

Prizes and awards granted to athletes in local and int’l sports competitions and tournaments held in the Philippinesand abroad and sanctioned by their national associations shall be exempt from income tax.

9) Pensions, retirement benefit, or separation pay

Pensionrefers to allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss or injury.

Retirement benefits received under RA 7641 and those received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer.179

Any amount received by an employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness, other physical disability or for any cause beyond the control of the employee.180

The social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions.

Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration

179 Requisites: i. The retiring employee has been in the service of the same employer for at least 10 years. ii. The retiring employee is not less than 50 years of age at the time of his retirement iii. The benefits shall be availed of by an employee only once. iv. That there be a reasonable private benefit plan as defined below.180i.e., the separation of the employee must be involuntary and not initiated by him

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Benefits received from or enjoyed under the Social Security System.

Benefits received from theGSIS, including retirement gratuity received by government officials and employees.

10) Income from any source whatever

All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income.181

a) Forgiveness of indebtedness

The cancellation and forgiveness of indebtedness may, dependent upon the circumstances, amount to:

1. a payment of income; 2. a gift; or3. a capital transaction.

If, for example, an individual performs services for a creditor who, inconsideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service.

If, however, a creditor merely desires to benefit a debtor and without any consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income.

If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of dividends.182

b) Recovery of accounts previously written off

Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction.183There is an income tax benefit when thededuction of the bad debt in the prior year resulted in lesser income and hence tax savings for the company.184

181Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.182Sec. 50, Rev. Reg. 2183Tax Benefit Rule184Sec. 4, RR 5-99

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c) Receipt of tax refunds or credit

As a general rule, a refund of a tax related to the business or the practice of profession, is taxable income185in the year of receipt to the extent of the income tax benefit of said deduction.186

Tax credit takes place upon the issuance of a tax certificate or tax credit memo, which can be applied against any sum that may be due and collected from the taxpayer.

d) Income from any source whatever187

f. Source rules in determining income from within and without188

The following items of gross income shall be treated as gross income from sources within the Philippines: 

1) Interests

Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise.

2) Dividends

The amount received as dividends:

185e.g., refund of fringe benefit tax186i.e., the tax benefit rule applies However, the following tax refunds are not to be included in the computation of gross income: 1. Philippine income tax, except the fringe benefit tax 2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred. 3.Estate and donor’s taxes 4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessments) 5.ValueAddedTax 6. Fines and penalties due to late payment of tax 7.Final taxes 8. Capital Gains Tax187 supra188 Sec. 42

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(a) from a domestic corporation; and(b) from a foreign corporation, unless less than fifty percent

(50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

3) Services

Compensation for labor or personal services performed in the Philippines.

4) Rentals

Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for -

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident 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;

(f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and

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(g) The use of or the right to use:

(i) Motion picture films;(ii) Films or video tapes for use in connection with television;

and(iii) Tapes for use in connection with radio broadcasting.

5) Royalties189

6) Sale of real property

Gains, profits and income from the sale of real property located in the Philippines.

7) Sale of personal property

Gains, profits and income from the sale of personal property

The following items of gross income shall be treated as income from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines

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

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines.

8) Shares of stock of domestic corporation

Gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold.

189 See 4) Rentals, supra

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g. Situs of Income Taxation190

h. Exclusions from Gross Income191

Refers to income received or earned but is not taxable as income because it is exempted by law or by treaty. Receipts which are not in fact income are also excluded from Gross Income.192

1) Rationale for the exclusions

a) Life Insurance proceeds – represents indemnity not income

b) Amount Received by Insured as Return of Premium– the amount returned are not income but return of

capital. They represent earnings which were previously taxed.

c) Gifts, Bequests, and Devises- the property is subject to donor’s or estate taxes

as the case may be. Further, there is no income.

d) Compensation for Injuries or Sickness - they are mere compensation for injuries or

sickness suffered and not income.

e) Income Exempt under Treaty - the principle of reciprocity and comity among nations.

2) Taxpayers who may avail of the exclusions

a) Individuals b) Corporations; and c) Estates and trusts

3) Exclusions distinguished from deductions and tax credit

Exclusions– refer to income received or earned but is not taxable because by law or treaty. Such tax – free income is not to be included in the income tax return unless information regarding it is specifically called for.193

190See Inherent Limitations, Territorial, supra191 See Sec. 32 (B)192Exclusions are in the nature of tax exemptions, thus, the claimant must establish them convincingly.193 Sec. 61, Rev. Regs. No. 2

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Deductions – refer to the items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income.194

Tax credit – an amount subtracted from an individual’s or entity’s taxliability to arrive at the total tax liability.195

4) Under the Constitution

a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function

Refers only to income derived by the Government or any of its political subdivisions from:

1) any public utility; and(2) the exercise of any essential governmental function.196

5) Under the Tax Code

a) Proceeds of life insurance policies

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise.197

b) Return of premium paid

The amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term of the contract of upon surrender.198

194Secs. 34 and 35, NIRC195M.E. Holding Corp. vs. Commissioner of Internal Revenue, CTA Case No. 5314, prom.August 17, 1998 citing Black’s Law Dictionary, 6th Ed.196Thus, income from sources other than those mentioned is subject to income tax.197 Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the proceeds thereof are considered indemnity rather than a gain or profits.Instances when proceeds from insurance are taxable: a) Where proceeds are held by the insurer under an agreement to pay interest. The interest is included in determination of gross income. b) Where the transfer is for valuable consideration.198Reason for the exclusion: The return of premium is a mere return of capital. However, where the included in the gross amount received exceed the aggregate premiums paid, the excess shall be income

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c) Amounts received under life insurance, endowment or annuity contracts199

d) Value of property acquired by gift, bequest, devise or descent

The value the property acquired by gift, devise, or descent shall be excluded. However, the income from such property, as well as gift, bequest, devise, or descent of income from property, in cases of transfers of divided interest, shall be included in gross income.

e) Amount received through accident or health insurance

Amounts received, through Accident or Health Insurance or under Workmen’s Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on the account of such injuries or sickness.200

f) Income exempt under tax treaty

Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

g) Retirement benefits, pensions, gratuities, etc.

a) Retirements benefits received under RA 7641 and those received by officials and employees of private firms in accordance with reasonable private benefit plan.201

199 See b.200 Example of damages recovered from personal injuries: Moral damages for personal injuries. If the award of damages is to compensate loss of property or an award of damages to compensate loss of income / profits, such is subject to tax.201 Requisites: 1) The retiring official or employees has been in service of the same employer for at least ten years. 2) Is not less than 50 yrs. of age at the time of his retirement and 3) Available to official or employee only once. A “reasonable private benefit plan” means a pension; gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his employees – a) wherein contributions are made by such employer or employees, or both, for the purpose of distributing to such employer the earnings and principal of the fund thus accumulated; and b) wherein said plan provides that at no time shall any part of the principal or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of said employee

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b) Any amount received by an official or employees or by his heirs from the employer as a “consequence of separation from service due to death, sickness or other physical disability beyond the control of the said official or employer.

c) Terminal leave and other social security benefits.202

d) Benefits received under the US veterans Administration.e) Benefits received from SSSf) Benefits received from GSIS

h) Winnings, prizes, and awards, including those in sports competition

1) Prizes and Award - to be excluded, the following conditions must concur:

(1) Prizes and award made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement.

(2) The recipient was selected without any action on his part to enter the contest or proceeding.

(3) The recipient is not required to render substantial future services as a condition in receiving the award.

2) Prizes and Award in Sports Competition - All prizes and award granted to athletes in local and international sports competitions and tournaments whether held in the Phils. or abroad and sanctioned by sports associations.

6) Under a Tax Treaty

To the extent required by any treaty obligation binding upon the Philippine government.

7) Under Special Laws

202The terminal leave pay of government employees whose employment is co-terminous is exempt since it falls within the meaning of the phrase “for any cause beyond the control of the said official or employees” (BIR Ruling 143-98)

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1. Prizes received by winners in charity horse race sweepstakes from PCSO.

2. Back pay benefits 3. Income of cooperative marketing association 4. Salaries and stipends in dollars received by non – Filipino

citizens on the technical staff of IRRI (International Rice Research Institutes).

5. Supplemental allowances per diem, benefits received by officer or employees of the Foreign Service.

6. Income from bonds and securities for sale in the international market.

i. Deductions from Gross Income203

1) General rules

a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession

It must be directly connected with trade or business or profession of the taxpayer.

b) Deductions must be supported by adequate receipts or invoices204

203 These are items or amounts authorized by the law to be subtracted from the pertinent items of the gross income to arrive at the taxable income.The term ‘taxable income’ means the pertinent items of gross income specified in the National Internal Revenue Code [Sec. 32], less the deductions [Sec. 34] and/or personal and additional exemptions [Sec. 35], if appropriate, authorized for such types of income by the Code or other special laws. [Sec. 31]. Who can avail of deductions? General rule: All taxpayers Exception: Those earning compensation income arising from personal servicesrendered under an employer-employeerelationship Basic Principles Governing Tax Deductions: He who claims it must point to the specific provision of the statute authorizing it, and he must be able to prove that he is entitled to it. If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent. However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction against the taxpayer-claimant will not apply. Unlike gross income, there is no catch-all provision for deductions. Deductions must comply with the substantiation requirement.204 except standard deduction

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The claimed deduction must be evidenced by official receipts or other adequate records.205

2) Return of capital (cost of sales or services)

a) Sale of inventory of goods by manufacturers and dealers of properties

b) Sale of stock in trade by a real estate dealer and dealer in securitiesc) Sale of services

3) Itemized deductions206

a) Expenses207

(1) Requisites for deductibility

1. It must be ordinary and necessary.2. It must be paid or incurred during the taxable year.3. It must be paid or incurred in carrying on or which are

directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession.

4. The amount must be reasonable.5. It must be substantiated with sufficient evidence, such as

official receipts or other adequate records, showing:

205 The evidence must establish the following; a) the amount of expenses being deducted b) the direct relation of such to the development, management, operation, and/or conduct of the trade, business or profession of the taxpayer.206 The following can claim itemized deductions: a. Corporations, whether domestic or (resident) foreign b. General Professional Partnerships c. Individuals engaged in trade, profession or business (citizen, resident alien, non-resident alien doing business in the Philippines) d. Estates and trusts engaged in trade or business e. Proprietary educational institutions and hospitals (non-profit) f. Government-owned or controlled corporationsOnly individuals, except non-resident aliens, can elect between itemized deductions and optional standard deduction.207Sec. 34(A) Only deductions allowable are ordinary and necessary trade, business or professional expenses

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i. the amount of the expense being deducted, andii. the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.

6. It is not contrary to law, public policy or morals.7. The tax required to be withheld on the amount paid or

payable must have been paid to the BIR by the taxpayer, who is constituted as a withholding agent of the government.208

(a) Nature: Ordinary and necessary209

Ordinary – expenses which are commonly incurred in the trade or business of the taxpayers as distinguished from capital expenditures. An expense is ordinary if it is normal or usual to the line of business.

Necessary – expenses which are appropriate and helpful to the taxpayer’s business or if it is intended to realized profit or to minimize a loss.

(b) Paid and incurred during taxable year

Paid – the payment is on cash receipt basis, expenses are deductible in the year they are incurred.

Incurred – the payment thereof is on accrual basis, expenses are deductible in the year they are incurred, whether paid or not.

(2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit

208 For instance, withholding tax on compensation income paid to employees, fringe benefit tax on fringe benefits given to managerial and supervisory employees, etc. ( Sec. 2.58.5, RR 2-98 as amended by Sec. 6, RR 14-2002)209 The two conditions must concur. A court may decide on when an expense is, or is not, ordinary, but as much as possible, it will refuse to substitute its judgment for that of the taxpayer on the necessity of an expense.

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tax which tax should have been paid210

(3) Travel/Transportation expenses211

(4) Cost of materials

(5) Rentals and/or other payments for use or possession of property212

(6) Repairs and maintenance213

(7)Expenses under lease agreements214

(8) Expenses for professionals

(9) Entertainment expenses

(10) Political campaign expenses

(11) Training expenses

210 Sec. 34 (A)(1)(a)(i)211For travel expenses, here and abroad,while away from home, in the pursuit of trade, business or profession. Include meals and lodging, here and/or abroad. While away from home means away from principal place of business If the trip is undertaken for purposes other than business or exercise of profession, the transportation expenses are personal expenses and the meals and lodging are living expenses and are not deductible. Transportation expenses of an employee from his residence to his office and back are not deductible. They are personal expenses. However, transportation expenses from his office to his customer’s place of business and back are deductible. They are business expenses.212 Required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor.213 Extraordinary repairs - those in the nature of replacements, alteration, and expansion to the extent that they arrest deterioration and prolong the life of the property. Ordinary repairs - those made to keep the property ordinarily efficient working condition and do not materially add to the value of the property214 See 5) Rentals, etc., supra

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b) Interest215

(1) Requisites for deductibility

a) there must be indebtedness.b) the indebtedness must be that of the taxpayerc) the indebtedness must be connected with the trade, business or

profession of the taxpayerd) the interest must have been paid or incurred during the taxable

yeare) the interest must have been stipulated in writingf) the deduction for interest expense shall be reduced by an amount

equal to 38% of the interest income subject to final tax.216

g) The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B),217 both of the Tax Code of 1997.

h) The interest must not be incurred to finance petroleum operations.i) In case of interest incurred to acquire property used in trade,

business or exercise of profession, the same was not treated as a capital expenditure.

(2) Non-deductible interest expense

1) Interest paid in advance by a taxpayer reporting income on cash basis provided:

a) Such interest may be allowed as deduction in the year the indebtedness is paid: and

(b) If the indebtedness is payable in periodic amortization -- the interest corresponding to the amortized principal may be deducted during the taxable year.

(2) If the indebtedness is incurred to finance petroleum exploration.

(3) Interest on loans between related taxpayer:

(a) between members of a family

215The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income. (Sec. 34, B (1))216 beginning Jan. 1, 2000217 infra

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- Brothers and sisters218

- Spouse- Ancestors- Lineal descendants

(b) between an individual and a corporation --- where more than 50 % in the value of outstanding capital stock is owned by such individual except in the case of distribution in liquidation.

(c) between two corporations – where more than 50% of the OCS of which is owned directly or indirectly by or for the same individual except distribution in liquidation.

(d) between the Grantor and the fiduciary in Trust

(e) between the fiduciary of a trust and a fiduciary of another trust if the same person is a grantor with respect to each trust.

(4) In the case of banks and loan or trust companies, interest paid within the year on deposits or on savings received for investment and secured by interest-bearing certificates of indebtedness issued by such bank or company.

(3) Interest subject to special rules

(a) Interest paid in advance

If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year.

(b) Interest periodically amortized219

(c) Interest expense incurred to acquire property for use in

218 whether full or half-blood219 See a), above

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trade/business/profession

At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.220

c) Taxes221

(1) Requisites for deductibility

1. It must be paid or incurred within the taxable year.2. It must be paid or incurred in connection with the

taxpayer’strade, profession or business.222

3. It must be imposed directly on the taxpayer.4. It must not be specifically excluded by law from being

deducted from the taxpayer’s gross income.

(2) Non-deductible taxes

1. Foreign income tax, if not claimed as tax credit223

2. Final Taxes3. Estate and donor’s taxes4. Stock transaction tax on the sale, barter or exchange of s/s listed

and traded through the local stock exchange.

220 Sec. 34 (B)(3)221The word ‘taxes’ means taxes proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2)222 Examples: 1) Import duties 2) Business taxes 3) Occupation taxes 4) Privilege and license taxes 5) Excise taxes 6) Documentary stamp taxes 7) Automobile registration fees 8) Real property taxesLimitation: In the case of a nonresident alien individual engaged in trade or business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.223 Income tax imposed by a foreign country are deductible only if: a) the taxpayer is qualified to avail of tax credit; b) He does not signify in its return his desire to avail of the same. The right to deduct income taxes paid to a foreign government is given only as an “alternative or substitute “to his right to claim a tax credit for such foreign income taxes. Limitation on deduction a) non – resident alien engaged in trade or business in the Phils. b) resident foreign corporation --- the deductions for taxes shall be allowed only if and to the extent that they are connected with income from “sources within” the Phils.

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5. Taxes assessed against local benefits tending to increase the value of the property224

6. Taxes which are not in connection with the trade, business or profession of taxpayer.

7. Income tax imposed by the Philippine gov’t.8. Value – added Tax (VAT)225

9. Energy Taxes

(3)Treatment/of surcharges/interests/fines/for delinquency226

(4) Treatment of special assessment

A special assessment227 is levied on land.A special assessment is not a personal liability of the person

assessed; it is limitedto the land.A special assessment is based wholly on benefits, not necessity.A special assessment is exceptional both as to time and place.

224 special assessment or levies225 To be deductible, the taxes must be imposed by law and payable by the taxpayer. Thus, a value- added tax is not deductible by the customer upon whom the burden of the tax is shifted by the seller. However, the customer may consider the tax burden as part of his cost as an ordinary or capital expenditure if incurred in business or trade.226 See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra227an enforced proportional contribution from owners of lands, especially or peculiarly benefited by public improvements.

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(5) Tax credit228 vis-à-vis deduction

Tax Credit Tax deduction-- deducted from Phil income tax

-- deducted from the gross income

-- all taxes are allowed to be deducted with the exception of the taxes expressly excluded

-- only foreign income taxes may be claimed as credits

d) Losses

Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:

1) If incurred in trade, profession or business;2) Of property connected with the trade, business or profession,

if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

(1) Requisites for deductibility229

228refers to the taxpayer’s right to deduct from the income tax due, the amount of tax he has paid to foreign country. Persons entitled to tax credit 1 .Resident Citizen of the Philippines 2. Domestic Corp. except General Professional Partnership 3. Members of the GPP 4. Beneficiaries of Estates and Trusts. Persons not entitled to Tax credit 1. Non Resident Citizen 2. Aliens, whether residents or non – residents 3. Foreign Corporation, whether residents or non - residents

229 Despite concurrence of requisites, when is loss nonetheless NOT deductible?

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a) The loss must be that of the taxpayer.230

b) There must be an actual loss suffered in a closed and completed transaction.231

c) The loss must be connected with the taxpayer’s trade, business or profession.d) The loss must not be compensated for by insurance or otherwise.e) The loss must be actually sustained and charge – off during the taxable year.232

f) In the case of casualty loss, declaration of loss233must be filed within 45 days from the occurrence of the casualty loss.234

g) The loss must not be claimed as deduction for estate tax purposes in the estate tax return.

(2) Other types of losses

(a) Capital losses

(a) Losses from sale or exchange of capital assets.b) Losses resulting from securities becoming worthless and which are capital assets235

(c) Losses from short sales of property.(d) Losses due to failure to exercise privilege or options to buy

or sell.

(b) Securities becoming worthless

If any securities which are capital assets, are ascertained to be worthless and charged-off within the taxable year, the loss resulting

In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B) ]230 The loss is personal to the taxpayer and is not transferable or usable by another. The loss of a predecessor partnership is not deductible by a successor corporation. The loss of the parent company may not be deducted by its subsidiary.231 “closed transaction “means that taxable year when the amount of loss was finally ascertained. 232The deduction shall be in full or not at all. However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation). Deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)233 Sworn Declaration of Loss234 RR 12-77235A mere loss on account of the shrinkage in value of securities or shares of stock is not deductible. The loss to be deducted must be actually suffered when the stock is disposed.

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therefrom to the taxpayer236is not considered as a bad debt but as a capital loss.

(c) Losses on wash sales of stocks or securities

Loss on wash sales not deductible when:

1) A taxpayer who is not a dealer of stocks in trade has disposed shares and

2) Within the period of 60(sixty) days beginning 30 days before the date of such sale and ending 30 days after such date.

3) The taxpayer has acquired substantially identical stocks or securities.237

(d) Wagering losses

Wagering losses are deductible only to the extent of the gains from such wagering transaction. If there is no gain from the wagering transaction, the loss therefrom cannot be deducted from gross income.238

(e) NOLCO

Net Operating Loss – denotes the excess of allowable deductions over gross income.

Net Operating loss Carry – over – it means that the net operating loss for the taxable year immediately preceding the current taxable year shall be carried over as a deduction from gross income for the next three (3) consecutive taxable yrs. immediately following the year of such loss.239

e) Bad debts

236other than a bank or trust company incorporated under the laws of the Phil.237However, if losses from wash sales are claimed by a “dealer” in securities in the ordinary course of business, such losses are deductible. 238Wagering transactions - are those in which the outcome is uncertain or those that involve games of chance.239 Limitations of availability of NOLCO a) There must be no substantial change in ownership of the business or enterprise in that: 1. Not less than 75% in nominal value of the outstanding issued shares, if the business is on the name of the corporation, is held by or on behalf of the same persons; or 2. Not less than 75% of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. b) Where one business operation is income tax – exempt and the other is not, the losses in the latter operations are not deductible from the profits in the taxable operation.

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Debts due to the taxpayer when actually ascertained to be worthless240 and charged-off within the taxable year.241

They refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered.242

(1) Requisites for deductibility

1) There must be a valid and subsisting debt.243

2) The same must be connected with the taxpayer’s trade, business or practice of profession.

3) The same must notbe sustained in a transaction entered into between related parties enumerated under Sec. 36 (B)244 of the NIRC.

c) Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed to be carried over to the next three years. NOLCO For mines other than oil and gas wells - the net operating loss of mines incurred in the first 10 yrs. of operation shall be carried over to the next five (5) yrs following the loss.240 In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes which have long become overdue, and where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year. While a mere hope probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit the account to be carried along notwithstanding that the probabilities are that the debt may not be collected at all.241Sec.34 [E1]242Sec.2 [a], Rev. Regs. No.5-99243A valid and subsisting debt is one the collection of which may be enforced in a court of law. A debt which had prescribed is no longer valid and subsisting.244 The said section provides: In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchange of property directly or indirectly.i. Between members of a family. For the purpose of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole half-blood), spouse, ancestors, and lineal descendants; or ii. Except in the case of distributions in liquidation, between an individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or iii. Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; iv. Between the grantor and a fiduciary of any trust; or

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4) The same must be actually charged-off the books of accounts of the taxpayer as of the end of the taxable year.245

5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.246

f) Depreciation

The gradual diminution in the useful value of tangibleproperty used in trade or business resulting from exhaustion, wear and tear, and normal obsolescence.

The term is also applied to amortization of value of intangible assets the use of which in trade or business is definitely limited in duration.247

(1) Requisites for deductibility

a) The allowance for depreciation must be reasonable248

b) It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year249

c) It must be charged-off during the taxable year;250

d) A statement on the allowance must be attached to the return.e) The property must have a limited useful life.

(2) Methods of computing depreciation allowance

(a) Straight-line method251

v. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; orvi. Between a fiduciary of a trust and a beneficiary of such trust.245A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at all (Fernandez Hermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs. Court of Appeals, 70 SCAD 544, 256 SCRA 667).246In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is determined upon the exercise of a sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and circumstances of the case.247Basilan Estates, Inc. vs. Comm., 21 SCRA 17248Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969249Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966).250The deduction must be made in the year in which the wear & tear occurs. Depreciation may not be accumulated.251Fixed Percentage Method

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This method spreads the total depreciation over the useful life of the asset and generally results in an equal depreciation per unit of time regardless of the use to which the properties are put.

(b) Declining-balance method

This method uses a rate252 to the declining book value of the asset. Depreciation is largest in amount the first year and declines in the years thereafter.

(c)Sum-of-the-years-digit method

This method requires the application of a changing fraction to the cost basis of the property, reduced by the estimated residual salvage value.

g) Charitable and other contributions253

(1) Requisites for deductibility

1) The contribution must actually be paid or made to the Phil. Government or any of its agencies or political subdivision or to any domestic corporations or associations specified by the Tax Code or other entities as allowed by the Tax Code and existing special laws.

2) It must be made within the taxable year;3) It must not exceed 10% of the individual’s taxable income and 5%

of the corporation’s taxable income before deducting the contribution (applicable only to contributions with limit); and

4) It must be evidenced by adequate records or receipts.254

(2) Amount that may be deducted

The following are subject to limit:255

252usually 1.5 or 2 times the straight-line rate253Kinds of contributions allowed as deduction: 1) Ordinary or contributions with limit or subject to limitation 2) Special or contributions deductible in full254 Sec. 34 (H)255 5%/10%

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1.) Donations to the Philippine government or any of its agencies or any political subdivision thereof exclusively for public purposes;

2.) Donations to accredited domestic corporations or associations organized and operated exclusively for:

a.)Religions;b.) Charitable;c.)Scientific;d.) Youth and sports development;e.)Cultural; orf.) Educational purposes; or for theg.) Rehabilitations of veterans; and

3.) Donations to social welfare institutions or to non-government organizations in accordance with rules and regulations promulgated by the Secretary of Finance,provided no part of the net income of which inures to the benefit of any private stockholders or individual.256

Contributions deductible in full under the Tax Code:

1.) Donations to the government of the Philippines or to any of its agencies or political subdivisions including fully-owned government corporations exclusively to finance, to provide for, or to be used in undertaking priority activities in:

a.)Education;b.) Health;c.)Youth and sports development;d.) Human settlements;e.)Science and culture; andf.) Economic development

According to the national priority plan determined by NEDA provided, that donations not in accordance with the said annual priority plan shall be with limit;

2.) Donations to foreign institutions or international organizations in pursuance or compliance with agreements, treaties, or commitments entered into by the government of the and the foreign laws or international organizations or in pursuance of special laws, and

3.) Donations to certain accredited non-government organization.257

h) Contributions to pension trusts

256 Sec. 34 (H)(1)257see Sec. 34(H)( 2)

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(1) Requisites for deductibility258

1) The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees;

2) The pension plan is reasonable and actuarially sound.259

3) It must be funded by the employer; i.e., the employer contributes cash to the plan;

4) The amount contributed must no longer be subject to its control or disposition; and

5) The payment has not therefore been allowed as a deduction.

4) Optional standard deduction

a) Individuals, except non-resident aliens

The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. The “cost of sales” in case of individual seller of goods, or the “cost of services” in the case of individual seller of services, is not allowed to be deducted for purposes of determining the basis of the OSD inasmuch as the law260 is specific as to the basis thereof which states that for individuals, the basis of the 40% OSD shall be the “gross sales” or “gross receipts” and not “gross income”261

b) Corporations, except non-resident foreign corporations

The OSD shall be in an amount not exceeding forty percent (40%) of their gross income.

5) Personal and additional exemption262

a) Basic personal exemptions

Fifty thousand pesos (P50,000) for each individual taxpayer.263

258 under Sec. 34 [J]259Sec. 118,Regs.260R.A. 9504, Minimum Wage Earner Law261Rev. Reg. No. 16-2008262 R. A. 9504263Sec. 4, id.In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.

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b) Additional exemptions for taxpayer with dependents

Twenty-five thousand pesos (P25,000) for each dependent264 not exceeding four (4).265

c) Status-at-the-end-of-the-year rule

1. If taxpayer marries during taxable year, taxpayer may claim the corresponding BPE266in full for such year267

2. If taxpayer should have additional dependent(s) during taxable year, taxpayer may claim corresponding AE268in full for such year.

3. If taxpayer dies during taxable year, his estate may still claim BPE and AE for himself and his dependent(s) as if he died at the close of such year.

4. If during the taxable year

a. spouse dies, orb. any of the dependents dies or marries, turns 21 years

old or becomes gainfully employed, taxpayer may still claim same exemptions as if the spouse or any of the dependents died, or married, turned 21 years old or became gainfully employed at the close of such year.269

6) Items not deductible

264means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.265 In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. (ibid)266 Basic personal exemption267i.e., no need to pro- rate the exemption268additional exemption(s)269 Sec. 35 (C)

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a) General rules

These items are not related to the trade, business or profession of the taxpayer.

b) Personal, living or family expenses

These are not deductible from compensation and business/professional income.270

c) Amount paid for new buildings or for permanent improvements (capital expenditures)

Does not apply to intangible drilling and development cost incurred in petroleum operations which are deductible under Sec.34 (G)(1)271of the NIRC (Depletion).

d) Amount expended in restoring property272

They are capital expenditures or those expenditures that result in obtaining benefits of a permanent nature such as lands, buildings and machineries

e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested

A person is said to be financially interestedin the taxpayer’s business, if he is a stockholders thereof or he is to receive as his compensation a share of the property of the business.

f) Interest expense, bad debts, and losses from sales of property between related parties

Interest Expense

270 under Sec. 24 (A)271 See Reference272 major repairs

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In general, the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business.273

Bad Debts

In general, debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.274

Losses from sales of property between related parties:

(1) Between members of a family;275 or(2) Except in the case of distributions in liquidation, between an

individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or(5) Between the fiduciary of and the fiduciary of a trust and the

fiduciary of another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust.276

g) Losses from sales or exchange or property

In general, losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity:

(a) If incurred in trade, profession or business;

273 Sec. 34 (B)274 Id., (E)275 The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;276 Sec. 36 (B)

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(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.277

h) Non-deductible interest

(a) interest paid in advance through discount or otherwise278allowed as deduction in the year the debt is paidif indebtedness is payable in periodic amortizations, interest is deducted in proportion of the amt. of the principal paid.

(b) payments made:

1. between members of a family279

2. 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)

3. 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

4. between grantor & fiduciary of any trust5. between Fiduciary of a trust & the fiduciary of another if

same person is a grantor to each trust6. between Fiduciary & a beneficiary of a trust7. indebtedness is incurred by a service contractor to finance

petroleum corp.8. interest on preferred stock which in reality is dividend9. interest on unpaid salaries and bonuses10. interest calculated for cost keeping on account of capital or

surplus invested in business which does not represent charges arising under interest-bearing obligation

11. interest paid when there is no stipulation for the payment thereof

i) Non –deductible taxes

a) Philippine income tax280

277 Sec. 34 (D)(1)278in case of cash basis taxpayer279 supra280but FBT can be deducted from gross income (RR 8-98)

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b) incometax 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 taxesd) taxes assessed against local benefits of a kind tending to

increase the value of the property assessede) final taxes, being in the nature of income taxf) special assessments

j) Non-deductible losses

1. Losses from Illegal Transactions 2.Losses from sales or exchanges of property between related

taxpayers281 – but the gains are taxable

k) Losses from wash sales of stock or securities

Notdeductible unless claim is made by a dealer in stock/securities & made in ordinary course of business.

j.Exempt Corporations

1. General Professional Partnerships282

Any other partnership is liable for corporate income tax.

2. Joint Venture under a service contract with the government

A merger of two (2) or more corporations for the purpose of engaging in construction projects or energy operations pursuant to a consortium agreement or a service contract with the government. The corporations comprising the joint venture or consortium must be engaged in the same line of business.

It is only the joint venture or consortium itself which is exempt from corporate income tax, not the income of each corporation from the joint venture consortium. Thus, each corporation comprising of the joint venture or consortium is liable for corporate income tax.283

281 As provided under Sec. 36282 Two (2) requisites to be exempt from corporate income tax: 1. It is formed by persons for the sole purpose of exercising their common profession; and 2. No part of the income of which is derived from engaging in any trade or business.283Batangas Land Transportation Co. vs. Collector, 102 Phil. 822

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3. Government-owned or controlled corporations:

i. Government Service Insurance System (GSIS), ii. the Social Security System (SSS), iii. the Philippine Health Insurance Corporation (PHIC), iv. the Philippine Charity Sweepstakes Office (PCSO) and v. the Philippine Amusement and Gaming Corporation

(PAGCOR)

Other exempt corporations:

The following organizations shall not be taxed in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

(H) A non-stock and nonprofit educational institution;

(I) Government educational institution;

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(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.284

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

a. General rule: Resident citizens – Taxable on income from all sources within and without the Philippines

The tax base is net income.

b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

Compensation income derived from an employer-employee relationship in consideration of services rendered,except in the case of a minimum wage earner.285

(2) Separation pay/retirement benefit not otherwise exempt

Separation pay received by an employee who voluntarily resigns is subject to income tax. Retirements benefits may be subject to tax if it does not comply with the provision of Sec. 32 (B)(6)(a).286

284Sec. 30285 infra286 See Reference

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(3) Bonuses, 13th month pay, and other benefits not exempt

Amount in excess of Thirty thousand pesos (P30,000.00)

(4) Director’s fees287

b) Non-monetary compensation

(1) Fringe benefit not subject tax288

(1) fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and

(4) De minimis benefits.289

(5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business, or profession of the employer.

(6) If the grant of the fringe benefits is for the convenience of the employer.290

2) Exclusions

a) Fringe benefit subject to tax

287 See (1) Regular salary/wage, supra288 Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98289 infra290 Convenience of the employer rule

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Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee291 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 and others;(5) Interest on loan at less than market rate to the extent of the

difference between the market rate and actual rate granted;(6) Membership fees, dues and other expenses borne by the employer

for the employee in social and athletic clubs or other similar organizations;(7) Expenses for foreign travel;(8) Holiday and vacation expenses;(9) Educational assistance to the employee or his dependents; and(10) Life or health insurance and other non-life insurance premiums

or similar amounts in excess of what the law allows.

b) De minimis benefits

Limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:

(a)Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500; and

(b)Uniform and clothing allowance not exceeding P4,000 per annum.292

c) 13th month pay and other benefits and payments specifically excluded from taxable compensation income

Gross benefits received by officials and employees of public and private entities: Provided, the total exclusion shall not exceed Thirty thousand pesos (P30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;291except rank and file employees 292 RR 5-2008

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(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.293

3) Deductions

a) Personal exemptions and additional exemptions

A basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer.294

An additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4).295

b) Health and hospitalization insurance

The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family: Provided, said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year, and in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.296

293 Sec. 32 (e)294 Sec. 35(A),as amended by R.A. 9504In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption295Sec. 35 (B), id. The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed296 Sec. 34 (M)

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c) Taxation of compensation income of a minimum wage earner

(1) Definition of Statutory Minimum Wage

The rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE)297

(2) Definition of Minimum Wage Earner298

(3) Income also subject to tax exemption: holiday pay, overtime pay, night shift differential, and hazard pay299

c. Taxation of Business Income/Income from Practice of Profession

Optional Standard Deduction (OSD) orItemized deductions

Optional Standard Deductions –10 % of the gross income. May be availed only by individuals300who are not purely compensation income earners. This is in lieu of the itemized deductions.

Premium payments on health and/or hospital insurance.301

Personal and additional exemptions.

d. Taxation of Passive Income

1) Passive income subject to final tax

297 Sec. 22, as amended by R.A. 9504298 See II. (A) (6), Kinds of Taxpayers, supra299 ibid300except nonresident aliens301 if requisites are complied with

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a) Interest income

Interest income derived by a resident individual302from a depositary bank under the expanded foreign service deposit system– 7.5%.

Interest income from long term deposit or investment evidenced by certificates prescribed by BSP:

a) Exempt, if investment is held for more than 5 yearsb) If investment is pre-terminated, interest income on such investment

shall be subject to the following rates:20% - If pre-terminated in less than 3 years12% - If pre-terminated after 3 years to less than 4 years5%- If pre-terminated after 4 years to less than 5 years

b) Royalties

Royalties, except on books, as well as other literary works and musical compositions –20%

Royalties on books literary works and musical compositions – 10%

c) Dividends from domestic corporation

Cash and or property dividend actually or constructively received from adomestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies. – 10%

d) Prizes and other winnings

Prizes over P10,000 – 20%

Prizes less than P10,000 are included in the income tax of the individual subject to the schedular rate of 5% up to P125,000 +32% of excess of P500,000.

Other winnings, except PCSO and Lotto, derived from sources within the Philippines –20%

2) Passive income not subject to final tax

302non-resident citizen not included

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Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas (BSP) shall be exempt from final tax.303

e. Taxation of capital gains

1) Income from sale of shares of stock of a Philippine corporation

a) Shares traded and listed in the stock exchange

The gains are not subject to income tax. The tax applicable will be a business tax known as percentage tax.

Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange. - There shall be levied, assessed and collected on every sale, barter, exchange, or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor.304

b) Shares not listed and traded in the stock exchange

A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000…………………………..... 5%

303 See Sec. 24 (B)(1)304 Sec. 127 (A)

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Amount in excess of P100,000…………….. 10%305

2) Income from the sale of real property situated in the Philippines

A final tax of six percent (6%) based on the gross selling price or current fair market value, whichever is higher, upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts xxx.306

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

A final tax of 6% on the gross selling price, or the current fair market value at the time of the sale, whichever is higher.

11. Taxation of Non-resident Aliens Engaged in Trade or Business

a. General rules

A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines.A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines.307

b. Cash and/or property dividends

10% final tax, by January 1, 2000, on the following:

a) Cash and or property dividend actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies.

b) Share of an individual in the distributive net income after tax of a partnership except a general professional partnership of which he is a partner305 Sec. 27 (D)(2)306 Sec. 24 (D)307 Sec. 25 (A)(1)

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c) Share of an individual in the net income after tax of an association, joint account, or a joint venture or consortium taxable as a corporation of which he is a member or a co-venture.308

c. Capital gains

Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.309

[12. Exclude Non-resident Aliens Not Engaged in Trade or Business]

13. Individual Taxpayers Exempt from Income Tax

a. Senior citizens

Senior Citizen is:

1. any resident citizen of the Philippines

2. at least sixty 60 years old, including those who have retired from both government offices and private enterprises, and

3. has an income of not more than sixty thousand pesos (P60,000.00) per annum subject to the review of the NationalEconomic Development Authority(NEDA) every three (3) years.

b. Exemptions granted under international agreements

NRAETB310 may deduct personal exemption311but only to the extent allowed by his country to Filipinos not residing therein, and shall not exceed the aforementioned amounts.NRANETB cannot claim any personal or additional exemption.

14. Taxation of Domestic Corporations

a. Tax payable

308 Id., (A)(2)309 Id., (A)(3)310 Non-resident alien engaged in trade or business311 but not additional exemption

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1) Regular tax

An income tax of thirty-five percent (35%)312 is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation,313 and taxable as a corporation, organized in, or existing under the laws of the Philippines.314

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT315

A tax rate of 2% is imposed on the gross income of domestic corporations and resident foreign corporations.

b) Carry forward of excess minimum tax

Any excess of the minimum corporate income tax (MCIT) over the normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable yrs.

c) Relief from the MCIT under certain conditions

The Sec. of Finance, upon recommendation of the Commissioner may suspend the imposition of MCIT, upon showing that the corporation suffers losses due to any of the following causes:

a. Prolonged labor dispute316

312 lowered to 30% beginning January 1, 2009 (R.A. 9337)313The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. (Sec. 22(B))314 Sec. 27 (A)315 a. It is imposed beginning the fourth (4th) taxable year immediately following the taxable yr. in which such corporation starts its business operation.b. It is imposable only if such corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the Normal Corporate Income Tax (NCIT) due from such corporation.316e.g. strikes for more than 6 months

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b. Legitimate business reverses317

c. Force majeure318

d) Corporations exempt from the MCIT

The following corporations are not subject to MCIT:

(1.)Proprietary Educational Institution(2.)Non-profit hospitals(3.)Depository banks under expended FCDU(4.)International carriers(5.)Offshore Banking Units(6.)ROHQs of resident foreign corp.

e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system

Only one may be imposed. “A minimum corporate income tax of 2% of the gross income xxx is imposed xxx on a corporation319 xxx when the minimum income tax is greater than the (net income tax)”320

b. Allowable deductions

1) Itemized deductions

Business321expenses which are ordinary and necessary in the conduct of business.322

2) Optional standard deduction323

May be taken by an individual, in lieu of itemized deductions.324

c. Taxation of Passive Income317e.g. strikes for more than 6 months)318 e.g. war319 domestic and resident foreign320Secs. 27 (E) and 28 (A)(2)321or professional322or in the exercise of profession323 See also (9)(h)(4)(b), supra324 Section 34(L) Requisites: a. Available only to citizens and resident aliens b. The standard deduction is optional; i.e., unless the taxpayer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions.c. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years.

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1) Passive income subject to tax

a) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties

A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.325

b) Capital gains from the sale of shares of stock not traded in the stock exchange

On sale, barter, exchange or other disposition of shares of stock of adomestic corporation not listed and traded through a local stock exchange, held as a capital asset:

On the net capital gain:

Not over P100,000Final Tax of 5%

On any amount in excess of P100,000plus 10% Final tax on the excess

c) Income derived under the expanded foreign currency deposit system

Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income 325 Sec. 27 (D)(1)

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from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.326

d) Intercorporate dividends

Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.

e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings

On the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets.

On the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of6%.327

2) Passive income not subject to tax328

d. Taxation of Capital Gains

1) Income from sale of shares of stock329

2) Income from the sale of real property situated in the Philippines330

3) Income from the sale, exchange, or other disposition of other capital assets331

e. Tax on proprietary educational institutions and hospitals

326 Id., (D)(3)327Tax treatment is the same as that of individuals328 supra329 See 10 (e), Taxation of Capital Gains, supra330 ibid331 See (A)(10)(e)(3), under Taxation of Capital Gains, supra

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Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income..332

f. Tax on government-owned or controlled corporations, agencies or instrumentalities

The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in s similar business, industry, or activity.333

15. Taxation of Resident Foreign Corporations334

a. General rule

Resident foreign corporationsare subject to any or some of the following:

1. Capital Gain Tax2. Final Tax on Passive Income3. Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax (GIT)4. Branch Profit Remittance Tax

332 Sec. 27 (B)A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.333 The term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. (ibid) Id., (C)334Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax (GIT)under the subheading of domestic corporations is equally applicable to resident foreign corporations, both as to concepts and computations, except that RFCs are taxed only on income from sources within the Philippines.

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b. With respect to their income from sources within the Philippines

Normal corporate income tax rate at 35%335 of net taxable income from sources within the Philippines.

c. Minimum corporate income tax

At 2% of MCIT Gross Income from sources within the Philippines. The MCIT is imposed on RFCs under the same conditions as domestic corporations.336

d. Tax on certain income

(1) Interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties

Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, the interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.337

(2)Income derived under the expanded foreign currency deposit system

Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas(BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

335 Lowered to 30% beginning January 1, 2009336 Sec. 28(A)(2)337 Sec. 28 (A)(7)(a)

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Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.338

(3) Capital gain from sale of shares of stock not traded in the stock exchange

A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000…………..………………..........5%On any amount in excess of P100,000…………10%

(4) Intercorporate dividends339

16. Taxation of Non-resident Foreign Corporations

a. General rule

Non-resident foreign corporations are subject to any or some of the following:

1. Capital Gains Tax2. Final Tax on Passive Income3. Final Tax on [Other] Gross Income from sources within the

Philippines

b. Tax on certain income

(1) Interest on foreign loans

A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986.340

338 Id., (A)(7)(c)339 supra340 Sec. 28 (B)(5)(2)

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(2) Intercorporate dividends

– 15%, as long as the country in which the nonresident foreign corporation is domiciled allows a tax credit for taxes “deemed paid” in the Philippines equivalent to 20%.

20% represents the difference between the regular income tax of 35% on corporations and the 15% tax on dividends

If the country within which the NRFC is domiciled does not allowa tax credit, a final withholding tax at the rate of 35% is imposed on the dividends received from a domestic corporation.341

(3) Capital gains from sale of shares of stock not traded in the stock exchange342

17.Improperly Accumulated Earnings of Corporations

Every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

18. Exemption from tax on corporations

A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents;

341 Sec. 28 (B)(5)(b)In other words, the dividends are subject to the third kind of tax: Final Tax on [Other] Gross Income from sources within the Philippines.342 See 10 (e)(1)(b), under Taxation of capital gains

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(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.343

19. Taxation of Partnerships344

Rules:

343 Sec. 30344partnerships wherein all or part of their income is derived from the conduct of trade or business

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1. The partnership is subject to the same rules on corporations (capital gains tax, final tax on passive income, normal tax, minimum corporate income tax [MCIT] and gross income tax [GIT]), but is not subject to the improperly accumulated earnings tax [IAET]. The partnership must file quarterly and year-end income tax returns.

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

3. The share of a partner in the partnership’s distributable net income of a year shall be deemed to have beenactually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.345Such share will be subjected to a final tax of 10% to be withheld by the partnership.346

20. Taxation of General Professional Partnerships347

Rules:

1. A GPP as such shall not be subject to the income tax.

2. The partners shall only be liable for income tax only in their separate andindividual capacities.

3. For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.

4. Each partner shall report as gross income his distributive share, actually orconstructively received, in the net income of the partnership.

6. The share of a partner shall be subject to a creditable withholding income tax of 15%.348

345Sec. 73(D)346 Sec. 24(B)(2)347GPP is not a taxable entity à The partnership is a mere mechanism or a flow-through entity in the generation of income by, and the ultimate mechanism distribution of such income to the individual partners. (Tan v. Commissioner [Oct. 3, 1994]) But, the partnership itself is required to file income tax returns for the purpose of furnishing information as to the share in the gains or profits which each partner shall include in his individual return. (RR 2- 1998) The share of an individual partner in the net profit of a general professional partnership is deemed to have been actually or constructively received by the partner in the same taxable year in which such partnership net income was earned, and shall be taxed to them in their individual capacities, whether actually distributed or not, at the graduated income tax ranging from 5% to 32%. Thus, the principle of constructive receipt of income or profit is being applied to undistributed profits of GPPs. The payment [to the partners] of such tax-paid profits in another year should no longer be liable to income tax. (Mamalateo)348RR 2- 1998

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21. Taxation on Estates and Trusts

a) Application

The tax imposed upon individuals shall apply to the income of estates or of any kind ofproperty held in trust, including:

1. Income accumulated in trust for the benefit of unborn or unascertainedperson or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;

2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by aguardian of an infant which is to be held or distributed as the court may direct;

3. Income received by estates of deceased persons during the period of administration or settlement of the estate; and

4. Income which, in the discretion of thefiduciary, may be either distributed to the beneficiaries or accumulated.

b) Exception

The tax shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan ofan employer for the benefit of some or all of his employees:

i. if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings andprincipal of the fund accumulated by the trust in accordance with such plan, and

ii. if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities withrespect to employees under the trust, for any part of the corpus or income to be349used for, or diverted to, purposes other than for the exclusive benefit of his employees.350

c) Determination of tax

349within the taxable year or thereafter350 Any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

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1) Consolidation of income of two or more trusts

Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts.

2) Taxable income351

General rule:

Any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

3) Revocable trusts

Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested:

i. in the grantor either alone or inconjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or

351The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that: (A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, BUT the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year. (B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. (Sec. 61)

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ii. in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,the income of such part of the trust shall be included in computing the taxable income of the grantor.352

4) Income for benefit of grantor

Where any part of the income of a trust

i. is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or

ii. may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or

iii. is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life ofthe grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor.353

5) Meaning of "in the discretion of the grantor"

'In the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

22. Withholding tax

a. Concept

This practice which is also known as “taxation at source” refers to the requirement that taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations and/or persons

352 Exception353 ibid

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from payments made to payees-corporations and/or persons for the former to pay the same directly to the BIR.

b. Kinds

1) Withholding of final tax of certain incomes

Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.354

2) Withholding of creditable tax at source

The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty- two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.355

c. Withholding on wages

1) Requirement for withholding

Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: No withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory

354 Sec. 57 (A); see Reference 355 Id., (B)

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minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher.356

2) Tax paid by recipient

If the employer fails to deduct and withhold the tax as required, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withhold.357

3) Refunds or credits

(1) Employer. - When there has been an overpayment of tax, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer.

(2) Employees. - The amount deducted and withheld during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A).358Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made.

Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of counter- signature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987.359

4) Year-end adjustment

356 Sec. 79 (A)357 Id. (B)358 See Reference359 Id. (C)

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On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A).360 The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.361

5) Liability for tax

The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld. If the employer fails to withhold and remit the correct amount of tax as required to be withheld, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit.

Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to:

(1) failure or refusal to file the withholding exemption certificate; or

(2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government.362

d. Withholding of VAT

(a) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or

360 supra361 Id. (H)362 Sec. 80

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controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services taxed at twelve percent (12%0 VAT pursuant to Secs. 106 and 108363 of the Tax Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceedsseven percent (7%) of gross payments, the excess may form part of the seller’s expense or cost. On the other hand, if actual input VAT is less than seven percent (7%) of gross payment, the difference must be closed to expense or account.

(b) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations(GOCCs), as well as private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments:

(1)Lease or use of properties or property rights owned by non-residents; and

(2)Other services rendered in the Philippines by non-residents.364

e. Filing of return and payment of taxes withheld

1) Return and payment in case of government employees

If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose.365

2) Statements and returns

363 supra364 RR 16-2005, as amended by RR 4-2007365 Sec. 82

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(A) Requirements. - Every employer required to deduct and withhold a tax shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of such wages. The statement required to be furnished by this Section in respect of any wage shall contain such other information, and shall be furnished at such other time and in such form as the Secretary of Finance, upon the recommendation of the Commissioner, may, by rules and regulation, prescribe.

(B) Annual Information Returns. - Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to the Commissioner an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary. This return, if made and filed in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect of such wages.

(C) Extension of time. - The Commissioner, under such rules and regulations as may be promulgated by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required under this Section.366

f. Final withholding tax at source

Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.367

366 Sec. 83367 Sec. 57 (A), supra

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g. Creditable withholding tax

1) Expanded withholding tax

The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.368

2) Withholding tax on compensation369

Every employer must withhold from compensation paid, an amount computed in accordance with the regulations.

Exception:

Where such compensation income of an individual:

1. Does not exceed the statutory minimum wages; or2. Five thousand pesos (P5,000) monthly (P60,000 a year)-

whichever is higher

h. Fringe benefit tax

A final tax of thirty-two percent (32%) is imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee370 by the employer, whether an individual or a corporation, unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or

368 Id. (B)369 Elements of Withholding on Compensation: 1. There must be an employer-employee relationship 2. There must be payment of compensation or wagesfor services rendered 3. There must be a payroll period370except rank and file employees

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when the fringe benefit is for the convenience or advantage of the employer.371

B. Estate Tax

1. Basic principles

The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death.372

Not a direct tax on the property transmitted or transferred although its amount is based thereon.

2. Definition

A graduated tax imposed on the privilege of the decedent to transmit property at death and is based on the entire net estate, regardless of the number heirs and relations to the decedent.

3. Nature

It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid neither on the property, nor on the transferee or transferor, but on the right of the decedent to transmit his estate.

It is not a property tax but an excise tax.

4. Purpose or object

a) Benefit-Received Theory

For the performance of services rendered by the government in the distribution of the estate of the decedent and other benefits that accrue to the estate and the heirs, the state collects the tax.

b) Redistribution of Wealth Theory

Is a contributing factor to the inequalities in wealth and income. The imposition of death tax reduces the property received by the

371 Sec. 33 (A)372 Sec. 3, RR 2-2003

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successor bringing about a more equitable distribution of wealth in society.

c) Ability-to pay- theory

The receipt of inheritance places assets in the hands of the heirs and beneficiaries thereby creating an ability to pay the tax and thus to contribute to governmental income; and

d) Privilege theory or State Partnership theory

Inheritance is not a right but a privilege granted by the state and large estates have been acquired only with the protection of the state. The State, as a “passive and silent partner” in the accumulation of property has the right to collect the share which is properly due to it

5. Time and transfer of properties

At the time of death. The tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon.

6. Classification of decedent

a) resident decedentb) non – resident alien decedent

7. Gross estate vis-à-vis Net estate

The total value of all property, whether real or personal, tangible or intangible belonging to the decedent at the time of his death, situated within or outside the Philippines, where such decedent was a resident or citizen of the Philippines.

In the case of a nonresident alien decedent, it shall include only property situated in the Philippines.

8. Determination of gross estate and net estate

Formula:

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Gross Estate373

Less: Allowable deductionsEstate after allowable deductions

Less: ½ net share of surviving spouse on conjugal or community property374

Family home allowance375

= Net estate of decedent Less: P200, 000.00 exemptions

= Taxable net estate X Tax Rate in section 84.= Amount of estate tax due

9. Composition of gross estate

Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.  

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his/death;  

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death

(1) the possession or enjoyment of, or the right to the income from the property, or

(2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate

373 when the gross estate exceeds P2,000,000.00, the estate tax return shall be accompanied by a statement, which is certified by an independent public accountant stating: 1. The itemized assets of the decedent with its corresponding gross value at the time of his death or in the case of a non-resident, not citizen of the Philippines that part of his gross estate situated in the Philippines. 2. The itemized deductions from the gross estate. 3. The amount of tax due, whether paid or still due and outstanding.374if applicable375 ibid

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and full consideration in money or money's worth.   (C) Revocable Transfer. -

(1) To the extent of any interest therein, of which the decedent has at any time made a transfer376 by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power377 by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.

(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death.

(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.  

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable.  

376except in case of a bona fide sale for an adequate and full consideration in money or money's worth377in whatever capacity exercisable

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(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code.  

(G)Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent.  

(H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate.378

10.Items to be included in gross estate

In case of resident citizens, nonresident citizens and resident aliens:

1. Real Property within and without the Philippines;2. Tangible personal property within and without the Philippines; and 3. Intangible personal property within and without the Philippines.

In cases of nonresident aliens:

1. Real property within the Philippines;2. Tangible personal property within the Philippines and;3. Intangible personal property within the Philippines, unless there is

reciprocity in which case, it is not taxable.

11.Deductions from estate

The following are the expenses, losses, indebtedness and taxes that may be allowed as deductions from the gross estate:

A) If decedent is a resident decedent:

Ordinary deductions:

378 Sec. 85

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1) Funeral Expenses379

2) Medical expenses380

3) Judicial expenses of the testamentary or intestate proceedings.381

4) Claims against the decedent’s estate382

5) Claims against insolvent persons383

6) Unpaid mortgages indebtedness384

7) Casualty Losses385

8) Unpaid Taxes386

9) Vanishing deduction387

379The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenses whichever is lower, but in no case to exceed P200, 000.“Actual funeral expenses” are those which were actually incurred in connection with the interment or burial of the deceased and paid for from the estate of said deceased. Funeral expenses include: a) Costs of coffin, tombstone, mausoleum, and burial lot; b) Funeral parlor fees; c) Mourning clothing of the surviving spouse and the unmarried minor children; d) Costs of obituary notices; and e) Expenses during the wake The following cannot be deducted under funeral expenses: a) Cash advances of the surviving spouse and the heirs; b) Expenses paid by the relatives and friends; and c) Expenses after the burial.380 Provided, that the following requisites are met: a. Must be incurred by the decedent within one (1) year prior to his death b. Must be duly substantiated by receipts; and c. Must not exceed P500, 000.00.381Include “administration expenses” to those actually incurred in the administration of the estate Examples: a) fees of the executor or administrator; b) attorney’s fees; c) accountant’s fees; d) court fees; e) salaries of employees; and All other expense related to the administration of the estate.Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions.382 Debts or obligations of the decedent that is enforceable against the estate provided that the following requisites are met: a) They were contracted in good faith and for an adequate and full consideration in money or money’s worth. b) They must be existing against the estate. c) They must be legally enforceable obligations of the decedent and ought to be enforced by the claimants. d) They must be reasonably certain in amount; and; e) At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan.383 Requisites for deductibility: a) The amount of said claims has been initially included as part of the gross estate; and

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10) Transfer for public use388

11) Family home389

12) Standard deduction equivalent to P1, 000,000.00390

13) Amounts received by heirs under RA NO.4917 from the decedent’s employer as a consequence of the death of the decedent –employee provided that such amount is included in the gross estate of the decedent.14) Net share of the surviving spouse in the conjugal / community

property.15) Tax credit for estate tax paid to a foreign country.

b) The incapacity of the debtors to pay their obligations is proven and not merely alleged.384 Requisites for deductibility: a) The fair market value of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of his gross estate; and b) The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or money’s worth.385 They include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement. Provided, that the following requisites are met: a) Losses not compensated by an insurance or otherwise; b) Losses not have been claimed as a deduction for income tax purposes; and c) Losses incurred not later than the last day for payment of the estate tax (6 months from death).386 Unpaid income tax on income due or received before death of the decedent, and real property taxes, which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of the year but may be paid before or at the end of each quarter) are deductible. Income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax cannot be deducted because they are chargeable to the income of the estate.387 property – previously taxed Is an amount allowed to reduce the taxable estate of a decedent where the property: a. received by him from prior decedent by gift, bequest, devise or inheritance, orb. transferred to him by gift, has been the object of previous transfer deduction. It is so-called a vanishing deduction because the rate of deduction gradually diminishes and entirely vanishes depending upon the time interval between the two (2) successive transfers. Two (2) factors necessary in vanishing deduction, these are; a. There are two (2) deceased persons and the first is the donor; and b. The second decedent dies within five (5) years after the death of the prior decedent or in the case of gifts the decedent – donee dies within the same period after the date of the gift. Rationale: The deduction operates to ease the harshness of successive taxation of the same property within a relatively short period of time.388 Requisites: a. The disposition must be testamentary in character. b. To take effect after death.c. In favor of the government of the Philippines, or any political subdivision thereof. d. Exclusively for public purpose.389 Refers to the dwelling house, including the land on which it is situated, where the husband and wife, or an unmarried person who is the head of the family and members of their immediate family resides as certified by the Barangay Captain of the locality. For the purpose of availing of a family home deduction to the extent provided by law, a person may constitute only one family home.

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B) If decedent is a non – resident alien.

The deductions allowed to citizens or residents of the Philippines are also extended to a non-resident alien decedent with respect to his estates situated in the Philippines at the time of his death.

In case of deductions for expenses, losses, indebtedness and taxes, the amount of the allowable deduction is limited only to the proportion of such deductions with the value of such part of his gross estate which at the time of his death, is situated in the Philippines, bears to the value of his entire gross estate wherever situated.391

12.Exclusions from estate

The following properties are excluded from gross estate:392

1) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured.

2) Proceeds of a group insurance policy taken out by a company for its employees.

3) Proceeds of insurance policies issued by the GSIS to government officials and employees.

4) Benefits accruing under the Social Security Act.5) Proceeds of life insurance payable to the heirs of deceased members

of the military personnel of the United States Army or Philippine Army under laws administered by the United State veterans Administration.

The amount deductible is equivalent to the current fair market value of the decedent’s family home if said current fair market value exceeds P1, 000,000.00., the excess shall be subject to estate tax. Requisites to be deductible: a. The family home must be the actual residential home of the decedent and his family at the time of his death as certified by the barangay Captain of the locality where the family is situated.b. The total value of the family home must be included in the gross estate of the decedent.c. The allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate not exceeding P1, 000,000.00.390does not include the P 200,000.00 exemption

391Sec. 86 (B)392 In the determination of the gross estate, the nature of the property, whether common property of the spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of vital importance. What regime of property relations shall govern the spouses? Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed by the Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governed by the Absolute Community of Property, unless a different regime was agreed upon in the marriage settlement.

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6) Accident insurance proceeds.393

7) Separate property of the surviving spouse.

13.Tax credit for estate taxes paid in a foreign country

The estate tax imposed by the tax code shall be credited with the amount of any estate tax paid to a foreign country.

14.Exemption of certain acquisitions and transmissions

a. The first P200, 000.00 value of the estate.394

b. The merger of the usufruct in the owner of the naked title.c. The transmission from the first heir, legatee, or donee in favor of

another beneficiary in accordance with the desire of the predecessor.d. All bequest, devises, legacies or transfers to social welfare, cultural

and charitable institutions, no part of the net income of which inured to the benefit of any individual and provided that not more than 30% of the said bequest, etc. shall be used by such institution for administration purposes.

e. Intangible personal property of non-resident aliens under the principle of reciprocity.

f. Retirement benefits of employees of private firms from private pension plans approved by the BIR.

g. Amount received for war damages.h. Grants and donations to the Intramuros administration.

15.Filing of notice of death

Where the gross value of the estate exceeds twenty thousand pesos (P 20,000.00) although exempt, the executor, administrator, or any of the legal heirs shall give, within two (2) months after the decedent’s death or within like period after the executor or administrator qualifies as such, a written notice thereof, to the Commissioner of Internal Revenue.395

16.Estate tax return

An estate tax return, under oath, is required by law to be filed by the executor, administrator, or any of the legal heirs;

a) Where the gross value of the estate exceeds p200, 000.00 though exempt from the estate tax; or

b) Regardless of the gross value of the estate, where the said estate consists of registered or registrable real property, such as real

393Items 1 – 6 are proceeds of insurance not includible in the gross estate of the decedent394 Sec. 84 395 Sec. 89

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property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the tr5ansfer of ownership thereof in the name of the transferee.

C. Donor’s Tax

1. Basic principles

It is levied, assessed, collected and paid upon the transfer of any person, resident or non-resident, of the property by gift inter vivos. It applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.396

A “gift” is merely subjected to donor’s tax.

2. Definition

A tax on the privilege of transmitting one’s property or property rights to another or others without adequate and full valuable consideration.

3. Nature

Gift or donation – an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it.397

4. Purpose or object

Donor’s tax shall be imposed whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.

5. Requisites of valid donation

1. The donor must have capacity2. There must be an intent to donate3. There must be delivery, either actual or constructive4. The donee must accept the donation

6. Transfers which may be constituted as donation

396 Sec. 98397 Art. 725, CC

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a. Sale/exchange/transfer of property for insufficient consideration398

If bona fide sale – no value shall be included in the gross estate.

If not a bona fide sale - the excess of the fairmarket value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate.

If inter vivos transfer is proven fictitious - total value of the property at the time ofdeath included in the gross estate.399

b. Condonation/remission of debt

If a creditor wishes merely to benefit the debtor, and without any consideration therefore, cancels the debt, the amount of the debt is a gift to the debtor and need not be included in the latter’s report of income.

7. Transfer for less than adequate and full consideration

Where property, other than real property referred to in Section 24(D),400 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 exceeded the value of the consideration shall, for the purpose of the tax imposed, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.401

8. Classification of donor

1. Citizens or Residents of the Philippines – all properties located not only within the Philippines but also in foreign countries

2. Nonresident Alien – all real and tangible properties within the Philippines, and intangible personal property, unless there is reciprocity,402 in which case it is not taxable

398Transfers that are not bona fide sales of property for an adequate and full consideration in money or money’s worth399 Sec. 85 (G)400real property located in the Philippines, classified as capital assets401 Sec. 100402 There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death:

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9. Determination of gross gift

10.Composition of gross gift

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

11.Valuation of gifts made in property

If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof.403

12.Tax credit for donor’s taxes paid in a foreign country

In General.- The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country.

Limitations on Credit.- The amount of the credit taken under this Section shall be subject to each of the following limitations:

(a)  The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and

(b)  The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's

a) did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or b) allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country (Sec. 104)In sum, both states must exempt nonresidents (citizens of the other state) from transfer taxes in respect of intangible personal property.For the reciprocity rule to apply, there must be total reciprocity.403Sec. 102.

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net gifts situated outside the Philippines taxable under this title bears to his entire net gifts.404

13. Exemptions of gifts from donor’s tax

The following gifts or donations shall be exempt from the tax:

(A)  In the Case of Gifts Made by a Resident. -

(1)  Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000):

(2)  Gifts made to or for the use of 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; and

(3)  Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation.

(B)  In the Case of Gifts Made by a Nonresident Not a Citizen of the Philippines. -

(1)  Gifts made to or for the use of 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.

(2)  Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however,That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.405

14. Person liable

404 Sec. 101 (C)405 Sec. 101

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There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99.

The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.406

15. Tax basis

(A) In General. - The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year in accordance with the following schedule:

If the net gift is: 

OVER 

BUT NOT OVER

THE TAX SHALL BE  

PLUS OF THE EXCESS OVER

  P 100,000 Exempt    P 100,000 200,000 0 2% P100,000200,000 500,000 2,000 4% 200,000500,000 1,000,000 14,000 6% 500,0001,000,000 3,000,000 44,000 8% 1,000,0003,000,000 5,000,000 204,000 10% 3,000,0005,000,000 10,000,000 404,000 12% 5,000,00010,000,000   1,004,000 15% 10,000,000

 (B)  Tax Payable by Donor if Donee is a Stranger. - When the donee or

beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a "stranger", is a person who is not a:

(1)  Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or

(2)  Relative by consanguinity in the collateral line within the fourth degree of relationship.

(C)  Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended.

406 Sec. 98

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D. Value-Added Tax (VAT)

1. Concept

VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange, or lease of goods or properties, and on the performance of service in the course of trade or business, or on the importation of goods, whether for business or non-business purposes.

It is a business tax levied on certain transactions involving a wide range of goods, properties, and services, such tax being payable by the seller, lessor, or transferor. The tax is so- called because it is imposed on the value not previously subjected to VAT.407

It is also an excise tax, or a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods.

The taxpayer408determines his tax liability by computing the tax on the gross selling price or gross receipt409and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the sale of service (input tax) against the tax due on his own sale.

2. Characteristics

It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee, or lessee of the goods, properties or services.410

This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337.411

407De Leon, “The National Internal Revenue Code Annotated,” 2000 edition408seller409 output tax410 Sec. 105411RR 16-200523

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It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic marine and agricultural products in their original state are still not subject to tax. Congress also provided for mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax.

VAT, by its very nature, is regressive. But the Constitution does not really prohibit the imposition of indirect taxes412. What it simply provides is that Congress shall “evolve a progressive system of taxation”. In Tolentino v. Sec. of Finance, the Court said that direct taxes are to be preferred, and as much as possible, indirect taxes should be minimized… but not avoided entirely because it is difficult, if not impossible, to avoid them.

The Constitution mandate to “evolve a progressive system of taxation” simply means that direct taxes are to be preferred as much as possible, and indirect taxes should be minimized. Resort to indirect taxes should be minimized but not avoided entirely. Also, the regressive effects are corrected by the zero rating of certain transactions and through the exemptions. The transactions which are subject to VAT are those which involve goods and services which are used or availed of mainly by higher income groups.413

3. Impact of tax414

The seller415who shifts the burden to …

4. Incidence of tax416

… the customer who finally bears the incidence of the tax.

5. Tax credit method

412which is essentially regressive413real properties held primarily for sale to customers, right or privilege to use patent, copyright...414The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax415manufacturer416 That point on which the tax burden finally rests orsettle down. It takes place when shifting has been effected from the statutorytaxpayer to another

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This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.417

If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes.418

6. Destination principle

VAT is imposed in the country in which the products or services are actually consumed or used. Exportsexempt, imports taxable.419

7. Persons liable420

A. Any person who, in the course of trade or business421

(1) sells, barters, exchanges goods or properties, (2) leases goods or properties,(3) renders services; and (4) any person who imports goods.422

8. VAT on sale of goods or properties

417Commissioner of Internal Revenue v. Seagate Technology Philippines, G. R. No. 153866, February 11, 2005 citing various cases and authorities; AbakadaGuro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases)418Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities419Situs: country of Consumption.420Sec. 105421 The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity (Sec. 105)422 The importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to pay VAT. (RR 16-2005)

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a. Requisites of taxability of sale of goods or properties:

1) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 2 4/5%; or

2) National government deficit as a percentage of GP of the previous year exceeds 1 ½%.423

9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods or properties

1. Export Sales as provided in Section 106(A)(2)(a)424

2. Foreign Currency Denominated Sale as provided in Section 106 (A)(2)(b)425

3. Sale to persons or entities which is VAT exempt under special laws or international agreements to which the Philippines is a signatory as provided in Section 106 (A)(2)(c)

4. Transactions subject to zero-rated (0%) as provided in Section 108(B)426

10.Transactions deemed sale427

a. Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business.

e.g. when a VAT-registered person withdraws goods from his business for his personal use.428

b. Distribution or transfer to shareholders, investors or creditors

Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered persons; or(b)Creditors in payment of debt.429

c. Consignment of goods if actual sale not made within 60 days from date of consignment

423 Sec. 106 (i)(ii)424 See Reference425 Ibid.426 Ibid.427 Sec. 106 (B)428 RR 16-2005429 Property dividends which constitute stocks in trade or properties 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 FMV atthe time of the distribution, whichever is applicable. ( RR 16-2005)

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Consigned goods returned by theconsignee within the 60-day period are not deemed sold.430

d. Retirement from or cessation of business with respect to inventories on hand

Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation431as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. Examples are change of ownership of the business432and dissolution of a partnership and creation of a new partnership which takes over the business.433

11.Change or cessation of status as VAT-registered person

VAT shall apply to goods disposed of or existing as of a certain date if under the circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated. xxx

a. Subject to VAT

Subject to output tax - applicable to goods/properties originally intended for sale or use in business and capital goods which are existing as of the occurrence of the following:

1) Change of business activity from VAT taxable status to VAT-exempt status

430RR 16-2005431with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials432e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business433 RR 16-2005

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2) Approval of request for cancellation of a registration due to reversion to exempt status

3) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years434

b. Not subject to VAT

1) Change of control of a corporation

Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders.

2) Change in the trade or corporate name

Change in the trade or corporate name of the business

3) Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed the surviving or new corp.

12.VAT on importation of goods

On every importation of goods.435

a. Transfer of goods by tax exempt persons

If importer is tax-exempt, the subsequent purchasers, transferees or recipients of such imported goods shall be considered as importers who shall be liable for the tax on importation.

The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof.436

434from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2)435 whether or not goods are for use in business436Sec. 107 (B)

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13.VAT on sale of service and use or lease of properties

a. Requisites for taxability

The President, upon the recommendation of the Sec. of Finance, shall, effective January 1, 2006, raise the rate of value- added tax to 12%, after any of the following conditions has been satisfied:

1. Value-added tax collection as a percentage ofGross Domestic Product (GDP) of the previous year exceeds 2 4/5%; or

2. National government deficit as a percentage ofGP of the previous year exceeds 1 ½%.437

14.Zero-rated sale of services438

1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed,the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

3) Services rendered to persons or entities whose exemption under special laws or international agreements to which thePhilippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate.

4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof;439Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport ofpassengers, goods or cargoes from one place in the Phil. to another place in the Phil., the same being subject to 12% VAT under Sec. 108.440

5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whoseexport sales exceed seventy percent (70%) of total annual production.

437 Sec. 108 (A)438 Sec. 108 (B)439 Ibid.440 supra

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6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country and;

7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.441Zero-rating shall applystrictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power.

15.VAT exempt transactions442

a. VAT exempt transactions, in general

Refer to sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT443 and the seller is not allowed any tax credit of VAT444 on purchases. The person making the exempt sale of goods, properties or services shall not bill anyoutput tax to his customers because the said transaction is not subject to VAT.

1. Sale/ import of agricultural, marine food products in original state;445 of livestock and poultry.446

Original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state.

2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds.

3. Import of personal and household effects of Phil resident returning from abroad and nonresident citizens coming to resettle in the Philippines

4. Import of professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange.441 Ibid.442 Sec. 109443output tax444 input tax445Original state –including preservation using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods (RR 16-2005)446Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets

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5. Services subject to percentage tax under Title V.

6. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services except those rendered by professionals.447

8. Educational services rendered by private educational institutions, duly accredited by DEPED, CHED, TESDA, and those rendered by government educational institutions.

9. Services rendered by individuals pursuant to an employer-employee relationship;

10. Services rendered by regional or area headquarters established in the Philippines 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;

11. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529 [Petroleum Exploration Concessionaires under the Petroleum Act of 1949]

12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce. Exemption includes importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority.

14. Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority are exempt BUT their importation of machineries and equipment, including spare parts thereof, to be used by them are subject to vat.

15. Export sales by persons who are not VAT- registered;

16. Sale of real properties – the ff. sales are exempt:

1) Sale of real properties NOT primarily held for sale to customers or held for lease in the ordinary course of trade or business.

447 IbidLaboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. [RR 16-2005]

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2) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" andother related laws, such as RA No. 7835 and RA No. 8763. “Low-cost housing" refers to housing projects intended for homeless low- income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of P750,000.00 under RA No. 7279, and other laws, such as RA No. 7835 and RA No. 8763.

3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. "Socialized housing" refers to housing programs and projects covering houses and lots or home lots only undertaken by the Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development, long-term financing, liberated terms on interest payments, and such other benefits in accordance with the provisions of RA No. 7279and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivilegedand homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or non-government organizations.

4) Sale of residential lot valued at P1.5M and below, or house & lot and other residential dwellings valued at P2.5M and below, where the instrument of sale/transfer/disposition was executed on or after July 1, 2005;448If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots does not exceed P1.5M. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot.449

17. Lease of residential units with a monthly rental per unit not exceeding P10K, regardless of the amount of aggregate rentals received by the lessor during the year.Lease of residential units where the monthly rental per unit exceeds 10K but the aggregate of such rentals of the lessor during the year do not

448 To be adjusted every 3 years from Jan 31, 2009449 RR 16-2005

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exceed One Million Five Hundred Pesos P1.5M shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax.

In cases where a lessor has several residential units450 for lease, some are leased out for a monthly rental per unit of not exceeding P10K while others are leased out for more than P10K per unit, his tax liabilitywill be as follows:

a. The gross receipts from rentals not exceeding P10K per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts.

b. The gross receipts from rentals exceedingP10K per month per unit shall be subject to VAT if the aggregate annual grossreceipts from said units only451exceeds P1.5M. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code.

18. Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;

19. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations.

20. Importation of fuel, goods, and supplies by persons engaged in international shipping or air transport operations.

21. Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and

22. Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,500,0000.

b. Exempt transactions, enumerated

1) Subject to the provisions of subsection (2) hereof, the following shall be exempt from the value-added tax:450 The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent. [RR 16-2005]451not including the gross receipts from units leased for not more than P10K

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(a) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of or kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.

Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state;

(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 fish, zoo animals and other animals generally considered as pets);

(c) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;

(d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;

(e) Services subject to percentage tax underTitle V;

(f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

(g) Medical, dental, hospital and veterinary services except those rendered by professionals.

(h) Educational services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports (DECS) Department of Education (DEPED), the

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Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA), and those rendered by government educational institutions.

(i) Services rendered by individuals pursuant to an employer-employee relationship;

(j) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential DecreeNo. 529;

(l) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

(m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;

(n) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

(o) Export sales by persons who are notVAT-registered;

(p) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at one million five hundred thousand pesos(P1,500,000)and below, house and lot, and other residential dwellings valued at two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the national Statistics Office (NSO);

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(q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000); Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NS0);

(r) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; and

(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;

(t) Importation of fuel, goods, and supplies by persons engaged in international shipping or air transport operations;

(u) Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and

(v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO).

(2) A vat-registered person may elect that subsection (1) not apply to its sale of goods or properties or services: provided, that an election made under this subsection shall be irrevocable for a period of three (3) years from the quarter the election was made.

16.Input tax and output tax, defined

Input tax- the VAT due from or 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 includes the transitional input tax determined in accordance with Section 111452 of this Code.

It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax

452 See Reference

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which cannot be directly attributed to either the taxable or exempt activity. Input tax must be evidenced by a VAT invoice or official receipt issued by a VAT- registered person in accordance with Secs. 113 and 237453 of the Tax.454

Output tax- the VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236455 of this Code.

17.Sources of input tax

a. Purchase or importation of goods456

b. Purchase of real properties for which a VAT has actually been paid

c. Purchase of services in which VAT has actually been paid

d. Transactions deemed sale

(1)  Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business;

(2)  Distribution or transfer to:

453 Ibid.454RR 16-2005455 See Reference456 (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1)

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(a)  Shareholders or investors as share in the profits of the VAT-registered persons; or(b)  Creditors in payment of debt;

(3)  Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and

(4)  Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.457

e. Transitional input tax458

f. Presumptive input tax

Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil and packed noodle based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent four percent (4 %) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.459

g. Transitional input tax credits allowed under the transitory and other provisions of the regulations460

A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and

457 Sec. 106 (B)458 See input tax, supra459 Id. (B)460 See e) Transitional input tax, supra

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supplies, whichever is higher, which shall be creditable against the output tax.461

18.Persons who can avail of input tax credit

The input tax on domestic purchase of goods or properties shall be creditable:

(a) To the purchaser upon consummation of sale and on importation of goods or properties; and

(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.

A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and

(b) A ratable portion of any input tax which cannot be directly attributed to either activity.462

19.Determination of output/input tax; VAT payable; Excess input tax credits

a. Determination of output tax

If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the Vat-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters, any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered

461 Sec. 111 (A)462 Sec. 110 (A)(2)(3)

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person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.463

b. Determination of input tax creditable

The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale.

The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs.464

c. Allocation of input tax on mixed transactions

A VAT-registered person who is also engaged in transactions not subject to Vat shall be allowed to recognize input tax credit on transactions subject to Vat as follows:

All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; Provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non-Government entities; and

2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.

d. Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits465

463 See Reference464 Sec. 110 (C)465 See a., supra

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20.Substantiation of input tax credits466

a) Input taxes must be substantiated and supported by the following documents, and must be reported in the information returns required to be submitted to the Bureau:

(1) For the importation of goods— importentry or other equivalent document showing actual payment of VAT on the imported goods.

(2) For the domestic purchase of goods and properties—invoice showing the information required under Secs. 113 and 237467 of the Tax Code.

(3) For the purchase of real property - public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller.

(4) For the purchase of services—officialreceipt showing the information required under Secs. 113 and 237 of the Tax Code.

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 Secs. 113 and 237 of the Tax Code.

b) Transitional input tax shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR.

(c) Input tax on "deemed sale" transactions shall be substantiated with the invoice required.

(d) Input tax from payments made to non- residents (such as for services, rentals and royalties) shall be supported by a copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor.

(e) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT

21.Refund or tax credit of excess input tax

a. Who may claim for refund/apply for issuance of tax credit certificate (TCC)

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit 466 RR 16-2005467 See Reference

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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)468 and Section 108 (B)(1) and (2),469 the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.470

b. Period to file claim/apply for issuance of TCC

Within two (2) years after the close of the taxable quarter when the sales were made,

c. Manner of giving refund

Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.471

d. Destination principle or Cross-border doctrine472

Destination principle – goods and services are taxed only in the country where these are consumed.

Cross border doctrine – mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority.

22.Invoicing requirements

468 Ibid.469 Ibid.470 Sec. 112 (A)471 Id. (E)472 See also (D)(7), supra

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a. Invoicing requirements in general

A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax.

b. Invoicing and recording deemed sale transactions

Transaction Invoicing Requirement

Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business

Memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use

Distribution or transfer to shareholders/investors or creditors

Invoice, at the time of the transaction, which should include all the info prescribed in Sec. 113 (B)

Consignment of goods if actual sale is not made within 60 days

Invoice, at the time of the transaction, which should include all the info prescribed in Sec. 113 (B)

Retirement from or cessation of business with respect to all goods in hand

An inventory shall be prepared and submitted to the RDO who has jurisdiction over the taxpayer’s principal place of business not later than 30 days after retirement or cessation from the business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the

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subsidiary sales journal. The invoice need not enumerate the specific items appearing in the inventory regarding the description of the goods. If the business is to be continued by the new owners or successors, the entire amount of output tax on the amount deemed sold shall be allowed as input taxes.

c. Consequences of issuing erroneous VAT invoice or VAT official receipt

(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed by the word “VAT”:

a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:

i. The tax imposed in Section 106 or 106 without the benefit of any input tax credit; and

ii. A 50% surcharge under Section 248 (B)473 of this code;

(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110474 of this Code.

(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term “VAT-exempt Sale,” the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109475 did not apply.476

23.Filing of return and payment

Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each

473 See Reference474 See Reference475 supra476 Sec. 113 (D)

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taxable quarter prescribed for each taxpayer: Provided, thatVAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.477

24.Withholding of final VAT on sales to government

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 each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108478 deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor: Provided, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent.

The value-added tax withheld shall be remitted within ten (10) days following the end of the month the withholding was made.479

E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements

a. Registration requirements

1) Annual registration fee

477Sec. 114 (A)478 supra479Sec. 114 (C)

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An annual registration fee in the amount of Five hundred pesos (P500) for every separate or distinct establishment or place of business, including facility types where sales transactions occur, shall be paid upon registration and every year thereafter on or before the last day of January: Provided, however, That cooperatives, individuals earning purely compensation income, whether locally or abroad, and overseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality where each place of business or branch is registered.480

2) Registration of each type of internal revenue tax

Every person who is required to register with the Bureau of Internal Revenue shall register each type of internal revenue tax for which he is obligated, shall file a return and shall pay such taxes, and shall updates such registration of any changes in accordance with Subsection (E) hereof.481

3) Transfer of registration

In case a registered person decides to transfer his place of business or his head office or branches, it shall be his duty to update his registration status by filing an application for registration information update in the form prescribed therefor.482

4) Other updates

Any person registered shall, whenever applicable, update his registration information with the Revenue District Office where he is registered, specifying therein any change in type and other taxpayer details.483

5) Cancellation of registration

480 Sec. 236 (B)481 Id., (C)482 Id., (D)483 Id., (E)

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The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the Revenue District Office where he is registered an application for registration information update in a form prescribed therefor.484

6) Power of the Commissioner to suspend the business operations of any person who fails to register

The Commissioner or his authorized representative is hereby empowered to suspend the business operations and temporarily close the business establishment of any person for any of the following violations:

(a) In the case of a VAT-registered Person. -

(1) Failure to issue receipts or invoices; (2) Failure to file a value-added tax return as required

under Section 114; or (3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable quarter.

(b) Failure of any Person to Register as Required under Section 236. -

The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order.485

b. Persons required to register for VAT

1) Optional registration for VAT of exempt person

Any person whose transactions are exempt from value-added tax under Section 109(z)486 of this Code; or any person whose transactions are exempt from the value-added tax under Section 109(a), (b), (c), and (d)487 of this Code, who opts to register as a VAT taxpayer with respect to his export sales only, may update his registration

484 Id., (F)485 Sec. 115486 supra487 Id.

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information in accordance with Subsection (E) hereof, not later than ten (10) days before the beginning of the taxable quarter and shall pay the annual registration fee prescribed in Subsection (B) hereof.488

2) Cancellation of VAT registration489

3) Changes in or cessation of status of a VAT-registered person490

c. Supplying taxpayer identification number (TIN)

Any person required under the authority of this Code 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 indicate in such return, statement or document filed with the Bureau of Internal Revenue for his proper identification for tax purposes, and which he shall indicate in certain documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments; (2) Domestic bills of lading; (3) Documents to be registered with the Register of Deeds of

Assessor's Office; (4) Registration certificate of transportation equipment by land, sea or

air; (5) Documents to be registered with the Securities and Exchange

Commission; (6) Building construction permits; (7) Application for loan with banks, financial institutions, or other

financial intermediaries; (8) Application for mayor's permit; (9) Application for business license with the Department of Trade &

Industry; and (10) Such other documents which may hereafter be required under

rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance with Subsection (A) hereof and a new Taxpayer Identification Number (TIN) shall be supplied in accordance with the provisions of this Section.

488 Id., (I)489 See E (1)(a)(5), under Compliance Requirements, supra490 See (D)(11)

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In the case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the Revenue District Office where he is registered: Provided, however, That in case such executor or administrator is not registered, registration of the estate shall be made with the Taxpayer Identification Number (TIN) supplied by the Revenue District Office having jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person who shall secure more than one Taxpayer Identification Number shall be criminally liable under the provision of Section 275 on 'Violation of Other Provisions of this Code or Regulations in General.491

d. Issuance of receipts or sales or commercial invoices

All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax from compliance with the provisions of this Section.492

491 Id., (I)492 Sec. 237

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1) Printing of receipts or sales or commercial invoices

All persons who are engaged in business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices before a printer can print the same.

No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show, among other things, the name, business style, Taxpayer Identification Number (TIN) and business address of the person or entity to use the same, and such other information that may be required by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

All persons who print receipt or sales or commercial invoices shall maintain a logbook/register of taxpayers who availed of their printing services. The logbook/register shall contain the following information:

(1) Names, Taxpayer Identification Numbers of the persons or entities for whom the receipts or sales or commercial invoices were printed; and

(2) Number of booklets, number of sets per booklet, number of copies per set and theserial numbers of the receipts or invoices in each booklet.

2) Invoicing requirements for VAT

a) Information contained in the VAT invoice or VAT official receipt

A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and

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(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax.

b) Consequences of issuing erroneous VAT invoice or official receipts493

e. Exhibition of certificate of payment at place of business

The certificate or receipts showing payment of taxes issued to a person engaged in a business subject to an annual registration fee shall be kept conspicuously exhibited in plain view in or at the place where the business is conducted; and in case of a peddler or other persons not having a fixed place of business, shall be kept in the possession of the holder thereof, subject to production upon demand of any internal revenue officer.494

f.Continuation of business of deceased person

When any individual who has paid the annual registration fee dies, and the same business is continued by the person or persons interested in his estate, no additional payment shall be required for the residue of the term which the tax was paid: Provided, however, That the person or persons interested in the estate should, within thirty (30) days from the death of the decedent, submit to the Bureau of Internal Revenue or the regional or revenue District Office inventories of goods or stocks had at the time of such death.

The requirement under this Section shall also be applicable in the case of transfer of ownership or change of name of the business establishment.495

g. Removal of business to other location

493 See (D)(22)(c), supra494 Sec. 241495 Sec. 242

167

Any business for which the annual registration fee has been paid may, subject to the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be removed and continued in any other place without the payment of additional tax during the term for which the payment was made.496

2. Tax returns

a. Income Tax Returns

1) Individual Tax Returns

a) Filing of individual tax returns

(1) Who are required to file

The following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;(b) Every Filipino citizen residing outside the Philippines, on his

income from sources within the Philippines;(c) Every alien residing in the Philippines, on income derived from

sources within the Philippines; and(d) Every nonresident alien engaged in trade or business or in the

exercise of profession in the Philippines.497

(a) Return of husband and wife

Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year.498

(b) Return of parent to include income of children

The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent,

496 Sec. 243497 Sec. 51 (A)498 Id., (D)

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except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax.499

(c) Return of persons under disability

If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.500

(2)Who are not required to file

The following individuals shall not be required to file an income tax return;

(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35:501 Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1),502 derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79503 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A)504 of this Code; and

499 Id., (E)500 Id., (F)501 supra502Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items.503 supra504 Id.

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(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

The foregoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.505

b) Where to file

Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner.506

c) When to file

(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2) Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D507) shall file a return within thirty (30) days following each sale or other disposition.508

2) Corporate Returns

505 Id., (A)(2)506 Id., (B)507 See Reference508 Id., (C)

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a) Requirement for filing returns

Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII509 of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.510

(1) Declaration of quarterly corporate income tax

Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.511

(a) Place of filing

Except as the Commissioner otherwise permits, the quarterly income tax declaration required in Section 75512 and the final adjustment return required I Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept.513

(b)Time of fling

The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth

509 Quarterly Corporate Income Tax Annual Declaration and Quarterly Payments of Income Taxes510 Sec. 52511 Sec. 75512 supra513 Sec. 77 (A)

171

(15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.514

(2) Final adjustment return

Every corporation liable to tax shall file a final adjustment return covering the total taxableincome for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal tothe total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or(B) Carry-over the excess credit; or(C) Be credited or refunded with the excess amount paid, as

the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed.515

(a) Place of filing

Except as the Commissioner otherwise permits, the quarterly income tax declaration required inSection 75516 and the final adjustment return required in Section 76517 shall be filed with:

a)the authorized agent banks orb) Revenue District Officer orc) Collection Agent ord) duly authorized Treasurer of the city ormunicipality

having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of

514 Id., (B)515 Sec. 76516 supra517 Id.

172

accounts and other data from which the return is prepared are kept.518

(b)Time of filing

Quarterly declaration – shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year.

The final adjustment return - shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.519

(3) Taxable year of corporations

A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47520 of this Code.521

(4)Extension of time to file return

The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code.522

b) Return of corporation contemplating dissolution or reorganization

518 Sec. 77 (A)519 Id., (B)520 See Reference521 Sec. 52 (B)522 Sec. 53

173

Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.523

c) Return on capital gains realized from sale of shares of stock not traded in the local stock exchange

Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c),524 shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.525

3) Returns of receivers, trustees in bankruptcy or assignees

In cases wherein receivers, trustees in bankruptcy or assignees are operating the property or business of a corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net income as and for such corporation, in the same manner and form as such organization is hereinbefore required to make returns, and any tax due on the income as returned by receivers, trustees or assignees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody or control.526

523 Sec. 52 (C)524 supra525 Id., (D)526 Sec. 54

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4) Returns of general partnerships

Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B)527 of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners.528

5) Fiduciary returns

Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.529

b. Estate Tax Returns

1) Notice of death to be filed

In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or

527 supra528 Sec. 55529 Sec. 65

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within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner.530

2) Estate tax returns

a) Requirements

In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;

(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and

(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.

Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following:

(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86; and

(c) The amount of tax due whether paid or still due and outstanding.531

530 Sec. 89531 Sec. 90 (A)

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b) Time of filing and extension of time

The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return.532

c) Place of filing

Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner.533

3) Discharge of executor or administrator from personal liability

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 therefore, 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 in Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge.534

a) Definition of deficiency

(a) 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 amounts 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 amount previously abated, refunded or otherwise repaid in respect of such tax; or

532 Ibid., (C)533 Ibid., (D)534 Sec. 92

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(b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax.535

c. Donor’s Tax Returns

1) Requirements

Any individual who makes any transfer by gift536shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall set forth:

(1) Each gift made during the calendar year which is to be included in computing net gifts;

(2) The deductions claimed and allowable;(3) Any previous net gifts made during the same calendar year;(4) The name of the donee; and(5) Such further information as may be required by rules and

regulations made pursuant to law.537

2) Time and place of filing

The return of the donor required in this Section shall be filed within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a nonresident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner.538

d. VAT Returns

535 Sec. 93536except those which, under Section 101, are exempt from the tax provided for in this Chapter537 Sec. 103 (A)538 Id., (B)

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1) In general

Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, that only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.539

2) Where to file the return540

Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register.541

e. Withholding Tax Returns

1) Quarterly returns and payments of taxes withheld

Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes

539 Sec. 114 (A)540 and pay the tax541 Id., (B)

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shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.542

2) Annual information return

Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection.543

3. Tax payments

a. Income Taxes

1) Payment, in general; time of payment

The total amount of income tax imposed shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.544

542 Sec. 58543 Id., (C)544 Sec. 56 (A)(1)

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2) Installment payment

When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.545

3) Payment of capital gains tax

The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c)546 shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That 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, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption.

In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid.547

b. Estate Taxes

545 Id., (A)(2)546 supra547 Id., (A)(3)

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1) Time of payment

The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the heirs.548

a) Extension of time

When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension.

Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner.

If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.549

2) Liability for payment

a) Discharge of executor or administrator from personalliability550

b) Definition of deficiency551

548 Sec. (91) (A)549 Id., (B)550 See (E)(2)(b)(3), under Estate Tax Returns551 ibid

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3) Payment before delivery by executor or administrator

No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid is shown.552

a) Payment of tax antecedent to the transfer of shares, bonds or rights

There shall not be transferred to any new owner in the books of any corporation, sociedadanonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.

If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.553

4) Duties of certain officers and debtors

Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is show, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the non-552 Sec. 94553 Sec. 97

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payment of the tax discovered by them. Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donation intervivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased.554

5) Restitution of tax upon satisfaction of outstanding obligations

If after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid.555

c. Donor’s Taxes

1) Time and place of payment

The return of the donor required in this Section shall be filed within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a nonresident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner.556

554 Sec. 95555 Sec. 96556 Sec. 103 (B)

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d. VAT

1) Payment of VAT

Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.

2) Where to pay the VAT

Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register.557

F. Tax Remedies under the NIRC

1. Taxpayer’s Remedies

a. Assessment

1) Concept of assessment

1. It is the official action of an officer authorized by law in ascertaining the amount of tax due under the law from a taxpayer. This action necessarily involves:

a. the computation of the sum due;b. giving notice to that effect to the taxpayer; andc. the making, simultaneously with or sometime after the giving

of notice, of a demand upon him for the payment of the tax deficiency stated.

557 Sec. 114 (B)

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a) Requisites for valid assessment

a. post-reporting notice or notice for an informal conference after the tax audit

b. Pre-assessment notice, if requiredc. Issuance and receipt of Notice of Assessment

i. must be issued prior to lapse of prescriptive periodii. the written notice must state the facts and the law upon which the assessment is based

b) Constructive methods of income determination

c) Inventory method for income determination558

Assessment is made when it is mailed, released or sent.

d) Jeopardy assessment

An assessment made demanding immediate payment of the tax due without the usual formalities in instances when the Commissioner believes that if the tax will be collected under normal procedures, the collection of such tax is at risk which might result in loss to the government.

Instances when jeopardy assessment may be issued:

When it shall come to the knowledge of the Commissioner that a taxpayer is:

a. retiring from business subject to tax; orb. intending

1. to leave the Philippines or remove his property therefrom; or

2. to hide or conceal his property;c. performing any act tending

1. to obstruct the proceedings for the collection of the tax for the past or current quarter or year; or

2. to render the same totally or partly ineffective unless such proceedings are begun immediately.559

3.558 also called Net Investigatory Method559Sec. 6D, R.A. 8424

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e) Tax delinquency and tax deficiency

Tax delinquency – the taxpayer did not file a return

Tax deficiency – the taxpayer filed a return but the same was deficient. Deficiency is the difference between the tax due and the tax paid.

2) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement

a) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons

In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or material to such inquiry;

(B) To Obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the BangkoSentralngPilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members;

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(C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony;

D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed.

The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of this Code.560

3) When assessment is made

a) Prescriptive period for assessment

(1) False, fraudulent, and non-filing of returns

Ten (10) years after the discovery of the falsity, fraud or omission.561

b) Suspension of running of statute of limitations

1) Periods suspended:

560 Sec. 5561 Sec. 222

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(a)periods for assessment in Secs. 203562 and 222563

(b) beginning of distraint or levy(c) proceeding in court for collection

2) Grounds for suspension ofprescriptive periods:

a) Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for 60 days thereafter

b) Taxpayer requests for Reinvestigation which is granted

c) Taxpayer cannot be located in the address given in the return filed, except if the taxpayer informs the Commissioner of a change in address the prescriptive period will not be suspended

d) When the warrant is duly served upon the taxpayer and no property could be located

e) When the taxpayer is out of the Phils.564

4) General provisions on additions to the tax

a) Civil penaltiesb) Interest565

562 See Reference563 Ibid.564 Sec. 223

565 This is an increment on any unpaid amount of tax, assessed at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed y rules and regulations, from the date prescribed for payment until the amount is fully paid. (Sec. 249 [A], 1997 NIRC) Interest is classified into:1.Deficiency interestAny deficiency in the tax due, as the term is defined in this code, shall be subject to the interest of 20% per annum, or such higher rate as may be prescribed by rules and regulations, which shall be assessed and

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Additions to the tax consist of the:

(1) civil penalty, otherwise known as surcharge, which may either be 25% or 50 % of the tax depending upon the nature of the violation;

(2) interesteither for a deficiency tax or delinquency as to payment;

(3) other civil penalties or administrative fines such as for failure to file certain information returns and violations committed by withholding agents.566

5) Assessment process567

a) Tax audit

The process of examining, going over, or scrutinizing the books and records of the taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer. It can only be performed upon a Letter of Authority issued by the Commissioner or Regional Director.

b) Notice of informal conference

A written notice informing a taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid

collected from the date prescribed for its payment until the full payment thereof (Sec. 249 [B], 1997 NIRC)2.Delinquency interestThis kind of interest is imposed in case of failure to pay:(1)The amount of the tax due on any return required to be filed, or(2)The amount of the tax due for which no return is required, or(3)A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner.566 General Considerations on the Addition to tax a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed in the Tax Code. b. The amount so added to the tax shall be collected at the same time, in the same manner, and as part of the tax. c. If the withholding agent is the government or any of its agencies, political subdivisions or instrumentalities, or a government owned or controlled corporation, the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed (Sec. 247[b], 1997 NIRC) such as the 25% surcharge and the 20% interest per annum on the delinquency (Secs. 248 and 249 [C], 1997 NIRC) 567 Assessments Prima facie correct Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN L- 81446 August 18, 1988.)

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- If, after the culmination of an audit, a Revenue Officer recommends the imposition of deficiency tax assessments, this recommendation is communicated by the Bureau to the taxpayer concerned during an informal conference called for this purpose, the taxpayer shall have 15 days from receipt of the notice of informal conference to explain his side.

c) Issuance of preliminary assessment notice (PAN)

Communication issued by the Regional Assessment Division or any other concerned BIR office, informing a taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings. The assessment shall be in writing, and should inform the taxpayer of the law and the facts on which the assessment is made; otherwise, the assessment is void.

- If the taxpayer disagrees with the findings in the PAN, he has 15 days to file a written reply contesting the proposed assessment.

d) Exceptions to Issuance of PAN

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.568

568 Sec. 228

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e) Reply to PAN

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.569

f) Issuance of formal letter of demand and assessment notice/final assessment notice570

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 without merit. This is commonly known as the Final Assessment Notice. An assessment contains not only a computation of under declaration of taxable sales, receipts or income, OR a substantial overstatement of deductions.

g) Disputed assessment

Taxpayer or his duly authorized representative may administratively protest against a Formal Letter of Demand and Assessment notice within thirty (30) days from date of receipt thereof.

If the protest is denied in whole or part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the CTA within 30 days from receipt of the said decision, or from lapse of the one hundred (180)-day period: otherwise, the decision shall become final and executor.

569

570 GENERAL RULE: Taxes are self-assessing and donot require the issuance of an assessment notice inorder to establish the tax liability of a taxpayer. Exceptions: 1. Tax period of a taxpayer is terminated (sec.6d, NIRC) 2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC) 3. Tax lien (sec. 219, NIRC) 4. Dissolving Corporation (sec. 52c, NIRC

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j) Administrative decision on a disputed assessment

Adverse decision or ruling rendered by theCommissioner of Internal Revenue indisputed assessment or claim for taxrefund or credit, taxpayer may appeal thesame within thirty (30) days after receipt.571

Appeal equivalent to a judicial action.

In the absence of appeal, the decision becomes final and executory. But where the taxpayer adversely affected has not received the decision or ruling, he could not appeal the same to the CTA within 30 days from notice. Hence, it could not become final and executory.572

Motion for reconsideration suspends the running of the 30 - day period of perfectingan appeal. Must advance new grounds notpreviously alleged to toll the reglementaryperiod; otherwise, it would be merely pro-forma.573

6) Protesting assessment

a) Protest574 of assessment by taxpayer

(1) Protested assessment(2) When to file a protest

Filing a request for reconsideration575 or reinvestigation576within 30 days from receipt of assessment.

(3) Forms of protest

1. It is made in writing, and addressed to the Commissioner of Internal Revenue.

571Sec. 11, R.A. No. 1125572Republic vs. De la Rama, 18 SCRA 861573Roman Catholic Archbishop vs. Coll., L-16683, Jan. 31, 1962574A protest is a vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case of administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the official actuations of the CIR. This is equivalent to a pleading.575a plea for re-evaluation of the assessment on the basis of existing records without need of additional evidence.Involves a question of fact or law or both. (Revenue Regulation No. 12-85)576a plea for re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. Involves a question of fact or law or both

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2. It contains information as specified in RR12-85.

3. It states the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise the protest shall be considered void and without force and effect.

4. It is filed within the period prescribed by law.

b) Submission of documents within 60 days from filing of protest

Within 60 days from filing, all relevant documents should be filed, otherwise assessment becomes final and cannot be appealed.577

c) Effect of failure to protest578

7) Rendition of decision by Commissioner

a) Denial of protest579

(1) CIR’s actions equivalent to denial of protest

(a) Filing of criminal action against taxpayer(b) Issuing a warrant of distraint and levy

577Sec 228Submission of documents within the 60 days period is optional to the taxpayer. The relevant supporting documents mentioned in the law refers to such documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted, otherwise the taxpayer would always be at the mercy of the BIR which may require production of such documents which taxpayer could not produce. (Standard Chartered Bank v. CTA, Case No. 5696, Aug. 16, 2001)578 See b), supra579 1. Direct Denial The decision of the Commissioner or his duly rep shall (a) state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise the protest shall be considered void and without force and effect, in which case the same shall not be considered a decision a disputed assessment and (b) that the same is his final decision. (sec. 3.1.5, RR 12-99)2. Indirect Deniala. Commissioner did not rule on the taxpayer’s MR of the assessment – it was only when respondent received summons on the civil action for the collection of deficiency income tax that the period to appeal commenced to run. (CIR vs. Union Shipping Corp.)b. Referral by the Commissioner of request for reinvestigation to the Solicitor General (Republic vs. Lim TianTeng Sons)c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayer’s continued refusal to execute waiver (CIR vs. Ayala Securities Corp.)d. Preliminary collection letter may serve as assessment notice (United Int’l Pictures vs. CIR)

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These actions of the CIR serve as bases for appeal to the CTA.

(2)Inaction by Commissioner

The protest is not acted upon by the Commissioner within 180 days from submission of documents.

8) Remedies of taxpayer to action by Commissioner

a) In case of denial of protest

Appeal of Protest to the Court of Tax Appeals (CTA) within 30 days from receipt of decision denying the protest.

b) In case of inaction by Commissioner within 180 days from submission of documents

Appeal of Protest to the Court of Tax Appeals (CTA)30 days from the lapse of 180 day period.

c) Effect of failure to appeal

The decision shall be final, executory and demandable.

b. Collection

1) Requisites

2) Prescriptive periods

Local taxes, fees or charges may be collected within five years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of such period.580

3) Distraint of personal property including garnishment

a) Summary remedy of distraint of personal property

(1) Procedure for distraint and garnishment

580sec. 194, LGC

195

The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, a copy of which, signed by himself, shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale.

Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the corporation, company or association, which issued the said stocks or securities.

Debts and credits shall be distrained by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The warrant of distraint shall be sufficient authority to the person owning the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits.

Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government.581

(2) Sale of property distrained and disposition of proceeds

The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is made, specifying; the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained.

581 Sec. 208

196

At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges.

In the case of Stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities.

Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending ;the sale, and no charge shall be imposed for the services of the local internal revenue officer or his deputy.582

(a) Release of distrained property upon payment prior to sale

If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner.583

(3)Purchase by the government at sale upon distraint

When the amount bid for the property under distraint is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the national Government for the amount of taxes, penalties and costs due thereon.

Property so purchased may be resold by the Commissioner or his deputy, subject to the rules and regulations prescribed by the 582 Sec. 209583 Sec. 210

197

Secretary of Finance, the net proceeds therefrom shall be remitted to the National Treasury and accounted for as internal revenue.584

(4) Report of sale to BIR

Within two (2) days after the sale, the officer making the same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record.585

(5) Constructive distraint to protect the interest of the government

To safeguard the interest of the Government, the Commissioner may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property or to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him.

The constructive distraint of personal property shall be affected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same ;in any manner whatever, without the express authority of the Commissioner.

In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnessed, leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint.586

4) Summary remedy of levy on real property

584 Sec. 212585 Sec. 211586 Sec. 206

198

a) Advertisement and sale

Within twenty (20) days after levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of a least thirty (30) days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in public and conspicuous place in the barrio or district in which the real estate lies and ;by publication once a week for three (3) weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain a statement of the amount of taxes and penalties so due and the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties and interest. If he does not do so, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify.

Within five (5) days after the sale, a return by the distraining or levying officer of the proceedings shall be entered upon the records of the Revenue Collection Officer, the Revenue District officer and the Revenue Regional Director. The Revenue Collection Officer, in consultation with the Revenue district Officer, shall then make out and deliver to the purchaser a certificate from his records, showing the proceedings of the sale, describing the property sold stating the name of the purchaser and setting out the exact amount of all taxes, penalties and interest: Provided, however, That in case the proceeds of the sale exceeds the claim and cost of sale, the excess shall be turned over to the owner of the property.

The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his collection, advance an amount sufficient to defray the costs of collection by means of the summary remedies provided for in this Code, including ;the preservation or transportation in case of personal property, and the advertisement and subsequent sale, both in cases of personal and real property including improvements found on the latter. In his monthly collection reports, such advances shall be reflected and supported by receipts.587

b) Redemption of property sold

587 Sec. 213

199

Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issued to the purchaser and a certificate from the said Revenue District Officer that he has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the purchaser the amount by which such property has thus been redeemed, and said property thereafter shall be free form the lien of such taxes and penalties.

The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption.588

c) Final deed of purchaser

In case the taxpayer shall not redeem the property as herein provided the Revenue District Officer shall, as grantor, execute a deed conveying to the purchaser so much of the property as has been sold, free from all liens of any kind whatsoever, and the deed shall succintly recite all the proceedings upon which the validity of the sale depends.589

5) Forfeiture to government for want of bidder

a) Remedy of enforcement of forfeitures

(1)Action to contest forfeiture of chattel

In case of the seizure of personal property under claim of forfeiture, the owner desiring to contest the validity of the forfeiture may, at any time before sale or destruction of the property, bring an action against the person seizing the property or having possession thereof to recover the same, and upon giving proper bond, may enjoin

588 Sec. 214589 Sec. 202

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the sale; or after the sale and within six (6) months, he may bring an action to recover the net proceeds realized at the sale.590

b) Resale of real estate taken for taxes

The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days’ notice, sell and dispose of the same of public auction or with prior approval of the Secretary of Finance, dispose of the same at private sale. In either case, the proceeds of the sale shall be deposited with the National Treasury, and an accounting of the same shall rendered to the Chairman of the Commission on Audit.591

c) When property to be sold or destroyed

Sales of forfeited chattels and removable fixtures shall be effected, so far as practicable, in the same manner and under the same conditions as the public notice and the time and manner of sale as are prescribed for sales of personal property distrained for the non-payment of taxes.

Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco, and all apparatus used I or about the illicit production of such articles may, upon forfeiture, be destroyed by order of the Commissioner, when the sale of the same for consumption or use would be injurious to public health or prejudicial to the enforcement of the law.

All other articles subject to excise tax, which have been manufactured or removed in violation of this Code, as well as dies for the printing or making of internal revenue stamps and labels which are in imitation of or purport to be lawful stamps, or labels may, upon forfeiture, be sold or destroyed in the discretion of the Commissioner.

Forfeited property shall not be destroyed until at least twenty (20) days after seizure.592

590 Sec. 231591 Sec. 216592 Sec. 225

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d) Disposition of funds recovered in legal proceedings or obtained from forfeiture

All judgments and monies recovered and received for taxes, costs, forfeitures, fines and penalties shall be paid to the Commissioner or his authorized deputies as the taxes themselves are required to be paid, and except as specially provided, shall be accounted for and dealt with the same way.593

6) Further distraint or levy

The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected.594

7) Tax lien

A legal claim or charge on property, either real or personal, established by law as a security in default of the payment of taxes.

1. Nature:

A lien in favor of the government of the Philippines when a person liable to pay a tax neglects or fails to do so upon demand.

2. Duration:

Exists from time assessment is made by the CIR until paid, with interests, penalties and costs.

1. Extent: Upon all property and rights to property belonging to the taxpayer.

2. Effectivity against third persons:Only when notice of such lien is filed by the CIR in the Register of Deeds concerned.

8) Compromise

593 Sec. 226594 Sec. 217 Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of his property would escape payment of his tax liability by sacrificing an insignificant portion of his holdings.

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a) Authority of the Commissioner to compromise and abate taxes

(A) Compromise the payment of any internal revenue tax, when:

(1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or

(2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

The compromise settlement of any tax liability shall be subject to the following minimum amounts:

For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and

For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax.

Where the basic tax involved exceeds One million pesos (P1,000.000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners

(B) Abate or cancel a tax liability, when:

(1) The tax or any portion thereof appears to be unjustly or excessively assessed; or

(2) The administration and collection costs involved do not justify the collection of the amount due.

All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud.595

9) Civil and criminal actions

a) Suit to recover tax based on false or fraudulent returns

If tax is collected under an assessment that the list, statement or return is false/fraudulently made, it cannot be recovered by any

595 Sec. 204 (A)(B)

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suit unless it is proved that the said list, statement or return was not false nor fraudulent & did not contain any understatement or undervaluation

Not applicable to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells & mines.

c. Refund596

1) Grounds and requisites for refund

a) Taxes erroneously or illegally receivedb)Penalties imposed without authorityc) Any sum alleged to have been excessively or in any manner

wrongfully collectedd) Refund the value of internal revenue stamps when returned

in good conditionby the purchaser

e) Redeem or change unused stamps renderedunfit for use and refund their value upon proof of destruction, in the discretion of the Commission

2) Requirements for refund as laid down by cases

a) Necessity of written claim for refund

This requirement is mandatory.597

Except:

596 A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress (Sec. 229) Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196 LGC),however, under protest is necessary to claim for(a)real property taxes (Sec. 252 LGC)(b)custom duties (Sec 2308 TCC597 Reasons: a) to afford the commissioner an opportunity to correct the action of subordinate officer and (b) to notify the government that the taxes sought to be refunded are under question and that, therefore, such notice should then be borne in mind in estimating the revenue available for expenditure(Bermejo vs. CIR 87 Phil 96)

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Tax credit or tax refund where onthe face of the return upon which paymentis made, such payment appears clearly tohave been erroneous.598

b) Claim containing a categorical demand for reimbursement

Categorical demand for reimbursement.

c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause599

Requirement a condition precedent andnon-compliance therewith bars recovery.600

Refers not only to the “administrative”claim that the taxpayer should file within 2years from date of payments with the BIR,but also the judicial claim or the action forrefund the taxpayer should commencewith the CTA.601

3) Legal basis of tax refunds

Legal principle of quasi-contracts or solutioindebiti.602

The Government is within the scope of the principle of solutioindebiti.603

4) Statutory basis for tax refund under the Tax Code

a) Scope of claims for refund

The Commissioner may credit or refund taxes:

a) Erroneously or illegally assessed or collected internal revenue taxes

b) Penalties imposed without authority

598Sec. 229599Secs.204 (c) & 229600Phil. Acetylene Co. Inc, vs. Commissioner,CTA Case No. 1321, Nov. 7, 1962601seeGibbs vs.. Collector of Internal Revenue, 107 Phil 232602see Art. 2142 & 2154, CC603CIR vs. Fireman’s Fund Insurance Co

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c) Any sum alleged to have been excessive or in any manner wrongfully collected.604

b) Necessity of proof for claim or refund

Refund claim partakes of the nature of an exemption which cannot be allowed unless granted in the most explicit and categorical language.605

Failure to discharge burden of giving proof is fatal to claim.

It must be shown that payment was an independent single act of voluntary payment of a tax believed to be due, collectible and accepted by the government, and which therefore, become part of the state moneys subject to expenditure and perhaps already spent or appropriated.606

c) Burden of proof for claim of refund

Written claim for refund or tax creditfiled by the taxpayer with the Commissioner.

d) Nature of erroneously paid tax/illegally assessed collected

Taxpayer pays under the mistake of fact, as for instance in a case where he is not aware of the existing exemption in his favor at the time payments were made.

A tax is illegally collected if payments are made under duress.

e) Tax refund vis-à-vis tax credit607

A tax refund requires a physical return of the sum erroneously paid by the taxpayer.

The taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option

604Secs. 204 and 209605CIR vs. Johnson and Sons606CIR vs. Li Yao, L-11875,Dec. 28, 1963607It may be that there is no essential difference between a tax refund and a tax credit since both are moves of recovering taxes erroneously or illegally paid to the government. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)

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not proximately available if the taxpayer chooses instead to receive a tax credit.608

Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an allowance against the tax itself, or a deduction from what is owned.

A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income.609

f) Essential requisites for claim of refund

a. The claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of the payment of the tax.

b. It is shown on the return of the recipient that the income payment received was declared as part of the gross income; and

c. The fact of withholding is established by a copy of a statement duly issued by the payee showing the amount paid and the amount of tax withheld therefrom.610

5) Who may claim/apply for tax refund/tax credit

a) Taxpayer/withholding agents of non-resident foreign corporation

A withholding agent is subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under the law. A “person liable for tax” has been held to be a “person subject to tax” and properly considered a “taxpayer.” xxx By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes.611

6) Prescriptive period for recovery of tax erroneously or illegally collected

Two (2) years from the date of payment of the tax or penalty.

608Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, ibid.609Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15,2005610Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007611CIR vs. Procter and Gamble PMC, 204 SCRA 377

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7) Other consideration affecting tax refunds

a) Taxpayer may file an action for refund inthe CTA even before the Commissionerdecides his pending claim in the BIR.612

b) Suspension of the 2-year prescriptive period may be had when:

i. there is a pending litigation between the two parties (government and taxpayer) as to the proper tax to be paid and of the proper interpretation of the taxpayer’s charter in relation to the disputed tax; and

ii.the commissioner in that litigated case agreed to abide by the decision of the Supreme Court as to the collection of taxes relative thereto.613

c) Even if the 2-year period has lapsed thesame is not jurisdictional and may besuspended for reasons of equity and other special circumstances.614

d) 2-year prescriptive period for filing of tax refund or credit claim computed from date of payment of tax of penalty except in the following:

i. Corporations:

2-year prescriptive period for overpaid quarterly income tax is counted not from the date the corporation files its quarterly income tax return, but from the date the final adjusted return is filed after the taxable year.615

ii. Taxes payable in installment:

2-year period is counted form the payment of the last installment.616

iii. Withholding Taxes

612Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966613Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819614CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995615Commissioner of Internal Revenue vs. TMX Sales, Inc., G.R. No.83736, Jan. 15, 1992616CIR vs. Palanca, Jr., supra

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Prescriptive period counted not from the date the tax is withheld and remitted to the BIR, but from the end of the taxable year.617

iv. VAT Registered Person whose sales are zero-rated or effectively zero-rated

2-year period computed from the end of the taxable quarter when the sales transactions were made.618

e) Interest on Tax Refund:

The Government cannot be required topay interest on taxes refunded to the taxpayerunless:

i.The Commissioner acted with patent arbitrariness619

ii. In case of Income Tax withheld on the wages of employees.620

2. Government Remedies

a. Administrative remedies

1) Tax lien621

2) Levy and sale of real property

617Gibbs vs. Commissioner of Internal Revenue, supra618Sec. 112 (A)619 Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (CIR vs.Victorias Milling Corp., Inc. L-19607, Nov. 29,1966)620Any excess of the taxes withheld over the tax due from the taxpayer shall be returned orcredited within 3 months from the fifteenth (15th)day of April. Refund or credit after such time earn interest at the rate of 6% per annum, starting after the lapse of the 3-month period to the date the refund or credit is made (Sec 79 (c) (2)) 621 See (F)(1)(b)(7), supra

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Levy – Act of seizure of real property in order to enforce the payment of taxes. The property may be sold at public sale, if after seizure; the taxes are not voluntarily paid.

The requisites are the same as that of distraint.

Procedure:

1. International Revenue officer shall prepare a duly authenticated certificate showing

a. Name of taxpayerb. Amount of tax andc. Penalty due.

- enforceable throughout the Philippines2. Officer shall write upon the certificate a description of the property upon

which levy is made.3. Service of written notice to:

a. The taxpayer, andb. RD where property is located.

4. Advertisement of the time and place of sale.5. Sale at public auction to highest bidder.6. Disposition of proceeds of sale.

The excess shall be turned over to owner

3) Forfeiture of real property to the government for want of bidder

Forfeiture: Implies a divestiture of property without compensation, in consequence of a default or offense.

Includes the idea of not only losing but also having the property transferred to another without the consent of the owner and wrongdoer.

1. Effect: Transfer the title to the specific thing from the owner to the government.

2. When available:a. No bidder for the real property exposed for sale.b. If highest bid is for an amount insufficient to pay the taxes,

penalties and costs.- Within two days thereafter, a return of the proceeding is duly

made.3. How enforced:

a. In case of personal property – by seizure and sale or destruction of the specific forfeited property.

b. In case of real property – by a judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require.

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4) Further distraint and levy622

5) Suspension of business operation623

6) Non-availability of injunction to restrain collection of tax

No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code.624

Exception:

Injunction may be issued by the CTA in aid of its appellate jurisdiction.625

b. Judicial remedies

Civil and Criminal Actions:

1. Brought in the name of the Government of the Philippines.2. Conducted by Legal Officer of BIR3. Must be with the approval of the CIR, in case of action, for

recovery of taxes, or enforcement of a fine, penalty or forfeiture.

A. Civil Action

Actions instituted by the government to collect internal revenue taxes in regular courts (RTC or MTCs, depending on the amount involved)

When assessment made has become final and executory for failure or taxpayer to:

a. Dispute same by filing protest with CIRb. Appeal adverse decision of CIR to CTA

B. Criminal Action

622 See (F)(1)(b)(6), supra623 See (E)(1)(a)(6), supra624 Sec. 218625under Sec. 11 of RA 1125, as amended by RA 9282 (…when in the opinion of the Court the collection … may jeopardize the interest of the Government and/or the taxpayer, the Court any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court).

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A direct mode of collection of taxes, the judgment of which shall not only impose the penalty but also order payment of taxes.

An assessment of a tax deficiency is not necessary to a criminal prosecution for tax evasion, provided there is a prima facie showing of willful attempt to evade.

3. Statutory Offenses and Penalties

a. Civil penalties

1) Surcharge

A civil penalty imposed by law as an addition to the main tax required to be paid. It is not a criminal penalty but a civil administrative sanction provided primarily as safeguard for the protection of the State revenue and to reimburse the government for the expenses of investigation and the loss resulting from the taxpayer’s fraud. A surcharge added to the main tax is subject to interest.

2) Interest

a) In General

There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.626

b) Deficiency interest

Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof.627

c) Delinquency interest

In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or626 Sec. 249 (A)627 Id., (B)

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(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax.628

d) Interest on extended payment

If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid.629

4. Compromise and Abatement of taxes

a. Compromise630

Involves a mere reduction of the tax.

b. Abatement

There is a cancelation of the entire liability.

G. Organization and Function of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of secretary of finance to promulgate rules and regulations

The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.631

628 Id., (C)629 Id., (D)630 See I. (A)(7), under General Principles of Taxation, supra631 Sec. 244

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b. Specific provisions to be contained in rules and regulations

The rules and regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing or defining:

(a) The time and manner in which Revenue Regional Director shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept;

(b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the manner in which the labelling, branding or marking shall be effected;

(c) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labelled, branded or marked;

(d) The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings;

(e) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses;

(f) The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business ort by the person for whom such denaturing is done or by whom, such alcohol is dealt in;

(g) The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes;

(h) The conditions to be observed by revenue officers respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and such other rules and

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regulations which the Commissioner may consider suitable for the enforcement of the said Title III;

(i) The manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics;

(j) The manner in which internal revenue taxes, such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax: Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations, require that the tax returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax. Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations require that the tax returns, papers and statements and taxes of large taxpayers be filed and paid, respectively, through collection officers or through duly authorized agent banks: Provided, further, That the Commissioner can exercise this power within six (6) years from the approval of Republic Act No. 7646 or the completion of its comprehensive computerization program, whichever comes earlier: Provided, finally, That separate venues for the Luzon, Visayas and Mindanao areas may be designated for the filing of tax returns and payment of taxes by said large taxpayers.

c. Non-retroactivity of rulings

Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or

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(c) Where the taxpayer acted in bad faith.632

2. Power of the Commissioner to suspend the business operation of a taxpayer633

III. Local Government Code of 1991, as amended

A. Local Government Taxation634

1. Fundamental principles

1. Taxation shall be uniform635 in each LGU2. Taxes, fees, charges and other impositions shall be:

a. Equitable and based on the taxpayer’s ability to pay.b. For public purpose.636

c. Not unjust, excessive, oppressive or confiscatory.d. Not contrary to law, public policy, national economic policy, or in restraint of trade.

3. Not let to any private person4.Not inure solely to the local government levying5. Each LGU shall, as far as practicable, evolve a progressive

system of taxation.

Just Taxation – Municipal corporations are allowed a wide range in determining tax rates of imposable taxes and license fees.

2. Nature and source of taxing power

a. Grant of local taxing power under the Local Government Code

632 Sec. 246633 See (E)(1)(a)(6), under Compliance Requirements (Internal Revenue Taxes), supra634 The power to tax which may be exercised by local legislative bodies is no longer merely by nature of a valid delegation as before but pursuant to direct authority conferred by Sec. 5, Art X of the Constitution (MactanCebyIntn’l Airport vs Marcos, G.R. No. 120082, Sept 11, 1996) Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax power (MERALCO vs Prov. of Laguna, G.R. No 131359, May 5, 1999635Uniformity of Taxation – Equality and uniformity of local taxation is that all taxable articles of the same class shall be taxed at the same rate within the same territorial jurisdiction of the taxing authority.636 Public Purpose – Proceeds obtained are to be used to support the existence of theLGU.

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Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units.637

b. Authority to prescribe penalties for tax violations

The sanggunian of a local government unit is authorized to prescribe fines or other penalties for violation of tax ordinances but in no case shall such fines be less than One thousand pesos (P1,000.00) nor more than Five thousand pesos (P5,000.00), nor shall imprisonment be less than one (1) month nor more than six (6) months. Such fine or other penalty, or both, shall be imposed at the discretion of the court. The sangguniang barangay may prescribe a fine of not less than One hundred pesos (P100.00) nor more than One thousand pesos (P1,000.00).638

c. Authority to grant local tax exemptions

Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary.639

d. Withdrawal of exemptions

Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.640

e. Authority to adjust local tax rates637 Sec. 129638 Sec. 516639Sec. 192, LGC640 Sec. 193

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LGUs are given authority to adjust the tax rates, but the adjustment should be made not oftener than once every 5 years but in no case shall the adjustment exceed 10% of the rates fixed under the LGC 10% of the rates fixed under the LGC.641

f. Residual taxing power of local governments

The power to tax which may be exercised by local legislative bodies is no longer merely by nature of a valid delegation as before but pursuant to direct authority conferred by Sec. 5, Art X of the Constitution.642

Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist althoughCongress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax power.643

g. Authority to issue local tax ordinances

The power to impose a tax, fee, or charge or to generate revenue under this Codeshall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance.644

3. Local taxing authority

a. Power to create revenues exercised thru LGUs

Local governments are authorized to impose and collect the following charges:

1. Reasonable fees and charges for services rendered.645

2. Public Utility Charges if:

a. Owned, operated and maintainedb. Within their jurisdiction646

641Sec 191

642MactanCebyIntn’l Airport vs Marcos, G.R. No. 120082, Sept 11, 1996643MERALCO vs Prov. of Laguna, G.R. No 131359, May 5, 1999644 Sec. 132645 Sec. 153646 Sec. 154

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3. Tools, Fees or Charges for:

a. Use of public road, pier or wharf, waterway bridge, ferry or telecommunicatio system

b. Funded and constructed by the local government647

b. Procedure for approval and effectivity of tax ordinances

The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction.648

4. Scope of taxing power

Not Inherent – Unlike a sovereign state, municipal corporations have no inherent power to tax. Being mere creatures of law, they may exercise the power only if delegated to them by the national legislature or conferred by the Constitution itself.

Limitations of Local Tax Power – Sec. 5, Art X of the Constitution sought to safeguard the viability and self-sufficiency of local government units. It expressly provides the power to be subject to such limitations and guidelines as the Congress may provide.

1. The taxpayer will not be over-burdened with unreasonable impositions

2. Local taxation is to be fair, uniform and just.3. Each LGU will have its fair share of available

647 Sec. 155648 Sec. 187

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5. Specific taxing power of local government unit (LGUs)

a. Taxing powers of provinces

1) Tax on transfer of real property ownership

Real Property – Refers only to lands, buildings, and machineries intended by the owner of the land or building for an industry or works which may by carried on in a building or on a piece of land and which tend directly to meet the needsof the industry or works.

Transaction taxed - sale, barter, or any other mode of transferring ownership of, or title to, real property.

Rate – At not more than 50% of 1% total consideration.

Tax base – 1) total consideration or2) fair market value, whichever is higher

Exception from tax – The sale, transfer or other disposition of real property pursuant to RA 6657649is exempt from tax.

2) Tax on business of printing and publication

Transaction taxed – business of printing and publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and other similar nature

Tax Rate – Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, in the case of newly started business, not to exceed 1/20 of 1% of the capital investment

Exception – The receipts from the printing and/ or publishing of books or other reading materials prescribed by the DECS as school text or references are not subject to the tax imposed

3) Franchise tax

649Comprehensive Agrarian Reform Law

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Franchise – Generally refers to a privilege conferred by the government on an individual or corporation, which does not belong to the citizens by common right

Purpose of Franchise Tax – to be in addition to the franchise tax imposed by the national government on business which are holders of franchise except when otherwise prohibited by law.650

Tax Rate – not exceeding 50% of 1% , if newly started business, 1/20 of 1 %

Tax base – gross annual receipts of preceding calendar year based on:

a) Incoming receipts, or b) Realized within territorial jurisdiction.

4) Tax on sand, gravel and other quarry services

Tax Rate – not more than 10% of fair market value

Issuance of Permit – To permit to extract the sand, gravel and other quarry resources shall be issued exclusively by the provincial governor pursuant to the ordinance of the sangguniangpanlalawigan

Distribution of the Proceeds – The proceeds of the tax shall be distributed as follows

a) Province – 30% b) Component city or municipality where the sand, etc are

extracted – 30% c) Barangay where the sand, etc. are extracted – 40%

5) Professional tax

Tax rate – in such as Sanggunian may determine in no case to exceed P300

Profession – a calling w/c requires the passing of an appropriate government board or bar examination, such as the practice of law, medicine, public accounting, engineering, etc.

650Sec 267 (b), NIRC

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Nature of Tax – Professional tax applies only to natural or physical persons and not to juridical entities. Said tax is fixed on the privilege of exercising or engaging in a profession. The tax is not based on the amount of earnings of the taxpayer .

When paid – on or before Jan. 20 Where: paid on the place where you practice your profession.651

6) Amusement tax

Amusement – Pleasurable diversion and entertainment

Amusement Place – Includes theaters, cinemas, concert halls, circuses and other places of amusement where one seeks admission to entertain himself by seeing or viewing the show or performance.652

Tax Rate – not more than 30% of the gross receipt from admission feesExemption – operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentation.

Exceptions to exemption – pop, rock, or similar concert.

7) Tax on delivery truck/van

Transaction taxed – use of truck, van vehicle in the delivery or distribution of distilled spirits, fermented liquors, softdrinks, cigar and cigarettes and other products, determined by the Sanggunian to sales outlets or consumers.

Tax rate – not exceeding P500 for every truck, van or any vehicle used

Exemption – exempt from tax on peddlers.

b. Taxing powers of cities

Cities are authorized specifically to impose taxes, fees and charges that provinces and municipalities may levy.

651government employees are exempted from paying PT652Sec 131 (c)

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Rate: That may be above the maximum established for provinces and municipalities but not exceeding 50% of such maximum rates except the rates of professional and amusement taxes

c. Taxing powers of municipalities

Municipality may levy taxes, fees and charges not otherwise levied by provinces and cities

1) Tax on various types of businesses

Municipal Taxes – Municipalities may impose taxes on the following business653

1. Manufacturers, assemblers, repackers of liquors, distilled spirits and wines

2. Rate: At graduated annual fixed tax based on gross sales or receipts for the preceding calendar year in an amount not to exceed P6.5 M or more, a rate not exceeding 37 ½ of 1% is imposed

3. Wholesalers, distributors or dealers in any article of Commerce

Rate: Graduated annual fixed rate based on gross sales or receipts not exceeding P2M or more, the rate not exceeding 50% of 1%

4. Exporters, manufacturers, millers, producers of essential commodities

Rate: Not exceeding ½ of the rates prescribed in (a) and (b)

5. Contractors and other independent contractors

Rate: Graduated annual fixed rate when the gross receipts exceeds P2M the rate is not exceeding 50% of 1%

6. Banks and other financial institutions

Rate: Not exceeding 50% of 1% on the gross receipts of preceding calendar year

7. Peddlers

Rate: Not exceeding 50% per peddler annually

8. Any business not otherwise specified

653Sec 143, LGC

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Rate: As the Sanggunian may deem proper. When subject to excise, VAT or percentage tax, it shall not exceed 2% of gross receipts of the preceding calendar year

2) Ceiling on business tax impossible on municipalities within Metro Manila

The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed in the preceding Section.654

3) Tax on retirement on business

A business subject to tax pursuant to the preceding sections shall, upon termination thereof, submit a sworn statement of its gross sales or receipts for the current year. If the tax paid during the year be less than the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired.655

4) Rules on payment of business tax

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.

b. The tax on a business must be paid by the person conducting the same.

c. In cases where a person conducts or operates 2 or more of the businesses mentioned in Section 143656 of LGC:

a. Which 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.

b. Which are subject to different rates of tax, the gross sales or receipts of each business shall be separately reported for the purpose of computing the tax due from each business.

654 Sec. 144655 Sec. 145656 See Reference

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5) Fees and charges for regulation & licensing

(a) Municipalities shall have the exclusive authority to grant fishery privileges in the municipal waters and impose rentals, fees or charges therefor in accordance with the provisions of this Section.

(b) The sangguniangbayan may:

(1) Grant fishery privileges to erect fish corrals, oysters, mussels or other aquatic beds or bangus fry areas, within a definite zone of the municipal waters, as determined by it: Provided, however, That duly registered organizations and cooperatives of marginal fishermen shall have the preferential right to such fishery privileges: Provided, further, That the sangguniangbayan may require a public bidding in conformity with and pursuant to an ordinance for the grant of such privileges: Provided, finally, That in the absence of such organizations and cooperatives or their failure to exercise their preferential right, other parties may participate in the public bidding in conformity with the above cited procedure.

(2) Grant the privilege to gather, take or catch bangus fry, prawn fry or kawag-kawag or fry of other species and fish from the municipal waters by nets, traps or other fishing gears to marginal fishermen free of any rental, fee, charge or any other imposition whatsoever.

(3) Issue licenses for the operation of fishing vessels of three (3) tons or less for which purpose the sangguniangbayan shall promulgate rules and regulations regarding the issuances of such licenses to qualified applicants under existing laws.

Provided, however, That the sanggunian concerned shall, by appropriate ordinance, penalize the use of explosives, noxious or poisonous substances, electricity, muro-ami, and other deleterious methods of fishing and prescribe a criminal penalty therefor in accordance with the provisions of this Code: Provided, finally, That the sanggunian concerned shall have the authority to prosecute any violation of the provisions of applicable fishery laws.657

6) Situs of tax collected

Rule 1: For purposes of collection of the taxes underSection 143 (tax on business),

657 Sec. 149

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businesses maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located.

Rule 2: In case there is no branch or sales outlet inthe city or municipality where the sale is made, the sale shall be recorded in the principal office and the taxes due shall accrue and be paid to such city or municipality.

Rule 3: The following sales allocation for salesrecorded in the principal office of businesses with factories, project offices, plants, and plantations:

30% of all sales recorded in the principaloffice shall be taxable by the city ormunicipality where the principal office is located; and 70% of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located.

Rule 4: Where the plantation located at a place other than the place where the factory is located, the abovementioned 70% shall be divided as follows:

60% - to the city or municipality where the factory is located; and

40% - to the city or municipality where the plantation is located.

Rule 5: Where there are 2 or more factories, project offices, plants, or plantations located in different localities, the above mentioned 70% shall be prorated among the localities where the factories, project offices, plants, and plantations are located in proportion to their respective volumes of production during the period for which the tax is due.658

d. Taxing powers of barangays

1) Taxes on stores / retailers with fixed business establishment with gross sales or receipts of the preceeding calendar year of P50,000 or less in the cities & municipalities

Rate: Not exceeding 1% on such gross sales or receipts

658 Sec. 150

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2) Service Fees/ Charges – it may collect reasonable fees or charges for services rendered in connection with the regulation or the use of barangay owned property or service facilities

3) Barangay Clearance – no city municipality may issue any license/ permit for any business / activity is located. For such clearance, the sangguniangbrgy. May impose reasonable fee.

4) Other fees & charges – the brgy. May levy reasonable fees & charges

a) On commercials breeding of fighting cocks & cockpits; b) On places of recreation w/c charge admission fees; and c) On billboards, signs boards, neon signs and outdoor advertisement

e. Common revenue raising powers

1) Service fees and charges

Reasonable fees and charges for services rendered.659

2) Public utility charges

3)Public Utility Charges if:

i. Owned, operated and maintainedii. Within their jurisdiction660

4) Toll fess or charges

5)Tools, Fees or Charges for:i. Use of public road, pier or wharf, Waterway Bridge, ferry or telecommunication systemii. Funded and constructed by the local government661

f. Community tax

Nature: The community tax, w/c replaced the residence tax, is essentially a poll or capitalization tax. It is of fixed amount imposed upon certain inhabitants of the Phil. Without regard to the property/ occupation in w/c they may be engaged.

Who are authorized to levy – cities or municipalities may levy a community tax, as well as the rates & accrual of the proceeds thereof.662

Persons liable to tax

659Sec. 153660 Sec. 154661 Sec. 155662 Sec 156

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1) Individuals – Rate: P5.00 an annual additional tax of P1.00 for every P1,000 income regardless of whether from business, exercise of profession or from property w/c in no case shall exceed P5,000

2) Corporations Rate: Annual community tax of P500 and an annual additional tax w/c in no case shall exceed P10,000

Exemptions from the Tax Community

1) Diplomatic and consular representatives and 2) Transient visitors when their stay in the Phil. Does not exceed 3 mos.

Estates of deceased persons, being neither corporations nor individuals, are not subject to the tax, but the heirs must declare their proportionate shares of their income.

Community Tax Certificate – shall be issued to every person or corporation upon payment of the community tax. It may also be issued to any corporation / person not subject to the community tax upon payment of P1.00663

6. Common limitations on the taxing powers of LGUs664

Unless otherwise provided herein, the exercise of the taxing power of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

1.Income tax Exception: banks and other financial institutions

2. Documentary Stamp Tax

3.Tax on estates, inheritance, gifts, legacies and other acquisitions mortis causa

Exception: tax on transfer of real property ownership

663 Sec 162 664Sec 133

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4. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products.

Taxable Articles embodied in the NIRC are:

1) Alcoholic products2) Tobacco products3) Petroleum products4) Miscellaneous articles5) Mineral products

Local governments can tax the selling of these finished products or the raw materials.

5. Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services exchanges or similar transactions on goods or services except as otherwise provided herein

Percentage of taxes – imposed when there is set of ration between the amount of tax and the volume of sales.

6. Taxes on the gross receipts of transportation of contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water except as provided by the code.

On the other hand, transportation contractors including persons who transport passengers for hire and other domestic carriers by land, air or water for transport of passengers, except owners of bancas and owners of animal drawn two-wheeled vehicle are subject to 3% percentage tax on their gross quarterly receipt.665

Sec 117 of NIRC, also, specifies that the gross receipt of common carriers derived from their incoming and outgoing freight shall not be subjected to local taxes imposed under LGC.

7. Taxes, fees and charges imposed under the Tariff and Customs Code and other Special Laws

8. Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and all other kinds of customs fees, charges and due except wharfage on wharves constructed and maintained by LGU concerned.

9. Taxes, fees and charges and other Impositions which contravene Existing Government Policies or which are Violative of the Fundamental Principles of Taxation.

10.Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdiction of LGU in the

665 Sec 117, NIRC

229

guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatever upon such goods or merchandise.

11. Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers of\r fishermen.

12. Taxes on business enterprises certified to by the Board of Investment as pioneer or non-pioneer who enjoy tax holidays for a period of 6 and 4 years, respectively from the date of registration

+tax holidays refer to exemption from income tax only.

13. Taxes on premiums paid by way of reinsurance or retrocession.

14. Taxes, fees or other charges on Philippine products actually exported, excepted otherwise provided herein in the LGC.

15. Taxes, fees or charges on Countryside and Baranggay Business Enterprises and Cooperative duly registered under RA No. 6810 and RA 6938 otherwise known as the Cooperative Code of the Phil. Respectively.

16. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and LGU.

17. Taxes, fees, and charges imposed under special laws.

18.Taxes, fees or charges for registration of motor vehicles.Exception: Tricycles

7. Collection of business tax

a. Tax period and manner of payment

Unless otherwise provided in the LGC, the tax period of all local taxes, fees and charges shall be the calendar year

Such, taxes, fees and charges may be paid in quarterly installments.666

b. Accrual of tax

Unless otherwise provided in the Code, all local taxes, fees and charges shall accrue on the 1st day of January of each year.

666 Sec. 165

230

New taxes, fees or charges or changes in the rates thereof, shall accrue on the 1st day of the quarter next following the effectively of the ordinance imposing such new rates.667

c. Time of payment

Unless otherwise provided in the Code, all local taxes, fees & charges shall be paid within the first 20 days of January or of each subsequent quarter.

The sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such charges but only for a period not exceeding 6 months.668

d. Penalties on unpaid taxes, fees or charges

Surcharges & penalties on unpaid taxes, fees or charges

The Sanggunian may impose a surcharge not exceeding 27% of the amount of taxes, fees or charges not paid on time and an interest at the rate not exceeding 2% per month of unpaid taxes, fees or charges including surcharges, until such amount is fully paid

In no case shall the total interest on the unpaid amount or portion thereof exceed 36 months669

e. Authority of treasurer in collection and inspection of books

All local taxes, fees, and charges shall be collected by the provincial, city, municipal, or barangay treasurer, or their duly authorized deputies. The provincial, city or municipal treasurer may designate the barangay treasurer as 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 the premiums thereon in addition to the premiums of bond that may be required under this Code.670

The provincial, city, municipal or barangay treasurer may, by himself or through any of his deputies duly authorized in writing, examine the books, accounts, and other pertinent records of any person, partnership, corporation, or association subject to local taxes, fees and charges in order to ascertain, assess, and collect the correct amount of the tax, fee, or charge. Such examination shall be made during regular business hours, only once for every tax period, and shall be certified to by the examining official. Such certificate shall be made of record in the books of accounts of the

667 Sec 166 668 Sec 167669 Sec 168670 Sec. 170

231

taxpayer examined. In case the examination herein authorized is made by a duly authorized deputy of the local treasurer, the written authority of the deputy concerned shall specifically state the name, address, and business of the taxpayer whose books, accounts, and pertinent records are to be examined, the date and place of such examination, and the procedure to be followed in conducting the same. For this purpose, the records of the revenue district office of the Bureau of Internal Revenue shall be made available to the local treasurer, his deputy or duly authorized representative.671

8. Taxpayer’s remedies

a. Periods of assessment and collection of local taxes, fees or charges672

1. Prescriptive period of assessment – within five years from the date they become due.

- in case of fraud of intent to evade payment – within 10 years

2. Prescriptive period of collection – within 5 years from the date of assessment by administrative or judicial action

b. Protest of assessment

a. Assessment made by the local Treasurer

b. Taxpayer has 60 days from receipt to file written protest with Treasurer, otherwise it shall become final and executory

c. Treasurer has 10 days within which to decide.

Treasurer cancels assessmentTreasurer denies protestTaxpayer appeals within 30 days after receipt of denialTreasurer does not act within 60 daysTaxpayer has 30 days from the lapse of 60 days to appeal

c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge

671 Sec. 171672Suspension of the running of the prescriptive Period -

a. Treasurer legally prevented from the making the assessment or collectionb. Taxpayer requests for reinvestigation and executes waiver in writingc. Taxpayer out of the countryd. Taxpayer cannot be located

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A written claim for refund or credit is filed with the local Treasurer within 2 years from the date of payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit

9. Civil remedies by the LGU for collection of revenues

a. Local government’s lien for delinquent taxes, fees or charges

1. Superior to all items, charges or encumbrances in favor of any person, enforceable by the administrative of judicial action

2. Covers not only property or rights subject to the lien but also upon property used in business.

b. Civil remedies, in general

1) Administrative action

a. Distraint of goods, chattels or effects and other personal property of whatever character

b. Levy upon real property and interest in or rights to real property

2) Judicial action

Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of local government unit concerned.673

c. Procedure for administrative action

1) Distraint of personal property

(a) Seizure - Upon failure of the person owing any local tax, fee, or charge to pay the same at the time required, the local treasurer or his deputy may, upon written notice, seize or confiscate any personal property belonging to that person or any personal property subject to the lien in sufficient quantity to satisfy the tax, fee, or charge in question, together with any increment thereto incident to delinquency and the expenses of seizure. In such case, the local treasurer or his deputy shall issue a duly

673 Sec 174

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authenticated certificate based upon the records of his office showing the fact of delinquency and the amounts of the tax, fee, or charge and penalty due. Such certificate shall serve as sufficient warrant for the distraint of personal property aforementioned, subject to the taxpayer's right to claim exemption under the provisions of existing laws. Distrained personal property shall be sold at public auction in the manner hereon provided for.

(b) Accounting of distrained goods. - The officer executing the distraint shall make or cause to be made an account of the goods, chattels or effects distrained, a copy of which signed by himself shall be left either with the owner or person from whose possession the goods, chattels or effects are taken, or at the dwelling or place or business of that person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and a note of the time and place of sale.

(c) Publication - The officer shall forthwith cause a notification to be exhibited in not less than three (3) public and conspicuous places in the territory of the local government unit 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 the notice to the owner or possessor of the property as above specified and the publication or posting of the notice. One place for the posting of the notice shall be at the office of the chief executive of the local government unit in which the property is distrained.

(d) Release of distrained property upon payment prior to sale - If at any time prior to the consummation of the sale, all the proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner.

(e) Procedure of sale - At the time and place fixed in the notice, the officer conducting the sale shall sell the goods or effects so distrained at public auction to the highest bidder for cash. Within five (5) days after the sale, the local treasurer shall make a report of the proceedings in writing to the local chief executive concerned.

Should the property distrained be not disposed of within one hundred and twenty (120) days from the date of distraint, the same shall be considered as sold to the local government unit concerned for the amount of the assessment made thereon by the Committee on Appraisal and to the extent of the same amount, the tax delinquencies shall be cancelled.

Said Committee on Appraisal shall be composed of the city or municipal treasurer as chairman, with a representative of the Commission on Audit and the city or municipal assessor as members.

(f) Disposition of proceeds - The proceeds of the sale shall be applied to satisfy the tax, including the surcharges, interest, and other penalties incident to delinquency, and the expenses of the distraint and sale. The balance over and above what is required to pay the entire claim shall be

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returned to the owner of the property sold. The expenses chargeable upon the seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending the sale, and no charge shall be imposed for the services of the local officer or his deputy. Where the proceeds of the sale are insufficient to satisfy the claim, other property may, in like manner, be distrained until the full amount due, including all expenses, is collected.674

2) Levy of real property, procedure

After the expiration of the time required to pay the delinquent tax, fee, or charge, real property may be levied on before, simultaneously, or after the distraint of personal property belonging to the delinquent taxpayer. To this end, the provincial, city or municipal treasurer, as the case may be, shall prepare a duly authenticated certificate showing the name of the taxpayer and the amount of the tax, fee, or charge, and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. Levy shall be effected by writing upon said certificate the description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the assessor and the Register of Deeds of the province or city where the property is located who shall annotate the levy on the tax declaration and certificate of title of the property, respectively, and the delinquent taxpayer or, if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.

In case the levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his delinquency, the provincial, city or municipal treasurer, as the case may be, shall within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer's real property.

A report on any levy shall, within ten (10) days after receipt of the warrant, be submitted by the levying officer to the sanggunian concerned.675

3) Further distraint or levy

The remedies by distraint and levy may be repeated if necessary until the full amount due, including all expenses, is collected.676

4) Exemption of personal property from distraint or levy

674 Sec. 165675 Sec. 166676 Sec. 184

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The following property shall be exempt from distraint and the levy, attachment or execution thereof for delinquency in the payment of any local tax, fee or charge, including the related surcharge and interest:

(a) Tools and implements necessarily used by the delinquent taxpayer in his trade or employment;

(b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation;

(c) His necessary clothing, and that of all his family;

(d) Household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding Ten thousand pesos (P10,000.00);

(e) Provisions, including crops, actually provided for individual or family use sufficient for four (4) months;

(f) The professional libraries of doctors, engineers, lawyers and judges;

(g) One fishing boat and net, not exceeding the total value of Ten thousand pesos (P10,000.00), by the lawful use of which a fisherman earns his livelihood; and

(h) Any material or article forming part of a house or improvement of any real property.677

5) Penalty on local treasurer for failure to issue and execute warrant of distraint or levy

Without prejudice to criminal prosecution under the Revised Penal Code and other applicable laws, any local treasurer who fails to issue or execute the warrant of distraint or levy after the expiration of the time prescribed, or who is found guilty of abusing the exercise thereof by competent authority shall be automatically dismissed from the service after due notice and hearing.678

d. Procedure for judicial action

1) In any court of competent jurisdiction2) Filed by local Treasurer

677 Sec. 185678 Sec. 177

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3) Within 5 years from the date taxes, fees or charges become due

B. Real Property Taxation

1. Fundamental principles

a.) Real property shall be appraised at its current and fair market value.

b.) Real property shall be classified for assessment purposes on the basis of its actual use.

c.) Real property shall be assessed on the basis of a uniformstandard within each local government unit.

d.) The appraisal, assessment, and collection of real property tax shall not be let to any private person; and

e. ) The appraisal and assessment of real property shall be equitable679

2. Nature of real property tax

Property taxes are assessed on all property, or all property of a certain class located within a certain territory on a specified date in proportion to its value or in accordance with some other reasonable method of apportionment.680

In the Philippines, a real property tax is an annual ad valorem tax imposed by LGU’s on real property within their jurisdiction, determined on the basis of a fixed proportion of the value of the property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan Manila Area my levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted.681

b. Exemption from real property tax682

679Sec. 198, id.680The function of a property tax is to raise revenue. Such tax does not impose any condition nor does it place any restriction upon the use of the property taxed.681 Sec. 232682Real properties of review schools are subject to tax (why? Considered an ordinary corporation)

237

1. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;

2. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non profit or religious cemeteries, and all lands, buildings, and improvements actually, directly andexclusively used for religious, charitable, or educational purposes.

3. All pieces of machinery and equipment that are actually, directly, and exclusively used by local water districts, and government – owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.

4. All real property owned by duly registered cooperatives as provided for under RA 6938, and

5. Machinery and equipment used for pollution control and environmental protection.

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair market value

All real property, whether taxable or exempt, shall be appraised at the current and fair market value prevailing in the locality where the property is situated. The Department of Finance shall promulgate the necessary rules and regulations for the classification, appraisal, and assessment of real property pursuant to the provisions of this Code.683

b. Declaration of real property

It shall be the responsibility of the owner, administrator or their representatives to declare, under oath, the true value of real property, taxable or exempt, within 60 days after the acquisition. The sworn declaration shall be filed once every 3 years before June 30th of the year commencing 1992. The failure or refusal to make that declaration within the prescribed period would authorize the provincial or city assessor to declare the property in the name of the

Non-stock, nonprofit private schools are exempt. Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if property is actually, directly and exclusively used for educational purposes. The term “exclusively” under the Constitution does not mean “solely” butonly “primarily” (Roman Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando, 107 SCRA 104 & other cases).683 Sec. 201

238

defaulting owner, if known, or against an unknown owner as the case may be, and to assess the property for taxation.684

c. Listing of real property in assessment rolls

(a) In every province and city, including the municipalities within the Metropolitan Manila Area, there shall be prepared and maintained by the provincial, city or municipal assessor an assessment roll wherein shall be listed all real property, whether taxable or exempt, located within the territorial jurisdiction of the local government unit concerned. Real property shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property.

(b) The undivided real property of a deceased person may be listed, valued and assessed in the name of the estate or of the heirs and devisees without designating them individually; and undivided real property other than that owned by a deceased may be listed, valued and assessed in the name of one or more co-owners: Provided, however, That such heir, devisee, or co-owner shall be liable severally and proportionately for all obligations imposed by this Title and the payment of the real property tax with respect to the undivided property.

(c) The real property of a corporation, partnership, or association shall be listed, valued and assessed in the same manner as that of an individual.

(d) Real property owned by the Republic of the Philippines, its instrumentalities and political subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease.685

d. Preparation of schedules of fair market value

Before any general revision of property assessment is made pursuant to the provisions of this Title, there shall be prepared a schedule of fair market values by the provincial, city and municipal assessor of the municipalities within the Metropolitan Manila Area for the different classes of real property situated in their respective local government units for enactment by ordinance of the sanggunian concerned. The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality

684Secs. 201-204

685 Sec. 205

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concerned or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in two other conspicuous public places therein.686

1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the market value of any real property, the assessor of the province, city or municipality or his deputy may summon the owners of the properties to be affected or persons having legal interest therein and witnesses, administer oaths, and take deposition concerning the property, its ownership, amount, nature, and value.687

2) Amendment of schedule of fair market value

The provincial, city or municipal assessor may recommend to the sanggunian concerned amendments to correct errors in valuation in the schedule of fair market values. The sanggunian concerned shall, by ordinance, act upon the recommendation within ninety (90) days from receipt thereof.688

e. Classes of real property

For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or special.

The city or municipality within the Metropolitan Manila Area, through their respective sanggunian, shall have the power to classify lands as residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance with their zoning ordinances.689

f. Actual use of property as basis of assessment

686 Sec. 212687 Sec. 213688 Sec. 214689 Sec. 215

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Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.690

g. Assessment of real property

1) Assessment levels

The assessment levels to be applied to the fair market value of real property to determine its assessed value shall be fixed by ordinances of the sangguniangpanlalawigan, sangguniangpanlungsod or sangguniangbayan of a municipality within the Metropolitan Manila Area, at the rates not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

Residential 20%Agricultural 40%Commercial 50%Industrial 50%Mineral 50%Timberland 20%

(b) On Buildings and Other Structures:

(1) ResidentialFair market Value

Over Not Over Assessment Levels

P175,000.00 0%P175,000.00 300,000.00 10%300,000.00 500,000.00 20%500,000.00 750,000.00 25%750,000.00 1,000,000.00 30%1,000,000.00 2,000,000.00 35%2,000,000.00 5,000,000.00 40%5,000,000.00 10,000,000.00 50%10,000,000.00

60%

(2) Agricultural

690 Sec. 217

241

Fair Market ValueOver Not Over Assessment Levels

P300,000.00 25%P300,000.00 500,000.00 30%500,000.00 750,000.00 35%750,000.00 1,000,000.00 40%1,000,000.00 2,000,000.00 45%2,000,000.00 50%

(3) Commercial / Industrial

Fair Market ValueOver Not Over Assessment Levels

P300,000.00 30%P300,000.00 500,000.00 35%500,000.00 750,000.00 40%750,000.00 1,000,000.00 50%1,000,000.00 2,000,000.00 60%2,000,000.00 5,000,000.00 70%5,000,000.00 10,000,000.00 75%10,000,000.00 80%

(4) Timberland

Fair Market ValueOver Not Over Assessment Levels

P300,000.00 45%P300,000.00 500,000.00 50%500,000.00 750,000.00 55%750,000.00 1,000,000.00 60%5,000,000.00 2,000,000.00 65%2,000,000.00 70%

(c) On Machineries

Class Assessment Levels

Agricultural 40%Residential 50%Commercial 80%Industrial 80%

(d) On Special Classes: The assessment levels for all lands buildings, machineries and other improvements;

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Actual Use Assessment Level

Cultural 15%Scientific 15%Hospital 15%Local water districts 10%Government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power 10%691

2) General revisions of assessments and property classification

The provincial, city or municipal assessor shall undertake a general revision of real property assessments within two (2) years after the effectivity of this Code and every three (3) years thereafter.692

3) Date of effectivity of assessment or reassessment

All assessments or reassessments made after the first (1st) day of January of any year shall take effect on the first (1st) day of January of the succeeding year: Provided, however, That the reassessment of real property due to its partial or total destruction, or to a major change in its actual use, or to any great and sudden inflation or deflation of real property values, or to the gross illegality of the assessment when made or to any other abnormal cause, shall be made within ninety (90) days from the date any such cause or causes occurred, and shall take effect at the beginning of the quarter next following the reassessment.

4) Assessment of property subject to back taxes

Real property declared for the first time shall be assessed for taxes for the period during which it would have been liable but in no case of more than ten (10) years prior to the date of initial assessment: Provided, however, That such taxes shall be computed on the basis of the applicable schedule of values in force during the corresponding period.693

691 Sec. 218692 Sec. 219693 Sec. 222

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5) Notification of new or revised assessment

When real property is assessed for the first time or when an existing assessment is increased or decreased, the provincial, city or municipal assessor shall within thirty (30) days give written notice of such new or revised assessment to the person in whose name the property is declared. The notice may be delivered personally or by registered mail or through the assistance of the punong barangay to the last known address of the person to be served.

h. Appraisal and assessment of machinery

(a) The fair market value of a brand-new machinery shall be the acquisition cost. In all other cases, the fair market value shall be determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement or reproduction cost.

(b) If the machinery is imported, the acquisition cost includes freight, insurance, bank and other charges, brokerage, arrastre and handling, duties and taxes, plus charges at the present site. The cost in foreign currency of imported machinery shall be converted to peso cost on the basis of foreign currency exchange rates as fixed by the Central Bank.

5. Collection of real property tax

a. Date of accrual of real property tax

The real property tax for any year shall accrue on the first day of January and from that date it shall constitute a lien on the property which shall be superior to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of the delinquent tax.694

b. Collection of tax

1) Collecting authority

The collection of the real property tax with interest thereon and related expenses, and the enforcement of the remedies provided for in

694 Sec. 246

244

this Title or any applicable laws, shall be the responsibility of the city or municipal treasurer concerned.

The city or municipal treasurer may deputize the barangay treasurer to collect all taxes on real property located in the barangay: Provided, That the barangay treasurer is properly bonded for the purpose: Provided, further, That the premium on the bond shall be paid by the city or municipal government concerned.695

2) Duty of assessor to furnish local treasurer with assessment rolls

The provincial, city or municipal assessor shall prepare and submit to the treasurer of the local government unit, on or before the thirty-first (31st) day of December each year, an assessment roll containing a list of all persons whose real properties have been newly assessed or reassessed and the values of such properties.696

3) Notice of time for collection of tax

The city or municipal treasurer shall, on or before the thirty-first (31st) day of January each year, in the case of the basic real property tax and the additional tax for the Special Education Fund (SEF) or any other date to be prescribed by the sanggunianconcerned in the case of any other tax levied under this title, post the notice of the dates when the tax may be paid without interest at a conspicuous and publicly accessible place at the city or municipal hall. Said notice shall likewise be published in a newspaper of general circulation in the locality once a week for two (2) consecutive weeks.

c. Periods within which to collect real property tax

The basic real property tax and any other tax levied under this Title shall be collected within five (5) years from the date they become due. No action for the collection of the tax, whether administrative or judicial, shall be instituted after the expiration of such period. In case of fraud or intent to evade payment of the tax, such action may be instituted for the collection of the same within ten (10) years from the discovery of such fraud or intent to evade payment.

The period of prescription within which to collect shall be suspended for the time during which:

695 Sec. 247696 Sec. 248

245

(1) The local treasurer is legally prevented from collecting the tax;

(2) The owner of the property or the person having legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and

(3) The owner of the property or the person having legal interest therein is out of the country or otherwise cannot be located.697

d. Special rules on payment

1) Payment of real property tax in installments

The owner of the real property or the person having legal interest therein may pay the basic real property tax and the additional tax for Special Education Fund (SEF) due thereon without interest in four (4) equal installments; the first installment to be due and payable on or before March Thirty-first (31st); the second installment, on or before June Thirty (30); the third installment, on or before September Thirty (30); and the last installment on or before December Thirty-first (31st), except the special levy the payment of which shall be governed by ordinance of the sanggunianconcerned.

The date for the payment of any other tax imposed under this Title without interest shall be prescribed by the sanggunian concerned.

Payments of real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and only after said delinquencies are settled may tax payments be credited for the current period.698

2) Interests on unpaid real property tax

In case of failure to pay the basic real property tax or any other tax levied under this Title upon the expiration of the periods as provided in Section 250, or when due, as the case may be, shall subject the taxpayer to the payment of interest at the rate of two percent (2%) per month on the unpaid amount or a fraction thereof, until the delinquent tax shall have been fully paid: Provided, however,

697 Sec. 270698 Sec. 250

246

That in no case shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months.699

3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in the price of agricultural or agri-based products, or calamity in any province, city or municipality, the sanggunianconcerned, by ordinance passed prior to the first (1st) day of January of any year and upon recommendation of the Local Disaster Coordinating Council, may condone or reduce, wholly or partially, the taxes and interest thereon for the succeeding year or years in the city or municipality affected by the calamity.700

The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area.701

e. Remedies of LGUs for collection of real property tax

1) Issuance of notice of delinquency for real property tax payment

(a) When the real property tax or any other tax imposed under this Title becomes delinquent, the provincial, city or municipal treasurer shall immediately cause a notice of the delinquency to be posted at the main hall and in a publicly accessible and conspicuous place in each barangay of the local government unit concerned. The notice of delinquency shall also be published once a week for two (2) consecutive weeks, in a newspaper of general circulation in the province, city, or municipality.

(b) Such notice shall specify the date upon which the tax became delinquent and shall state that personal property may be distrained to effect payment. It shall likewise state that any time before the distraint of personal property, payment of the tax with surcharges, interests and penalties may be made in accordance with the next following Section, and unless the tax, surcharges and penalties are paid before the expiration of the year for which the tax

699 Sec. 255700 Sec. 276701 Sec. 277

247

is due except when the notice of assessment or special levy is contested administratively or judicially pursuant to the provisions of Chapter 3, Title II, Book II of this Code, the delinquent real property will be sold at public auction, and the title to the property will be vested in the purchaser, subject, however, to the right of the delinquent owner of the property or any person having legal interest therein to redeem the property within one (1) year from the date of sale.702

2) Local government’s lien

The basic real property tax and any other tax levied under this Title constitutes a lien on the property subject to tax, superior to all liens, charges or encumbrances in favor of any person, irrespective of the owner or possessor thereof, enforceable by administrative or judicial action, and may only be extinguished upon payment of the tax and the related interests and expenses.703

3) Remedies in general

For the collection of the basic real property tax and any other tax levied under this Title, the local government unit concerned may avail of the remedies by administrative action thru levy on real property or by judicial action.704

4) Resale of real estate taken for taxes, fees or charges

The sanggunian concerned may, by ordinance duly approved, and upon notice of not less than twenty (20) days, sell and dispose of the real property acquired under the preceding section at public auction. The proceeds of the sale shall accrue to the general fund of the local government unit concerned.705

5) Further levy until full payment of amount due

Levy may be repeated if necessary until the full amount due, including all expenses, is collected.706

6. Refund or credit of real property tax

702 Sec. 254703 Sec. 257704 Sec. 256705 Sec. 264706 Sec. 265

248

a. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be annotated on the tax receipts the words "paid under protest". The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of this Code.707

b. Repayment of excessive collections

When an assessment of basic real property tax, or any other tax levied under this Title, is found to be illegal or erroneous and the tax is accordingly reduced or adjusted, the taxpayer may file a written claim for refund or credit for taxes and interests with the provincial or city treasurer within two (2) years from the date the taxpayer is entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, the taxpayer may avail of the remedies as provided in Chapter 3, Title II, Book II of this Code.708

7. Taxpayer’s remedies

a. Contesting an assessment of value of real property

707 Sec. 252708 Sec. 253

249

1) Appeal to the Local Board of Assessment Appeals (LBAA)

Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of the provincial or city by filing a petition under oath in the form prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal.709

2) Appeal to the Central Board of Assessment Appeals (CBAA)

The owner of the property or the person having legal interest therein or the assessor who is not satisfied with the decision of the Board, may, within thirty (30) days after receipt of the decision of said Board, appeal to the Central Board of Assessment Appeals, as herein provided. The decision of the Central Board shall be final and executory.710

3) Effect of payment of tax

Appeal on assessments of real property made under the provisions of this Code shall, in no case, suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city assessor, without prejudice to subsequent adjustment depending upon the final outcome of the appeal.711

b. Payment of real property under protest

1) File protest with local treasurer712

2) Appeal to the LBSS713

3) Appeal to the CBAA714

4) Appeal to the CTA

709 Sec. 226710 Sec. 229 (c), last par.711 Sec. 231712 See B. (6)(a), under Refund or credit of real property tax, supra713 See (a)(1), supra714 See (a)(2), supra

250

Appeal shall be made by filing a petition for review715 with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction, from the expiration of the period fixed by law to act thereon.716

5) Appeal to the SC

No judicial proceeding against the Government involving matters arising under the National Internal Revenue Code, the Customs Law or the Assessment Law shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the Court of Tax Appeals and disposed of in accordance with the provisions of this Act.

Any party adversely affected by any ruling, order or decision of the Court of tax Appeals may appeal therefrom to the Supreme Court by filing with the said Court a notice of appeal and with the Supreme Court a petition for review, within thirty days from the date he receives notice of said ruling, order or decision. If, within the aforesaid period, he fails to perfect his appeal, the said ruling, order or decision shall become final and conclusive against him

If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision may file with said Court a notice of his intention to appeal to the Supreme Court, and if, within thirty days from the filing of said notice of intention to appeal, no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section.

If any ruling, order or decision of the Court of Tax Appeals be adverse to the Government, the Collector of Internal Revenue, the Commissioner of Customs, or the provincial or city Board of Assessment Appeals concerned may likewise file an appeal therefrom to the Supreme Court in the manner and within the same period as above prescribed for private parties.

Any proceeding directly affecting any ruling, order or decision of the Court of Tax Appeals shall have preference over all other civil proceedings except habeas corpus, workmen's compensation and election cases.

715under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure716 Sec. 11, RA No. 1125

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IV. Tariff and Customs Code of 1978, as amended (TCC)

A. Tariff and duties, defined

1. Custom duties:

Are duties which are one charged upon commodities on their being imported into or exported out of a country.

2. Tariff:

Means a book of rates, a table or catalogue drawn usually in alphabetical order containing the names of several kinds of merchandise with the duties to be paid for the same as settled or agreed upon between several states that holds commerce together.

B. General rule: All imported articles are subject to duty. Importation by the government taxable.

All articles when imported from a foreign country including those previously exported from the Philippines are subject to duty unless otherwise specifically provided for in the Tariff and Customs Code or other laws. (Sec. 100, TCS)

C. Purpose for imposition

For the protection of consumers and manufacturers, as well as Phil. products from undue competition posed by foreign-made products.

D. Flexible tariff clause

The flexible tariff clause is a provision in the Tariff and Customs Code,717 which implements the constitutionally delegated power to the Congress to further delegate to the President of the Philippines, in the

717 Sec. 401

252

interest of national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others.

E. Requirements of importation

1. Beginning and ending of importation

Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unload718 therein.

Importation is deemed terminated upon payment of duties, taxes and other charges due upon the articles or secured to be paid at a port of entry and the legal permit for withdrawal shall gave been granted or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs.719

2. Obligations of importer

a. Cargo manifest

A cargo manifest shall in no case be changed or altered, except after entry of the vessel, by means of an amendment by the master, consignee, or agent thereof, under oath, and attached to the original manifest.720

b. Import entry

It is a declaration to the BOC showing particulars of the imported article that will enable the customs authorities to determine

718Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place because importation has already begun.719Sec. 1202720 Sec. 1228, 3rd par., Rev. Adm. Code

253

the correct duties. An importer is required to file an import entry. It must be accomplished from disembarking of last cargo from vessel.

c. Declaration of correct weight or value

The declaration, ascertainment or verification of the correct weight of the cargo at the port of loading is the duty or obligation of the master, pilot, owner, officer or employee of the vessel.721 If he omits or disregards this duty and a punishable discrepancy between the declared weight and actual weight of the cargo exists, the inevitable conclusion is that he is negligent or careless.722Similarly, if in the exercise or performance of this duty, he is negligent or careless resulting in the commission of excessive discrepancy in the weight of the ship's cargo penalized under the law, carelessness or incompetency is, nonetheless, imputable to him.

d. Liability for payment of dutiesUnless relieved by laws or regulations, the liability for duties,

taxes, fees and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced while such articles are in custody or subject to the control of the government.723

e. Liquidation of duties

If the Collector shall approve the returns of the appraiser and the report of the weights, gauge or quantity, the liquidation shall be made on the face of the entry showing the particulars thereof, initiated by the liquidating clerk, approved by the chief liquidator, and recorded in the record of liquidations.

A daily record of all entries liquidated shall be posted in the public corridor of the customhouse, stating the name of the vessel or aircraft, the port from which she arrived, the date of her arrival, the name of the importer, and the serial number and date of the entry. A daily record must also be kept by the Collector of all additional duties,

721 Sec. 2523722See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs, C.T.A. Case No. 2685, Feb. 15, 1977; Macondray& Co., Inc. vs. Commissioner of Customs, C.T.A. Case No. 274 1, Feb. 3, 1977; Macondray& Co., Inc, vs. Commissioner of Customs, C.T.A. Case No. 2656, January 21, 1977 and cases cited therein.723 Sec. 1204

254

taxes and other charges found upon liquidation, and notice shall promptly be sent to the interested parties.724

If to determine the exact amount due under the law in whole or in part some future action is required, the liquidation shall be deemed to be tentative as to the item or items affected and shall to that extent be subject to future and final readjustment and settlement. The entry in such case shall be stamped "Tentative liquidation".725

When articles have been entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative.726

In determining the total amount of duties, taxes, surcharges, wharfage and/or other charges to be paid on entries, a fraction of a peso less than fifty centavos shall be disregarded, and a fraction of a peso amounting to fifty centavos or more shall be considered as one peso. In case of overpayment or underpayment of duties, taxes, surcharges, wharfage and/or other charges paid on entries, where the amount involved is less than five pesos, no refund or collection shall be made.727

f. Keeping of records

F. Importation in violation of TCC

1. Smuggling

1. An act of any person who shall:

a. Fraudulently import any article contrary to law, or b. Assist in so doing, or c. Receive, conceal, buy, sell, facilitate, transport, conceal

or sell such article knowing its illegal importation.728

724 Sec. 1601725 Sec. 1602726Sec. 1603727 Sec. 1604728 Sec. 3601

255

d. Export contrary to law.729

2. The Philippines is divided into various ports of entry – entry other than port of entry, will be smuggling.

2. Other fraudulent practices

Any person who makes or attempts to make any entry of imported or exported article by means of any false or fraudulent invoice, declaration, affidavit, letter, paper, or by means of any false statement, written or verbal, or by means of any false or fraudulent practice whatsoever, or shall be guilty of any willful act or omission by means of whereof the Government might be deprived of the lawful duties, taxes and other charges, or any portion thereof, accruing from the article or any portion thereof, embraced or referred to in such invoice, declaration, affidavit, letter, paper, or statement, or affected by such act or omission, shall, for each offense, be punished by a fine of not less than six hundred pesos nor more than five thousand pesos and by imprisonment for not less than six months nor more than two years and if the offender is an alien, he shall be deported after serving the sentence.730

G. Classification of goods

1. Taxable importation

All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in other laws.731

2. Prohibited importation

The importation into the Philippines of the following articles is prohibited:

a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of war, and detached parts thereof, except when authorized by law.1awphil©

b. Written or printed article in any form containing any matter advocating or inciting treason, rebellion, insurrection or sedition against the Government of the Philippines, of forcible resistance to

729Sec. 3514730 Sec. 3602731 Sec. 101

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any law of the Philippines, or containing any threat to take the life of or inflict bodily harm upon any person in the Philippines.

c. Written or printed articles, photographs, engravings, lithographs, objects, paintings, drawings or other representation of an obscene or immoral character.

d. Articles, instruments, drugs and substances designed, intended or adapted for preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly information where, how or by whom human conception is prevented or unlawful abortion produced.

e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances.

f. Lottery and sweepstakes tickets except those authorized by the Philippine Government, advertisements thereof and lists of drawings therein.

g. Any article manufactured in whole or in part of gold silver or other precious metal, or alloys thereof, the stamps brands or marks of which do not indicate the actual fineness or quality of said metals or alloys.

h. Any adulterated or misbranded article of food or any adulterated or misbranded drug in violation of the provisions of the "Food and Drugs Act."

i. Marihuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, any compound, manufactured salt, derivative, or preparation thereof, except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue, for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever material.

k. All other articles the importation of which is prohibited by law.732

732Sec. 102, id.

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H. Classification of duties

1. Ordinary/Regular duties

These are duties imposed on imported articles that enter the country of the Philippines in avoidance with the schedules and classifications provided under the Tariff and Customs Code.

a. Ad valorem; Methods of valuation

1) Transaction value

The price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding:

(1) The following to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods:

(a) Commissions and brokerage fees (except buying commissions);

(b) Cost of containers;

(c) The cost of packing, whether for labour or materials;

(d) The value, apportioned as appropriate, of the following goods and services: materials, components, parts and similar items incorporated in the imported goods; tools; dies; moulds and similar items used in the production of imported goods; materials consumed in the production of the imported goods; and engineering, development, artwork, design work and plans and sketches undertaken elsewhere than in the Philippines and necessary for the production of imported goods, where such goods and services are supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods;

(e) The amount of royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods to the buyer;

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(2) 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;

(3) The cost of transport of the imported goods from the port of exportation to the port of entry in the Philippines;

(4) Loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Philippines; and

(5) The cost of insurance.733

2) Transaction value of identical goods

Where the dutiable value cannot be determined under method one, the dutiable value shall be the transaction value of identical goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Identical goods" shall mean goods which are the same in all respects, including physical characteristics, quality and reputation. Minor differences in appearances shall not preclude goods otherwise conforming to the definition from being regarded as identical.734

3) Transaction value of similar goods

Where the dutiable value cannot be determined under the preceding method, the dutiable value shall be the transaction value of similar goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Similar goods" shall mean goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark shall be among the factors to be considered in determining whether goods are similar.

If the dutiable value still cannot be determined through the successive application of the two immediately preceding methods, the dutiable value shall be determined under method four or, when the dutiable value still cannot be determined under that method, under method five, except that, at the request of the importer, the order of application of methods four and five shall be reversed: Provided, however, That if the Commissioner of Customs deems that he will

733 Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC734Sec. 1 (B),Id.

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experience real difficulties in determining the dutiable value using method five, the Commissioner of Customs may refuse such a request in which event the dutiable value shall be determined under method four, if it can be so determined.735

4) Deductive value

The dutiable value of the imported goods under this method shall be the deductive value which shall be based on the unit price at which the imported goods or identical or similar imported goods are sold in the Philippines, in the same condition as when imported, in the greatest aggregate quantity, at or about the time of the importation of the goods being valued, to persons not related to the persons from whom they buy such goods, subject to deductions for the following:

(1) Either the commissions usually paid or agreed to be paid or the additions usually made for profit and general expenses in connection with sales in such country of imported goods of the same class or kind;

(2) The usual costs of transport and insurance and associated costs incurred within the Philippines; and

(3) Where appropriate, the costs and charges referred to in subsection (A) (3), (4) and (5); and

(4) The customs duties and other national taxes payable in the Philippines by reason of the importation or sale of the goods.

If neither the imported goods nor identical nor similar imported goods are sold at or about the time of importation of the goods being valued in the Philippines in the conditions as imported, the customs value shall, subject to the conditions set forth in the preceding paragraph hereof, be based on the unit price at which the imported goods or identical or similar imported goods sold in the Philippines in the condition as imported at the earliest date after the importation of the goods being valued but before the expiration of ninety (90) days after such importation.

If neither the imported goods nor identical nor similar imported goods are sold in the Philippines in the condition as imported, then, if the importer so requests, the dutiable value shall be based on the unit price at which the imported goods, after further processing, are sold in the greatest aggregate quantity to persons in the Philippines who are not related to the persons from whom they buy such goods, subject to allowance for the value added by such processing and deductions provided under Subsections (D)(1), (2), (3) and (4) hereof.736

735Sec. 1 (C), id.736Sec. 1 (D), id.

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5) Computed value

The dutiable value under this method shall be the computed value which shall be the sum of:

(1) The cost or the value of materials and fabrication or other processing employed in producing the imported goods;

(2) The amount for profit and general expenses equal to that usually reflected in the sale of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to the Philippines;

(3) The freight, insurance fees and other transportation expenses for the importation of the goods;

(4) Any assist, if its value is not included under paragraph (1) hereof; and

(5) The cost of containers and packing, if their values are not included under paragraph (1) hereof.

The Bureau of Customs shall not require or compel any person not residing in the Philippines to produce for examination, or to allow access to, any account or other record for the purpose of determining a computed value. However, information supplied by the producer of the goods for the purposes of determining the customs value may be verified in another country with the agreement of the producer and provided they will give sufficient advance notice to the government of the country in question and the latter does not object to the investigation.737

6) Fallback value

If the dutiable value cannot be determined under the preceding methods described above, it shall be determined by using other reasonable means and on the basis of data available in the Philippines.

If the importer so requests, the importer shall be informed in writing of the dutiable value determined under Method Six and the method used to determine such value.

No dutiable value shall be determined under Method Six on the basis of:

737Sec. 1 (E), id.

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(1) The selling price in the Philippines of goods produced in the Philippines;

(2) A system that provides for the acceptance for customs purposes of the higher of two alternative values;

(3) The price of goods in the domestic market of the country of exportation;

(4) The cost of production, other than computed values, that have been determined for identical or similar goods in accordance with Method Five hereof;

(5) The price of goods for export to a country other than the Philippines;

(6) Minimum customs values; or(7) Arbitrary or fictitious values.738

b. Specific

Duty based on the dutiable weight of goods number or measurement.

2. Special duties

Imposed in addition to regular or ordinary duties principally in order to protect local industries against unfair competition from foreign manufacturers or procedures; consumer against possible deceptions; and national interest.

a. Dumping duties

Imposed by the Secretary of Finance upon the recommendation of the Tariff Commission when:

a. The price of the imported article is deliberately or continually fixed at less than the fair market value or cost of production; and

b. Importation would cause or likely cause and injury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment.

Amount of special duty: extent of the underpricing.

b. Countervailing duties

738Sec. 1 (F), id.

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Special duty imposed on imported articles which are granted any kind or form of subsidy by the government in the country or origin or exportation, the importation of which has caused or threatens to cause material injury to a domestic industry or has materially relaided the growth or, prevents the establishment of a domestic industry.739

c. Marking duties

Special duty of five percent (5%) advalorem imposed or articles properly marked, collected by the commissioner, except when such article is exported or destroyed under the customs supervision and prior to final liquidation of the corresponding entry.

Purpose: To prevent possible deception of the consumers.

d. Retaliatory/Discriminatory duties

Imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines in such a manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country.

e. Safeguard

Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them.740

The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA).741

The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition.

739 RA 8751 Requisites: 1.The levy of an excise tax or inland tax or local goods of the same or similar class as the article imported or the grant of subsidy to the foreign exporter by his government; and 2.The importation is likely to insure materially established local industries or prevent their establishments. Amount of special duty: Equal to the bounty or subsidy or subvention.740Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports.741Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004

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I.Drawbacks

A drawback is a device resorted to for enabling a commodity affected by taxes to be exported and sold in foreign markets upon the same terms as if it had not been taxed at all. It refers to duties or taxes paid back or remitted by the government on the exportation of that on which they were levied under the Tariff and Customs Code. It refers to refund of duties on imported fuel used for provision of vessels.

J.Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

For the enforcement of the customs and tariff laws, the following persons are authorized to effect searches, seizures and arrests conformably with the provisions of said laws:

a. Officials of the Bureau of Customs, collectors, assistant collectors, deputy collectors, surveyors, security and secret-service agents, inspectors, port patrol officers and guards of the Bureau of Customs.

b. Officers of the Philippine Navy when authorized by the Commissioner.

c. Any person especially authorized in writing by the Commissioner.

d. Officers generally empowered by law to effect arrests and execute processes of courts, when acting under direction of the Collector.

e. Any person especially authorized by a Collector, subject to the restrictions stated in the next succeeding section.

Persons exercising the powers hereinabove conferred shall, in the exercise thereof, have the same authority, be entitled to the proper protection, and shall be governed by the same law, not inconsistent with the provisions of this section, as other officers exercising police authority in general.742

742 Sec. 2203

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Place Where Authority May Be Exercised. Persons acting under authority conferred pursuant to subsection (e) of the preceding section may exercise their authority within the limits of the collection district only and in or upon the particular vessel or aircraft, or in the particular place, or in respect to the particular article specified in the appointment. All such appointments shall be in writing, and the original shall be filed in the customhouse of the district where made.

All other persons exercising the powers hereinabove conferred may exercise the same at any place within the jurisdiction of the Bureau of Customs.743

It shall be within the power of a customs official or person authorized as aforesaid, and it shall be his duty, to make seizure of any vessel, aircraft, cargo, articles, animal or other movable property when the same is subject to forfeiture or liable for any fine imposed under customs and tariff laws, and also to arrest any person subject to arrest for violation of any customs and tariff laws, such power to be exercised in conformity with the law and the provisions of this Code.744

It shall be the duty of any person exercising authority as aforesaid, upon being questioned at the time of the exercise thereof, to make known his official character as an officer or official of the Government, and if his authority is derived from special authorization in writing to exhibit the same for inspection, if demanded.745

Any person exercising police authority under the customs and tariff laws may demand assistance of any police officer when such assistance shall be necessary to effect any search, seizure or arrest which may be lawfully made or attempted by him. It shall be the duty of any police officer upon whom such requisition is made to give such lawful assistance in the matter as may be required.746

For the more effective discharge of his official duties, any person exercising the powers herein conferred, may at anytime enter, pass through, or search any land or enclosure or any warehouse, store or other building, not being a dwelling house.747

A warehouse, store or other building or enclosure used for the keeping of storage of articles does not become a dwelling house within the meaning hereof merely by reason of the fact that a person employed as watchman lives in the place, nor will the fact that his family stays there with him alter the case.

743Sec. 2204744Sec. 2205.745Sec. 2206746Sec. 2207.747Sec. 2208.

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A dwelling house may be entered and searched only upon warrant issued by a judge or justice of the peace, upon sworn application showing probable case and particularly describing the place to be searched and person or thing to be seized.748

It shall be lawful for any official or person exercising police authority under the provisions of this Code to go abroad any vessel or aircraft within the limits of any collection to go aboard any vessel or aircraft within the limits of any collection district, and to inspect, search and examine said vessel or aircraft and any trunk, package, box or envelope on board, and to search any person on board the said vessel or aircraft and to this end to hail and stop such vessel or aircraft if under way, to use all necessary force to compel compliance; and if it shall appear that any breach or violation of the customs and tariff laws of the Philippines has been committed, whereby or in consequence of which such vessels or aircrafts, or the article, or any part thereof, on board of or imported by such vessel or aircraft, is liable to forfeiture, to make seizure of the same or any part thereof.

The power of search hereinabove given shall extend to the removal of any false bottom, partition, bulkhead or other obstruction, so far as may be necessary to enable the officer to discover whether any dutiable or forfeitable articles may be concealed therein.

No proceeding herein shall give rise to any claim for the damage thereby caused to article or vessel or aircraft.749

It shall also be lawful for a person exercising authority as aforesaid to open and examine any box, trunk, envelope or other container, wherever found where he has reasonable cause to suspect the presence therein of dutiable or prohibited article or articles introduced into the Philippines contrary to law, and likewise to stop, search and examine any vehicle, beast or person reasonably suspected of holding or conveying such article as aforesaid.750

All persons coming into the Philippines from foreign countries shall be liable to detention and search by the customs authorities under such regulations as may be prescribed relative thereto.

Female inspectors may be employed for the examination and search of persons of their own sex.751

Upon making any seizure, the Collector shall issue a warrant for the detention of the property; and if the owner or importer desires to secure the release of the property for legitimate use, the Collector may surrender it upon the filing of a sufficient bond, in an amount to be fixed by him, conditioned for the payment of the appraised value of the article and/or any

748 Sec. 2209749 Sec. 2210750Sec. 2211751 Sec. 2212

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fine, expenses and costs which may be adjudged in the case: Provided, That articles the importation of which is prohibited by law shall not be released under bond.752

When a seizure is made for any cause, the Collector of the district wherein the seizure is effected shall immediately make report thereof to the Commissioner and to the Auditor General.753

The Collector shall give the owner or importer of the property or his agent a written notice of the seizure and shall give him an opportunity to be heard in reference to the delinquency which was the occasion of such seizure.

For the purpose of giving such notice and of all other proceedings in the matter of such seizure, the importer, consignee or person holding the bill of lading shall be deemed to be the "owner" of the article included in the bill.

For the same purpose, "agent" shall be deemed to include not only any agent in fact of the owner of the seized property but also any person having responsible possession of the property at the (missing) of the seizure, if the owner or his agent in fact is unknown or cannot be reached.754

Notice to an unknown owner shall be effected by posting a notice for fifteen days in the public corridor of the customhouse of the district in which the seizure was made, and, in the discretion of the Commissioner, by publication in a newspaper or by such other means as he shall consider desirable.755

The Collector shall also cause a list and particular description of the property seized to be prepared and an appraisement or classification of the same at its wholesale value in the local market in the usual wholesale quantities to be made by at least two appraising officials, if there are such officials at or near the place of seizure; in the absence of such officials, then by two competent and disinterested citizens of the Philippines, to be selected by him for that purpose, residing at or near the place of seizure, which list and appraisement shall be properly attested to by such Collector and the persons making the appraisal.756

If, within fifteen days after the notification prescribed in section twenty-three hundred and four of this Code, no owner or agent can be found or appears before the Collector, the latter shall declare the property forfeited to the government to be sold at auction in accordance with law.757

752 Sec. 2301753 Sec. 2302754 Sec. 2303755 Sec. 2304756Sec. 2305757Sec. 2306.

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If, in any seizure case, the owner or agent shall, while the case is yet before the Collector of the district of seizure, pay to such Collector the fine imposed by him or, in case of forfeiture, shall pay the appraised value of the property, or, if after appeal of the case, he shall pay to the Commissioner the amount of the fine as finally determined by him, or, in case of forfeiture, shall pay the appraised value of the property, such property shall be forthwith surrendered, and all liability which may or might attach to the property by virtue of the offense which was the occasion of the seizure and all liability which might have been incurred under any bond given by the owner or agent in respect to such property shall thereupon be deemed to be discharged.

Redemption of forfeited property shall not be allowed in any case where the importation is absolutely prohibited or where the surrender of the property to the person offering to redeem the same would be contrary to law.758

b. Judicial

1) Rules on appeal including jurisdiction

The party aggrieved by a ruling of the Commissioner in any matter brought before him upon protest or by his action or ruling in any case of seizure may appeal to the Court of Tax Appeals, in the manner and within the period prescribed by law and regulations.

Unless an appeal is made to the Court of Tax Appeals in the manner and within the period prescribed by laws and regulations, the action or ruling of the Commissioner shall be final and conclusive.759

2) Taxpayer

a. Protest

When a ruling or decision of the Collector is made whereby liability for duties, fees, or other money charge is determined, except the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision by presenting to the Collector at the time when payment of the amount claimed to be due the Government is made, or within thirty days thereafter, a written protest setting forth his objections to the ruling or decision in question, together with the reasons therefor. No protest shall be considered unless payment of the amount due after final liquidation has first been made.760

758 Sec. 2307759 Sec. 2402760Sec. 2308

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In all cases subject to protest, the interested party who desires to have the action of the Collector reviewed, shall make a protest, otherwise, the action of the Collector shall be final and conclusive against him, except as to matters correctible for manifest error in the manner prescribed in section one thousand seven hundred and seven hereof.761

Every protest shall be filed in accordance with the prescribed rules and regulations promulgated under this section and shall point out the particular decision or ruling of the Collector to which exception is taken or objection made, and shall indicate with reasonable precision the particular ground or grounds upon which the protesting party bases his claim for relief.

The scope of a protest shall be limited to the subject matter of a single adjustment or other independent transaction; but any number of issue may be raised in a protest with reference to the particular item or items constituting the subject matter of the protest.

"Single adjustment", as hereinabove used, refers to the entire content of one liquidation, including all duties, fees, surcharges or fines incident thereto.762

If the nature of the articles permit, importers filing protests involving questions of fact must, upon demand, supply the Collector with samples of the articles which are the subject matter of the protests. Such samples shall be verified by the custom official who made the classification against which the protest are filed.763

When a protest in proper form is presented in a case where protest in required, the Collector shall reexamine the matter thus presented, and if the protest is sustained, in whole or in part, he shall enter the appropriate order, the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a declaration of forfeiture or fix the amount of the fine or take such other action as may be proper.764

The person aggrieved by the decision or action of the Collector in any matter presented upon protest or by his action in any case of seizure may, within fifteen days after notification in writing by the Collector of his action or decision, give written notice to the Collector of his desire to have the matter reviewed by the Commissioner. Thereupon the Collector shall forthwith transmit all the records of the proceedings to the Commissioner, who shall approve, modify or reverse the action or decision of the Collector

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and take such steps and make such orders as may be necessary to give effect to his decision.765

Notice of the decision of the Commissioner shall be given to the party by whom the case was brought before him for review, and in seizure cases such notice shall be effected by personal service if practicable.766

If in any case involving the assessment of duties the importer shall fail to protest the ruling of the Collector, and the Commissioner shall be of the opinion that the ruling was erroneous and unfavorable to the Government, the latter may order a reliquidation; and if the ruling of the Commissioner in any unprotested case should, in the opinion of the department head, be erroneous and unfavorable to the Government, the department head may require the Commissioner to order a reliquidation.

Except as in the preceding paragraph provided, the supervisory authority of the department head over the Bureau of Customs shall not extend to the administrative review of the ruling of the Commissioner in matters appealed to theCourt of Tax Appeals.767

b. Abandonment

Abandonment is express when it is made direct to the Collector by the interested party in writing, and it is implied when, from the action or omission of the interested party, an intention to abandon can be clearly inferred. The failure of any interested party to file the import entry within fifteen days or any extension thereof from the discharge of the vessel or aircraft, shall be implied abandonment. An implied abandonment shall not be effective until the article is declared by the Collector to have been abandoned after notice thereof is given to the interested party as in seizure cases.

Any person who abandons an imported article renounces all his interests and property rights therein.768

The owner or importer of any articles may, within ten days after filing of the import entry, abandon to the Government all or a part of the articles included in an invoice, and, thereupon, he shall be relieved from the payment of duties, taxes and all other charges and expenses due thereon: Provided, That the portion so abandoned is not less than ten per cent of the total invoice and is not less than one package, except in cases of articles imported for personal or family use. The article so abandoned shall be delivered by the owner or importer at such place within the port of arrival as the Collector shall designate, and upon his failure to so comply, the owner or

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importer shall be liable for all expenses that may be incurred in connection with the disposition of the articles.

Nothing in this section shall be construed as relieving such owner or importer from any criminal liability which may arise from any violation of law committed in connection with the importation of the abandoned article.769

The owner or importer of an article impliedly abandoned may, at any time before it is sold or otherwise disposed of, reclaim such article provided all legal requirements regarding its importation are complied with and the corresponding duties, taxes and other charges as well as all expenses incurred as a consequence of the abandonment, are paid.770

c. Abatement and refund

Except as herein specially provided, no abatement of duties shall be made on account of damage incurred or deterioration suffered during the voyage of importation; and duties will be assessed on the actual quantity imported, as shown by the return of weighers, gaugers, measures, examiners or appraisers, as the case may be.771

When any package or packages appearing on the manifest or bill of lading are missing, a remission or refund of the duty thereon shall be made if it is shown by proof satisfactory to the Collector that the package or packages in question have not been imported into the Philippines.772

If, upon opening any package, a deficiency or absence of any article, or of part of the contents thereof, as called for by the invoice shall be found to exist, such deficiency shall be certified to the Collector by the appraiser; and upon the production of proof satisfactory to the Collector showing that the shortage occurred before the arrival of the article in the Philippines, the proper abatement or refund of the duty shall be made.773

A Collector may abate or refund the amount of duties accruing or paid, and may likewise make a corresponding allowance or credit on the entry bond, or other document, upon satisfactory proof of the injury, destruction, or loss by theft, fire or other causes of any article as follows:

a. While within the limits of any port of entry prior to unlading under customs supervision.

b. While remaining in customs custody after unlading.

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c. While in transit under bond from the port of entry to any port in the Philippines.

d. While released under bond to export, except in case of loss by theft.774

Where it is satisfactorily shown to the Collector that an animal which is the subject of importation dies or suffers injury before arrival, or while in customs custody, the duty shall be correspondingly abated by him, provided the carcass of any dead animal remaining on board or in customs custody be removed in the manner required by the Collector and at the expense of the importer.775

The Collector shall in all cases of allowances, abatements or refunds of duties, cause an examination and report in writing to be made as to any fact discovered during such examination which tends to account for the discrepancy or difference and cause the corresponding adjustment to be made on the import entry.776

Manifest clerical errors made in an invoice or entry, errors in return of weight, measure and gauge, when duly certified to by the surveyor or examining official (when there are such officials at the port), and errors in the distribution of charges on invoices not involving any question of law and certified to by the examining official, may be corrected in the computation of duties, if such errors be discovered before the payment of duties, or, if discovered within one year after the final liquidation, upon written request and notice of error from the importer, or upon statement of error certified by the Collector.

For the purpose of correcting errors specified in the next preceding paragraph the Collector is authorized to reliquidate entries and collect additional charges, or to make refunds on statement of error within the statutory time limit.777

All claims for refund of duties shall be made in writing, and forwarded to the Collector to whom such duties are paid, who upon receipt of such claim shall verify the same by the records of his office, and if found to be correct and in accordance with law, shall certify the same to theCommissioner with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct.778

774 Sec. 1704775 Sec. 1705776 Sec. 1706777 Sec. 1707778 Sec. 1708

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V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax Appeals (CTA),779 as amended, and the Revised Rules of the Court of Tax Appeals

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases

a. Cases within the jurisdiction of the Court en banc

The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the following:

(a) Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over:

(1) Cases arising from administrative agencies – Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and

(3) Tax collection cases decided by the Regional Trial Courts in the exercise of their original jurisdiction involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and penalties claimed is less than one million pesos;

(b) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their appellate jurisdiction;

779 The Court of Tax Appeals is a court of special appellate jurisdiction and a part of our judicial system. The proceedings therein are judicial in nature although the Court is not bound by the technical rules of evidence. (Purakan Plantation Co. vs. Domingo L-18571, 29 Oct. 1966) It is a regular court vested with exclusive appellate jurisdiction over cases arising under the:1.National Internal Revenue Code2.Tariff and Customs Code3.Assessment law The CTA is a highly specialized body specially created for the purpose of reviewing tax cases, its findings will not be ordinarily be reviewed absent a showing of gross error or abuse on its part. These findings are binding upon the Supreme Court and in the absence of strong reasons for the court to delve on fatcs, only questions of law are open for determination.

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(c) Decisions, resolutions or orders of the Regional Trial Courts in tax collection cases decided or resolved by them in the exercise of their appellate jurisdiction;

(d) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over tax collection cases;

(e) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals;

(f) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs;

(g) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the preceding subparagraph; and

(h) Decisions, resolutions or orders of the Regional trial Courts in the exercise of their appellate jurisdiction over criminal offenses mentioned in subparagraph (f).780

b. Cases within the jurisdiction of the Court in divisions

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the

780Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals

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inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the National Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their original jurisdiction;

(4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures of other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs;

(5) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the Government under Section 2315 of the Tariff and Customs Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture, in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties;

(b) Exclusive jurisdiction over cases involving criminal offenses, to wit:

(1) Original jurisdiction over all criminal offenses arising from violations of the National internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue of the Bureau of Customs, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of the Regional Trial Courts in their original

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jurisdiction in criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than one million pesos or where there is no specified amount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) 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 one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them within their respective territorial jurisdiction.781

2. Criminal cases

a. Exclusive original jurisdiction

(a) Exclusive original jurisdiction over all criminal cases arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR or the Bureau of Customs

Provided however, where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than one million pesos (P1,000, 000. 00) or where there is no specified amount claimed - the offenses or penalties shall be tried by the regular courts and the jurisdiction of the CTA shall be appellate.

Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal action will be recognized.

b. Exclusive appellate jurisdiction in criminal cases

781 Sec. 3, id.,

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Over appeals from the judgments, resolutions or orders of the RTC in tax cases originally decided by them, in their respective territorial jurisdiction.

Over petitions for review of the judgments, resolutions, or orders of the RTC in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts in their respective jurisdiction.

B. Judicial Procedures

1. Judicial action for collection of taxes

a. Internal revenue taxes

Upon the issuance of any ruling, order or decision by the CTA favorable to the national government, the CTA shall issue an order authorizing the Bureau of Internal Revenue, through the Commissioner to seize and distraint any goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property and/or levy the real property of such persons in sufficient quantity to satisfy the tax or charge together with any increment thereto incident to delinquency. This remedy shall not be exclusive and shall not preclude the Court from availing of other means under the Rules of Court.782

b. Local taxes

1) Prescriptive period

Five (5) years from date of assessment.

2. Civil cases

a. Who may appeal, mode of appeal, effect of appeal

Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary

782 Sec. 13 of RA No. 1125, as amended by Sec. 9 of RA No. 9282

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of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42783 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. A Division of the CTA shall hear the appeal: Provided, however, That with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 43 of the 1997 Rules of Civil Procedure with the CTA, which shall hear the case en banc.

All other cases involving rulings, orders or decisions filed with the CTA as provided for in Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration of new trial before the same Division of the CTA within fifteens (15) days from notice thereof: Provide, however, That in criminal cases, the general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply.

No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act, the Government may directly file the said cases with the CTA covering amounts within its exclusive and original jurisdiction.784

1) Suspension of collection of tax

a) Injunction not available to restrain collection

783 See Reference784Sec. 11 of RA No. 1125,id.

278

Sec. 11 of RA No. 1125785 grants CTA power to suspend collection of tax if such collection works to serious prejudice of either taxpayer or government.

However, Sec. 218 of the Tax Code provides that no court may grant injunction to restrain collection of any tax, fee or charge imposed by Tax Code.

The provision in Tax Code refers to courts other than the CTA.786

Appeal to the CTA does not automatically suspend collection unless CTA issues suspension order at any stage of proceedings.

2) Taking of evidence

The Court may, upon proper motion on or its initiative, direct that a case, or any issue thereof, be assigned to one of its members for the taking of evidence, when the determination of a question of fact arises upon motion or otherwise in any stage of the proceedings, or when the taking of an account is necessary, or when the determination of an issue of fact requires the examination of a long account. The hearing before such member shall proceed in all respects as though the same had been made before the Court.

Upon the recommendation of such hearing such member, he shall promptly submit to the Court his report in writing, stating his findings and conclusions; and thereafter, the Court shall render its decisions on the case, adopting, modifying, or rejecting the report in whole or in part, as the case may be, or the Court may, in its discretion recommit it with instructions, or receive further evidence.787

3) Motion for reconsideration or New trial

A party adversely affected by a decision or resolution of a Division of the Court on a motion for reconsideration or new trial may appeal to the Court by filing before it a petition for review within fifteen days from receipt of a copy of the questioned decision or resolution. Upon proper motion and the payment of the full amount of the docket and other lawful fees and deposit for costs before the expiration of the reglementary period herein fixed, the Court may

785as amended by Sec. 9 of RA No. 9282786Blaquera vs. Rodriguez, GR No. L-11295, March 29, 1958787 Sec. 12, R.A. 1125

279

grant an additional period not exceeding fifteen days from the expiration of the original period within which to file the petition for review.788

An appeal from a decision or resolution of the Court in Division on a motion for reconsideration or new trial shall be taken to the Court by petition for review as provided in Rule 43 of the Rules of Court. The Court en banc shall act on the appeal.789

b. Appeal to the CTA, en banc

No civil proceeding involving matter arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this Act.790

"A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc.

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure.791

3. Criminal cases

a. Institution and prosecution of criminal actions

1) Institution on civil action in criminal action

In cases within the jurisdiction of the Court, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall be deemed jointly instituted in the same proceeding. The filing of the criminal action shall necessarily carry with it the filing of the civil action. No right to reserve the filing of

788 Sec. 3 (b), Revised Rules of the CTA789Sec. 4 (b), id.790SEC. 18, id.791Sec. 19.

280

such civil action separately from the criminal action shall be allowed or recognized.792

b. Appeal and period to appeal

1) Solicitor General as counsel for the People and government officials sued in their official capacity

The Solicitor General shall represent the People of the Philippines and government officials sued in their official capacity in all cases brought to the Court in the exercise of its appellate jurisdiction. He may deputized the legal officers of the Bureau of Internal Revenue in cases brought under the National Internal Revenue Code or other laws enforced by the Bureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases brought under the Tariff and Customs Code of the Philippines or other laws enforced by the Bureau of Customs, to appear in behalf of the officials of said agencies sued in their official capacity: Provided, however, such duly deputized legal officers shall remain at all times under the direct control and supervision of the Solicitor General.793

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the Court en banc may appeal therefrom by filing with the Supreme Court a verified petition for review on certiorari within fifteen days from receipt of a copy of the decision or resolution, as provided in Rule 45 of the Rules of Court. If such party has filed a motion for reconsideration or for new trial, the period herein fixed shall run from the party’s receipt of a copy of the resolution denying the motion for reconsideration or for new trial.794

C. Taxpayer’s suit impugning the validity of tax measures or acts of taxing authorities

a. Taxpayer’s suit, defined

Taxpayers’ suit is a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation.795

792 Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court793Sec. 10, id.794 Rule 16, Sec. 1, id.795Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110

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b. Distinguished from citizen’s suit

The plaintiff in a taxpayer’s suit is in a different category from the plaintiff in a citizen’s suit. In the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern.796

As held by the New York Supreme Court in People ex rel Case v. Collins: "In matter of mere public right, however…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 offence be properly pursued and punished, and that a public grievance be remedied." With respect to taxpayer’s suits, Terr v. Jordan held that "the right of a citizen and a taxpayer to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied."

c. Requisites for challenging the constitutionality of a tax measure or act of taxing authority

1) Concept of locus standi as applied in taxation

It is a party’s personal and substantial interest in the case, such that the party has sustained or will sustain direct injury as a result of the government act being challenged. It calls for more than just a generalized grievance.797

A party need not be a party to the contract to challenge its validity.798

2) Doctrine of transcendental importance

Requisites for a taxpayers petition: 1) That money is being extracted and spent in violation of specific constitutionalprotections against abuses of legislative power 2) That public money is being deflected to any improper purpose 3) That the petitioner seeks to restrain respondents from wasting public fundsthrough the enforcement of an invalid or unconstitutional law. The Supreme Court has discretion whether or not to entertain taxpayerssuit and could brush aside lack of locus standi (Kilos Bayan vs. Guingona)796 Beauchamp v. Silk797Abaya v. Ebdane, G. R. No. 167919, February 14, 2007798 Ibid.

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When paramount public interest is involved.

3) Ripeness for judicial determination

In our jurisdiction, the issue of ripeness is generally treated in terms of actual injury to the plaintiff. Hence, a question is ripe for adjudication when the act being challenged has had a direct adverse effect on the individual challenging it.799 An alternative road to review similarly taken would be to determine whether an action has already been accomplished or performed by a branch of government before the courts may step in.800

To be ripe for judicial adjudication, the petitioner must show a personal stake in the outcome of the case or an injury to himself that can be redressed by a favorable decision of the Court.801

799Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998).800Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003).801ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary of Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion

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Reference

Sec. 24

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.

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(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000……………………………........ 5%

On any amount in excess of P100,000………… 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

Section 25

(A)(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock

Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BangkoSentralngPilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

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Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%.

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

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Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

Section 27xxx

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000…………………………..... 5%Amount in excess of P100,000…………….. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

Section 28

(A) Tax on Resident Foreign Corporations. -

xxx

287

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the BangkoSentralngPilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

xxx(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000………………………......… 5%On any amount in excess of P100,000……. 10%

(B) Tax on Nonresident Foreign Corporation. -

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(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that 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 twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph;(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not overP100,000…………..………………..........5%On any amount in excess of P100,000………… ….10%

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Sec. 32 (B)(6)(a)

Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

SEC. 33.Special Treatment of Fringe Benefit.-

(A)  Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.

(B)  Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means 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 as defined herein) such as, but not limited to, the following:

(1) Housing;(2) Expenseaccount;(3)  Vehicle of any kind;

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(4)  Household personnel, such as maid, driver and others;(5)  Interest on loan at less than market rate to the extent of the difference between themarket rate and actual rate granted;(6)  Membership fees, dues and other expenses borne by the employer for the employee insocial and athletic clubs or other similar organizations;(7)  Expenses for foreign travel;(8)  Holiday and vacation expenses;(9)  Educational assistance to the employee or his dependents; and(10) Life or health insurance and other non-life insurance premiums or similar amounts inexcess of what the law allows.

(C)  Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:

(1)  fringe benefits which are authorized and exempted from tax under special laws;(2)  Contributions of the employer for the benefit of the employee to retirement, insuranceand hospitalization benefit plans;(3)  Benefits given to the rank and file employees, whether granted under a collectivebargaining agreement or not; and(4)  De minimis benefits as defined in the rules and regulations to be promulgated bythe Secretary of Finance, upon recommendation of the Commissioner.

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.

(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.

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(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. 

SEC. 75. 

Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

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Sec. 106

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;

(4) Sale of gold to the BangkoSentralngPilipinas (BSP); and

(5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws.

(b)  Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

Sec. 108

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP);

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(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; `

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

SEC. 111.Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom.

SEC. 112.Refunds or Tax Credits of Input Tax. -

(A)  Zero-Rated or Effectively Zero-Rated Sales.- any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP): Provided,

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further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

(B)  Capital Goods.- A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.

(C)  Cancellation of VAT Registration. - A person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes. (D)  Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of compete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.- (E)  Manner of Giving Refund.- Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.

SEC. 113.

Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax.

(B) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal

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on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance.

Section 143.Tax on Business. - The municipality may impose taxes on the following businesses:

(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, in accordance with the following schedule:

With gross sales or receipts for the preceding calendar year in the amount of:

Amount of Tax Per Annum

Less than 10,000.00 165.00

P 10,000.00 or more but less than 15,000.00 220.00

15,000.00 or more but less than 20,000.00 202.00

20,000.00 or more but less than 30,000.00 440.00

30,000.00 or more but less than 40,000.00 660.00

40,000.00 or more but less than 50,000.00 825.00

50,000.00 or more but less than 75,000.00 1,320.00

75,000.00 or more but less than 100,000.00 1,650.00

100,000.00 or more but less than 150,000.00 2,200.00

150,000.00 or more but less than 200,000.00 2,750.00

200,000.00 or more but less than 300,000.00 3,850.00

300,000.00 or more but less than 500,000.00 5,500.00

500,000.00 or more but less than 750,000.00 8,000.00

750,000.00 or more but less than 1,000,000.00 10,000.00

1,000,000.00 or more but less than 2,000,000.00

13,750.00

2,000,000.00 or more but less than 3,000,000.00

16,500.00

3,000,000.00 or more but less than 4,000,000.00

19,000.00

4,000,000.00 or more but less than 5,000,000.00

23,100.00

5,000,000.00 or more but less than 6,500,000.00

24,375.00

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6,000,000.00 or more at a rate not exceeding thirty-seven and a half percent (37½%) of one percent (1%)

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule:

With gross sales or receipts for the preceding calendar year in the amount of:

Amount of Tax Per Annum

Less than 1,000.00 18.00

P 1,000.00 or more but less than 2,000.00 33.00

2,000.00 or more but less than 3,000.00 50.00

3,000.00 or more but less than 4,000.00 72.00

4,000.00 or more but less than 5,000.00 100.00

5,000.00 or more but less than 6,000.00 121.00

6,000.00 or more but less than 7,000.00 143.00

7,000.00 or more but less than 8,000.00 165.00

8,000.00 or more but less than 10,000.00 187.00

10,000.00 or more but less than 15,000.00 220.00

15,000.00 or more but less than 20,000.00 275.00

20,000.00 or more but less than 30,000.00 330.00

30,000.00 or more but less than 40,000.00 440.00

40,000.00 or more but less than 50,000.00 660.00

50,000.00 or more but less than 75,000.00 990.00

75,000.00 or more but less than 100,000.00 1,320.00

100,000.00 or more but less than 150,000.00 1,870.00

150,000.00 or more but less than 200,000.00 2,420.00

200,000.00 or more but less than 300,000.00 3,300.00

300,000.00 or more but less than 500,000.00 4,400.00

500,000.00 or more but less than 750,000.00 6,600.00

750,000.00 or more but less than 1,000,000.00 8,800.00

1,000,000.00 or more but less than 2,000,000.00 10,000.00

2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%).

(c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (½) of the rates prescribed under subsection (a), (b) and (d) of this Section:

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(1) Rice and corn;

(2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not;

(3) Cooking oil and cooking gas;

(4) Laundry soap, detergents, and medicine;

(5) Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs;

(6) Poultry feeds and other animal feeds;

(7) School supplies; and

(8) Cement.

(d) On retailers.

With gross sales or receipts for the preceding calendar year in the amount of:

Rate of Tax Per Annum

P400,000.00 or less 2%

more than P400,000.00 1%

Provided, however, That barangays shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of cities, and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities.

(e) On contractors and other independent contractors, in accordance with the following schedule:

With gross sales or receipts for the preceding calendar year in the amount of:

Amount of Tax Per Annum

Less than 5,000.00 27.50

P 5,000.00 or more but less than P 10,000.00 61.60

10,000.00 or more but less than 15,000.00 104.50

15,000.00 or more but less than 20,000.00 165.00

20,000.00 or more but less than 30,000.00 275.00

30,000.00 or more but less than 40,000.00 385.00

40,000.00 or more but less than 50,000.00 550.00

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50,000.00 or more but less than 75,000.00 880.00

75,000.00 or more but less than 100,000.00 1,320.00

100,000.00 or more but less than 150,000.00 1,980.00

150,000.00 or more but less than 200,000.00 2,640.00

200,000.00 or more but less than 250,000.00 3,630.00

250,000.00 or more but less than 300,000.00 4,620.00

300,000.00 or more but less than 400,000.00 6,160.00

400,000.00 or more but less than 500,000.00 8,250.00

500,000.00 or more but less than 750,000.00 9,250.00

750,000.00 or more but less than 1,000,000.00 10,250.00

1,000,000.00 or more but less than 2,000,000.00 11,500.00

2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%)

(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler annually.

(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed herein.

SEC. 236.Registration Requirements. -

(A) Requirements. - Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer:

(1) Within ten (10) days from date of employment, or

(2) On or before the commencement of business,or

(3) Before payment of any tax due, or

(4) Upon filing of a return, statement or declaration as required in this Code.

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The registration shall contain the taxpayer's name, style, place of residence, business and such other information as may be required by the Commissioner in the form prescribed therefor.

A person maintaining a head office, branch or facility shall register with the Revenue District Officer having jurisdiction over the head office, brand or facility. For purposes of this Section, the term "facility" may include but not be limited to sales outlets, places of production, warehouses or storage places.

(B) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos (P500) for every separate or distinct establishment or place of business, including facility types where sales transactions occur, shall be paid upon registration and every year thereafter on or before the last day of January: Provided, however, That cooperatives, individuals earning purely compensation income, whether locally or abroad, and overseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality where each place of business or branch is registered.

(C) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register with the Bureau of Internal Revenue under Subsection (A) hereof, shall register each type of internal revenue tax for which he is obligated, shall file a return and shall pay such taxes, and shall updates such registration of any changes in accordance with Subsection (E) hereof.

(D) Transfer of Registration. - In case a registered person decides to transfer his place of business or his head office or branches, it shall be his duty to update his registration status by filing an application for registration information update in the form prescribed therefor.

(E) Other Updates. - Any person registered in accordance with this Section shall, whenever applicable, update his registration information with the Revenue District Office where he is registered, specifying therein any change in type and other taxpayer details.

(F) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the Revenue District Office where he is registered an application for registration information update in a form prescribed therefor.

(G) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts subject to value-added tax in excess of the amount prescribed under Section 109(z) of this Code for the next 12-month period from the commencement of the business, shall register with the Revenue District Office which has jurisdiction over the head office or branch and shall pay the annual registration fee prescribed in Subsection (B) hereof.

(H) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or receipts in any 12-month period exceeds the amount prescribed under Subsection 109(z) of this Code for exemption from the value-added tax shall register in accordance with Subsection (A) hereof, and shall pay the annual registration fee prescribed within ten (10) days after the end of the last month of that period, and shall be liable to the value-added tax commencing from the first day of the month following his registration.

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(I) Optional Registration of Exempt Person. - Any person whose transactions are exempt from value-added tax under Section 109(z) of this Code; or any person whose transactions are exempt from the value-added tax under Section 109(a), (b), (c), and (d) of this Code, who opts to register as a VAT taxpayer with respect to his export sales only, may update his registration information in accordance with Subsection (E) hereof, not later than ten (10) days before the beginning of the taxable quarter and shall pay the annual registration fee prescribed in Subsection (B) hereof.

In any case, the Commissioner may, for administrative reasons, deny any application for registration including updates prescribed under Subsection (E) hereof.

For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as VAT-registered person who shall be assigned only one Taxpayer Identification Number.

(J) Supplying of Taxpayer Identification Number (TIN). - Any person required under the authority of this Code 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 indicate in such return, statement or document filed with the Bureau of Internal Revenue for his proper identification for tax purposes, and which he shall indicate in certain documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments; (2) Domestic bills of lading; (3) Documents to be registered with the Register of Deeds of Assessor's Office; (4) Registration certificate of transportation equipment by land, sea or air; (5) Documents to be registered with the Securities and Exchange Commission; (6) Building construction permits; (7) Application for loan with banks, financial institutions, or other financial intermediaries; (8) Application for mayor's permit; (9) Application for business license with the Department of Trade & Industry; and (10) Such other documents which may hereafter be required under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance with Subsection (A) hereof and a new Taxpayer Identification Number (TIN) shall be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the Revenue District Office where he is registered: Provided, however, That in case such executor or administrator is not registered, registration of the estate shall be made with the Taxpayer Identification Number (TIN) supplied by the Revenue District Office having jurisdiction over his legal residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person who shall secure more than one Taxpayer Identification Number shall be criminally liable under the provision of Section 275 on 'Violation of Other Provisions of this Code or Regulations in General'.

Section 237.

Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at

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Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax from compliance with the provisions of this Section.

SEC. 248.Civil Penalties. –xxx

(B) In case of willful neglect to file the return within the period prescribed by this Code or byrules and regulations, or in case a false or fraudulent return is willfully made, the penaltyto be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case,any payment has been made on the basis of such return before the discovery of thefalsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receiptsor income, or a substantial overstatement of deductions, as determined by theCommissioner pursuant to the rules and regulations to be promulgated by the Secretaryof Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided,further, That failure to report sales, receipts or income in an amount exceeding thirtypercent (30%) of that declared per return, and a claim of deductions in an amountexceeding (30%) of actual deductions, shall render the taxpayer liable for substantialunderdeclaration of sales, receipts or income or for overstatement of deductions, asmentioned herein.

SEC. 282.

Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal Revenue Code and in the Discovery and Seizure of Smuggled Goods. -

(A) For Violations of the National Internal Revenue Code. - Any person, except an internal revenue official or employee, or other public official or employee, or his relative within the sixth degree of consanguinity, who voluntarily gives definite and sworn information, not yet in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds upon the internal revenue laws or violations of any of the provisions thereof, thereby resulting in the recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any of the fine or penalty, shall be rewarded in a sum equivalent to ten percent

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(10%) of the revenues, surcharges or fees recovered and/or fine or penalty imposed and collected or One Million Pesos (P1,000,000) per case, whichever is lower. The same amount of reward shall also be given to an informer where the offender has offered to compromise the violation of law committed by him and his offer has been accepted by the Commissioner and collected from the offender: Provided, That should no revenue, surcharges or fees be actually recovered or collected, such person shall not be entitled to a reward: Provided, further, That the information mentioned herein shall not refer to a case already pending or previously investigated or examined by the Commissioner or any of his deputies, agents or examiners, or the Secretary of Finance or any of his deputies or agents: Provided, finally, That the reward provided herein shall be paid under rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the public to extend full cooperation in eradicating smuggling, a cash reward equivalent to ten percent (10%) of the fair market value of the smuggled and confiscated goods or One Million Pesos (P1,000,000) per case, whichever is lower, shall be given to persons instrumental in the discovery and seizure of such smuggled goods.

The cash rewards of informers shall be subject to income tax, collected as a final withholding tax, at a rate of ten percent (10%).The provisions of the foregoing Subsections notwithstanding, all public officials, whether incumbent or retired, who acquired the information in the course of the performance of their duties during their incumbency, are prohibited from claiming informer's reward.

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RULES OF COURT

RULE 42

Petition for Review From the Regional Trial Courts to the Court of Appeals

Section 1.How appeal taken; time for filing. — A party desiring to appeal from a decision of the Regional Trial Court rendered in the exercise of its appellate jurisdiction may file a verified petition for review with the Court of Appeals, paying at the same time to the clerk of said court the corresponding docket and other lawful fees, depositing the amount of P500.00 for costs, and furnishing the Regional Trial Court and the adverse party with a copy of the petition. The petition shall be filed and served within fifteen (15) days from notice of the decision sought to be reviewed or of the denial of petitioner's motion for new trial or reconsideration filed in due time after judgment. Upon proper motion and the payment of the full amount of the docket and other lawful fees and the deposit for costs before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days. (n)

Section 2.Form and contents. — The petition shall be filed in seven (7) legible copies, with the original copy intended for the court being indicated as such by the petitioner, and shall (a) state the full names of the parties to the case, without impleading the lower courts or judges

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thereof either as petitioners or respondents; (b) indicate the specific material dates showing that it was filed on time; (c) set forth concisely a statement of the matters involved, the issues raised, the specification of errors of fact or law, or both, allegedly committed by the Regional Trial Court, and the reasons or arguments relied upon for the allowance of the appeal; (d) be accompanied by clearly legible duplicate originals or true copies of the judgments or final orders of both lower courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of plain copies thereof and of the pleadings and other material portions of the record as would support the allegations of the petition.

The petitioner shall also submit together with the petition a certification under oath that he has not theretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days therefrom. (n)

Section 3.Effect of failure to comply with requirements. — The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof. (n)

Section 4.Action on the petition. — The Court of Appeals may require the respondent to file a comment on the petition, not a motion to dismiss, within ten (10) days from notice, or dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raised therein are too insubstantial to require consideration. (n)

Section 5.Contents of comment. — The comment of the respondent shall be filed in seven (7) legible copies, accompanied by certified true copies of such material portions of the record referred to therein together with other supporting papers and shall (a) state whether or not he accepts the statement of matters involved in the petition; (b) point out such insufficiencies or inaccuracies as he believes exist in petitioner's statement of matters involved but without repetition; and (c) state the reasons why the petition should not be given due course. A copy thereof shall be served on the petitioner. (a)

Section 6.Due course. — If upon the filing of the comment or such other pleadings as the court may allow or require, or after the expiration of the period for the filing thereof without such comment or pleading having been submitted, the Court of Appeals finds prima facie that the lower court has committed an error of fact or law that will warrant a reversal or modification of the appealed decision, it may accordingly give due course to the petition. (n)

Section 7.Elevation of record. — Whenever the Court of Appeals deems it necessary, it may order the clerk of court of the Regional Trial Court to elevate the original record of the case including the oral and documentary evidence within fifteen (15) days from notice. (n)

Section 8.Perfection of appeal; effect thereof. — (a) Upon the timely filing of a petition for review and the payment of the corresponding docket and other lawful fees, the appeal is deemed perfected as to the petitioner.

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The Regional Trial Court loses jurisdiction over the case upon the perfection of the appeals filed in due time and the expiration of the time to appeal of the other parties.

However, before the Court of Appeals gives due course to the petition, the Regional Trial Court may issue orders for the protection and preservation of the rights of the parties which do not involve any matter litigated by the appeal, approve compromises, permit appeals of indigent litigants, order execution pending appeal in accordance with section 2 of Rule 39, and allow withdrawal of the appeal. (9a, R41)

(b) Except in civil cases decided under the Rule on Summary Procedure, the appeal shall stay the judgment or final order unless the Court of Appeals, the law, or these Rules shall provide otherwise. (a)

Section 9.Submission for decision. — If the petition is given due course, the Court of Appeals may set the case for oral argument or require the parties to submit memoranda within a period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleading or memorandum required by these Rules or by the court itself. (n)

RULE 43

Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the Court of Appeals

Section 1.Scope. — This Rule shall apply to appeals from judgments or final orders of the Court of Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasi-judicial agency in the exercise of its quasi-judicial functions. Among these agencies are the Civil Service Commission, Central Board of Assessment Appeals, Securities and Exchange Commission, Office of the President, Land Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology Transfer, National Electrification Administration, Energy Regulatory Board, National Telecommunications Commission, Department of Agrarian Reform under Republic Act No. 6657, Government Service Insurance System, Employees Compensation Commission, Agricultural Invention Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments, Construction Industry Arbitration Commission, and voluntary arbitrators authorized by law. (n)

Section 2.Cases not covered. — This Rule shall not apply to judgments or final orders issued under the Labor Code of the Philippines. (n)

Section 3.Where to appeal. — An appeal under this Rule may be taken to the Court of Appeals within the period and in the manner herein provided, whether the appeal involves questions of fact, of law, or mixed questions of fact and law. (n)

Section 4.Period of appeal. — The appeal shall be taken within fifteen (15) days from notice of the award, judgment, final order or resolution, or from the date of its last publication, if publication is required by law for its effectivity, or of the denial of petitioner's motion for new trial or reconsideration duly filed in accordance with the governing law of the court or agency a quo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the docket fee before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within which to file the

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petition for review. No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days. (n)

Section 5.How appeal taken. — Appeal shall be taken by filing a verified petition for review in seven (7) legible copies with the Court of Appeals, with proof of service of a copy thereof on the adverse party and on the court or agency a quo. The original copy of the petition intended for the Court of Appeals shall be indicated as such by the petitioner.

Upon the filing of the petition, the petitioner shall pay to the clerk of court of the Court of Appeals the docketing and other lawful fees and deposit the sum of P500.00 for costs. Exemption from payment of docketing and other lawful fees and the deposit for costs may be granted by the Court of Appeals upon a verified motion setting forth valid grounds therefor. If the Court of Appeals denies the motion, the petitioner shall pay the docketing and other lawful fees and deposit for costs within fifteen (15) days from notice of the denial. (n)

Section 6.Contents of the petition. — The petition for review shall (a) state the full names of the parties to the case, without impleading the court or agencies either as petitioners or respondents; (b) contain a concise statement of the facts and issues involved and the grounds relied upon for the review; (c) be accompanied by a clearly legible duplicate original or a certified true copy of the award, judgment, final order or resolution appealed from, together with certified true copies of such material portions of the record referred to therein and other supporting papers; and (d) contain a sworn certification against forum shopping as provided in the last paragraph of section 2, Rule 42. The petition shall state the specific material dates showing that it was filed within the period fixed herein. (2a)

Section 7.Effect of failure to comply with requirements. — The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof. (n)

Section 8.Action on the petition. — The Court of Appeals may require the respondent to file a comment on the petition not a motion to dismiss, within ten (10) days from notice, or dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raised therein are too unsubstantial to require consideration. (6a)

Section 9.Contents of comment. — The comment shall be filed within ten (10) days from notice in seven (7) legible copies and accompanied by clearly legible certified true copies of such material portions of the record referred to therein together with other supporting papers. The comment shall (a) point out insufficiencies or inaccuracies in petitioner's statement of facts and issues; and (b) state the reasons why the petition should be denied or dismissed. A copy thereof shall be served on the petitioner, and proof of such service shall be filed with the Court of Appeals. (9a)

Section 10.Due course. — If upon the filing of the comment or such other pleadings or documents as may be required or allowed by the Court of Appeals or upon the expiration of the period for the filing thereof, and on the records the Court of Appeals finds prima facie that the court or agency concerned has committed errors of fact or law that would warrant reversal or modification of the award, judgment, final order or resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court or

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agency concerned, when supported by substantial evidence, shall be binding on the Court of Appeals. (n)

Section 11.Transmittal of record. — Within fifteen (15) days from notice that the petition has been given due course, the Court of Appeals may require the court or agency concerned to transmit the original or a legible certified true copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or addition to the record. (8a)

Section 12.Effect of appeal. — The appeal shall not stay the award, judgment, final order or resolution sought to be reviewed unless the Court of Appeals shall direct otherwise upon such .terms as it may deem just. (10a)

Section 13.Submission for decision. — If the petition is given due course, the Court of Appeals may set the case for oral argument or require the parties to submit memoranda within a period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleading or memorandum required by these Rules or by the court of Appeals. (n)

 

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