2019 Boc Taxation Law Reviewer.pdf

TABLE OF CONTENTS TAXATION I ...............................................1 I.

GENERAL PRINCIPLES OF TAXATION .. 2 A. Definition, Concept and Purpose of Taxation ........................................................... 2 B. Nature and Characteristics of Taxation ...... 3 C. Power of Taxation as Distinguished from Police Power and Eminent Domain ........... 4 D. Theory and Basis of Taxation ...................... 5 E. Principles of a Sound Tax System ............... 6 F. Scope and Limitations of Taxation ............. 6 1. Inherent Limitations .............................. 6 2. Constitutional Limitations .................... 9 G. Situs of Taxation ........................................... 15 H. Stages or Aspects of Taxation .................... 16 I. Definition, Nature and Characteristics of Taxes ............................................................... 16 J. Requisites of a Valid Tax............................. 17 K. Tax as Distinguished from Other Forms of Exactions ....................................................... 17 L. Kinds of Taxes .............................................. 19 1. As to object............................................ 19 2. As to burden or incidence ................... 19 3. As to tax rates........................................ 20 4. As to purpose ........................................ 20 5. As to scope (or authority imposing the tax)........................................................... 20 6. As to graduation ................................... 20 M. Sources of Tax Laws .................................... 21 1. Constitution of the Philippines .......... 21 2. Statutes ................................................... 21 3. Judicial Decisions.................................. 21 4. Executive Orders .................................. 21 5. Tax Treaties and Conventions ........... 21 6. Revenue Regulations by the Department of Finance ....................... 21 7. BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders ..................................................... 21 8. BIR Rulings ........................................... 22 9. Local Tax Ordinances .......................... 22 N. Construction and Interpretation ................ 22 1. Tax Laws ................................................ 22 2. Tax Exemption and Exclusion........... 23 3. Tax Rules and Regulations .................. 23 4. Penal Provisions of Tax Laws ............ 24 5. Non-Retroactive Application of Tax Laws to Taxpayers ................................ 24 O. Doctrines of Taxation.................................. 25 1. Prospectivity of Tax Laws ................... 25 2. Imprescriptibility of Taxes .................. 25 3. Double Taxation ................................... 26 4. Power to Tax Involves Power to Destroy ................................................... 27 5. Escape from Taxation ......................... 27 6. Exemption from Taxation .................. 29 7. Doctrine of Equitable Recoupment .. 30

8. Compensation and Set-Off ................. 30 9. Compromise and Tax Amnesty .......... 31 10. Ta pa er S i ....................................... 31 II. NATIONAL INTERNAL REVENUE CODE (NIRC) OF 1997, AS AMENDED .................. 34 A. Organization and Functions of the Bureau of Internal Revenue ...................................... 34 1. Rule-Making Authority of the Secretary of Finance ............................................... 34 2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue 35 B. Income Taxation ........................................... 36 1. Income Tax ............................................ 36 2. Gross Income ........................................ 45 3. Deductions from Gross Income ........ 68 4. Income Tax on Individuals ................. 81 5. Income Tax on Corporations ............. 97 6. Filing of Returns and Payment of Income Tax .......................................... 109 7. Withholding of Taxes ......................... 113

TAXATION II .......................................... 115 C. Transfer Taxes ............................................. 116 1. Estate Tax............................................. 116 2. Donor Ta ......................................... 133 D. Value-Added Tax (VAT) and Percentage Taxes ............................................................. 150 1. VAT....................................................... 150 2. Percentage Taxes ................................. 189 3. Excise Tax and Documentary Stamp Tax ......................................................... 190 E. TAX REMEDIES UNDER THE NIRC 192 1. General Concepts................................ 192 2. Collection ............................................. 199 F. Ta pa er Remedie .................................. 200 1. Protesting the Assessment ................. 200 2. Compromise and Abatement of Taxes 201 3. Recovery of Tax Erroneously or Illegally Collected ............................................... 202 G. Go ernmen Remedie ............................ 205 1. Administrative Remedies ................... 205 2. Judicial Remedies Civil or Criminal Action.................................................... 209 III. LOCAL GOVERNMENT CODE OF 1991, AS AMENDED ................................................. 211 A. Local Government Taxation ..................... 211 1. Fundamental Principles (UEPIP) ..... 211 2. Nature and Source of Taxing Power211 3. Local Taxing Authority ...................... 212 4. Scope of Taxing Power ...................... 213 5. Specific Taxing Power of LGUs....... 213 6. Common Limitations on the Taxing Powers of LGUs ................................. 222

7. 8. 9.

Collection of Business Tax ............... 223 Ta pa er Remedie .......................... 224 Civil Remedies by the LGU for Collection of Revenues ...................... 225 B. Real Property Taxation .............................. 226 1. Fundamental Principles ..................... 226 2. Nature of Real Property Tax ............ 226 3. Imposition of Real Property Tax ..... 227 4. Appraisal and Assessment of Real Property Tax ........................................ 228 5. Collection of Real Property Tax ...... 231 6. Refund or Credit of Real Property Tax 232 7. Ta pa er Remedie .......................... 233 IV. JUDICIAL REMEDIES .................................. 238 A. Jurisdiction of the Court of Tax Appeals238 1. Exclusive Appellate Jurisdiction over Civil Tax Cases .................................... 238 2. Criminal Cases..................................... 239 B. Judicial Procedures ..................................... 240 1. Judicial Action for Collection of Taxes 240 2. Civil Cases ............................................ 241 3. Criminal Cases..................................... 243

TRAIN LAW ............................................. 245 TARIFF AND CUSTOMS CODE .......... 259 V. TARIFF AND CUSTOMS CODE OF THE PHILIPPINES ................................................... 260 A. Tariff and Duties ........................................ 260 1. Definition ............................................. 260 2. Purpose for Imposition ..................... 260 3. Kinds or Classification of Duties ..... 260 4. Flexible Tariff Clause ......................... 265 B. Requirements of Importation................... 266 1. Beginning and Ending of Importation 266 2. Obligations of Importer .................... 267 C. Accrual and Payment of Tax and Duties 271 1. General Rule: All Imported Articles are Subject to Duty ................................... 271 2. Goods Declaration ............................. 278 D. Unlawful Importation or Exportation .... 281 1. Technical Smuggling and Outright Smuggling............................................. 281 2. Other Fraudulent Practices ............... 281 E. Remedies ...................................................... 282 1. Government ........................................ 282 2. Taxpayer ............................................... 285

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I. GENERAL PRINCIPLES OF TAXATION A. Definition, Concept and Purpose of Taxation DEFINITION & CONCEPT 1.

Revenue Raising Measure The process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government; a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens [51 Am. Jur. 34; 1 Cooley 72-93].

2. As a Power a. It refers to the inherent power of the state to demand enforced contributions for public purpose or purposes. b. Is described as a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. [Paseo Realty & Development Corporation v. CA, G.R. No. 119286 (2004)] PURPOSE 1.

Revenue-raising Primary purpose of taxation is to provide funds or property with which to promote the general welfare and protection of its citizens. Fees may be properly regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. [PAL v. Edu, G.R. No. L41383 (1988)]

2. Non-revenue/special or regulatory Taxation is often employed as a device for regulation by means of which certain effects or conditions envisioned by governments may be achieved. Taxes may be levied with a regulatory purpose to provide means for the rehabilitation Page 2 of 290

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and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. These regulatory purposes are also known as Sumptuary. Thus, taxation can: a. Strengthen anemic enterprises or provide incentives to greater production through grant of tax exemptions or the creation of conditions conducive to their growth. b. Protect local industries against foreign competition by imposing additional taxes on imported goods, or encourage foreign trade by providing tax incentives on imported goods. c. Be a bargaining tool by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country. d. Halt inflation in periods of prosperity to curb spending power; ward off depression in periods of slump to expand business. e. Reduce inequalities in wealth and incomes, as for instance, the estate, donor's and income taxes, their payers being the recipients of unearned wealth or mostly in the higher income brackets. Progressive system of taxation prevents the undue concentration of wealth in the hands of a few individuals. Progressivity is keystoned on the principle that those who are able to pay shoulder the bigger portion of the tax burden. [Mamalateo] f. Taxes may be levied to promote science and invention [see RA. No. 5448] or to finance educational activities [see RA. No. 5447] or to improve the efficiency of local police forces in the maintenance of peace and order through grant of subsidy [see RA. No. 6141]. g. Be an implement of the police power to promote the general welfare. h. Protect local industries from foreign competition. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. [Caltex v. COA, G.R. No. 92585 (1992)] i. To address f e g e e ea measure, just like what happened in the landmark legislation on sin taxes in 2012 [see R.A. No. 10351].

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although they may or may not be provided in the Constitution.

B. Nature and Characteristics of Taxation NATURE 1. Inherent in sovereignty The power to tax is an attribute of sovereignty. It 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 an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide [Phil. Guaranty Co., Inc. v. Commissioner, G.R. No. L-22074 (1965)]. 2.

Essentially a legislative function The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government [1 Cooley 160-161]. Hence, only Congress, our national legislative body, can impose taxes. The levy of a tax, however, may also be made by a local legislative body subject to such limitations as may be provided by law. It includes the authority to: a. Determine the nature, purpose, extent, coverage, apportionment, situs, and method of collection of the tax; b. Grant tax exemptions or condonations; and c. Specify or provide for the administrative as well as judicial remedies that either the government or the taxpayers may avail themselves in the proper implementation of the tax measure.

3.

Subject to constitutional and inherent limitations The power to tax is said to be the strongest of all the powers of government. It is unlimited, plenary, comprehensive and supreme, in the absence of constitutional restrictions, the principal check on its abuse resting in the responsibility of members of Congress to their constituents. However, the power of taxation is subject to constitutional and inherent limitations [Mamalateo]. These limitations are those provided in the fundamental law or implied therefrom, while the rest spring from the nature of the taxing power itself

CHARACTERISTICS 1. Enforced contribution Its imposition is in no way dependent upon the will or assent of the person taxed. It is not contractual, either express or implied, but positive acts of government; 2. Generally payable in the form of money Although the law may provide payment in kind (e.g. backpay certificates under Sec. 2, R.A. No. 304, as amended); 3. Proportionate in character Laid by some rule of apportionment which is usually based on ability to pay. The r le of a a ion hall be niform and equitable. The Congress shall evolve a progre i e em of a a ion. [Sec. 28 (1), Ar . VI, 1987 Constitution]; 4. Personal to the taxpayer; 5. Levied on persons, property, rights, acts, privileges, or transactions; 6. Levied by the State which has jurisdiction or control over the subject to be taxed; 7. Levied by the law-making body of the State. The power to tax is a legislative power but is also granted to local governments, subject to such guidelines and limitations as law may be provided by law. 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 accr e e cl i el o he local go ernmen . [Sec. 5, Art. X, 1987 Constitution]; 8.

9.

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Levied for public purpose. Revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. [Gaston v. Republic Planters Bank, G.R. No. 77194 (1988)]. The p blic p rpo e or p rpo e of he impo i ion i implied in he le of tax. [Mendoza v. Municipality, G.R. No. L-7373 (1954)]. A tax levied for a private purpose constitutes a taking of property without due process of law; and It is also an important characteristic of most taxes that they are commonly required to be paid at regular periods or intervals [see 1 Cooley 64] every year.

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C. Power of Taxation as Distinguished from Police Power and Eminent Domain When the distinction of exercise of powers is relevant The distinction is important when the one exercising it is the LGU (mere delegated authority). Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation, the distinction between police power and the power to tax, which could be significant if the exercising authority were mere political subdivisions (since delegation by it to such political subdivisions of one power does not necessarily include the other), would not be of any moment when, Congress itself exercises the power. [NTC v. CA, G.R. No. 127937 (1999)] Taxation Eminent Domain Police Power May be exercised by: the government; May be exercised only by: Authority (who May be exercised only by: its political subdivisions; the government; or exercises the the government; or or may be granted to public its political subdivisions. Power) its political subdivisions. service companies or public utilities. The use of the property is The property (generally in reg la ed for he the form of money) is Merely a power to take private Purpose purpose of promoting taken for the support of property for public use. the general welfare; it is the government. not compensable. Operates upon: Operates on: Operates upon: Persons a community; an individual as the owner of a a community; Affected or class of individuals. particular property. or a class of individuals. There is no transfer of The money contributed There is a transfer of the right title. At most, there is Effect becomes part of the public to property. restraint on the injurious funds. use of property. Protection and benefits Indirect benefits he receives. It is assumed that the Market value of the property The person affected Benefits individual receives the receives indirect benefits Received equivalent of the tax in the He receives the market value of as may arise from the form of protection and the property taken from him. maintenance of a healthy benefits he receives from economic standard of the government. society. Amount imposed should Generally, there is no limit No amount imposed but rather just be commensurate to Amount of on the amount of tax that the owner is paid the market cover the cost of the Imposition may be imposed. value of property taken. license and necessary expenses. Inferior to the impairment Subject to constitutional prohibition; government cannot Relatively free from limitations, including the expropriate private property, constitutional limitations Relationship to prohibition against which under a contract had and is superior to the Constitution impairment of the previously bound itself to impairment of contract obligation of contracts. purchase from the other provision. contracting party. [Mamalateo, Reviewer on Taxation 2nd Edition (2008), pp. 11-12] Page 4 of 290

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Despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. [CIR v. Algue, supra]

D. Theory and Basis of Taxation 1.

Lifeblood theory Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it [CIR v. Algue, G.R. No. L-28896 (1988); See also CIR v. Pineda, G.R. No. L-22734 (1967)].

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4. Jurisdiction over subject and objects

2. Necessity theory The power of taxation proceeds upon theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and property within its limits to contribute. The power to tax is an attribute of sovereignty. It 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 an aggression; a navy to defend its shores from invasion; a corps of civil servants to serve; public improvement designed for the enjoyment of the citizenry and those which come within the State's territory; and facilities and protection which a government is supposed to provide. [Phil. Guaranty v. CIR, G.R. No. L-22074 (1965)] The obligation to pay taxes rests upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. [Lorenzo v. Posadas, G.R. No. L-43082 (1937)] 3. Benefits-protection Theory (Symbiotic Relationship) This principle serves as the basis of taxation and is founded on the reciprocal duties of protection and support between the State and its inhabitants.

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The limited powers of sovereignty are confined to objects within the respective spheres of governmental control. These objects are the proper subjects or objects of taxation and none else.

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E.Principles of a Sound Tax System

F. Scope and Limitations of Taxation

1.

1. Inherent Limitations

Fiscal adequacy The sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures.

2. Administrative feasibility Tax laws should be capable of convenient, just and effective administration. Each tax should be: capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity.

The following are the inherent limitations of taxation: a. Public Purpose b. Inherently Legislative c. Territorial d. International Comity e. Exemption of Government Entities, Agencies, and Instrumentalities PUBLIC PURPOSE The proceeds of the tax must be used: a. for the support of the State; or b. for some recognized objects of government or directly to promote the welfare of the community.

3. Theoretical justice or equality The tax burden should be in proportion to the a pa er abili o pa . Thi i he o-called ability to pay principle. Taxation should be uniform as well as equitable

Test: Whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public. [Pascual v. Sec. of Public Works, G.R. No. L-10405 (1960)]

Note: The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated. [De Leon]

The protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. [Lutz v. Araneta, G.R. No. L-7859 (1955)] The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. [Tio v. Videogram, G.R. No. L-75697 (1987)] Tests in Determining Public Purpose: a. Duty Test Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to provide. b. Promotion of General Welfare Test Whether the proceeds of the tax will directly promote the welfare of the community in equal measure. c. Character of the Direct Object of the Expenditure It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be

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ultimately benefited by their promotion. Incidental advantage to the public or to the State, which results from the promotion of private enterprises or business, does not justify their aid with public money. [Pascual v. Sec. of Public Works, supra] INHERENTLY LEGISLATIVE Stated in another way, taxation may exceptionally be delegated, subject to such well-settled limitations as: a. The delegation shall not contravene any constitutional provision or the inherent limitations of taxation; b. The delegation is effected either by: the Constitution; or by validly enacted legislative measures or statute; and c. The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned. [Vitug and Acosta] General Rule: Delegata potestas non potest delegari. The power to tax is exclusively vested in the legislative body and it may not be re-delegated. Judge Cooley enunciates the doctrine in the following oft-quoted language: "One of the settled maxims in constitutional law is that the power conferred upon the legislature to make laws cannot be delegated by that department to any other body or authority. Where the sovereign power of the state has located the authority, there it must remain; and by the constitutional agency alone the laws must be made n il he Con i ion i elf i charged. [People v. Vera, G.R. No. L-45685 (1937)]

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government in respect to matters of local concern. [Pepsi-Cola Bottling Co. of the Phil. Inc. v. Mun. of Tanauan, G.R. No. L-31156 (1976)]. Under the new Constitution, however, LGUs are now expressly given the power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. [Art. X, Sec 5, 1987 Constitution] b. Delegation to the President 1. to enter into Executive agreements; and 2. to ratify treaties which grant tax exemption subject to Senate concurrence. 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. [Art. 6, Sec. 28(2), 1987 Constitution] c.

Legislature has the power to determine the: a. Nature (kind), b. Object (purpose), c. Extent (rate), d. Coverage (subjects) and e. Situs (place) of taxation. Exceptions a. Delegation to local governments This exception is in line with the general principle that the power to create municipal corporations for purposes of local self-government carries with it, by necessary implication, the power to confer the power to tax on such local governments. (1 Cooley 190). This is logical for after all, municipal corporations are merely instrumentalities of the state for the better administration of the Page 7 of 290

Delegation to administrative agencies Limited to the administrative implementation that calls for some degree of discretionary powers under sufficient standards expressed by law or implied from the policy and purposes of the Act. There are certain aspects of the taxing process that are not legislative and they may, therefore, be vested in an administrative body. The powers which are not legislative include: 1. the power to value property for purposes of taxation pursuant to fixed rules; 2. the power to assess and collect the taxes; and 3. the power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details. The exercise of the above powers is really not an exception to the rule as no delegation of the strictly legislative power to tax is involved. The powers which cannot be delegated include: the determination of the subjects to be taxed; the purpose of the tax, the amount or rate of the tax;

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the manner, means, and agencies of collection; and the prescribing of the necessary rules with respect thereto. TERRITORIAL Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercise and enjoyed. [51 Am.Jur. 87-88]. Reasons: a. Tax laws (and this is true of all laws) do not operate be ond a co n r erri orial limi . b. 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 a compensation. Note: Where privity of relationship exists. It does not mean, however, that a person outside of state is no longer subject to its taxing powers. 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 where there is between him and the taxing state, a privity of he rela ion hip j if ing he le . Th , he ci i en income may be taxed even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. In this case, the basis of the power to tax is not dependent on the source of the income nor upon the location of the property nor upon the residence of the taxpayer but upon his relation as a citizen to the state. As such citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of his government. INTERNATIONAL COMITY Comity respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state or government may not be the subject of taxation by another state. Reasons: a. In par in parem non habet imperium. As between equals there is no sovereign (Doctrine of Sovereign Equality among states under international law). One state cannot exercise its sovereign powers over another.) b. In international law, a foreign government may not be sued without its consent. Therefore, it is

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useless to impose a tax which could not be collected. Usage among states that when a foreign sovereign enters the territorial jurisdiction of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the other.

EXEMPTION OF GOVERNMENT ENTITIES, AGENCIES, AND INSTRUMENTALITIES If the taxing Government:

authority

is

the

National

General Rule: Agencies and instrumentalities of the government are exempt from tax. Note: Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers. With respect to government-owned or controlled corporations performing proprietary (not governmental) functions, they are generally subject to tax unless exempted under Section 27(C) of the Tax Code or, in certain cases, if there is a tax exemption provisions in their charters or the law creating them in line with the rule that a specific law overrides a general law. Reasons for the exemption: a. To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over for itself. b. This immunity also rests upon fundamental principles of government, being necessary in order that the functions of government shall not be unduly impeded. [1 Cooley 263. c. The practical effect of an exemption running to the benefit of the government is merely to reduce the amount of money that has to be handled by the government in the course of its operations: For these reasons, provisions granting exemptions to government agencies may be construed liberally in favor of non-tax liability of such agencies. [Maceda v. Macaraig, Jr., G.R. No. 88291 (1991)]. Exception: There is no constitutional prohibition against the government taxing itself. [Coll. v. Bisaya Land Transportation, 105 Phil. 338 (1959)].

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If the taxing authority is a local government unit: RA 7160 expressly prohibits LGUs from levying tax on the National Government, its agencies and instrumentalities and other LGUs. [Sec. 133 (o), LGC]

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2. Uniformity and equality of taxation

2. Constitutional Limitations The following are the constitutional limitations of taxation: a. Provisions directly affecting taxation: 1. Prohibition against imprisonment for nonpayment of poll tax; 2. Uniformity and equality of taxation; 3. Grant by Congress of authority to the President to impose tariff rates; 4. Prohibition against taxation of religious, charitable entities, and educational entities; 5. Prohibition against taxation of non-stock, non-profit educational institutions; 6. Majority vote of Congress for grant of tax exemption; 7. Prohibition on use of tax levied for special purpose; 8. Pre iden e o po er on appropria ion, revenue, tariff bills; 9. Non-impairment of jurisdiction of the Supreme Court; 10. Grant of power to the local government units to create its own sources of revenue; 11. Flexible tariff clause; 12. Exemption from real property taxes; and 13. No appropriation or use of public money for religious purposes. b. Provisions indirectly affecting taxation: 1. Prohibition against imprisonment for nonpayment of poll tax; 2. Equal protection; 3. Religious freedom; and 4. Non-impairment of obligations of contracts

a. PROVISIONS DIRECTLY AFFECTING TAXATION 1. Prohibition against imprisonment for non-payment of poll tax No person shall be imprisoned for debt or nonpayment of a poll tax. [Art. III, Sec. 20, 1987 Constitution]

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The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation. [Art. VI, Sec. 28(1), 1987 Constitution] a. Uniformity All taxable articles or properties of the same class shall be taxed at the same rate. [City of Baguio v. De Leon, G.R. No. L-24756 (1968)] 1. Uniformity of operation throughout tax unit The rule requires the uniform application and operation, without discrimination, of the tax in every place where the subject of it is found. This means, for example, that a tax for a national purpose must be uniform and equal throughout the country and a tax for a province, city, municipality, or barangay must be uniform and equal throughout the province, city, municipality or barangay. 2. Equality in burden Uniformity implies equality in burden, not equality in amount or equality in its strict and literal meaning. The reason is simple enough. If legislation imposes a single tax upon all persons, properties, or transactions, an inequality would obviously result considering that not all persons, properties, and transactions are identical or similarly situated. Neither does uniformity demand that taxes shall be proportional to the relative value or amount of the subject thereof. Taxes may be progressive. b. Equity 1. Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be eq i able. Eq i able means fair, just, reasonable and proportionate to the a pa er abili o pa . Ta a ion ma be uniform but inequitable where the amount of the tax imposed is excessive or unreasonable. 2. The constitutional requirement of equity in taxation also implies an approach which employs a reasonable classification of the entities or individuals who are to be affected by a

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a . Where he a differen ia ion i no based on material or substantial difference , he g aran ee of eq al protection of the laws and the uniformity rule will likewise be infringed. Taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation.

Test of Valid Classification: Classification, to be

valid, must be reasonable and this requirement is not deemed satisfied unless: a. It is based upon substantial distinctions which make real differences; b. These are germane to the purpose of the legislation or ordinance; c. The classification applies not only to present conditions but also to future conditions substantially identical to those of the present; and d. The classification applies equally to all those who belong to the same class. [Pepsi-Cola v. Butuan City, G.R. No. L-22814 (1968)] The progressive system of taxation would place stress on direct rather than indirect taxes, on nonessentiality rather than essentiality to the taxpayer of he objec of a a ion, or on he a pa er abili o pay. Example is that individual income tax system that imposes rates progressing upwards as the tax base ( a pa er a able income) increa e . A progre i e tax, however, must not be confused with a progressive system of taxation. While equal protection refers more to like treatment of persons in like circumstances, uniformity and equity refer to the proper relative treatment for tax purposes of persons in unlike circumstances.

3. Grant by Congress of authority to the President to impose tariff rates Delegation of Tariff powers to the President under the flexible tariff clause [Sec. 28(2), Art. VI, 1987 Constitution], which authorizes the President to modify import duties. [Sec. 1608, Customs Modernization and Tariff Act]

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4. Prohibition against taxation of religious, charitable entities, and educational entities Art. VI, Sec. 28(3), 1987 Constitution: a. Charitable institutions, churches and personages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, b. Actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. c. The tax exemption under this constitutional provision covers property taxes only and not other taxes [Lladoc v. Commissioner, G.R. No. L-19201 (1965)]. d. In general, special assessments are not covered by the exemption because by nature they are not classified as taxes. [Apostolic Prefect v. City Treasurer of Baguio, G.R. No. L-47252 (1941)] To be entitled to the exemption, the petitioner must prove that: a. It is a charitable institution b. Its real properties are actually, directly and exclusively used for charitable purposes. Revenue or income from trade, business or other activity, the conduct of which is not related to the exercise or performance of religious, educational and charitable purposes or functions shall be subject to internal revenue taxes when the same is not actually, directly or exclusively used for the intended purposes. [BIR Ruling 046-2000]

Test of Exemption Nature of Use

Scope of Exemption

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Use of the property, and not the ownership Actual, direct and exclusive use for religious, charitable or educational purposes. Real property taxes on facilities which are actual, incidental to, or reasonably necessary for the accomplishment of said purposes such as in the case of hospitals, a school for training nurses, a n r e home, proper to provide housing facilities for interns, resident doctors and other members of the hospital staff, and recreational facilities for student nurses, interns and

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residents, such as athletic fields. [Abra Valley College v. Aquino, G.R. No. L-39086 (1988)] TEST: Whether an enterprise is charitable or not: Whether it exists to carry out a purpose recognized in law as charitable; or Whether it is maintained for gain, profit, or private advantage. A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution (including honoraria to members of the board of trustees; BIR Ruling No. 558-18, among others). E " possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; "Exclusively" - in a manner to exclude; as enjoying a pri ilege e cl i el . If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. [Lung Center of the Philippines v. Quezon City, G.R. No. 144104 (2004)]

Note: Lung Center did not necessarily overturn the

case of Abra Valley College v. Aquino, G.R. No. L-39086 (1988). Lung Center just provided a stricter interpretation. In Abra Valley, the Court held: The primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof. Under the 1935 Constitution, the trial court correctly held that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes (incidental to its educational purpose), but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for

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purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.

5. Prohibition against taxation of nonstock, non-profit educational institutions Art. XIV, Sec. 4, 1987 Constitution

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. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. This provision covers only non-stock, non-profit educational institutions. The exemption covers c e, e ,a dd a e, custom duties, and other taxes imposed by either or both the national government or political subdivisions on all revenues, assets, property or donations, used actually, directly and exclusively for educational purposes. (In the case of religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax.) The exemption does not cover revenues derived from, or assets used in, unrelated activities or enterprise. Similar tax exemptions may be extended to proprietary (for profit) educational institutions by law subject to such limitations as it may provide, including restrictions on dividends and provisions for reinvestment. The restrictions are designed to ensure that the tax-exemption benefits are used for educational purposes. Lands, buildings, and improvements actually, directly and exclusively used for educational purposes are exempt from property tax [Sec. 28(3), Art. VI, 1987 Constitution], whether the educational institution is proprietary or non-profit.

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c. Art. VI, Sec. 28, par. 3 Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes. Property taxes

Art. XIV, Sec. 4, par. 3 Non-stock, non-profit educational institutions.

Income, property, and donor a e and custom duties.

6. Majority vote of Congress for grant of tax exemption Art. VI, Sec. 28, 1987 Constitution. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

Basis: The inherent power of the state to impose taxes carries with it the power to grant tax exemptions. Exemptions may be created by: a. The Constitution, or b. Statutes, subject to constitutional limitations Vote required for the grant of exemption: Absolute majority of the members of Congress (at least ½ + 1 of ALL the members voting SEPARATELY) Vote required for withdrawal of such grant of exemption: Relative majority is sufficient (MAJORITY of the QUORUM). The provision guaranteeing equal protection of the laws and that mandating the rule of taxation shall be uniform and equitable likewise limit, although not expressly, the legislative power to grant tax exemption. Grants in the nature of tax exemptions: a. Tax amnesties b. Tax condonations

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Tax refunds

Note: a. Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. [Sec. 192, LGC] b. 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. [Sec. 277, LGC]

7. Prohibition on use of tax levied for special purpose All money collected on 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. [Gaston v. Republic Planters Bank, G.R. No. L-77194 (1988)].

8. P on appropriation, revenue, tariff bills Art. VI, Sec. 27(2), 1987 Constitution. 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 times to which he does not object.

9. Non-impairment of jurisdiction of the Supreme Court Art VIII, Sec. 2, 1987 Constitution. 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 Section 5 hereof.

Art. VIII, Sec. 5(2(b)), 1987 Constitution. The Supreme Court shall have the following powers: xxx (2) Review, revise, modify or affirm on appeal or certiorari, as the laws or the Rules of Court may provide, final judgments and orders of lower courts in xxx

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(b) all cases involving the legality of any tax, impost, assessment or toll or any penalty imposed in relation thereto. Even the legislative body cannot deprive the SC of its appellate jurisdiction over all cases coming from inferior courts where the constitutionality or validity of an ordinance or the legality of any tax, impost, assessment, or toll is in question. [San Miguel Corp v. Avelino, G.R. No. L-39699 (1979)]

used for religious, charitable, or educational purposes shall be exempt from taxation.

13. No appropriation or use of public money for religious purposes Art. VI, Sec. 29, 1987 Constitution 1. 2.

Art. VI, Sec. 30, 1987 Constitution. No law shall

be passed increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence. Scope of Judicial Review in taxation: limited only to the interpretation and application of tax laws. Its power does not include inquiry into the policy of legislation. Neither can it legitimately question or refuse to sanction the provisions of any law consistent with the Constitution. [Coll. v. Bisaya Land Transportation, 105 Phil. 338 (1959)].

3.

10. Grant of power to the local government units to create its own sources of revenue LGUs have power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. [Art. X, Sec. 5, 1987 Constitution]

11. Flexible tariff clause Delegation of tariff powers to the President under the flexible tariff clause [Art. VI, Sec. 28(2), 1987 Constitution] Flexible tariff clause: the authority given to the President, upon the recommendation of NEDA, to adjust the tariff rates under Sec. 1608 of the CMTA in the interest of national economy, general welfare and/or national security.

12. Exemption from real property taxes Art. VI, Sec. 28(3), 1987 Constitution.

Charitable institutions, churches and personages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively

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No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, 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. All money collected on 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

b. PROVISIONS INDIRECTLY AFFECTING TAXATION 1. Due process Art. III, Sec. 1, 1987 Constitution. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

Substantive Due Process An act is done under the authority of a valid law or the Constitution itself. Procedural Due Process An act is done after compliance with fair and reasonable methods or procedure prescribed by law. Due Process in Taxation requirements: a. Public purpose b. Imposed i hin a ing a hori erri orial jurisdiction c. Assessment or collection is not arbitrary or oppressive

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The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to the confiscation of property. [Sison v. Ancheta, G.R. No. L-59431(1984)]

preference, shall forever be allowed. (Free exercise clause)

Instances of violations of the due process clause: a. If the tax amounts to confiscation of property; b. If the subject of confiscation is outside the jurisdiction of the taxing authority; c. If the tax is imposed for a purpose other than a public purpose; d. If the law which is applied retroactively imposes just and oppressive taxes. e. If the law violates the inherent limitations on taxation.

The free exercise clause is the basis of tax exemptions.

2. Equal protection Art. III, Sec. 1, 1987 Constitution. No person shall

be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred and liabilities imposed. [1 Cooley 824-825; See Sison v. Ancheta, supra]. The doctrine does not require that persons or properties different in fact be treated in laws as though they were the same. Indeed, to treat them the same or alike may offend the Constitution. What the Constitution prohibits is class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may, therefore, group the persons or proper ie o be a ed and i i fficien if all of he same class are subject to the same rate and the tax is admini ered impar iall pon hem. [1 Cooley 608]. The equal protection clause is subject to reasonable classification (See requisites for valid classification, supra).

No religious test shall be required for the exercise of civil and political rights.

The imposition of license fees on the distribution and sale of bibles and other religious literature by a nonstock, non-profit missionary organization not for purposes of profit amounts to a condition or permit for the exercise of their right, thus violating the constitutional guarantee of the free exercise and enjoyment of religious profession and worship which carries with it the right to disseminate religious beliefs and information. [American Bible Society v. City of Manila, G.R. No. L-9637 (1957)] It is actually in the nature of a condition or permit for the exercise of the right. This is different from a tax in the income of one who engages in religious activities or a tax on property used or employed in connection with those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax for the privilege of delivering a sermon. The Constitution, however, does not prohibit imposing a generally applicable tax on the sale of religious materials by a religious organization. [Tolentino v. Secretary of Finance, G.R. No. 115455 (1994)]

4. Non-impairment of obligations of contracts Art. III, Sec. 10, 1987 Constitution. No law impairing the obligation of contracts shall be passed.

The Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. [Tolentino v. Secretary of Finance, supra]

3. Religious freedom Art. III, Sec. 5, 1987 Constitution. No law shall

be made respecting an establishment of religion, or prohibiting the free exercise thereof. (Nonestablishment clause) The free exercise and enjoyment of religious profession and worship, without discrimination or

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G.Situs of Taxation Meaning: Situs of taxation literally means the place of taxation. The state where the subject to be taxed has a situs may rightfully levy and collect the tax; and The situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. Within the territorial jurisdiction, the taxing authority may determine the situs. Factors that Determine Situs: 1. Nature of the tax; 2. Subject matter of the tax (person, property, act or activity); 3. Possible protection and benefit that may accrue both to the government and the taxpayer; 4. Citizenship of the taxpayer; 5. Residence of the taxpayer; 6. Source of income. Situs of Income Tax Taxpayer

Citizenship

Source of Income

Within PH.

Outside PH.

Resident NonResident

Taxable

Alien

Resident

Taxable

Alien

NonResident

Taxable

Taxable NonTaxable NonTaxable NonTaxable

Filipino Filipino

Residency

Situs of Property Tax Kind of Property

Real property Tangible Personal property Intangible personal property (e.g., credits, bills receivables, bank deposits, bonds, promissory notes, mortgage loans, judgments and corporate stocks)

Taxable

situs in another jurisdiction; or When the law provides for the situs of the subject of tax (e.g., Sec 104, NIRC) Situs of Excise Tax Kind of Excise Tax

Income Tax

D

Ta

Estate Tax Situs of Business Tax Kind of Business Tax

VAT Sale of Real Property Sale of Personal Property

Situs Where it is located (lex rei sitae) Where property is physically located although the owner resides in another jurisdiction. General Rule: Domicile of the owner. Mobilia sequuntur personam (movables follow the person) Exceptions: When property has acquired a business Page 15 of 290

Situs Source of the income, nationality or residence of taxpayer (Sec. 23, NIRC) Location of property; nationality or residence of taxpayer Location of property; nationality or residence of taxpayer Situs Where transaction is made Where the real property is located Where the personal property was sold

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H. Stages or Aspects of Taxation

I. Definition, Nature and Characteristics of Taxes

The exercise of taxation involves the following stages: 1. Legislative Act: Levy or imposition This process involves the passage of tax laws or ordinances through the legislature. The tax laws to be passed shall determine: a. Those to be taxed (person, property or rights); b. How much is to be collected (the rate and the base of tax); and c. How taxes are to be implemented (the manner of imposing and collecting tax). It also involves the granting of tax exemptions, tax amnesties or tax condonation. 2. Executive Act: Assessment and collection This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the Bureau of Internal Revenue or Bureau of Customs. 3. Ta a A : Pa this process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the government. Payment of tax also includes the options, schemes or remedies as may be legally open or available to the taxpayer. 4. Ta a a E tive Act: Refund A claim for refund must first be filed with the Commissioner of Internal Revenue. A suit or proceeding may be filed within two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment. The Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return, such payment appears clearly to have been erroneously paid. [Sec. 229, NIRC]

TAXES 1. Are 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 the government and all public needs. 2. Are the enforced proportional and pecuniary contributions from persons and property levied by the law-making body of the state having jurisdiction over the subject of the burden for the support of the government and public needs. 3. Are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. [CIR v. Algue, supra] ESSENTIAL CHARACTERISTICS 1. It is a forced charge, imposition or contribution. As such, it operates ad infinitum. 2. It is assessed in accordance with some reasonable rule of apportionment which means that conformably with the constitutional mandate for Congress to evolve a progressive tax system, a e m be ba ed on a pa er abili o pa [Art VI, Sec 28[a], 1987 Constitution] 3. It is a pecuniary burden payable in money. 4. It is imposed by the State on persons, property, or exercise within its jurisdiction, in accordance with the principle of territoriality. 5. It is levied by the legislative body of the State. 6. It is levied for a public purpose. 7. It is personal to the taxpayer.

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J. Requisites of a Valid Tax 1. For a public purpose; 2. Rule of taxation should be uniform; 3. The person or property taxed is within the jurisdiction of the taxing authority; 4. Assessment and collection is in consonance with the due process clause; AND 5. The tax must not infringe on the inherent and constitutional limitations of the power of taxation.

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K. Tax as Distinguished from Other Forms of Exactions Tariff Taxes All embracing term to include various kinds of enforced contributions upon persons for the attainment of public purposes

Tariff A kind of tax imposed on articles which are traded internationally

Toll Taxes Paid for the support of the government Demand of sovereignty

Toll Paid for the use of ano her proper . Demand of proprietorship Generally, no limit on Amount paid depends the amount collected as upon the cost of long as it is not construction or excessive, unreasonable maintenance of the or confiscatory public improvement used. Imposed only by the Imposed by the government government or by private individuals or entities. A toll is a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge or the like, of a public nature. [1 Cooley 77] The view has been expressed, however, that the taking of tolls is only another method of taxing the public for the cost of the construction and repair of the improvement for the use of which the toll is charged. [71 Am. Jur. 2d 351.] License fee Taxes Imposed under the taxing power of the state for purposes of revenue. Forced contributions for the purpose of maintaining government functions. Page 17 of 290

License and Regulatory Fee Levied under the police power of the state. Exacted primarily to regulate certain businesses or occupations.

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Generally unlimited as to amount

Imposed on persons, property and the right to exercise a privilege. Failure to pay does not necessarily make the act or business illegal. Penalty for nonpayment: Surcharges; or Imprisonment (except poll tax).

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Should not unreasonably exceed the expenses of issuing the license and of supervision. Imposed only on the right to exercise a privilege Failure to pay makes the act or business illegal.

License or permit fee is a charge imposed under the police power for purposes of regulation. License is in the nature of a special privilege, of a permission or authority to do what is within its terms. It makes lawful an act which would otherwise be unlawful. A license granted by the State is always revocable. [Gonzalo Sy Trading vs. Central Bank of the Phil., G.R. No. L-41480 (1976)] Importance of the distinctions 1. It is necessary to determine whether a particular imposition is a tax or a license fee because some limitations apply only to one and not to the other, and for the reason that exemption from taxes may not include exemption from license fee. 2. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. The amount of tax bears no relation at all to the probable cost of regulating the activity, occupation, or property being taxed. [Progressive Development Corp. vs. Quezon City, G.R. No. L-36081 (1989)] 3. An exaction, however, may be considered both a tax and a license fee. This is true in the case of car registration fees which may be regarded as taxes even as they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue, is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. [Phil. Airlines, Inc. vs. Edu, G.R. No. L- 41383 (1988)] 4. But it is possible that a tax may only have a regulatory purpose. The general rule, however, 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

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purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. [Progressive Development Corp. vs. Quezon City, supra] Primary purpose test (as seen in Progressive Development Corp v. QC, supra): 1. Imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; 2. Imposition must bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences as well. Note: Taxes may also be imposed for regulatory purposes. It is called regulatory tax. Fees may be properly regarded as taxes even though they also served as an instrument of regulation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. [PAL v. Edu, supra] Special assessment Taxes Levied not only on land Imposed regardless of public improvements Contribution of a taxpayer for the support of the government It has general application both as to time and place

Special Assessment Levied only on land Imposed because of an increase in value of land benefited by public improvement Contribution of a person for the construction of a public improvement Exceptional both as to time and locality

A special assessment is not a personal liability of the person assessed, i.e., his liability is limited only to the land involved. It is based wholly on benefits (not necessity). A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding that the statute calls it a tax. The rule is that an exemption from taxation does not include exemption from special assessment. But the power to tax carries with it the power to levy a special assessment.

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Note: The term "special levy" is the name used in the present Local Government Code (RA. No. 7160). A province, city, or municipality, or the National Government, may impose a special levy on lands especially benefited by public works or improvements financed by it. [Sec. 240, RA 7160]

L. Kinds of Taxes 1. As to object a.

Personal, Poll or Capitation Tax tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged (e.g. community (formerly residence) tax). Taxes of a specified amount imposed upon each person performing a certain act or engaging in a certain business or profession are not, however, poll taxes. [71 Am. Jur. 2d 357] 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 (e.g., real estate tax). The obligation to pay the tax is absolute and unavoidable and is not based upon the voluntary action of the person assessed. c. Privilege/Excise Tax any tax which does not fall within the classification of a poll tax or a property tax. Thus, it is said that an excise tax is a charge imposed upon: the performance of an act, the enjoyment of a privilege, or the engagement in an occupation, profession, or business.

Debt Taxes Based on laws Generally cannot be assigned Generally paid in money Cannot be a subject of set off or compensation Imprisonment is a sanction for nonpayment of tax, except poll tax Governed by the special prescriptive periods provided for in the NIRC Does not draw interest except only when delinquent Imposed only by public authority

Debt Generally based on contract, express or implied. Assignable May be paid in kind Can be a subject of set off or compensation (see Art. 1279, Civil Code) A person cannot be imprisoned for nonpayment of debt (except when it arises from a crime) Governed by the ordinary periods of prescription Draws interest when it is so stipulated or where there is default Can be imposed by private individual

A tax is not a debt in the ordinary sense of the word. Penalty Taxes Violation of tax laws may give rise to imposition of penalty Generally intended to raise revenue May be imposed only by the government Cannot be a subject of set off or compensation

Penalty Any sanction imposed as a punishment for violation of law or acts deemed injurious Designed to regulate conduct May be imposed by the government or private individuals or entities Can be a subject of set off or compensation (see Art. 1279, Civil Code)

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The obligation to pay the tax is based on the voluntary action of the person taxed in performing the act or engaging in the activity which is subject to the excise. The erm e ci e a i non mo i h pri ilege a and he o are of en ed in erchangeabl (e.g., income tax, val e added a , e a e a , donor a ).

2. As to burden or incidence

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a.

Direct Taxes taxes which are demanded from persons who also shoulder them; taxes for which the taxpayer is directly or primarily liable, or which he cannot shift to another (e.g., income a , e a e a , donor tax, community tax) b. Indirect Taxes taxes which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer; taxes levied upon transactions or activities before the articles subject matter thereof, reach the

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consumers who ultimately pay for them not as taxes but as part of the purchase price. Thus, the person who absorbs or bears the burden of the tax is other than the one on whom it is imposed and required by law to pay the tax. Practically all business taxes are indirect (e.g., VAT, percentage tax, excise taxes on specified goods, customs duties).

5. As to scope (or authority

imposing the tax) a.

National taxes imposed by the national government (e.g., national internal revenue taxes, customs duties, and national taxes imposed by laws). b. Municipal or Local taxes imposed by local governments (e.g., business taxes that may be imposed under the Local Government Code, professional tax).

3. As to tax rates

Specific Tax a tax of a fixed amount imposed by the head or number or by some other standard of weight or measurement. It requires no assessment (valuation) other than the listing or classification of the objects to be taxed (e.g., taxes on distilled spirits, wines, and fermented liquors; cigars and cigarettes) b. Ad Valorem Tax a tax of a fixed proportion of the value of the property with respect to which the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be de ermined. The phra e ad valorem mean li erall , according o al e. (e.g., real estate tax, excise tax on automobiles, nonessential goods such as jewelry and perfumes, customs duties (except on cinematographic films)). c. Mixed

a.

4. As to purpose a.

General or Fiscal Tax levied for the general or ordinary purposes of the Government, i.e., to raise revenue for governmental needs (e.g., income tax, VAT, and almost all taxes). b. Special/Regulatory/Sumptuary Tax levied for special purposes, i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g., protective tariffs or customs duties on imported goods to enable similar products manufactured locally to compete with such imports in the domestic market).

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6. As to graduation a.

Progressive The rate of tax increases as the tax base or bracket increases, e.g., income a , e a e a , donor a . b. Regressive The rate of tax decreases as the tax base or bracket increases. There is no regressive tax in the Philippines. c. Proportionate The rate of tax is based on a fixed percentage of the amount of the property, receipts or other basis to be taxed, e.g., real estate tax, VAT, and other percentage taxes. d. Digressive A fixed rate is imposed on a certain amount and diminishes gradually on sums below it. The tax rate in this case is arbitrary because the increase in tax rate is not proportionate to the increase of tax base.

Regressive/Progressive system of taxation A regressive tax must not be confused with the regressive system of taxation. In a society where the majority of the people have low incomes, regressive taxation system exists when there are more indirect taxes imposed than direct taxes. Since the low-income sector of the population as a whole buy more consumption goods on which the indirect taxes are collected, the burden of indirect taxes rests more on them than on the more affluent groups. A progressive tax is, therefore, also different from a progressive system of taxation.

Tariff duties intended mainly as a source of revenue are relatively low so as not to discourage imports.

5.

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M. Sources of Tax Laws

6. Revenue Regulations by the

1. Constitution of the

Revenue Regulations are rules or orders having force of law issued by executive authority of the government to ensure uniform application of the tax law.

Department of Finance

Philippines

A constitutional provision regarding taxation is primarily intended to limit and regulate the exercise of taxation power. The State can exercise the power to tax even if the Constitution is completely silent about taxation.

2. Statutes The present tax statutes of the Philippines are embodied in R.A. 8424, which is the prevailing National Internal Revenue Code (NIRC) effective January 1, 1998, which was amended per R.A. 9337 (The VAT Reform Law) and R.A. 10963 (TRAIN Law), among others.

In order that administrative regulations may be considered valid, all of the following requisites must be complied with: The regulations must be useful, practical and necessary for the enforcement of the law; They must be reasonable in their provisions; They must not be contrary to law; and They must be duly published in the Official Gazette. [Interprovincial Auto Bus Co. v. Collector, G.R. No. L-6741 (1956); Lim Hoa Ting v. Central Bank, G.R. No. L-10666 (1958)]

3. Judicial Decisions

Note: Ruling of the Secretary of Finance are not binding on the courts because the duty or power of interpreting laws is primarily a function of the judiciary.

These refer to the decisions for application made concerning tax issues by the proper courts exercising judicial authority of competent jurisdiction. These courts may be the Supreme Court and the Court of Tax Appeals. Their decisions on tax laws comprise the greater portion of tax jurisprudence. They form part of the legal system of the Philippines.

The Courts generally respect the interpretations made by the executive officer whose duty is to enforce the law. However, such interpretations are not conclusive and shall be disregarded if found erroneous by the Court. [Molina v. Rafferty, 37 Phil 545]

By the nature of its jurisdiction, the decisions of the Court of Tax Appeals are still appealable to the Supreme Court. The decision of the Supreme Court on any matter is final and executory.

The Secretary of Finance is vested with authority to revoke, repeal or abrogate acts or previous rulings of his predecessors in office because these are not binding on their successors. [Hilado v. Collector, G.R. No. L-9408 (1956)]

4. Executive Orders

7. BIR Revenue Memorandum

Executive Orders are regulations issued by the President or some administrative authority under his direction for the purpose of interpreting, implementing, or giving administrative effect to a provision of the Constitution or of some law or treaty.

5. Tax Treaties and

Conventions

These refer to the treaties or international agreements with foreign countries regarding tax enforcement and exemptions. They have the force and effect of law.

Circulars and Bureau of Customs Memorandum Orders

These are administrative rulings or opinions which are less general interpretations of tax laws being issued from time to time by the Commissioner of the Internal Revenue or Commissioner of the Bureau of Customs, as the case may be. They are primarily intended to maintain uniform application of tax laws within the department or area of authority.

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Memoranda have the status of advisory or sort of information service. For this reason, they can be reversed anytime.

N. Construction and Interpretation

Note: The Courts generally respect the interpretations made by the executive officer whose duty is to enforce the law. However, such interpretations are not conclusive and shall be disregarded if found erroneous by the Court. [Molina v. Rafferty, 37 Phil 545]

1. Tax Laws

8. BIR Rulings BIR Rulings are expressed official interpretations of the tax laws as applied to specific transactions. Unlike a Revenue Regulation, it is more limited in application. BIR Rulings are not the final interpretations of the tax laws. They are considered the best opinion or advisory at the moment and are considered sound law until changed by the court. [CIR v. Ledesma, (1970)]

General Rule: Tax laws are construed strictly against the government and liberally in favor of the taxpayer. [Manila Railroad Co. v. Coll. of Customs, G.R. No. L30264 (1929)]. No person or property is subject to taxation unless within the terms or plain import of a taxing statute. [see72 Am. Jur. 2d 44] Taxes, being burdens, they are not to be presumed beyond what the statute expressly and clearly declares. [Coll. v. La Tondena, G.R. No. L-10431 (1962)]. Thus, a a pa able b indi id al doe no appl o corpora ion . Tax statutes offering rewards are liberally construed in favor of informers. [Penid v. Virata, G.R. No. L44004 (1983)].

9. Local Tax Ordinances These are tax ordinances issued by the province, city, municipality and barangay subject to such limitations as provided by the Local Government Code. [Valencia and Roxas]

Exceptions: a. The rule of strict construction as against the government is not applicable where the language of the statute is plain and there is no doubt as to the legislative intent [see 51 Am. Jur. 368]. In such case, the words employed are to be given their ordinary meaning. E.g. Word indi id al a changed b he la o per on . Thi clearl indicates that the tax applies to both natural and juridical persons, unless otherwise expressly provided. b. The rule does not apply where the taxpayer claims exemption from the tax. Tax statutes are to receive a reasonable construction or interpretation with a view to carrying out their purpose and intent. They should not be construed as to permit the taxpayer easily to evade the payment of tax. [Carbon Steel Co. v. Lewellyn, 251 U.S. 201]. Thus, the good faith of the taxpayer is not a sufficient justification for exemption from the payment of surcharges imposed by the law for failing to pay tax within the period required by law.

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2. Tax Exemption and

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3. Tax Rules and Regulations

Exclusion

Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. [NPC v. Albay, G.R. No. 87479 (1990)] General Rule: In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer. [Republic Flour Mills v. Comm. & CTA, G.R. No. L-25602 (1970)] a. NPC v. Albay [supra]: Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. b. Floro Cement v. Gorospe [supra]: Claims for an exemption must be able to point out some provision of law creating the right, and cannot be allowed to exist upon a mere vague implication or inference. c. CIR v. CA [supra]: Refunds are in the nature of exemption and must be construed strictly against the grantee/taxpayer. d. Comm. v. Kiener Co. Ltd. [G.R. No. L-24754 (1975)]: Taxation is the rule and exemption the exception, and therefore, he who claims exemption must be able to justify his claim or right here o, b a gran e pre ed in erm oo plain to be mistaken and too categorical to be mi in erpre ed. Exceptions: a. When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption; and b. When the exemption is in favor of the government itself or its agencies, or of religious, charitable, and educational institutions because the general rule is that they are exempt from tax. c. When the exemption is granted under special circumstances to special classes of persons. d. If there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction does not apply. [Comm. v. Arnoldus Carpentry Shop, Inc., G.R. No. 71122 (1988)].

General Rule: The recommendation of needful rules and enforcement of the 244, NIRC]

Secretary of Finance, upon the CIR, shall promulgate all regulations for the effective provisions of the NIRC. [Sec.

It is an elementary rule in administrative law that administrative regulations and policies enacted by administrative bodies to interpret the law which they are entrusted to enforce have the force of law and entitled to great respect. They have in their favor a presumption of legality [Gonzales v. Land Bank, G.R. No. 76759 (1990)] Requisites for validity and effectivity of regulations a. Reasonable; b. Within the authority conferred; c. Not contrary to law and the Constitution [Art. 7, NCC]; and d. Must be published. Tax regulations whose purpose is to enforce of implement existing law must comply with the following requisites to be effective [RP v. Pilipinas Shell Petroleum Corp., G.R. No. 173918 (2008)]: a. Be published in a newspaper of general circulation [Art. 2, NCC]; AND b. Filed with the UP Law Center Office of the National Administrative Register (ONAR) [Ch 2, Book VII, EO 292] Note: Administrative rules and regulations must always be in harmony with the provisions of the law. In case of conflict with the law or the Constitution, the administrative rules and regulations are null and void. As a matter of policy, however, courts will declare a regulation or provision thereof invalid only when the conflict with the law is clear and unequivocal. Administrative interpretations and opinions The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive and original jurisdiction of the Commissioner of Internal Revenue subject to review by the Secretary of Finance [Sec. 4, par.1, NIRC]. Revenue regulations are the formal interpretation of the provisions of the NIRC and other laws by the

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Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue. General rule: The Commissioner has the sole authority to issue rulings but he also has the power to delegate said authority to his subordinates with the rank equivalent to a division chief or higher. Exceptions: The Commissioner may not delegate the following: a. The power to recommend the promulgation of rules and regulations by the Secretary of Finance; b. The power to issue rulings of first impression or to reverse, revoke, or modify any existing ruling of the Bureau; and c. The power to compromise or abate any tax liability as provided by Sec. 204 and 205 of the NIRC Exception to the exception: BUT assessments issued by RDOs involving (a) Php500,000 or less, and (b) minor criminal violations as determined by the Secretary of Finance as recommended by the Commissioner, may be compromised by a Regional Evaluation Board (CHAIRMAN: Regional Director; MEMBERS: Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions, and the Revenue District Officer having jurisdiction over the taxpayer.) [Sec. 7, NIRC].

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of individuals and the object is to establish a certain rule by conformity to which mankind would be safe, and the discretion of the court limited. [People v. Purisima, G.R. No. L-42050-66 (1978)].

5. Non-Retroactive Application

of Tax Laws to Taxpayers

General rule: Tax laws are prospective in operation. The reason is that the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction which the law seeks to tax was completed. Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent. [Lorenzo v. Posadas, supra]. Exception to the exception: a tax law should not be given retroactive application when it would be so harsh and oppressive for in such case, the constitutional limitation of due process would be violated [Republic v. Fernandez, supra].

Decisions of the Supreme Court applying or interpreting existing tax laws are binding on all subordinate courts and have the force and effect of law. As provided for in Article 8 of the Civil Code, he form par of he la of he land. The same is also true with respect to decisions of the Court of Tax Appeals. However, by the nature of its jurisdiction, the decisions of this court are still appealable to the Supreme Court by a petition for review on certiorari (Rule 45). [Sec. 11, RA 9282]

4. Penal Provisions of Tax

Laws

Penal provisions of tax laws must be strictly construed. It is not legitimate to stretch the language of a rule, however beneficent its intention, beyond the fair and ordinary meaning of its language. A penal statute should be construed strictly against the State and in favor of the accused. The reason for this principle is the tenderness of the law for the rights Page 24 of 290

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O. Doctrines of Taxation 1. Prospectivity of Tax Laws General rule: Tax laws are prospective in operation. Reason: Nature and amount of the tax under tax laws enacted after the transaction could not have been foreseen and understood by the taxpayer at the time of the transaction. Exception: Tax laws may be applied retroactively provided it is expressly declared or it is clearly the legislative intent (e.g., increase taxes on income already earned) except when retroactive application would be so harsh and oppressive. [Republic v. Fernandez, G.R. No. L-9141 (1956)] It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided (Art. 4, Civil Code). [Hydro Resources v. CA, G.R. No. 80276 (1990)] The language of the statute must clearly demand or press that it shall have a retroactive effect. [Lorenzo v. Posadas, supra] Exception to the exception: Collection of interest in tax cases is not penal in nature; it is but a just compensation to the State. The constitutional prohibition against ex post facto laws is not applicable to the collection of interest on back taxes. [Central Azucarera v. CTA, G.R. No. L-23236 (1967)] Non-retroactivity of rulings [Sec. 246, NIRC] General rule: Rulings do not have retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer. Exceptions: a. Ta pa er delibera e mi a emen or omi ion of facts b. BIR ga hered fac i ma eriall differen from the facts from which the ruling was based on c. Taxpayer acted in bad faith Note: The rule on non-retroactivity of rulings may be applied only if the parties in the ruling involve the taxpayer himself/itself. The taxpayer cannot invoke the rulings granted in favor of the other taxpayers.

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2. Imprescriptibility of Taxes Unless otherwise provided by law, taxes are imprescriptible. [CIR v. Ayala Securities Corporation G.R. No. L-29485 (1980)] The law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. [Commissioner v. CA, G.R. No. 104171 (1999)]

a. Prescriptions found in statutes 1. National Internal Revenue Code statute of limitations in the assessment and collection of taxes therein imposed. Summary of prescription on assessment and collection: Prescription of assessment AND collection from the: prescribed last day of filing of returns (even if return was filed 3 YEARS earlier than the deadline); OR the day when the return was actually filed if filed later than the last day of filing [Sec. 203, NIRC] whichever comes earlier. Prescription of assessment in cases of: false or fraudulent return with intent to evade tax; OR 10 YEARS failure to file a return [Sec. 222, NIRC] From the discovery of the fraud, falsity, or omission. Prescription of collection of tax if: assessed within the 3-year and 10year prescriptive periods assessed within the extended period agreed upon by the Commissioner 5 YEARS and taxpayer (waiver of the prescriptive period) Collected by distraint, levy or by a proceeding in court. [Sec. 222, NIRC] Note: The prescriptive period from final liquidation is three (3) years, except in cases of: 1. tentative liquidation; 2. payment under protest;

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3. 4.

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2. 3.

For the same purpose; By the same State, Government, or taxing authority; Within the same territory, jurisdiction or taxing district; During the same taxing period; and Of the same kind or character of tax.

fraud; and compliance audit.

2. Customs Modernization and Tariffs Act (CMTA)

4.

CMTA repealed the Tariff and Customs Code (TCC). Under Sec. 430, i pro ide ha [i]n he ab ence of fraud and when the goods have been finally assessed and released, the assessment shall be conclusive upon all parties three (3) years from the date of final payment or duties, or upon completion of the postclearance audit. (Note: The same rule was provided under Sec. 1603 of the TCC, but it was worded differently).

3. Local Government Code The LGC prescribes prescriptive periods for the assessment from the date they became due (5 years) and collection (5 years) of taxes (including Real Property Taxes) from the date of assessment by administrative or judicial action. The prescriptive period is 3 years if the tax accrued before the effectivity of the Local Government Code [Sec. 194 and 270, RA 7160 or the LGC]. In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed from discovery of the fraud or intent to evade payment (10 years). The prescriptive period is tolled when: a. The treasurer is legally prevented from making the assessment or collection b. The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and c. The taxpayer is out of the country or otherwise cannot be located.

3. Double Taxation Means taxing twice the same taxpayer for the same tax period upon the same thing or activity, when it should be taxed once, for the same purpose and with the same kind of character of tax.

a. Strict sense (Direct Duplicate Taxation) The same property must be taxed twice when it should be taxed once; 1. Both taxes must be imposed on the same property or subject matter;

5. 6.

b. Broad sense (Indirect Duplicate Taxation) There is double taxation in the broad sense or there is indirect duplicate taxation if any of the elements for direct duplicate taxation is absent. It extends to all cases in which there is a burden of two or more pecuniary impositions. For example, a tax upon the same property imposed by two different states. Double taxation, standing alone and not being forbidden by our fundamental law, is not a valid defense against the legality of a tax measure [Pepsi Cola v. Mun. of Tanauan, G.R. No. L-31156 (1976)]. But from it might emanate such defenses against taxation as oppressiveness and inequality of the tax. Constitutionality of double taxation There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated. [Villanueva v. City of Iloilo, G.R. No. L-26521 (1968)] If the tax law follows the constitutional rule on uniformity, there can be no valid objection to taxing the same income, business or property twice. [China Banking Corp. v. CA, G.R. No. 146749 (2003)] Double taxation in its narrow sense is undoubtedly unconstitutional but that in the broader sense is not necessarily so. [De Leon, citing 26 R.C.L 264-265]. Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee. [De Leon, citing 84 C.J.S.138]. International Double Taxation Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty

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resorts to several methods. [CIR v. SC Johnson & Sons, Inc., G.R. No. 127105 (1999)] The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. [CIR v. SC Johnson & Sons, Inc., supra] Modes of eliminating double taxation 1. Allowing reciprocal exemption either by law or by treaty; 2. Allowance of tax credit for foreign taxes paid; 3. Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax; OR 4. Reduction of Philippine tax rate.

4. Power to Tax Involves Power

to Destroy

According to Chief Justice John Marshall, "the power to tax involves the power to destroy." [McCulloch v. Maryland, 17 U.S. [4 Wheat.] 316-428, 4L. ed. 579.] To say, however, that the power to tax is the power to destroy is to describe not the purposes for which the taxing power may be used but the extent to which it may be employed in order to raise revenues [see 1 Cooley 178]. Thus, even if a tax should destroy a business, such fact alone could not invalidate the tax. [84 C.J.S. 46] Incidentally, our Constitution mandates that "the rule of taxation shall be uniform and equitable." In a case, our Supreme Court said: "The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to

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minimize injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the 'hen that lays the golden eggs.' And in order to maintain the general public's trust and confidence in the government, this power must be used justly and not treacherously." [Roxas v. Court of Tax Appeals, G.R. No. L-25043 (1968); Philex Mining Corp. vs. Comm. of Internal Revenue, G.R. No. 125704 (1998)] Note: J ice Holme once aid: The po er o a i not the power to destroy while this Court (the Supreme Court) i . The o limi a ion on he power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited po er. I i he Co r role o ee o i ha he exercise of the power does not transgress these limitations.

5. Escape from Taxation a. Shifting of Tax Burden Shifting - 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. What is transferred is not the payment of the tax but the burden of the tax. All indirect taxes may be shifted; direct taxes cannot be shifted. Ways of shifting the tax burden 1. 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. Examples: VAT, percentage tax. 2. Backward shifting - When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production. 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, and finally to the manufacturer or producer. 3. Onward shifting - When the tax is shifted two or more times either forward or backward. Factors determining tax shifting 1. Elasticity of demand and supply - The more the elasticity, the lower the incidence on the sales. The higher the incidence on supply.

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2.

3.

4.

5.

6. 7.

8.

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Nature of markets In an oligopolistic market (i.e. sellers and many buyers) tax shifting to buyers is high since few sellers can team up to determine the market price. In a situation where there are many buyers and sellers, a large portion of tax will be borne by sellers. For a monopolistic market, the entire tax burden falls on the shoulders of the buyer. Government policy on pricing In the case of government price control, the supplier cannot increase prices, hence cannot shift tax burden to buyers and vice versa. Geographical location If taxes are imposed on certain regions, it is hard to shift them to consumers because consumers will move to regions with low taxes. Nature of tax (Direct or Indirect tax) Direct tax e.g. PAYE (pay-as-you-earn) cannot be shifted whatsoever while indirect taxes can be shifted through increase in prices. Rate of tax If too high, shifting can occur backwards or forwards, if too low, it may be absorbed by the manufacturer. Time available for adjustment The person who can adjust faster (buyer or seller) will be able to shift tax e.g. if the buyer cash shift to substitute goods, the seller will bear the tax burden. The tax point

Taxes that can be shifted 1. Value-added Tax 2. Percentage Tax 3. Excise Tax 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, the subject of tax, is the person who must pay the tax to the government. Incidence of taxation is that point on which the tax burden finally rests or settles down. It takes place when shifting has been effected from the statutory taxpayer to another. Impact Distinguished from Incidence Impact Incidence Initial burden of tax Ultimate burden of the tax At the point of At the point of imposition settlement

Impact Falls upon the person from whom the tax is collected May be shifted

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Incidence Rests on the person who pays it eventually Cannot be shifted Incidence is the end of the shifting process. Sometimes, however, when no shifting is possible, as in the case of income tax or such other direct taxes, the impact coincides with incidence on the same person.

Notes: Suppose a tax excise duty is imposed on soap. Its impact is on the producers, in the first instance, as they are liable to pay it to the government. But, the producers may succeed in collecting it from the consumers by raising the price of soap by the amount of tax. In that case, consumers eventually pay the tax and so the incidence falls upon them. Relationship between Impact, Incidence of a Tax Impact Shifting Initial Intermediate phenomenon process Imposition of Transfer of the tax the tax

Shifting, and Incidence Result Setting or coming to rest of the tax

Example: Impact in VAT is on the producer who shifts the burden to the customer who finally bears the incidence of the tax

b. Tax Avoidance (Tax Minimization) The exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is politely called tax minimization and i NOT punishable by law. Example: A person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year.

c. Tax Evasion (Tax Dodging)

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Tax Evasion - is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a a . I i al o kno n a a dodging. I i punishable by law. Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been received; overstatement of expenses. Elements of Tax Evasion 1. The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in paying no tax when such is due. 2. An accompanying state of mind described as being e il, in bad fai h, illf l or delibera e and no acciden al. 3. A course of action (or failure of action) which is unlawful. Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus: 1. The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes. [Republic v. Gonzales, G.R. No. L-17962 (1965)] 2. The substantial underdeclaration of income in the income tax returns of the taxpayer for four (4) consecutive years coupled with his intentional overstatement of deductions justifies the finding of fraud. [Perez v. CTA and Collector, G.R. No. L-10507 (1958)]. Tax Avoidance v. Tax Evasion Tax Avoidance Also called Tax as Minimization Legal Means Outcome of tax planning Punishable? No Merely minimize payment of Purpose taxes (tax savings)

d. Transformation

Tax Evasion Tax Dodging Illegal Outcome of tax fraud Yes Entirely escape payment of taxes

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Method of escape in taxation whereby the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. The taxpayer escapes by a transformation of the tax into a gain through the medium of production.

6. Exemption from Taxation

Meaning ofexemption from taxation The grant of immunity to particular persons or corporations or to person 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. It is strictly construed against the taxpayer. Taxation is the rule; exemption is the exception. He who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms oo plain o be mi aken and oo ca egorical o be mi in erpre ed. If no e pre l men ioned in he law, it must at least be within its purview by clear legislative intent. Grounds for Tax Exemption a. It may be based on contract. b. It may be based on some ground of public policy. c. It may be created in a treaty on grounds of reciprocity or to lessen the rigors of international or multiple taxation. But equity is NOT a ground for tax exemption. Exemption from tax is allowable only if there is a clear provision. While equity cannot be used as a basis or justification for tax exemption, a law may validly authorize the condonation of taxes on equitable considerations. Nature of tax exemption a. Mere personal privilege - cannot be assigned or transferred without the consent of the legislature. The legislative consent to the transfer may be given either in the original act granting the exemption or in a subsequent law b. General rule: Revocable by the government. Exception: If founded on a contract which is protected from impairment. But the contract must contain the essential elements of other contracts. An exemption provided for in a franchise, however, may be repealed or amended pursuant to the Constitution [Art. XII, Sec. 11,

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1987 Constitution]. A legislative franchise is a mere privilege. c. Implies a waiver on the part of the government of its right to collect taxes due to it, and, in this sense, is prejudicial thereto. Hence, it exists only by virtue of an express grant and must be strictly construed. d. Not necessarily discriminatory, provided it has reasonable foundation or rational basis. Where, however, no valid distinction exists, the exemption may be challenged as violative of the equal protection guarantee or the uniformity rule. KINDS OF TAX EXEMPTION a. Express or Affirmative - either entirely or in part, may be made by provisions of the Constitution, statutes, treaties, ordinances, franchises, or contracts. b. Implied or Exemption by Omission - when a tax is levied on certain classes without mentioning the other classes. Every tax statute, in a very real sense, makes exemptions since all those not mentioned are deemed exempted. The omission may be either accidental or intentional. Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation is the exception. c.

Contractual - The legislature of a State may, in the absence of special restrictions in its constitution, make a valid contract with a corporation in respect to taxation, and that such contract can be enforced against the State at the instance of the corporation [Casanovas v. Hord, G.R. No. 3473 (1907)]. In the real sense of the term and where the non impairment clause of the Constitution can rightly be invoked, this includes those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. [Manila Electric Company v. Province of Laguna, G.R. No. 131359 (1999)]

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Rationale of Tax Exemption Such exemption will benefit the body of the people and not particular individuals or private interest and that the public benefit is sufficient to offset the monetary loss entailed in the grant of the exemption. Principles of Tax Exemption: a. As the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the same must be couched in clear and unmistakable terms in order that it may be applied. [Floro Cement v. Gorospe, G.R. No. L46787 (1991)] b. When granted, they are strictly construed against the taxpayer [Luzon Stevedoring Co. v. CTA, G.R. No. L-30232 (1988)] c. Tax exemptions are strictly construed against the taxpayer, they being highly disfavored and may almo be aid o be odio o he la . [Manila Electric Company v. Vera, G.R. No. L-29987 (1975)] Revocation of Tax Exemption General Rule: Revocable by the government. Exception: Contractual tax exemptions may not be unilaterally so revoked by the taxing authority without thereby violating the non-impairment clause of the Constitution.

7. Doctrine of Equitable

Recoupment

A claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. The doctrine finds NO application in this jurisdiction.

8. Compensation and Set-Off General rule: Internal revenue taxes cannot be the subject of set-off or compensation [Republic v. Mambulao Lumber, G.R. No. L-17725 (1962)] Reasons: a. This would adversely affect the government revenue system [Philex Mining v. CA, G.R. No. 125704 (1998)]. b. Government and the taxpayer are not creditors and debtors of each other. The payment of taxes

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is not a contractual obligation but arises out of a duty to pay. [Republic v. Mambulao Lumber, supra] Exception: If the claims against the government have been recognized and an amount has already been appropriated for that purpose. Where both claims have already become: a. due b. demandable, and c. fully liquidated, compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and 1290 of the NCC, and both debts are extinguished to the concurrent amount. [Domingo v. Garlitos, G.R. No. L18994 (1963)]

9. Compromise and Tax

Amnesty

COMPROMISE a. A contract whereby the parties, by making reciprocal concessions avoid litigation or put an end to one already commenced [Art. 2028, Civil Code]. It involves a reduction of he a pa er liability. b. Requisites of a tax compromise: i. The taxpayer must have a tax liability. ii. There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by the taxpayer. iii. There must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the offer in settlement of the original claim. TAX AMNESTY Definition A tax amnesty 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 give tax evaders, who wish to relent and are willing to reform a chance to do so and become a part of the new society with a clean slate. [Republic v. IAC, G.R. No. L-69344 (1991)] A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

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The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state. [CIR v. Marubeni Corp., G.R. No. 137377 (2001)]. Amnesty distinguished from tax exemption Tax amnesty is immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies to past tax periods, hence of retroactive application. [People v. Castañeda, G.R. No. L-46881 (1988)] Tax exemption is immunity from all civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. [Greenfield v. Meer, C.A. No. 156 (1946)]. It is generally prospective in application [Dimaampao, 2005, p. 111]. Tax Amnesty v. Tax Exemption Tax Amnesty

Tax Exemption

Benefit

Immunity from civil, criminal, administrative liability arising from nonpayment of taxes

Immunity from civil liability (relief from paying taxes)

Coverage

Past tax liability

Future tax liability

Actual Revenue Loss

Yes

None

10. Ta

a

S

NATURE AND CONCEPT Ta a refers to a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. [Kilosbayan v. Guingona, Jr. (1994)] A a 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

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instrument of the public concern. [De Castro v. Judicial and Bar Council, G.R. No. 191002 (2010)]

enjoined at the request of a taxpayer. [Pascual v. Secretary of Public Works, G.R. No. L-10405 (1960)]

REQUISITES OF A TAXPAYER S SUIT CHALLENGING THE CONSTITUTIONALITY OF A TAX MEASURE OR ACT OF TAXING AUTHORITY

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. A person suing as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds derived from taxation. He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury because of the enforcement of the questioned statute or con rac . In o her ord , for a a pa er i o prosper, two requisites must be met: 1. public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and 2. the petitioner is directly affected by the alleged act. [Mamba v. Lara, G.R. No. 165109 (2009)]

a. Concept of locus standi as applied in taxation The doctrine of locus standi is the right of appearance in a court of justice. The doctrine requires a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a "real party in interest," which is defined as "the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit." In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public right on behalf of the general public because of conflicting public policy issues. On one end, there is the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At the other end, there is the public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic public services. The Court has adopted the "direct injury test" to determine locus standi in public suits. In People v. Vera, it was held that a person who impugns the validity of a statute must have "a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result." the "direct injury test" in public suits is similar to the "real party in interest" rule for private suits under section 2, Rule 3 of the 1997 Rules of Civil Procedure. [P a e P d c , I c. . Fe Corporation, G.R. No. 166006 (2008)]

b. Doctrine of transcendental importance Recognizing that a strict application of the "direct injury" test may hamper public interest, this court relaxed the requirement in cases of "transcendental importance" or with "far reaching implications." being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest. [Id.]

It is well-stated that the validity of a statute may be contested only by one who will sustain a direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds, upon the theory that "the expenditure of public funds by an officer of the state for the purpose of administering an unconstitutional act constitutes a misapplication of such funds," which may be Page 32 of 290

Planters Products, Inc. v. Fertiphil Corp. [G.R. No. 166006 (2008)]: e en a ming arg endo ha there is no direct injury, We find that the liberal policy consistently adopted by this court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President Marcos issued LOI no. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided that "the capital contribution shall be collected

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until adequate capital is raised to make PPI viable." c. Ripeness for judicial determination Ripene for j dicial de ermina ion mean ha litigation is inevitable or there is no adequate relief available in any other form or proceeding. CJH Development Corp. v. BIR [G.R. No. 172457 (2008)]: Ho e er, CJH i no lef i ho recourse. The tariff and customs code provides for the administrative and judicial remedies available to a taxpayer who is minded to contest an assessment, subject of course to certain reglementary periods. The TCC provides that a protest can be raised provided that payment first be made of the amount due. The decision of the Collector can be reviewed by the Commissioner of Customs who can approve, modify or reverse the decision or action of the Collector. If the party is not satisfied with the ruling of the Commissioner, he may file the necessary appeal to the Court of Tax Appeals. Afterwards, the decision of the Court of Tax Appeals can be appealed o hi Co r .

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II. NATIONAL INTERNAL REVENUE CODE (NIRC) OF 1997, AS AMENDED

4.

A. Organization and Functions of the Bureau of Internal Revenue 1. Rule-Making Authority of

the Secretary of Finance

a. Authority of the Secretary of Finance to Promulgate Rules and Regulations (Sec. 244, NIRC) The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules and regulations for effective enforcement of the provisions of the Code.

b. Specific Provisions to be Contained in Rules and Regulations (Sec. 245, NIRC) 1.

2.

3.

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; 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; 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;

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The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings; 5. 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; 6. 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 CIR, 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; 7. 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; 8. 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 regulations which the CIR may consider suitable for the enforcement of the said Title III; 9. 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; 10. 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

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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 CIR 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 CIR can exercise this power within six (6) years from the approval of R.A. 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. For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any of the following criteria: a. Value-Added Tax (VAT) - Business establishment with VAT paid or payable of at least P100,000 for any quarter of the preceding taxable year; b. Excise tax - Business establishment with excise tax paid or payable of at least P1,000,000 for the preceding taxable year; c. Corporate Income Tax - Business establishment with annual income tax paid or payable of at least P1,000,000 for the preceding taxable year; and d. Withholding tax - Business establishment with withholding tax payment or remittance of at least P1,000,000 for the preceding taxable year. Provided, however, That the Secretary of Finance, upon recommendation of the CIR, may modify or add to the above criteria for determining a large taxpayer after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors. The penalties prescribed under Section 248 shall be imposed on any violation of the rules and regulations issued by the Secretary of Finance, upon recommendation of

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the CIR, prescribing the place of filing of returns and payments of taxes by large taxpayers. RA 7646 An Act Authorizing the CIR to Prescribe the Place for Payment of Internal Revenue Taxes by Large Taxpayers

2. Jurisdiction, Power and

Functions of the Commissioner of Internal Revenue

a. Powers and Duties of the Bureau of Internal Revenue (Sec. 2, NIRC) 1. 2. 3. 4.

To assess and collect national internal taxes, fees, and charges; To enforce all forfeitures, penalties and fines connected therewith; To execute judgment in all cases decided in its favor by the CTA and the ordinary courts; and To effect and administer the supervisory and police powers conferred upon it by the Tax Code or other special laws.

b. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases Power to Interpret The power to interpret provisions of the NIRC and other tax laws shall be under the exclusive and original jurisdiction of the CIR, subject to review by the Secretary of Finance. [Sec. 4, NIRC] A ruling by the CIR that interpret provisions of the NIRC and other tax laws shall be presumed valid unless modified, reversed or superseded by the Secretary of Finance. A taxpayer who receives an adverse ruling from the CIR may, within thirty (30) days from the date of receipt of such ruling, seek its review by the Secretary of Finance. The Secretary of Finance may also review the rulings motu proprio. [DOF Order 7-02] Power to Decide Tax Cases The power to decide (1) disputed assessments, (2) refunds of internal revenue taxes, fees, charges and penalties, or (3) other matters arising under the NIRC

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or other laws administered by the BIR is vested in the CIR, subject to the exclusive appellate jurisdiction of the CTA. [Sec. 4, NIRC]

c. Non-retroactivity of rulings (Sec. 246, NIRC) General Rule: Any revocation, modification or reversal of (1) rules and regulations promulgated in accordance with the NIRC, or (2) any rulings or circulars promulgated by the CIR shall not be given retroactive application if the prejudicial to the taxpayers. Exceptions: 1. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR; 2. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or 3. Where the taxpayer acted in bad faith. The general rule is that a void law or administrative act cannot be the source of legal rights or duties. The doctrine of operative fact is an exception to the general rule; it is incorporated in Sec. 246 of the NIRC. Under Sec. 246, taxpayers may rely upon a rule or ruling issued by the CIR from the time the rule or ruling is issued up to its reversal by the CIR or this Court. The reversal is not given retroactive effect. There must, however, be a rule or ruling issued by the Commissioner that is relied upon by the taxpayer in good faith. A mere administrative practice, not formalized into a rule or ruling, will not suffice because such a mere administrative practice may not be uniformly and consistently applied. [CIR v. San Roque, G.R. No. L-187485 (2013)].

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B. Income Taxation 1. Income Tax a. Definition, Nature and General Principles Definition Income Tax is defined as a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on the per on income, emol men , profits and the like. It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year. [De Leon citing CJS and AmJur] Nature Income tax is generally classified as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits. [De Leon] General Principles (Sec. 23, NIRC) Income Tax Law aims to mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation which places the burden of taxation on those best able to pay [Madrigal v. Rafferty & Concepcion, G.R. No. L-12287 (1918)]. 1. A resident citizen of the Philippines is taxable on all income derived from sources within and without the Philippines; 2. A nonresident 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 shall be treated as an overseas contract worker if he is a: (1) citizen of the Philippines; and (2) receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade 4. An alien individual, whether a resident or not 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; and 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable

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only on income derived from sources within the Philippines. Taxpayer Resident Citizen Non-resident Citizen and OCW Resident and Non-resident Alien Domestic Corporation Foreign Corporation

Within

Without X X

Global System It is a personal tax based on the income of the taxpayer. Emphasizes the burden allocation aspects. Most equitable system yet developed for distributing tax burden. The burden of an individual is closely related to his resources and his ability to pay.

X

1. Income Tax Systems a. Global Tax System Under a global tax system, it did not matter whether the income received by the taxpayer is classified as compensation income, business or professional income, passive investment income, capital gain, or other income. All items of gross income, deductions, and personal and additional exemptions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base. b. Schedular Tax System Different types of incomes are subject to different sets of graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification of the taxable income and the basis could be gross income or net income. Separate income tax returns (or other types of return applicable) are filed by the recipient of income for the particular types of income received.

It serves as a means for redistributing income and wealth. Big income earners are subject to higher taxes than small income earners it serves as an automatic countercyclical device to generate more revenues from people in times of expanding economies and at the same time to collect less from them in times of depression. It serves as a supplementary device to accomplish nonfiscal goals of the government, such as, to encourage desired activities. By adjusting the rates, for instance, it can promote saving or consumer's demand, or encourage donations worthy causes. Administration is not quite as easy as schedular because one has to consider all income from whatever source.

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Schedular System Tax on income producing activities. Emphasizes on revenue and administrative aspects. Because of its multiple rates, the tax burden of a person does not correspond to his income but rather fall fortuitously on the type of his income. It is fixed and final.

This function is alien to schedular system where in times of plenty or in times of need, people pay the same fixed tax on their income.

The schedular system cannot perform any of these functions.

The administration is simple, being confined to each transaction or activity.

c. Semi-schedular or Semi-global Tax System All compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, Page 37 of 290

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and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates or normal corporate income tax. With respect to such income the computation is global. For those other income not mentioned above, they remain subject to different sets of tax rates and covered by different returns. Note: The Philippines, under the NIRC, follows a semi-schedular and semi-global tax system.

2. Features of the Philippine Income Tax Law a.

Direct Tax The tax burden is borne by the income recipient upon whom the tax is imposed. b. Progressive The tax rate increases as the tax base increases. It is founded on the ability to pay principle and is consistent with Sec. 28, Art. VI, 1987 Constitution. c. Comprehensive The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, the residence principle, and the source principle. Any of the three principles is enough to justify the imposition of income tax on the income of a resident citizen and a domestic corporation that are taxed on a worldwide income. d. Semi-Schedular or Semi-Global Tax System The Philippines follows the semi-schedular or semi-global system of income taxation, although certain passive investment incomes and capital gains from sale of capital assets (namely: (a) shares of stock of domestic corporations, and (b) real property) are subject to final taxes at preferential tax rates.

3. Criteria in Imposing Philippine Income Tax CITIZENSHIP OR NATIONALITY PRINCIPLE A citizen of the Philippines is subject to Philippine income tax: On his worldwide income, if he resides in the Philippines; or Only on his income from sources within the Philippines, if he qualifies as a nonresident citizen. RESIDENCE PRINCIPLE A resident alien is liable to pay Philippine income tax on his income from sources within the Philippines but

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is exempt from tax on his income from sources outside the Philippines. SOURCE OF INCOME PRINCIPLE An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or nonresident foreign corporation is liable to pay Philippine income tax on 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.

Graduated income tax and fixed tax on gross sales or receipts for individuals b. Normal corporate income tax on corporations c. Minimum corporate income tax on corporations d. Special income tax on certain corporations e. Capital gains tax on sale or exchange of shares of stock of a domestic corporation classified as capital assets f. Capital gains tax on sale or exchange of real property classified as capital asset g. Final withholding tax on certain passive investment income paid to residents h. Final withholding tax on income payments made to non-residents i. Fringe benefits tax on fringe benefits of supervisory or managerial employees j. Branch profit remittance tax k. Tax on improperly accumulated earnings of corporations

5. Taxable Period "Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed. Taxable year includes, in the case of return made for a fractional part of a year under the provisions of Title II (Tax on Income), the period for which such return is made [Sec. 22 (P), NIRC]. a.

Calendar Year - Accounting period of 12 months ending on the last day of December. Instances when the Calendar Year is used for the computation of income: b. Fiscal Year - Accounting period of 12 months ending on the last day of any month other than December [Sec. 22(Q), NIRC]. c. Short Period - Accounting period which starts after the first month of the tax year or ends

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before the last month of the tax year (less than 12 months). Instances whereby short accounting period arises: d. When a corporation is newly organized. e. When a corporation is dissolved. [Sec 52(c), NIRC] f. When a corporation changes accounting period. [Sec 46, NIRC] g. When the taxpayer dies. General rule: Taxable income shall be computed based on he a pa er ann al acco n ing period, hich may be fiscal year or calendar year Exception: Taxable income shall be computed based on the basis of calendar year only if: a. If the taxpayer's annual accounting period is other than a fiscal year; or b. If the taxpayer has no annual accounting period; or c. If the taxpayer does not keep books of accounts; or d. If the taxpayer is an individual [Sec. 43, NIRC].

6. Kinds of Taxpayers Taxpayer any person subject to tax imposed by Title II of the Tax Code [Sec. 22(N), NIRC]. Person means an individual, a trust, estate or corporation [Sec. 22(A), NIRC]. For income tax purposes, taxpayers are classified generally as follows: a. Individuals b. Corporations c. Estates and Trusts d. Partnerships (General Partnership and General Professional Partnerships) Primary Classification

Sub-Classification(s) Citizens of the Philippines

Residents citizens Non-resident citizens Residents

Individuals Aliens

Nonresidents

Engaged in Trade or Business in the Philippines Not Engaged in Trade or Business in

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the Philippines Special Classes of Individuals

Minimum Wage Earner

Domestic Corporations Corporations

Foreign Corporations

Resident Corporations Nonresident Corporations

Estates and Trusts Partnerships

General Partnership General Professional Partnership

a. INDIVIDUAL TAXPAYERS CITIZENS 1. Resident Citizens (RC) 2. Non-resident Citizens (NRC) [Sec. 22 (E)] a. PH citizen who establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein. b. PH citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. c. PH citizen who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year (183 DAYS). d. PH citizen previously considered as nonresident citizen and who arrives during the taxable year to reside permanently in the Philippines Treated as NRC with respect to his income derived from sources abroad until his arrival in the Philippines ALIENS 1. Resident Alien An alien actually present in the Philippines who is not a mere transient or sojourner is a resident for income tax purposes. a. No/Indefinite Intention = RESIDENT: If he lives in the Philippines and has no definite intention as to his stay, he is a resident. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient.

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b. Definite Intention = TRANSIENT: One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient. Exception: Definite Intention but such cannot be promptly accomplished; If his purpose is of such nature that an extended stay may be necessary for its accomplishment, and thus the alien makes his home temporarily in the Philippines, then he becomes a resident. 2. Non-resident Alien a. Engaged in trade or business within the Philippines - If the aggregate period of his stay in the Philippines is more than 180 days during any calendar year. b. Not engaged in trade or business within the Philippines - If the aggregate period of his stay in the Philippines does not exceed 180 days. SPECIAL CLASS OF INDIVIDUAL EMPLOYEES Minimum Wage Earner a. worker in the private sector paid the statutory minimum wage; or b. employee in the public sector with compensation income not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. [Sec. 22 (HH), NIRC]

b. Corporations Includes all types of corporations, partnerships (no matter how created or organized), joint stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, whether or not registered with the SEC. Excludes general professional partnerships (GPP); joint venture or consortium formed for the purpose of (1) undertaking construction projects or (2) engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. [Sec. 22 (B), NIRC] Domestic corporations A corporation created and organized in the Philippines or under its laws (the law of incorporation test). [Sec. 22 (C), NIRC]

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Foreign corporations A corporation which is not domestic. [Sec. 22 (D), NIRC] 1. Resident foreign corporations Foreign corporation engaged in trade or business within the Philippines. [Sec. 22 (H), NIRC] 2. Non-resident foreign corporations Foreign corporation not engaged in trade or business within the Philippines. [Sec. 22 (I), NIRC] DOING BUSINESS The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization Includes: 1. soliciting orders, service contracts 2. opening offices, whether called "liaison" offices or branches 3. appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period totaling 180 days or more 4. participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines. Excludes: 1. mere investment as a shareholder in domestic corporations, and/or the exercise of rights as such investor 2. having a nominee director or officer to represent its interests in such corporation 3. appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. [RA 7042, Foreign Investments Act]

c. Estates and Trusts Income tax imposed on individuals shall apply to income of estates or of any kind of property held in trust. [Sec. 60 (A), NIRC] Exceptions: (1) Emplo ee r [Sec. 60, NIRC]; (2) Revocable trusts [Sec. 63, NIRC]; (3) Income for Benefit of Grantor [Sec. 64, NIRC] Taxable income of the estate or trust is computed in the same manner as an individual, subject to certain special rules [Sec 61, NIRC]

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Estate Refers to all the property, rights and obligations of a person which are not extinguished by his death and those which have accrued thereto since the opening of the succession. [De Leon citing Arts. 776 and 781 NCC] Trust An arrangement created by will or an agreement under which legal 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. [De Leon]

d. Partnerships, ownership

Joint

Ventures,

Co-

General Partnerships A partnership which is not a general professional partnership. Treated as a corporation. General Professional Partnerships (GPP) A partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. [Sec. 22 (B), NIRC] The partners themselves, not the partnership, shall be liable for income tax in their separate and individual capacities. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. [Sec. 26, NIRC] Joint venture and consortium Essential factors of a joint venture or consortium: 1. Each party must make a contribution, not necessarily of capital but by way of services, skill, knowledge, material or money; 2. Profits must be shared among the parties; 3. There must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; 4. There is a single business transaction. Co-ownership There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. [Art. 484, NCC]

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Co-ownerships are not subject to tax if the activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom, in which case each co-owner is taxed individually on his distributive share in the income of the coownership. [De Leon citing Sec. 210 Regs]

b. Income 1. Definition and Nature a.

Income means all wealth which flows to the taxpayer other than a mere return of capital. It includes gain derived from the sale or other disposition of capital assets. Income is a gain derived from labor or capital, or both labor and capital; and includes the gain derived from the sale or exchange of capital assets. [De Leon] b. Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as their disposition. [James v. US, 366 US 213 (1961)] c. Income may be received in the form of cash, property, service, or a combination of the three. Income v. Capital "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains."[Madrigal v. Rafferty, supra] Income Denotes a flow of wealth during a definite period of time. Service of wealth Subject to tax Fruit

Capital Fund or property existing at one distinct point in time. Wealth itself Return of capital is not subject to tax Tree

2. When Income is Taxable a. Existence of Income Requisites for income to be taxable [De Leon] 1. There is INCOME, gain or profit 2. RECEIVED or REALIZED during the taxable year 3. NOT EXEMPT from income tax

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c. Recognition of Income

b. Realization of Income Income is realized when there is a gain or profit derived from a closed and completed transaction. The realization of gain may take the form of actual receipt of cash or may occur as a constructive receipt of income. [Valencia and Roxas] A mere increase in the value of property is not income, but merely unrealized increase in capital. Mere increase in the value of property without actual realization, either through sale or other disposition, is not taxable. [De Leon] Actual v. Constructive receipt 1. Actual receipt Income is actually reduced to possession. The realization of gain may take the form of actual receipt of cash. 2. Constructive receipt An income is considered constructively received when it is credited to the account of, or segregated in favor of a person. The person may withdraw the said account credited in his favor anytime without any substantial limitations or conditions upon which payment or enjoyment is to be made or exercised. Examples of Constructive receipt: 1. Interest credited on savings bank deposit 2. Matured interest coupons not yet collected by the taxpayer 3. Dividends applied by the corporation against the indebtedness of a stockholder 4. Share in the profit of a partner in a general professional partnership, although not yet distributed, is regarded as constructively received; or 5. Intended payment deposited in court (consignation). The doctrine of constructive receipt is designed to prevent the taxpayer using the cash basis from deferring or postponing the actual receipt of taxable income. Without the rule, the taxpayer can conveniently select the year in which he will report the income. [Dimaampao] The A If Theor of Con r c i e Income i designed to prevent a cash basis taxpayer to delay reporting of income. It also presumes the existence of income on transactions supposedly not subject to tax. [Valencia and Roxas]

Income realized pertains to the accrual basis of accounting. Recognition of income in the books is when it is realized and expenses are recognized when incurred. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income Examples: 1. Interest or rent income earned but not yet received 2. Rent expense accrued but not yet paid 3. Wages due to workers but remaining unpaid Generally, trade and manufacturing businesses use accrual method while servicing businesses use cash method. If the service business opted to report on accrual basis, such method can only be applied when it comes to reporting of expense. To prevent tax evasion, individual taxpayers whose business consists of the sale of inventories cannot use cash method. [Valencia and Roxas]

d. Cash Method of Accounting v. Accrual Method of Accounting PRINCIPAL METHODS: 1. Cash method income, profits and gains earned are not included in gross income until received, and expenses are not deducted until paid. [De Leon] N.B. recei ed here incl de ac al and constructive receipt. 2. Accrual method income, profits and gains 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. [De Leon] 3. Hybrid method income and expenses are reported by employing the combination of cash and accrual method. Example: where a taxpayer is engaged in more than one trade or business, he may use a different method of accounting for each trade or business. [De Leon] OTHER METHODS: N.B. not included in Bar Syllabus 1.

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Installment Basis [Sec. 49, NIRC]

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Taxpayer reports as income only a part of the gross profit to be realized from the sale on the instalment plan equivalent to that proportion of the instalments received every year which the gross profit realized or to be realized when payment is completed bears to the contract price. Gross Income to be Profit Instalment reported for = × Received Contract the year Price Installment basis is available to: Dealers in personal property [Sec 49 (A), NIRC]; Casual Sellers of personal property [Sec 49 (B), NIRC]; and Sellers of real property [Sec 49 (B) & (C), NIRC] Personal Property

Real Property

Dealer Installment method Person who regularly sells/disposes of personal property on instalment plan Held as ordinary asset Regardless of amount of percentage of initial payments

Installment method if initial payments do not exceed 25% of selling price Deferred payment method if initial payments exceed 25% Held as inventory

Casual Sale

Installment method if :(1) Selling price exceeds P1k and (2) Initial payments do not exceed 25% of selling price Deferred payment method if neither of the 2 conditions are met Personal property not considered inventory

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Held as capital asset Initial payments mean the payments received in cash or property (other than evidences of indebtedness of the purchaser) by the seller during the taxable year of the disposition of the real property. [Sec 49 (B), NIRC] Deferred Payment Sales a. Applicable when the initial payments exceed 25% of the selling price b. The income to be reported during the year of sale is the difference between the selling or contract price and the cost of the property, even though the entire purchase price has not been actually received in the year of sale. c. The obligations of the purchaser received by the vendor are considered as equivalent of cash. 2. Percentage of completion [Sec. 48, NIRC] Income from long-term contracts is reported for tax purposes on the basis of percentage of completion. Long- erm con rac mean b ilding, in alla ion or construction contracts covering a period in excess of 1 year. Gross income already earned though not yet received, based on estimates of architects or engineers duly certified by them, is reported in a taxable year; and all deductions relating to such gross income for the taxable year, even if not yet paid are taken into account. [De Leon] Completed contract method No longer allowed since January 1, 1998 as per RA 8424. Cost of the contract is accumulated during the years of construction, and deducted from the income of the contract in the year it is completed. 3. Crop Year Basis Expenses in the production of crops are deducted in the year the gross income from the crop has been realized. Applicable only to farmers engaged in producing crops which take more than a year from planting to gathering and disposal. [De Leon]

Sale by Individuals Installment method provided; initial payments do not exceed 25% of selling price

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5. All Events Test

c. Tests in Determining Whether Income is Earned for Tax Purposes

Under the accrual method of accounting, expenses are deductible in the taxable year in which: (1) all events have occurred which determine the liability; and (2) the amount of liability can be determined with reasonable accuracy.

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 [Eisner v. Macomber, 252 U.S. 189, 190 (1920)]. Thus, stock dividends are not income subject to income tax on the part of the stockholder when he merely holds more shares representing the same equity interest in the corporation that declared stock dividends [Fisher v Trinidad, supra].

2. Claim of Right Doctrine a.k.a. Doctrine of Ownership, command, or control In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it as its own under the claim of right that the payments are made absolutely and not contingently, such amounts are included in the taxpayer's income, even though the right to the income has not been perfected at that time. It does not matter that the taxpayer's title to the property is in dispute and that the property may later be recovered from the taxpayer. [CIR v Meralco, C.T.A. EB No. 773 (2012)]

3. Economic Benefit Test, Doctrine of Proprietary Interest Any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is effected, is taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise (not upon the grant or vesting of the right).

All events test requires: (1) fixing a right to income or liability to pay; and (2) the availability of reasonably accurate determination of such income or liability. [CIR v Isabela Cultural Corporation, G.R. No. 172231 (2007)] All of the above tests are followed in the Philippines for purposes of determining whether income is received by the taxpayer or not during the year [Mamalateo].

d. Classification of Income 1.

Compensation Income The gain derived from labor, especially employment (earned form employer-employee relationship) such as salaries and commissions.

2. Profession or Business Income The value derived from an exercise of profession, business or utilization of capital including profit and gain derived from sale or conversion of assets. Examples are net income from business and gain from the sale of assets used in trade or business. 3. Passive Income An income in which the taxpayer merely waits for the amount to come in. Examples are royalty, interest, prizes, and winnings. 4. Capital Gain An income derived from sale of assets not used in trade or business. Examples are sale of family home and other capital assets. [Valencia and Roxas]

4. Severance Test

e. Situs of Income Taxation

Under the doctrine of severance test of income, in order that income may exist, it is necessary that there be a separation from capital of something of exchangeable value. The income requires a realization of gain.

Income Interest Dividends Services Rentals

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Situs Residence of the debtor Residence of the corporation Place of performance Location of the property

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Royalties Sale of Real Property Sale of Personal

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computation of gross income which determines taxable income. [CIR v PAL, GR 160628 (2006)]

Place of use or exercise Location of realty Tangible Manufactured w/in and sold w/o: Partly w/in and partly w/o the PH Manufactured w/o and sold w/in: Partly w/in and partly w/o the PH Purchased w/in but sold w/o: Place of Sale Purchased w/o but sold w/in: Place of sale Intangible General rule: Place of Sale Exception: Shares of stock of domestic corporations: Place of incorporation

2. Gross Income

The erm gross income hene er ed i ho qualification is comprehensive, as defined above, and is different from the limited meaning of gross income for purposes of minimum corporate income tax or the gross income tax of corporations. Gross income includes gross profit from ordinary business and other income not subject to passive income tax or final withholding tax. Gross income means income, gain, or profit subject to income tax. It includes the compensation for personal services, business income, profits, and income derived from any source whatever (whether legal or illegal), unless it is exempt from income tax under the Constitution, tax treaty, or statute or it is subject to final withholding income tax in accordance with the semi-global or semi-schedular tax system adopted by the Philippines. It is the difference between gross sales/revenue and the cost of goods sold/services. The definition of gross income is broad and comprehensive to include proceeds from sales of transport documents. [Mamalateo]

a. Definition Gross Income [Sec. 32(A)]

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CG2IR2DAP3

Gross Income means all income derived from whatever source, including (but not limited to) the following items: 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; 2. Gross income derived from the conduct of trade or business or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interests; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and winnings; 10. Pensions; and 11. Partner's distributive share from the net income of the general professional partnership. The list here is NOT exclusive.

b. Concept of Income from Whatever Source Derived Income deri ed from ha e er o rce means inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources (i.e. gambling, extortion, smuggling, etc.)

c. Gross Income vis-à-vis Net Income vis-à-vis Taxable Income Gross income The total income of a taxpayer subject to tax. It includes the gains, profits, and income derived from whatever source, whether legal or illegal. (Sec. 32(A), NIRC) It does not include income excluded by law, or which are exempt from income tax. [Sec. 32(B), NIRC]

The definition of gross income is broad enough to include all passive income subject to specific rates or final taxes. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the Page 45 of 290

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Net income Means gross income less statutory deductions and exemptions. [Sec. 31, NIRC1] Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws [Sec. 31, NIRC2]. I i non mo o he erm ne income. [Valencia and Roxas]

d. Sources of Income Subject to Tax Source is ascribed to the place wherein the income is earned. It is governed by the situs of taxation. This classification of income is necessary to determine whether such income is subject to tax or not. Income may be:

1. Derived Entirely from Sources Within the Philippines [Sec. 42(A), NIRC] Examples: a. compensation for labor or service performed in the Philippines; b. interest on bonds, notes, deposits and the like earned in the Philippines; c. dividends declared by domestic corporations; d. rentals and royalties from property located within the Philippines; and e. gains, profits and income from sale of real property as well as from personal property in the Philippines. As a rule, incomes earned within the Philippines are taxable.

2. Derived Entirely from Sources without the Philippines [Sec. 42(C), NIRC] Examples: a. compensation for labor or service rendered by overseas contract workers; b. interest on bonds, notes, deposits and the like earned abroad; c. dividends declared by non-resident foreign corporation; d. rental and royalties from property located outside the Philippines; and 1

SECTION 31. Taxable Income Defined. T taxable income a ome specified in this Code, less the deductions and/or personal and

e.

TAXATION LAW

gains, profits and income from sale of real property as well as from personal property located outside the Philippines.

As a rule, income earned from outside the Philippines are not taxable except for resident citizens and domestic corporations.

3. Derived from Sources Partly within and Partly without the Philippines [Sec. 42(E), NIRC] Examples: a. gains, profits and income from transportation or other services rendered partly within and partly outside, and dividend received by a resident citizen from a resident foreign corporation. (Sec. 43(E), NIRC). b. In general, when an income is earned partly from within and partly from without, only income within is taxable in the Philippines, except if the taxpayer is a resident citizen or a domestic corporation. c. A Filipino citizen or a domestic corporation whose income is derived from within and without the Philippines is generally subject to tax.

e. Classification of Income Subject to Tax The following sources of income subject to tax are the following. 1. Compensation income; 2. Fringe benefits; 3. Professional income; 4. Income from business; 5. Income from dealings in property; 6. Passive investment income; 7. Annuities, proceeds from life insurance or other types of insurance; 8. Prizes and awards; 9. Pensions, retirement benefits, or separation pay.

1. Compensation Income All remunerations for services performed by an employee for his employer under an employeremployee (ER-EE) relationship, unless excepted under the provisions of the NIRC are considered as compensation income. [RR No. 02-98, Sec 2.78.1] additional exemptions, if any, authorized for such types of income by this Code or other special laws. 2 Id.

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It includes, but is not limited to, salaries and wages, honoraria and emoluments, allowances (e.g., transportation, representation, entertainment), commi ion , fee (incl ding direc or fee , if he director is, at the same time, an employee of the payor-corporation), tips, taxable bonuses, fringe benefits except those subject to Fringe Benefit Tax (FBT) under Section 33 of the Tax Code, and taxable pensions and retirement pay (e.g., retirement benefits earned without meeting the conditions for exemption thereof, such as retirement of less than 50 years of age.) General Rule: every form of compensation income is taxable regardless of how it is earned, by whom it is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it is received. The basis upon which remuneration is paid is immaterial. It may be paid on the basis of piece of work, percentage of profits, hourly, weekly, monthly, or annually. Exception: The term wages does NOT include remuneration paid: 1. For agricultural labor paid entirely in products of the farm where the labor is performed 2. For domestic service in a private home 3. For casual labor not in the course of the employer's trade or business 4. For services by a citizen or resident of the Philippine for a foreign go ernmen or an in l organization. [Sec. 78(A), NIRC] The term a refers to remuneration paid for services of a household nature performed by an employee in or about the private home of the person whom he is employed. The services of household personnel furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Tax Code. A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted. Services 3

Prior to TRAIN Law, threshold is P82,000. SECTION 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (7) Miscellaneous Items.

TAXATION LAW

of the household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use. The remuneration paid for the services which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial officer or establishments is considered as compensation. Remuneration paid for services performed as a private secretary, even if they are performed in the emplo er home i con idered a compen a ion. The term a a ab includes labor which is occa ional, inciden al or reg lar. No in the course of he emplo er rade or b ine incl de labor that does not promote or advance the trade or business of the employer. The term a a performed as an employee of a foreign government or an international organiza includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a non-diplomatic representative of such government. Compensation income including overtime pay, holiday pay, night shift differential pay, and hazard pay, earned by MINIMUM WAGE EARNERS (MWE) who has no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504]; Provided, however, that an employee shall not enjoy the privilege of being a MWE and, therefore, his/her entire earning are not exempt from income tax and, consequently, from withholding tax if he receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P90,0003 [RA 10963], taxable allowance, and other taxable income other than the statutory minimum wage (SMW), holiday pay, overtime pay, hazard pay and night shift differential pay.

(e) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed eighty-two Ninety thousand pesos (P82,000) (P90,000) x x x

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MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday Pay, overtime pay, night differential pay and hazard pay shall still exempt from withholding tax. FORMS OF COMPENSATION AND HOW THEY ARE ASSESSED 1. Cash If compensation is paid in cash, the full amount received is the measure of the income subject to tax. 2. Medium other than money If services are paid for in a medium other than money (e.g., shares of stock, bonds, and other forms of property), the fair market value (FMV) of the thing taken in payment is the amount to be included as compensation subject to tax. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the FMV of the remuneration received. Living quarters or meals General Rule: The value to the employee of the living quarters and meals given by the employer shall be added to his compensation subject to withholding. Exception: If living quarters/meals are furnished to an employee for the convenience of the employer, the value need NOT be included as part of compensation income. Facilities and privileges of a relatively small value - Facilities and privileges (such an entertainment, medical services, or o called co r e di co n on p rcha e ), o her i e kno n a de minimi benefi f rni hed or offered b an emplo er o hi employees generally, are NOT considered as compensation subject to income tax and therefore withholding tax if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. Convenience of the Employer Rule Allowances in kind furnished to the employee for and as necessary incident to the performance of his duties are not taxable [Valencia and Roxas].

TAXATION LAW

If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of he emplo ee ork or position, the value of that privilege need not be included as compensation [Henderson v. Collector, G.R. No. L12954 (1961)] The amo n of de minimi benefi confirming o the ceiling prescribed shall not be considered in determining the P90,000 [RA 10963] ceiling of o her benefi e cl ded from gro income nder Sec ion 32 (b)(7)(e) of the Tax Code, Provided, that the excess of he de minimi benefi o er heir re pec i e ceilings prescribed by these regulations shall be considered a par of o her benefi and he employee receiving it will be subject to tax only on the excess over the P90,000 ceiling [Section 32 (7) (e)], Pro ided, f r her, ha MWE recei ing, o her benefi e ceeding he P90,000 limi hall be taxable on the excess benefits, as well as on his salaries, wages, and allowances, just like an employee receiving compensation income beyond the SMW. Any amount given by the employer as benefits to its employees, he her cla ified a de minimi benefits or fringe benefits, shall constitute as deductible expense upon such employer. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the BIR. CLASSIFICATION OF GROSS COMPENSATION INCOME Basic salary or wage Salary earnings received periodically for a regular work other than manual labor, e.g., monthly salary of an employee Wages earnings received usually according to specified intervals of work, as by the hour, day, or eek, e.g., a carpen er age. Backwages are subject to income tax and withholding tax on wages [BIR Ruling No. DA-073-2008] Honoraria payments given in recognition for services performed for which the established practice discourages charging a fixed fee, e.g., honorarium of a guest lecturer

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Fixed or variable allowances, i.e. Transportation, Representation, and other allowances such as Cost of Living Allowances (COLA) General Rule: Fixed or variable transportation, representation or other allowances that are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office is COMPENSATION subject to withholding tax. [Rev. Regs. 2-98] Exception: Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are NOT COMPENSATION subject to withholding tax, provided the following conditions are satisfied: 1. It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the emplo er rade, business or profession; and 2. The employee is required to account or liquidate for the foregoing expenses. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Tax Code. Note: Reasonable amounts of reimbursements/ advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty are NOT subject to withholding tax on wages and substantiation requirements. Commission usually a percentage of total sales or on certain quota of sales volume attained as part of incentive such as sales commission. Fees received by an employee for the services rendered o he emplo er incl ding a direc or fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in the performance of their official duty over and above their regular salaries.

TAXATION LAW

Tips and Gratuities those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer (taxable income but not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1] Hazard or Emergency Pay additional payment recei ed d e o he orker e po re o danger or harm while working. It is normally added to the basic salary together with the overtime pay and night differential to arrive at gross salary. Retirement Pay a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b] In general, retirement pay is taxable except in the following instances: 1. SSS or GSIS retirement pays. 2. Retirement pay (RA 7641) due to old age provided the following requirements are met: a. The retirement program is approved by the BIR Commissioner; b. It must be a reasonable benefit plan. (Its implementation must be fair and equitable for the benefit of all employees) c. The retiree should have been employed for 10 years in the said company; d. The retiree should have been 50 years old or above at the time of retirement; and e. It should have been availed of for the first time. Separation pay taxable if VOLUNTARILY availed of. It shall not be taxable if involuntary, i.e., death, sickness, disability, reorganization/ merger of company and company at the brink of bankruptcy or for any cause beyond the control of the said official or employee. F a a b . Connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him or it was not of his own making. Such fact shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. Amounts received by reason of involuntary separation remain EXEMPT from income tax even if the official or the employee, at the time of separation,

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had rendered less than ten (10) years of service and/or is below fifty (50) years of age. Any payment made by an employer to an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment. Pension a stated 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. Pension is taxable unless the law states otherwise, OR unless the BIR approves the pension plan of a private company. Vacation and sick leave rules in determining whether money received for vacation and sick leave is taxable or not: 1. If paid or availed of as salary of an employee who is on vacation or on sick leave notwithstanding his absence from work, it constitutes TAXABLE compensation income. [RR 6-82, 2d] 2. Monetized value of unutilized VACATION leave credits of ten (10) days or less which were paid to private employees during the year, and the monetized value of vacation and sick leave credits paid to government officials and employees are NOT subject to income tax and to the i hholding a . The e are de minimi benefi . [RR no. 11-2018/RR no. 05-2011, amending Sec 2.78.1(A)(7) of RR no. 02-1998] Note: Monetization of sick leave credits of private employees even if not exceeding 10 days is not exempt from income tax and withholding tax on wages. 3. Terminal leave or money value of accumulated vacation and sick leave benefits received by heir upon death of employee is not taxable. Thirteenth month pay and other benefits - Not taxable if the total amount received is P90,000 [RA

4

SECTION 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (7) Miscellaneous Items. (e). 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed eighty-two Ninety thousand pesos (P82,000) (P90,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;

TAXATION LAW

10963] or less. Any amount exceeding P90,000 is taxable. [Sec. 32(7)e, NIRC4] Fringe Benefits and De Minimis Fringe Benefits any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries of an individual employee [Sec. 33, NIRC] De Minimis privileges of relatively small value as given by the employer to his employees. Fringe Benefits and De Minimis are not considered compensation subject to income tax and withholding tax. Overtime Pay premium payment received for working beyond regular hours of work which is included in the computation of gross salary of employee. It constitutes compensation. Profit Sharing the proportionate share in the profits of the business received by the employee in addition to his wages. Awards for special services awards for past services or suggestions to employers resulting in the prevention of theft or robbery, etc. are also compensations. Beneficial Payments such as where employer pays the income tax owed by an employee are additional compensation income. Other forms of compensation other forms received due to services rendered are compensation paid in kind, e.g., insurance premium paid by the employer for insurance coverage where the heirs of he emplo ee are he beneficiarie i he emplo ee income. Note: Any amount which is required by law to be deducted by the employer from the compensation of (ii)

Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (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, That every three (3) years after the effectivity of this Act, the President of the Philippines shall adjust the amount herein stated to its present value using the Consumer Price Index (CPI), as published by the National Statistics Office (NSO).

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an employee including the withheld tax is considered a par of he emplo ee compen a ion and i deemed to be paid to the employee as compensation at the time the deduction is made. (This also applies to deductions not required by law.) Withholding Tax on Compensation Income The income recipient (i.e., EE) is the person liable to pay the tax on income, yet to improve the collection of compensation income of EEs, the State requires the ER to withhold the tax upon payment of the compensation income.

2. Fringe Benefits a. Special treatment of fringe benefits Persons liable: The Employer (as a withholding agent), whether individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities, is liable to remit the fringe benefit tax to the BIR once fringe benefit is given to a managerial AND supervisory employee. The fringe benefit tax (FBT) is a final tax on the emplo ee income o be i hheld b he emplo er. The withholding and remittance of FBT shall be made on a calendar quarterly basis. Managerial employee: one who is vested with the powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory employees: those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. All employees not falling within any of the above definitions are considered rank-and-file employees. 5

SECTION 33. Special Treatment of Fringe Benefit. (A) Imposition of Tax. Effective January 1, 2018 and onwards, A 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, thirty-five percent (35%) 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

TAXATION LAW

Fringe benefit tax is imposed on fringe benefits received by supervisory and managerial employees. The fringe benefits of rank and file employees are treated as part of compensation income subject to income tax and withholding tax on compensation.

b. Definition Fringe benefit means any goods, services, or other benefit furnished or granted in cash or in kind, in addition to basic salaries, to an individual employee, except a rank and file employee (RR No. 03-98, Sec 2.23b) Fringe benefit means includes 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 and 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 on excess of what the law allows.[Sec. 33(B)] Tax Rate and Tax Base Tax base is based on the grossed-up monetary value (GMV) of fringe benefits. Rate is generally 35%, since this is the headline or the highest tax rate for individual income taxpayers. FBT is calculated using the GMV multiply by the 35%. [Sec. 33 (A), NIRC5] 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 sixty-five percent (65%) effective January 1, 2018 and onwards: Provided, however, That

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GMV represents 1. the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property that has been received; and 2. the amount of fringe benefit tax due from the employee which has been withheld and paid by the employer for and in behalf of his employee. How GMV is determined GMV is determined by dividing the actual monetary value of the fringe benefit by 65% [100% - tax rate of 35%]. For example, the actual monetary value of the fringe benefit is P1,000. The GMV is equal to P1,538.46 [P1,000 / 0.65]. The fringe benefit tax, therefore, is P538.46 [P1538.46 x 35%]. Special Cases: For fringe benefits received by non-resident alien not engaged in trade of business in the Philippines (NRANETB), the tax rate is 25% of the GMV. The GMV is determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%]. What is the tax implication if the employer gives b a -and-file employees? Fringe benefits given to a rank-and-file employee are treated as part of his compensation income subject to normal tax rate and withholding tax on compensation income, except de minimis benefits and benefits provided for the convenience of the employer. Payor of Fringe Benefit Tax (FBT): The employer withholds and pays the FBT but the law allows him to deduct such tax from his gross income.

c. Taxable and non-taxable fringe benefits Fringe Benefits NOT subject to Tax 1. Fringe benefits not considered as gross income if it is required or necessary to the business of employer; if it is for the convenience or advantage of employer 2. Fringe Benefit that is not taxable under Sec. 32 (B) Exclusions from Gross Income

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

TAXATION LAW

Fringe benefits not subject to Fringe Benefit Tax: 1. Fringe Benefits which are authorized and exempted from income tax under the Code or under special laws; 2. Contributions of the employer for the benefit of the employee for 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. Fringe benefits granted for the convenience of the employer; 5. De minimis benefits The exemption of any Fringe Benefit from the FBT shall not be interpreted to mean exemption from any other income tax imposed under the Tax Code except if the same is likewise expressly exempt from any other income tax imposed under the Tax Code or under any other existing law. Thus, if the Fringe Benefit is exempted from the FBT, the same may, however, still form of he emplo ee gro compensation income which is subject to income tax; hence, likewise subject to withholding tax on compensation income payment. De Minimis Benefits De Minimis Benefits are facilities and privileges furnished or offered by an employer to his employees that are relatively small value and are offered or furnished by the employer merely as means of promoting health, goodwill, contentment, and efficiency of his employees [RR No. 3-98, Sec 2.23c] The following De Minimis Benefits are exempt from income tax and withholding tax on compensation income of BOTH managerial and rank and file EEs [as provided by R.R. No. 11-2018/ R.R. No. 5-2011 / R.R. No. 8-2012 and R.R. No. 1-20156]: 1. Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year. Note that the monetization of unused VL credits in excess of 10 days and monetization of SL even if not exceeding 10 days are subject to tax; (RR No. 5-2011) 2. Monetized value of vacation and sick leave credits paid to GOVERNMENT officials and employees. Note that there is no limit as to the number of credits; [RR No. 5-2011] 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. 6 RR 11-2018 only changed the amount of de minimis benefit.

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Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month; [RR No. 112018] 4. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more than P2,000; [RR No. 11-2018] 5. Uniform and Clothing allowance not exceeding P6,000 per annum; [RR No. 11-2018] 6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum; [RR No. 52011] 7. Laundry allowance not exceeding P300 per month; [RR No. 5-2011] 8. Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; [RR No. 5-2011] 9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; [RR No. 5-2011] 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; [RR No. 3-98] 11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000.00 per employee per taxable year. [RR No 1-2015]

TAXATION LAW

3.

All other benefits given by employers which are not included in the above enumeration shall NOT be considered as "de minimis" benefits and hence, shall be subject to withholding tax on compensation (rank and file employees) and FBT (managerial/supervisory employees).

Housing Housing Privilege LEASE of residential property for the residential use of employees

Fringe Benefit Tax Base (Monetary Value) MV= 50% of lease payments, where MV = monetary value of the FB MV= [5% (FMV or ZV, whichever is higher) x 50%]

Assignment of residential property owned by employer for use of employees Purchase of residential MV= 5% x property in installment acquisition cost basis for the use of the exclusive of interest employee x 50% Purchase of residential MV= FMV or ZV, property and ownership is whichever is higher transferred in the name of the employee ZV = Zonal Value = value of the land or improvement, as declared in the Real Property Declaration Form FMV = Fair Market Value = FMV as determined by the Commissioner of Internal Revenue Non-taxable housing fringe benefit: 1. Housing privilege of the Armed Forces of the Philippines (AFP) officials i.e. those of the Philippine Army, Philippine Navy, or Philippine Air Force 2. A housing unit, which is situated inside or adjacent to the premises of a business or factory maximum of 50 meters from perimeter of the business premises 3. Temporary housing for an employee who stays in housing unit for three months or less Motor Vehicle Motor Vehicle Purchased in the name of the employee Cash given to employee to purchase in his own name Purchase on installment, in the name of employee Employee shoulders part of the purchase price, ownership in the name of employee

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Fringe Benefit Tax Base (Monetary Value) MV = acquisition cost MV = cash received by employee MV = acquisition cost exclusive of interest MV = amount shouldered by employer

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Employer owns and maintains a fleet of motor vehicles for use of the business and of employees Employer leases and maintains a fleet for the use of the business and of employees

4. Income from Business

MV = (AC/5) x 50%

Any income derived from doing business. MV = 50% of rental payment

Pure Compensation Earner (Minimum Wage Earner, Rank & File, Executive) Minimum Managerial or Wage Rank and File Supervisory Earner

Basic Compensation

Exempt

Taxable Compensation

Taxable Compensation

Taxable Compensation

Taxable Compensation

Holiday Pay, OT, Nightshift Pay, Hazard Pay Exempt

13th Month Pay up to P90,000 Exempt

Exempt

Exempt

Other Benefit in Excess of P90,000

N/A (with caveat)

Taxable Compensation

Taxable Compensation

N/A

Taxable Compensation Tax shouldered by employee

Subject to Fringe Benefit Tax Tax shouldered by employer

Fringe Benefit

De Minimis Benefit Exempt

Exempt

TAXATION LAW

Doing business: The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization.

5. Income from Dealings in Property Dealings in property such as sales or exchanges may result in gain or loss. The kind of property involved (i.e., whether the property is a capital asset or an ordinary asset) determines the tax implication and income tax treatment, as follows: Taxable Net Income

=

Ordinary Net Income

Ordinary Asset

+

Net Capital Gains (other than those subject to final CGT)

Capital Asset

Gain from sale, exchange or other disposition Ordinary Gain (part of Gross Income)

Capital Gain

Loss from sale, exchange, or other disposition

Exempt

3. Professional Income Refers to fees received by a professional from the practice of his profession, provided that there is NO employer-employee relationship between him and his clients. It includes the fees derived from engaging in an endeavour requiring special training as professional as means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers, and the like [RR No. 2-98]. The existence of employee-employer relationship is the distinguishing factor between compensation income versus professional income.

Ordinary Loss (part of Allowable Deductions from Gross Income)

Capital Loss

Part of Gross Income

Net Capital Gain

Part of Allowable Deductions from Gross Income

Net Capital Loss

Excess of Gains over Losses Excess of Losses over Gains

a. Types of Properties Capital v. Ordinary Asset Ordinary Assets Stock in trade of the taxpayer/ other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.

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Capital Assets Property held by the taxpayer, whether or not connected with his trade or business which is not an ordinary asset.

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Ordinary Assets Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Property used in the trade or business of a character which is subject to the allowance for depreciation, or Real property used in the trade or business of the taxpayer, including property held for rent.

Capital Assets Generally, they include: stocks and securities held by taxpayers other than dealers in securities real property not used in trade or business, such as residential house and lot, idle or vacant land or building investment property, such as interest in a partnership, stock investment Personal or nonbusiness properties, such as family car, home appliances, jewelry. Note in ordinary assets, that the list is EXCLUSIVE. The actual use determines whether a property is an ordinary asset or a capital asset. [BIR Ruling No. DA 212-07, April 3, 2007]

b. Types of Gains from dealings in property ORDINARY INCOME VIS-À-VIS CAPITAL GAIN. If the asset involved is classified as ordinary, the entire amount of the gain from the transaction shall be included in the computation of gross income [Sec 32(A)], and the entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See Allowable Deductions from Gross Income - Losses If the asset involved is a capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income. (See Capital Gains and Losses). These rules do not apply to: 1. real property with a capital gains tax (final tax), or 2. shares of stock of a domestic corporation with a capital gains tax (final tax). Also, sale of shares of stock of a domestic corporation, held as capital assets, through the stock exchange by either individual or corporate taxpayers, is subject to 0.6 of 1%7 percentage tax based on gross selling price. 7 8

TAXATION LAW

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. If the taxpayer is an individual 100% if the capital asset has been held for not more than 12 months; and 50% of the capital asset has been held for more than 12 months 2. If the taxpayer is a corporation 100%, regardless of the holding period of the capital asset [Sec. 39(B), NIRC] The tax rules for the gains or losses from sales or exchanges of capital assets over ordinary assets are as follows: 1. Net capital gain is added to ordinary gain but net capital loss is not deductible from ordinary gain. 2. Net ordinary loss is deductible from ordinary gain. 3. Capital losses are deductible only to the extent of the capital gain. 4. There is a net capital loss carry-over on the net capi al a e lo in a a able ear hich ma be deducted as a short-term capital loss from the net capital gain of the subsequent taxable year; provided that the following conditions shall be observed: a. The taxpayer is other than a corporation; b. The amount of loss does not exceed the income before exemptions at the year when the loss was sustained; and c. The holding period should not exceed 12 months. [Valencia] When a capital gain or capital loss is sustained by a corporation, the following rules shall be observed: 1. There is no holding period; hence, there is no net capital loss carry-over. 2. Capital gains and losses are recognized to the extent of their full amount. 3. Capital losses are deductible only to the extent of capital gains. 4. Net capital losses are not deductible from ordinary gain or income but ordinary losses are deductible from net capital gains. Note: For sale, barter, exchange or other forms of disposition of shares of stock subject to the 15%8 capital gains tax on the net capital gain during the

Prior to TRAIN, the rate was ½ of 1%. Prior to TRAIN, the rates were:

5% if not over P100,000; and 10% on any amount in excess of P100,000.

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taxable year, the capital losses realized from this type of transaction during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the shares is an individual, the rule on holding period and capital loss carry-over will not apply, notwithstanding the provisions of Section 39 of the Tax Code. [RR 6-2008, c.4] ACTUAL GAIN VIS-À-VIS PRESUMED GAIN Presumed Gain: In the sale of real property located in the Philippines, classified as capital asset, the tax base is the gross selling price or fair market value, whichever is higher. The law presumes that the seller makes a gain from such sale. Thus, whether or not the seller makes a profit from the sale of real property, he has to pay 6% capital gains tax. In fact, he has to pay the tax, even if he incurs an actual loss from the sale thereof. (However, when the buyer is the government, the individual seller has the option whether to be taxed at the graduated income tax rates or at 6% capital gains tax.) Actual Gain: The tax base in the sale of real property classified as an ordinary asset is the actual gain. If the seller incurs a loss from the sale, such loss may be deducted from his gross income during the taxable year. The ordinary gain shall be added to the operating income and the net taxable income shall be subject to the graduated rates from 0% to 35% (if an individual)9 or to 30% corporate tax or to 2% minimum corporate income tax (MCIT) (if a corporation). Computation of the amount of gain or loss Amount realized from sale or other disposition of property Less: Basis or Adjusted Basis NET GAIN (LOSS) Note: Amount realized from sale or other disposition of property = sum of money received + fair market value of the property (other than money) received. Note: When a taxpayer sells a real or personal property, he should deduct its cost from its selling price to measure the gain or loss from the sales transaction [Sec. 40, NIRC].

TAXATION LAW

LONG TERM CAPITAL GAIN VIS-À-VIS SHORT TERM CAPITAL GAIN Long-term capital gain: Capital asset is held for more than twelve months before it is sold. Only 50% of the gain is recognized. Short-term capital gain: Capital asset is held for 12 months or less, 100% of the gain is subject to tax. NET CAPITAL CAPITAL LOSS

GAIN

VIS-À-VIS

NET

Net Capital Gain: Excess of the gains over the losses on sales or exchange of capital assets during the taxable year. Net Capital Loss: Excess of the losses over the gains on sales or exchanges of capital assets during the taxable year. [Sec. 39 (A), NIRC] INCOME TAX TREATMENT OF CAPITAL LOSS Capital loss limitation rule (applicable to both corporations and individuals) General Rule: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges [Sec. 39(C), NIRC]. Exception for Banks and Trust Companies: If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof) with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses [Sec. 39(C), NIRC]. Net loss carry-over rule (applicable only to individuals) If an individual sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for the year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months [Sec. 39(D), NIRC].

9

Prior to TRAIN, graduated rates start from 5% to 32% for individuals.

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DEALINGS IN REAL PROPERTY SITUATED IN THE PHILIPPINES Persons Liable and Transactions Affected: 1. Individual taxpayers, estates and trusts 2. Sale or exchange or other disposition of real property considered as capital assets. 3. Includes "pacto de retro sale" and other conditional sale. 4. Domestic Corporation 5. Sale or exchange or disposition of lands and/or building which are not actually used in business and are treated as capital asset. Rate and Basis of Tax a. A final withholding tax of 6% is based on the b. gross selling price; or c. fair market value; or d. zonal value whichever is higher. Note: Gain or loss is immaterial, there being a conclusive presumption of gain. DEALINGS IN SHARES OF STOCK OF PHILIPPINE CORPORATIONS Persons Liable to the Tax: 1. Individual taxpayer, whether citizen or alien; 2. Corporate taxpayer, whether domestic or foreign; and 3. Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds and pension funds, among others. Persons not liable: 1. Dealers in securities 2. Investor in shares of stock in a mutual fund company 3. All other persons who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws. Shares listed and traded through the stock exchange other than sale by a dealer in securities 0.6 of 1%10 of the gross selling price of the stock or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor

10 11

Prior to TRAIN, the rate was ½ of 1%. Prior to TRAIN, the rates were: 5% if not over P100,000; and

TAXATION LAW

through the remittance of the stock transaction tax by he eller or ran feror broker. Note: In the nature of percentage tax and not income tax; exempt from income tax per Section 127 (d): An gain deri ed from the sale, barter, exchange or other disposition of share of stock under this section shall be exempt from taxes imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income a . Note: Percentage tax under Sec. 127 is NOT DEDUCTIBLE for income tax purposes. Shares not listed and traded through the stock exchange Net capital gains derived during the taxable year from sale, exchange, or transfer shall be taxed at 15% of net capital gains (on a per transaction basis).11 (Note: There is a different tax treatment for foreign corporations as RA 10963 [TRAIN Law] did not amend such provisions so the old rate is used12) SALE OF PRINCIPAL RESIDENCE Principal residence: the family home of the individual taxpayer [RR 14-2000] Disposition of principal residence (capital asset) is exempt from Capital Gains Tax, provided: 1. Sale or disposition of the old principal residence; 2. By natural persons - citizens or aliens provided that they are residents taxable under Sec. 24 of the Code (does not include an estate or a trust); 3. The proceeds of which is fully utilized in (a) acquiring or (b) constructing a new principal residence within eighteen (18) months from date of sale or disposition; 4. Notify the Commissioner within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail the tax exemption; 5. Can only be availed of only once every ten (10) years; 6. The historical cost or adjusted basis of his old principal residence shall be carried over to the cost basis of his new principal residence 7. If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to capital gains tax. 12

10% on any amount in excess of P100,000. Id.

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8.

TAXATION I

Portion of presumed gains subject to CGT: (Unutilized/GSP) x (higher of GSP or FMV)

c. Tax free exchanges [Sec. 40 (c)(2)] MERGER OR CONSOLIDATION No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation 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; or 2. 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; or 3. A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. Both corporations in the aforementioned cases must be parties to a merger or consolidation. Merger occurs when one corporation acquires all or substantially all the properties of another corporation. Consolidation occurs when two or more corporations merge to form one corporation. Securities include debentures but does not include notes of whatever class or duration. Substantially all the properties of another corporation means the acquisition of at least 80% of the assets, including cash, of another corporation which has the element of permanence and not merely momentary holding [Banggawan citing BIR Gen.Circ. V253 (1957)] INITIAL ACQUISITION OF CONTROL No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.

6. Passive Investment Income Under Sec 24(B) of the Tax Code, a final tax is imposed upon gross passive income of citizen and

TAXATION LAW

resident aliens. An income is considered passive if the taxpayer merely waits for it to be realized. TAX TREATMENT Passive income may be subject to either schedular rates or final tax rate. a. Subject to schedular rates such as dividend income received by a domestic corporation from non-resident foreign corporation; and b. Subject to final tax rate such as interest, income from foreign currency bank deposits by a resident citizen. SOURCES The following are the sources of passive income subject to final tax a. Interest income; b. Dividend Income; c. Royalty Income; and d. Rental Income. Note that these incomes are NOT added to other income in the determination of ordinary income tax liability. a. Interest Income An earning derived from depositing or lending of money, goods or credits [Valencia and Roxas] e.g., interest income from government securities such as Treasury Bills. Unless exempted by law, interest income received by the taxpayer, whether or not usurious, is subject to income tax. b. Dividend Income A form of earnings derived from the distribution made by a corporation out of its earnings or profits and payable to its stockholders, whether in money or in property. The following are the classification of dividends: 1. Cash dividends 2. Stock dividends 3. Property dividends; and 4. Liquidating dividends. In general, dividends are subject to final tax under the Tax Code. Cash dividends Dividends are subject to final tax under the NIRC. However, dividends received by a domestic corporation from another domestic corporation, and

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TAXATION LAW

a non-resident foreign corporation from a domestic corporation is exempt from income tax. Cash dividend is the most common form of dividend, valued at the amount of money received by the stockholder. Cash dividends and property dividends are subject to income tax. Stock dividends Stock dividend is generally exempt from income tax, EXCEPT: 1. If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits (Sec. 73(B), NIRC); or 2. Where there is an option that some stockholders could take cash or property dividends instead of stock dividends; some stockholders exercised the option to take cash of property dividends; and the exercise of option resulted in a change of the ockholder propor iona e hare in he outstanding share of the corporation. Property dividends Property dividends or dividends in the form of property are subject to tax at preferential rate under the NIRC. Liquidating dividends Represents distribution of all the property or assets of a corporation in complete liquidation or dissolution. It is strictly not dividend income, but rather is treated in effect, a return of capital to the extent of the hareholder in e men . The difference be een he cost or other basis of the stock and the amount received in liquidation of the stock is a capital gain or a capital loss. Where property is distributed in liquidation, the amount received is the FMV of such property. The income is subject to ordinary income tax rates. It is subject neither to the FWT on dividends nor to the CGT on sale of shares.

15% or 30% if without

c. Royalty Income Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in which case, any gain derived therefrom is considered as an active business income subject to the normal corporate tax. Where a person pays royalty to another for the use of its intellectual property, such royalty is generally a passive income of the owner thereof subject to withholding tax. d. Rental Income Refers to earnings derived from leasing real estate as well as personal property. Aside from the regular amount of payment for using the property, it also includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes, loans, insurance premiums, etc.) [RR 19-86] Rent income may be in the following forms: 1. Cash, at the stipulated price 2. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract of lease, e.g., real estate tax on the property leased assumed by the lessee

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3.

TAXATION I

TAXATION LAW

Advance payment

located in the Philippines shall be subject to 30% corporate income tax, such tax to be withheld and remitted by the lessee in the Philippines

If the advance payment is actually a loan to the lessor, or an option money for the property, or a security deposit for the faithful performance of certain obligations of the lessee, such advance payment is not income to the lessor. However, a security deposit that is applied to rental is taxable income to the lessor. If the advance payment is, in fact, a pre-paid rental, received by the lessor under a claim of right and without restriction as to its use, then such payment is income to the lessor. Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method used by the lessor. Lease of personal property Rental income on the lease of personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows: NRANRFC NETB Vessel 4.5% 25% Aircraft, machineries and 7.5% 25% other Equipment Other assets 30% 25% Lease of real property Lessor Citizen Resident Alien Non-resident alien engaged in trade or business in the Philippines Non-resident alien not engaged in trade or business in the Philippines

Domestic Corporation Resident Foreign Corporation Non-resident Foreign Corporation

Tax Rate Net taxable income shall be subject to the graduated income tax rates Rental income from real property located in the Philippines shall be subject to 25% final withholding tax unless a lower rate is imposed pursuant to an effective tax treaty Net taxable income shall be subject to 30% corporate income tax or its gross income will be subject to 2% MCIT Gross rental income from real property

TAX TREATMENTS a.

Leasehold improvements by lessee

Rent Income from leasehold improvements: 1. Outright method- lessor shall report as income FMV of the buildings or improvements subject to the lease in the year of completion. 2. Spread-out method- lessor shall spread over the remaining term of the lease the estimated depreciated (book) value of such buildings or improvements at the termination of the lease, and reports as income for each remaining term of the lease an aliquot part thereof. Estimated BV at the end of the lease contract/ remaining lease term = Income per year If for any reason than a bona fide purchase from the lessee by the lessor, the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed, lessor receives additional income for the year which the lease is so terminated to the extent of the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such building or improvement. No appreciation in value due to causes other than the premature termination of lease shall be included [Sec. 49, RR No. 2]. If the building or other leasehold improvement is destroyed before the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place, the amount previously reported as income because of the erection of the improvement, less any salvage value, to the extent that such loss was not compensated by insurance [Sec. 49, RR No. 2]. b. VAT added to rental/paid by the lessee If the lessee is VAT-registered, treat VAT paid as input VAT

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If the lessee is not VAT-registered OR not liable to VAT, treat VAT paid as additional rent expense deductible from gross income.

3. 4.

c. Advance Rental/ Long Term Lease Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method used by the lessor.

TAXATION LAW

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 international sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations shall be EXEMPT from income tax.

7. Annuities, Proceeds from Life insurance or Other Types of Insurance

9. Pensions, Retirement Benefit, or Separation Pay

It refers to periodic instalment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him. It is paid annually, monthly, or periodically, computed upon the amount paid yearly, but necessarily for life. [Peralta v. Auditor General, G.R. No. L-8480 (1957)]

Paid for past employment services rendered. A stated 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. It is generally taxable unless the law states otherwise. [Valencia]

Annuities are installment payments received for life insurance sold by insurance companies.

Inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources

The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income. [Art. 2021, New Civil Code] The annuity payments represent a part that is taxable and not taxable. If part of annuity payment represents interest, then it is a taxable income. If the annuity is a return of premium, it is not taxable.

8. Prizes and Awards A prize is a reward for a contest or a competition. It represents rem nera ion for an effor reflec ing one superiority. Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor. The EXCEPTIONS are as follows: 1. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are EXCLUSIONS from gross income if: 2. The recipient was selected without any action on his part to enter a contest or proceedings; and

10. Income from Any Source Whatever

Forgiveness of indebtedness The cancellation or forgiveness of indebtedness may have any of three possible consequences: It may amount to payment of income. If, for example, an individual performs services to or for a creditor, who, in consideration thereof, cancels the debt, income in that amount is realized by the debtor as compensation for personal services. It may amount to a gift. 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 la er repor of income. It may amount to a capital transaction. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of a payment of dividend. Tax Benefit Rule This is a general principle in taxation which states that if a taxpayer deducted an item on his income tax return and enjoyed a tax benefit (reduced his income

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tax) thereby, and in a subsequent year recovers all or part of that item, he will recognize gross income in the year the deducted item is recovered. The rule has both an inclusionary and an exclusionary component, i.e., he reco er i incl ded in he a pa er gro income to the extent that the taxpayer obtained a tax benefi from he prior ear deduction, and the reco er i e cl ded o he e en ha he prior ear deduction did not provide a tax benefit. 3 deductions in Sec. 34 which makes reference to Tax Benefit Rule are the following: Taxes [Sec 34(C)(1)] Abandonment Losses [Sec 34 (D)(7)(b)] Bad Debts [Sec 34(E)(1)] Recovery of accounts previously written-off Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included a par of he a pa er gro income in he ear of such recovery to the extent of the income tax benefit of said deduction. There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser income and hence tax savings for the company. [Sec. 4, RR 5-99]

Year 2 Recovery of Amounts Written Off Taxable Income on the Recovery

2,000

2,000

6,000

2,000

-

5,000

In Case A, the entire amount recovered (P2,000) is included in the computation of gross income in Year 2 because the taxpayer benefited by the same extent. Prior to the write-off, the taxable income was P300,000; after the write-off, the taxable income was reduced to P298,000. In Case B, none of the P2,000 recovered would be recognized as gross income in Year 2. Note that even without the write-off, the taxpayer would not have paid an income a an a . The a able income before the write-off was actually a net loss. In Case C, only P5,000 of the P6,000 recovered would be recognized as gross income in Year 2. It was only to this extent that the taxpayer benefited from the write-off. The taxpayer did not benefit from the extra P1,000 because at this point, the P1,000 was already a net loss. Receipt of tax refunds or credit

Illustration:

Gross Income Less: Allowable Deductions (before writeoff of Uncollectible Accounts/De bts) Taxable Income (Net Loss) before write-off Deduction for Accounts Receivable written off Taxable Income (Net Loss) after write-off

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Case A Case B Year 1

Case C

500,000

400,000

500,000

(200,000)

(480,000)

(495,000)

300,000

(60,000)

5,000

(2,000)

(2,000)

(6,000)

298,000

(62,000)

(1,000)

General rule: A refund of a tax related to the business or the practice of profession, is taxable income (e.g., refund of fringe benefit tax) in the year of receipt to the extent of the income tax benefit of said deduction (i.e., the tax benefit rule applies). Exceptions: However, the following tax refunds are not to be included in the computation of gross income: a. Philippine income tax, except the fringe benefit tax b. 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. c. Esta e and donor a e d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessments) e. Value Added Tax f. Fines and penalties due to late payment of tax g. Final taxes h. Capital Gains Tax Note: The enumeration of tax refunds that are not taxable (income) is derived from an enumeration of

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tax payments that are not deductible from gross income.

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1.

The income which is considered as derived from within the Philippines is obtained by using the following formula:

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; 2. The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; 3. The supply of scientific, technical, industrial or commercial knowledge or information; 4. 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 (a), any such equipment as is mentioned in (b) or any such knowledge or information as is mentioned in (c); 5. 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; 6. 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 7. The use of or the right to use: 8. Motion picture films; 9. Films or video tapes for use in connection with television; and 10. Tapes for use in connection with radio broadcasting.

Philippine Gross Income* x Dividend = Income Within Worldwide Gross Income* *of the corporation giving the dividend

As a rule, the situs of rental income is the place where the property is located. The situs of royalty income is where the rights are exercised.

If a tax is not an allowable deduction from gross income when paid (no reduction of taxable income, hence no tax benefit), the refund is not taxable. SOURCE RULES IN DETERMINING INCOME FROM WITHIN AND WITHOUT The following items of gross income shall be treated as gross income from sources WITHIN the Philippines: a. Interests Derived from sources within the Philippines, and interests on bonds, notes or other interestbearing obligation of residents. Ultimately, the situs of interest income is the residence of the debtor. b. Dividends Dividends received: From a domestic corporation; and from a foreign corporation, UNLESS less than 50% of its gross income for the previous 3-year period was derived from sources within the Philippines [in which case it will be treated as income partly from within and partly from without].

As a rule, the situs of dividend income is the residence of the corporation declaring the dividend. c. Services Compensation for labor or personal services performed in the Philippines: As a rule, the situs of compensation is the place of performance of the services. d. Rentals and Royalties From property located in the Philippines or from any interest in such property, including rentals or royalties for

e. Sale of Real Property As a rule, the situs of the income from sale of real property is where the realty is located. f.

Sale of Personal Property General Rule: Gains, profits and income from the sale of personal property, subject to the following rules: Place of Place of Treatment* PURCHASE SALE Income from Philippines Abroad Without Income from Abroad Philippines Within

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*in other words, the situs of the income from the sale of personal property is the place of sale. Exceptions: 1. Gain from the sale of shares of stock in a domestic corporation 2. Treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. 3. Gains from the sale of (manufactured) personal property: 4. produced (in whole or in part) by the taxpayer within and sold without the Philippines, or 5. produced (in whole or in part) by the taxpayer without and sold within the Philippines 6. Treated as derived partly from sources within and partly from sources without the Philippines. Place of PRODUCTION

Place of SALE

Philippines

Abroad

Abroad

Philippines

Treatment Partly within, partly without Partly within, partly without

g. Shares of Stock of Domestic Corporation Treated as derived entirely from sources within the Philippines regardless of where the said shares are sold.

f. Exclusions from Gross Income Exclusions from gross income refer to income received or earned but is not taxable as income because it is exempted by law or by treaty. Such taxfree income is not to be included in the income tax return unless information regarding it is specifically called for. Receipts which are not in fact income are, of course, excluded from gross income. The exclusion of income should not be confused with the reduction of gross income by the application of allowable deductions. While exclusions are simply not taken into account in determining gross income, deductions are subtracted from gross income to arrive at net income. [De Leon] Items of Exclusions representing return of capital Amount of capital is generally recovered through deduction of the cost or adjusted basis of the property

TAXATION LAW

sold from the gross selling price or consideration, or through the deduction from gross income of depreciation relating to the property used in trade or business before it is sold. It may also relate to indemnities, such as proceeds of life in rance paid o he in red beneficiarie and return of premiums paid by the insurance company to the insured under a life insurance, endowment or annuity contract. Damages, in certain instances, may also be exempt because they represent return of capital. Items of Exclusion because it is subject to another internal revenue tax The value of property acquired by gift, bequest, devise or descent is exempt from income tax on the part of the recipient because the receipt of such property is alread bjec o ran fer a e (e a e a or donor tax). Items of Exclusions because they are expressly exempt from income tax 1. Under the Constitution 2. Under a tax treaty 3. Under special laws

1. Rationale for the Exclusions The erm e cl ion refer o i em ha are no included in the determination of gross income because: a. They represent return of capital or are not income, gain or profit; b. They are subject to another kind of internal revenue tax; c. They are income, gain or profit expressly exempt from income tax under the Constitution, tax treaty, Tax Code, or a general or special law. [Mamalateo]

2. Taxpayers Who May Avail of the Exclusions Exclusion Return of capital Already subject to internal revenue tax Express exclusion

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Taxpayer All taxpayers since there is no income. All taxpayers unless provided that income is to be included. As expressly provided.

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3. Exclusions Distinguished from Deductions and Tax Credit

b. Return of premium paid

Exclusions from gross income refer to flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the a pa er a able income, d e o he follo ing reasons: (1) it is exempted by the Constitution or a statute; or (2) it does not come within the definition of income. Deductions, on the other hand, are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income. Exclusions are something received or earned by the taxpayer which do not form part of gross income while deductions are something spent or paid in earning gross income. Tax Credit refers to amounts subtracted from the computed tax in order to arrive at taxes payable.

4. Exclusions Under the Constitution a.

Income derived by the government or its political subdivisions from the exercise of any essential governmental function b. Also, all assets and revenues of a non-stock, non-profit private educational institution used directly, actually and exclusively for private educational purposes shall be exempt from taxation.

5. Exclusions Under the Tax Code (Sec. 32(b), NIRC) a.

TAXATION LAW

Proceeds of life insurance policies

General rule: The proceeds of life insurance policies paid to his estate or to any beneficiary (but not a transferee for a valuable consideration), directly or in trust, upon the death of the insured, are excluded from the gross income of the beneficiary. However, if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments received by the insured shall be included in gross income. The interest income shall be taxed at the graduated income tax rates.

General rule: 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 mentioned in the contract or upon surrender of the contract is a return of capital and not income. This refers to the cash surrender value of the contract. Exception: If the amounts received by the insured (when added to the amounts already received before the taxable year under such contract) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income. c. Amounts received under life insurance, endowment or annuity contracts Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment or annuity contracts are excluded from gross income, but if such amounts (when added to amounts already received before the taxable year under such contract) exceed the aggregate premiums of considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income. However, in the case of a transfer for 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. d. Value of property acquired by gift, bequest, devise or descent Gifts, bequests and devises (which are subject to estate or gift taxes) are excluded from gross income, BUT not the income from such property. If the amount received is on account of services rendered, whether constituting a demandable debt or not, or the use or opportunity to use of capital, the receipt is income [Pirovano v. Commissioner, G.R. No. L-19865, July 31, 1965]

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e. Amount received through accident or health insurance (Compensation for damages) As a rule, amounts received through accident or health insurance or nder orkmen compen a ion acts, as compensation for personal injuries or sickness, plus the amount of any damages received, whether by suit or agreement, on account of such injuries or sickness are excluded from gross income. Examples of non-taxable and taxable damages recoveries are: Non-taxable Taxable compensation for compensation for damages on account damages on account of of Personal (physical) Actual damages for loss injuries or sickness of anticipated profits Any other damages Moral and exemplary recovered on account damages awarded as a of personal injuries or result of break of sickness contract Exemplary and moral damages for out-ofInterest for non-taxable court settlement, damages above incl ding a orne fees Alienation of affection, Any damages as or breach of promise to compensation for marry unrealized income Any amount received as a return of capital or reimbursement of expenses f.

g.

Retirement benefits received under RA 7641(The Retirement Pay Law) and those received by officials and employees of private firms under a reasonable private benefit plan (RPBP) maintained by the employer under RA 4917 (now Section 32(B)(6)(a) of NIRC) are excluded from gross income subject to income tax. RA 7641 Retiring employee must be in the service of same employer CONTINUOUSLY for at least five (5) years Retiring employee must be at least sixty (60) years old but not more than 65 years of age at the time of retirement Availed of only once, and only when there is no RPBP

Income exempt under tax treaty

Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. Retirement benefits, pensions, gratuities, etc. These are: a. Retirement benefits under RA 7641, RA 4917, and Section 60(B) of the NIRC b. Terminal pay c. Retirement Benefits from foreign government agencies d. Veterans benefits e. Benefits under the Social Security Act f. GSIS benefits

TAXATION LAW

RPBP Retiring official or employee must have been in the service of the same employer for at least ten (10) years. Retiring official or employee must be at least fifty (50) years old at the time of retirement Retiring employee shall not have previously availed of the privilege under a retirement benefit plan of the same or another employer Plan must be reasonable. Its implementation must be fair and equitable for the benefit of all employees (e.g. from president to laborer) Plan must be approved by BIR

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 wherein contributions are made by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund thus accumulated by the trust in accordance with such plan (trust fund) Further, it should be provided in the plan that at no time prior to the satisfaction of all liabilities with respect to employees under any trust, 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 his employees.

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Terminal pay/Separation pay 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 emplo ee. The phra e for an ca e be ond he con rol of he aid official or emplo ee mean ha the separation of the employee must be involuntary and not initiated by him. The separation must not be of his own making. Notes: Sickness must be life-threatening or one which renders the employee incapable of working Retrenchment of the employee due to unfavorable business conditions or financial reverses is considered as involuntary. However, resignation or availment of an optional early retirement plan is voluntary and bars a claim under this provision. BIR Ruling 143-98: The erminal lea e pa (amount paid for the commutation of leave credits) of retiring government employees is considered not part of the gross salary, and is exempt from taxes. The government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. [Commissioner v. CA and Castaneda, G.R. 96016 (1991)]. Retirement BENEFITS from foreign government agencies The social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public; Payments of VETERANS benefits under U.S. Veterans Administration 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 Social Security Act benefits Payments of benefits received under the Social Security Act of 1954 (RA 8282), as amended, e.g., Maternity Benefits

TAXATION LAW

GSIS benefits Benefits received from GSIS under the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees are not taxable. [Sec. 32B6., NIRC; Sec. B1, RR 2-98] h. Winnings, prizes and award, including those in sports competitions All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad, AND sanctioned by their national sports associations shall not be included in gross income and shall be tax exempt. [Sec. 32 B7d, NIRC] Prizes and awards made primarily in recognition of charitable, literary, educational, artistic, religious, scientific, or civic achievement are not taxable, provided Recipient was selected without any action on his part to enter the contest or proceeding; and Recipient is not required to render substantial future services as a condition to receiving the prize or award

6. Exclusions Under Special Laws Personal Equity and Retirement Account Under R.A. 6657 (Comprehensive Agrarian Reform Package Law), gain arising from the transfer of agricultural property covered by the law shall be exempt from capital gains tax. Under R.A. 6938 (Cooperative Code of the Philippines), as amended by R.A. 9520, cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members' deposits. Under R.A. 7916 (PEZA Law), as amended, PEZAregistered enterprises are given income tax holidays of six or four years from the date of commercial operations, depending on whether their activities are considered pioneer or non-pioneer. Under R.A. 9178 (Barangay Micro Business Enterprises Act of 2002), BMBEs shall be exempt from income tax for income arising from the operation of the enterprise.

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3. Deductions from Gross

TAXATION LAW

a.

Income

Deductions are items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income. Deductions from income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are to be strictly construed, then it follows that deductions must also strictly construed. [CIR v Isabela Cultural Co., G.R. No. 172231 (2007)] Deductions are items or amounts which the law allows to be deducted from the gross of income of a taxpayer in order to arrive at taxable income.

itemized deductions in Section 34(A) to (J) and (M) available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines; b. optional standard deduction in Section 34(L) available only to individual taxpayers deriving business, professional, capital gains and passive income not subject to final tax, or other income; and c. optional standard deduction available to corporations under Section 34(L) of the Tax Code (introduced by RA No. 9504) d. the special deductions in Sections 37 and 38 of the NIRC, and in special laws like the BOI law (E.O. 226).

a. General Rules

In general, deductions or allowable deductions are business expenses and losses incurred which the law allows to reduce gross business income to arrive at net income subject to tax. [Sec. 65, RR No. 2]

1.

Deductions are in the nature of an exemption from taxation; they are strictly construed against the claimant, who must point to a specific provision allowing them and who has the burden of proving that they fall within the purview of such provision. Thus, all deductions must be substantiated, except when the law dispenses with the records, documents or receipts to support the deductions.

3.

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 [Commissioner of Customs v. Philippine Acetylene Co., G.R. No. L-22443 (1971)] 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 will not apply. [Commissioner v. Anoldus Caprentry Shop, G.R. No. 71122 (1988)] The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax amount as the basis of income tax. It is because many taxpayers spend adequate expenditures in order to obtain a legitimate income. Types of deductions There are four (4) types of deductions from gross income:

2.

Deductions must be paid or incurred in connec ion i h he a pa er rade, b ine or profession Deductions must be supported by adequate receipts or invoices (except standard deduction) Additional requirement relating to withholding

b. Return of Capital Income tax is levied by law only on income; hence, the amount representing return of capital should be deducted from proceeds from sales of assets and should not be subject to income tax. Costs of goods purchased for resale, with proper adjustment for opening and closing inventories, are deducted from gross sales in computing gross income [Sec. 65, Rev. Reg. 2] Sale of inventory of goods by manufacturers and dealers of properties: In sales of goods representing inventory, the amount received by the seller consists of return of capital and gain from sale of goods or properties. That portion of the receipt representing return of capital is not subject to income tax. Accordingly, cost of goods manufactured and sold (in the case of manufacturers) and cost of sales (in the case of dealers) is deducted from gross sales and is reflected above the gross income line in a profit and loss statement. Sale of stock in trade by a real estate dealer and dealer in securities: Real estate dealers and dealers in securities are ordinarily not allowed to compute the amount representing return of capital through cost of

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TAXATION LAW

sales. Rather they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged.

ORDINARY - normal and usual in relation to the taxpayer's business and surrounding circumstances; need not be recurring

Sale of services: Their entire gross receipts are treated as part of gross income.

NECESSARY - appropriate and helpful in the development of taxpayer's business or are proper for the purpose of realizing a profit or minimizing a loss

c. Itemized Deductions These are enumerated in Section 34 of the NIRC. Additional deductions are granted to insurance companies in Section 37, while losses from wash sales of stock or securities by a dealer in securities are provided for in Section 38 of the NIRC. Other itemized deductions could be granted under general or special laws, e.g. additional training expenses are allowed to enterprises registered with PEZA, BOI, and SBMA. Timing of Claiming Deductions A taxpayer has the right to deduct all authorized allowances for the taxable year. As a rule, if he does not within any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them from the income of the next of any succeeding year [Sec. 76, Income Tax Regulations]

1. Expenses Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected wi h or per aining o he a pa er trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. Includes: a. Salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefits furnished or granted by the employer to the employee b. Travel expenses c. Rentals d. Entertainment, recreation and amusement expenses e. Other expenses such as repairs or those incurred by farmers and other persons in agribusiness Requisites for deductibility of business expenses a. Ordinary AND necessary;

b. Paid or incurred during the taxable year; c. 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 profession; d. Substantiated by adequate proof documented by official receipts or adequate records, which reflect the amount of expense deducted and the connection or relation of the expense to the business/trade of the taxpayer); e. Legitimately paid (not a BRIBE, kickback, or otherwise contrary to law, morals, public policy); f. If subject to withholding tax, the tax required to be withheld on the expense paid or payable is shown to have been properly withheld and remitted to the BIR on time; g. Amount must be reasonable. Note: The expenses allowable to a non-resident alien or a foreign corporation consist of only such expenses as are incurred in carrying on any business or trade conducted within the Philippines exclusively. [Sec. 77 RR 2] COHAN Rule: This relief will apply if the taxpayer has shown that it is usual and necessary in the trade to entertain and to incur similar kinds of expenditures, there being evidence to show the amounts spent and the persons entertained, though not itemized. In such a situation, deduction of a portion of the expenses incurred might be allowed even if there are no receipts or vouchers. Absence of invoices, receipts or vouchers, particularly lack of proof of the items constituting the expense is fatal to the allowance of the deduction [Gancayco v. Collector, G.R. No. L-13325, (1961)] Substantiation requirement Sec. 34(A)(1)(b), NIRC: No deduction from gross income shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (1) the AMOUNT of the expense being deducted, and (2) the DIRECT CONNECTION or relation of the expense being deducted to the development, management,

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operation and/or conduct of the trade, business or profession of the taxpayer. When o ACCRUE e pen e : all e en e ae that under the accrual method of accounting, expenses are deductible in the taxable year in which: (1) all events have occurred which determine the liability; and (2) the amount of liability can be determined with reasonable accuracy. Kinds of business expenses These are: a. 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 tax which tax should have been paid b. Travelling expenses c. Cost of materials d. Rentals and/or other payments for use or possession of property e. Repairs and maintenance f. Expenses under lease agreements g. Expenses for professionals h. Entertainment expenses i. Political campaign expenses j. Training expenses k. Others 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 tax which tax should have been paid Given for personal services must be actually rendered and reasonable. For income payment to be allowed as deduction, the withholding tax must have been paid [RR No. 122013]. Bonuses are deductible when: a. made in good faith b. given as additional compensation for personal services actually rendered c. such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered Traveling expenses a. This include transportation expenses and meals and lodging [Secs. 65 and 66, Rev. Reg. No. 2] b. Expenses must be reasonable and necessary.

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c.

M be inc rred or paid hile a a from home d. Tax home is the principal place of business, when referring o a a from home e. Incurred or paid in the conduct of trade or business. Note: However, necessary transportation expenses of the taxpayer (which are different from the transportation expenses included in the term ra el e pen e ) in i a home are ded c ible. Th , a taxpayer operating its business in Manila is allowed transportation expenses from its office to its c omer place of b ine and back. B he transportation expenses of an employee from his residence to its office and back are not deductible as they are considered personal expenses. Cost of materials Deductible only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that their cost has not been deducted in determining the net income for any previous year. Rentals and/or other payments for use or possession of property Required as a condition for continued use or possession of property. For purposes of trade business or profession. Taxpayer has not taken or is not taking title to the property or has no equity other than that of lessee, user, or possessor. On the accrual basis, rent is deductible as expense when liability is incurred during the period of use. On cash basis, rent is deductible when it is incurred and paid. If the advance payment is a prepaid rental, such payment is taxable income to the lessor in the year when it was received. However, an advance payment is not deductible expense of the lessee until the period is used. [Valencia and Roxas] Repairs and maintenance Incidental or ordinary repairs are deductible. Repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient working condition, may be deducted as expenses, provided the plant or property account is not increased by the amount of such expenditure. The life of the asset referred to is the probable, normal, useful life for the purpose of the allowance for the return of the capital investment

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not what the life that would have been if no repairs had been made after the property was damaged by a casualty. Since the repairs prolonged the lives of the said vessels of petitioners, the disallowance must be sustained. [Visayan Transportation Co. v. CTA, CTA Case No. 1119, (1964)] Extraordinary repairs are not deductible capital expenditures

they are

Repairs which add material value to the property or appreciably prolong its life Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserves if such account is kept. [Sec. 68, Rev. Regs. 2] All maintenance expenses on account of nondepreciable vehicles for taxation purposes are disallowed in its entirely. [RR No. 12-2012] Expenses under lease agreements Requisites for deductibility: a. Required as a condition for continued use or possession; b. For purposes of the trade, business or possession; c. Taxpayer has not taken or is not taking title to the property or has no equity other than that of lessee, user, or possessor. Expenses for professionals Deductible in the year the professional services are rendered, not in the year they are billed, provided that the all e en i pre en . A : a. Fixing a right to income or liability to pay; and b. The availability of reasonably accurate determination of such income or liability. The all-e en e doe no demand ha he amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount. [Commissioner v. Isabela Cultural Corporation, G.R. No. 172231 (2007)] A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operation and repair of

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transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals. [Mamalateo] Entertainment/Representation expenses These are entertainment, amusement and recreation (EAR) expenses incurred or paid during the year that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer. Requisites for deductibility: a. Reasonable in amount. b. Paid or incurred during the taxable period. c. Directly connected to the development, management, and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct thereof. d. Not to exceed such ceiling as the Secretary of Finance prescribe (under RR 10-02, in no case to exceed 0.50% of net sales for sellers of goods or properties or 1% of net revenues for sellers of services, including taxpayers engaged in the exercise of profession and use or lease of properties) e. Not incurred for purposes contrary to law, morals, public policy or public order. f. Must be substantiated with sufficient evidence such as receipts and/or adequate records. Exclusions from EAR expenses: a. Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship b. Expenses for charitable or fund raising events c. Expenses for bona fide business meeting of stockholders, partners or directors d. Expenses for attending or sponsoring an employee to a business league or professional organization meeting e. Expenses for events organized for promotion marketing and advertising, including concerts, conferences, seminars, workshops, conventions and other similar events; and f. Other expenses of a similar nature. Political campaign expenses Amount expended for political campaign purposes or payments to campaign funds are NOT deductible either as business expenses or as contribution [CTA Case No. 695, April 30, 1969, citing Mertens]

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Training expenses Under Section 30 of the Tax Code, as implemented by Sec. 20 of the Revenue Regulations No. 2, organization and pre-operating expenses of a corporation (including training expenses) are considered as capital expenditures and are therefore, not deductible in the year they are paid or incurred. But taxpayers who incur these expenses and subsequently enter the trade or business to which the expenditures relate can elect to amortize these expenditures over a period not less than sixty (60) months. [BIR Ruling 102-97, Sept. 29, 1997] This rule, however, does not apply to a situation where an existing corporation incurs these same expenditures for the purpose of expanding its business in a new line of trade, venture or activity. OTHERS a. Expenses Allowable to Private Educational Institutions In addition to the expenses allowable as deductions under the NIRC, a private proprietary educational institution may at its OPTION, elect either: 1. To deduct expenditures otherwise considered as capital outlays or depreciable assets incurred during the taxable year for the expansion of school facilities, OR 2. To deduct allowances for depreciation thereof. Thus, where the expansion expense has been claimed as a deduction, no further claims for yearly depreciation of the school facilities are allowed. b. Advertising Expenses The media advertising expenses which were found to be inordinately large and thus, not ordinary, and which were incurred in order to pro ec he a pa er brand franchi e hich i analogous to the maintenance of goodwill or title o one proper , are no ordinar and nece ar expenses but are capital expenditures, which should be spread out over a reasonable period of time. [CIR v. General Foods Phils. Inc, G.R. No. 143672 (2003)]

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2. Interest Requisites for deductibility a. There is a valid and existing indebtedness. b. The indebtedness is that of the taxpayer c. The indebtedness is connected with the a pa er rade, profe ion, or b ine . d. The interest must be legally due. e. The interest must be stipulated in writing. f. The taxpayer is LIABLE to pay interest on the indebtedness. g. The indebtedness must have been paid or accrued during the taxable year. h. The interest payment arrangement must not be between related taxpayers i. The interest must not be incurred to finance petroleum operations. j. 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, Limitation: The taxpayer's allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax (see chapter on taxation of passive income for interest income); effective January 1, 2009. Non-deductible interest expense a. Interest paid in advance by the taxpayer who reports income on cash basis shall only be allowed as deduction in the year the indebtedness is paid. b. If the indebtedness is payable in periodic amortizations, only 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. c. Interest payments made between related taxpayers. d. Interest on indebtedness incurred to finance petroleum exploration. Related Taxpayers a. Between members of the family, i.e. brothers and sisters (whether by the whole or half-blood), spouse, ancestor, and lineal descendants; or b. Except in case of distributions in liquidation, between an individual and a corporation, where the individual owns directly or indirectly more than 50% of the outstanding stock of the corporation c. Except in the case of distributions in liquidation, between two corporations where:

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1.

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Either one is a personal holding company of a foreign personal holding company with respect to the taxable year preceding the date of the sale of exchange; and 2. More than 50% of the outstanding stock of each is owned, directly or indirectly, by or for the same individual; or d. Between parties to a trust Grantor and Fiduciary; or e. Fiduciary of a trust and fiduciary of another trust if the same person is a grantor with respect to each trust; or f. Fiduciary and Beneficiary

d. Reduction of interest expense/interest arbitrage The taxpayer's allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax; effective January 1, 2009. [RA 9337]

INTEREST SUBJECT TO SPECIAL RULES a. Interest paid in advance No deduction shall be allowed if within the taxable year an individual taxpayer reporting income on cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise.

3. Taxes

But the deduction shall be allowed in the year the indebtedness is paid b. Interest periodically amortized 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 c. Interest expense incurred to acquire property for use in trade/business/profession At the option of the taxpayer, interest expense on a capital expenditure may be allowed as A deduction in full in the year when incurred; A capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure. Should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In other words, the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. [Paper Industries Corp. v. Commissioner, G.R. Nos. 106949-50 (1995)]

This limitation is apparently intended to counter the tax arbitrage scheme where a taxpayer obtains an interest-bearing loan and places the proceeds of such loan in investments that yield interest income subject to preferential tax rate of 20% final withholding tax. [Valencia and Roxas]

Taxes Proper: Refers to national and local taxes Requisites for deductibility a. Such tax must be: b. Paid or incurred within the taxable year; c. Paid or incurred in connection with the taxpayer rade, profession or business; d. Imposed directly on the taxpayer; e. Not specifically excluded by law from being ded c ed from he a pa er gro income. The following taxes are deductible: a. Import duties; b. Business tax; c. Professional/occupation tax; d. Privilege and excise tax; e. DST; f. Motor vehicle registration fees; g. Real property tax; h. Electric energy consumption tax; and i. Interest on delinquent taxes. Non-deductible taxes General Rule: All taxes, national or local, paid or incurred during the taxable year in connection with the taxpayer's profession, trade or business, are deductible from gross income Exceptions: a. Philippine income tax, except Fringe Benefit Taxes; b. Income tax imposed by authority of any foreign country, if taxpayer avails of the Foreign Tax Credit (FTC) Exception to exception: When the taxpayer does NOT signify his desire to avail of the tax credit for taxes of foreign countries, the amount may be allowed as a

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deduction from gross income of citizens and domestic corporations subject to the limitations set forth by law. Treatments of surcharges/interests/fines for delinquency The amount of deductible taxes is limited to the basic tax and shall not include the amount for any surcharge or penalty on delinquent taxes. However, interest on delinquent taxes, although not deductible as tax, can be deducted as interest expense at its full amount. [CIR v. Palanca, G.R. No. L-16626 (1966)] Although interest payment for delinquent taxes is not deductible as tax, the taxpayer is not precluded thereby from claiming said interest payment as deduction as such. [CIR v. Vda. de Prieto, G.R. No. L13912 (1960)] Treatment of special assessment Special assessments and other taxes assessed against local benefits of a kind tending to increase the value of the property assessed are non-deductible from gross income. Tax credit vis-à-vis deduction Tax credit amount allowed by law to reduce the Philippine income tax due, subject to limitations, on account of taxes paid or accrued to a foreign country Tax Credit Taxes are deductible from the Phil. Income tax itself Effect: Reduces Philippine income tax liability Sources: Only foreign income taxes may be claimed as credits against Philippine income tax.

Tax Deduction Taxes are deductible from gross income in computing the taxable income Effect: Reduces taxable income upon which the tax liability is calculated

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The following may claim tax credits: a. Resident citizens b. Domestic corporations, which include all partnerships except general professional partnerships c. Members of general professional partnerships d. Beneficiaries of estates or trusts The following may NOT claim tax credits: a. Non-resident citizens b. Aliens, whether resident or non-resident c. Foreign corporations, whether resident on nonresident Note: Tax credits for foreign taxes are allowed only for income derived from sources outside the Philippines. The above taxpayers are not entitled to tax credit; they are taxable only on income derived from Philippine sources. Limitations on Tax Credit. [Per Country Limit] The amount of tax credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and [Worldwide Limit] The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable bears to his entire taxable income for the same taxable year. Formula: Limit #1 Per Country Limit

Sources: Deductible taxes (e.g. business tax, excise tax)

An amount subtracted from an individual's or entity's tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer's liability, compared to a deduction which reduces taxable income upon which the tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed. [CIR v. Bicolandia Drug Corp., G.R. No. 148083 (2006)]

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Taxable Income Per Foreign Country Worldwide Taxable Income

x

Phil. Income Tax

Limit on = amount of tax credit

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Limit #2 World Limit Taxable Income Per Foreign Country Worldwide Taxable Income

Phil. x Income Tax

=

Limit on amount of tax credit

Note: Computation of FTC: Limit #2 applies where taxes are paid to two or more foreign countries. Allowable tax credit is the lower between the tax credit computed under Limit #1 and that computed under Limit#2. FTC Limitations lowest of the 3: a. Actual FTC b. For taxes paid to one foreign country c. For taxes paid to 2 or more foreign countries

4. Losses Requisites for deductibility a. Loss must be that of the taxpayer (e.g., losses of the parent corp. cannot be deducted by its subsidiary); b. Actually sustained and charged off within the taxable year; c. Incurred in trade, business or profession; d. 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; e. Sustained in a closed and completed transaction; f. Not compensated for by insurance or other form of indemnity; g. Not claimed as a deduction for estate tax purposes; h. In case of casualty loss, filing of notice of loss with the BIR within 45 days from the date of the event that gave rise to the casualty; and i. The taxpayer must prove the elements of the loss claimed, such as the actual nature and occurrence of the event and amount of the loss. In case a non-depreciable vehicle is sold at a loss, the loss incurred from the sale of non- depreciable vehicle is not allowed as a deduction. [RR No. 2-2013]

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No loss is recognized in the following. a. Merger, consolidation, or control securities (where no gains are recognized either); b. Exchanges not solely in kind; c. Related taxpayers (see above (c) Interest expense incurred to acquire property for use in trade/business/profession) d. Wash sales; e. Illegal transactions OTHER TYPES OF LOSSES a. Capital losses 1. Incurred in the sale or exchange of capital assets (allowable only to the extent of capital gains, except for banks and trust companies under conditions in Sec. 39 of NIRC where loss from such sale is not subject to the foregoing limitation) 2. Resulting from securities becoming worthless and which are capital assets (considered loss from sale or exchange) on last day of the taxable year 3. Losses from short sales of property; 4. Losses due to failure to exercise privileges or options to buy or sell property. b. Securities becoming worthless Loss in shrinkage in value of stock through fluctuation in the market is not deductible from gross income. (To be deductible, the loss must be actually suffered when the stock is disposed of.) Exception: If the stock of the corporation becomes worthless, the cost or other basis may be deducted by its owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts. c. Losses on wash sales of stocks or securities Wash Sale - a sale or other disposition of stock or securities where substantially identical securities (substantially the same as those disposed of) are acquired or purchased (or there was an option to acquire, and the acquisition or option should be by purchase or exchange upon which gain or loss is recognized under the income tax law) within a 61-day period, beginning 30 days before the sale and ending 30 days after the sale General rule: Not deductible from gross income

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Exception: If by a dealer in securities in the course of ordinary business, it is deductible. d. Wagering losses Losses from wagering (gambling) are deductible only to the extent of gains from such transactions. A wager is made when the outcome depends upon CHANCE. e. Net Operating Loss Carry Over (NOLCO) Net operating loss (NOL) is the excess of allowable deductions over gross income for any taxable year immediately preceding the current taxable year. NOLCO: The NOL of the business or enterprise which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss, provided however, that any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction. [Sec. 34(3)(D), NIRC] Exception: Mines other than oil and gas wells, where a net operating loss without the benefit of incentives provided for under EO No. 226 (Omnibus Investments Code) incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. Requisites for NOLCO a. The taxpayer was not exempt from income tax the year the loss was incurred; b. There has been no substantial change in the ownership of the business or enterprise wherein: c. AT LEAST 75% of nominal value of outstanding issued shares is held by or on behalf of the same persons; or d. AT LEAST 75% of the paid up capital of the corporation is held by or on behalf of the same persons. Taxpayers Entitled to NOLCO a. Individuals engaged in trade or business or in the exercise of his profession (including estates and trusts); Note: An individual who avails of 40% OSD shall not simultaneously claim deduction of NOLCO. However, the three-year reglementary period shall continue to run during such period notwithstanding the fact that the aforesaid taxpayer availed of OSD during the said period.

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b. Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) or under special laws (e.g., PEZAregistered companies) Note: Domestic and resident foreign corporations taxed during the taxable year with Minimum Corporate Income Tax cannot enjoy the benefit of NOLCO. However, the three-year period for the expiry of the NOLCO is not interrupted by the fact that the corporation is subject to MCIT during such three-year period. Other Losses a. Abandonment losses in petroleum operation and producing well. b. Losses due to voluntary removal of building incident to renewal or replacements are deductible from gross income. c. Loss of useful value of capital assets due to charges in business conditions is deductible only to the extent of actual loss sustained (after adjustment for improvement, depreciation and salvage value) d. Losses from sales or exchanges of property between related taxpayers are not recognized, but the gains are taxable. e. Losses of farmers incurred in the operation of farm business are deductible.

5. Bad debts Debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer actually ascertained to be worthless and the corresponding receivable should have been written off or charged off within the taxable year. A debt is worthless when after taking reasonable steps to collect it, there is no likelihood of recovery at any time in the future. Requisites for deductibility a. Valid and legally demandable debt due to the taxpayer b. Debt is connected with the taxpayer's trade, business or practice of profession; c. Debt was not sustained in a transaction entered into between related parties;

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d. Actually ascertained to be worthless and uncollectible as of the end of the taxable year (taxpayer had determined with reasonably degree of certainty that the claim could not be collected despite the fact that the creditor took reasonable steps to collect); and e. Actually charged off the books of accounts of the taxpayer as of the end of the taxable year General rule: Taxpayer must ascertain and demonstrate with reasonable certainty the uncollectibility of debt Exceptions: a. Banks as creditors BSP Monetary Board shall ascertain the worthlessness and uncollectibility of the debt and shall approve the writing off b. Receivables from an insurance or surety company (as debtor) may be written off as bad debts only when such company is declared closed due to insolvency or similar reason The taxpayer must show that the debt is indeed uncollectible even in the future. He must prove that he exerted diligent efforts to collect: a. Sending of statement of accounts b. Collection letters c. Giving the account to a lawyer for collection d. Filing the case in court [Phil. Refining Corp. v. CA, G.R. No. 118794 (1996)] In ascertaining the debt to be worthless, it is not enough that the taxpayer acted in good faith. He must show that he had reasonably investigated the relevant facts from which it became evident, in the exercise of sound, objective business judgment, that there remained no practical, but only a vague prospect that the debt would be paid [Collector v. Goodrich, G.R. No. L-22265 (1967)] Rev. Reg. No. 5-1999 Ac all a cer ained o be or hle Determination of worthlessness must depend upon the particular facts and 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, where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year. Accounts receivable may be written off as bad debts even without conclusive evidence that they had definitely become worthless when: a. the amount is insignificant; and

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b. collection through court action may be more costly to the taxpayer. Ac ally charged off from the taxpa er book of acco n Receivable which has actually become worthless at the end of the taxable year has been cancelled and written off. Mere recording in the books of account of estimated uncollectible accounts does not constitute a write-off. EFFECT OF RECOVERY OF BAD DEBTS Tax Benefit Rule on Bad Debts Bad debts claimed as deduction in the preceding year(s) but subsequently recovered shall be included a par of he a pa er gro income in he ear of such recovery the extent of the income tax benefit of said deduction. Also called the equitable doctrine of tax benefit. Requisites: a. Allowance must be reasonable b. Charged off during the taxable year from the a pa er book of acco n . c. Does not exceed the acquisition cost of the property.

6. Depreciation An annual reasonable allowance to reduce the wasteful value of the tangible fixed assets resulting from wear and tear and normal obsolescence For intangible assets, the annual allowance to reduce their useful value is called amortization. Requisites for Deductibility a. It must be reasonable. b. It must be charged off during the year. c. The asset must be used in profession, trade or business. d. The asset must have a limited useful life. The depreciable asset must be located in the Philippines if the taxpayer is a nonresident alien or a foreign corporation. [Valencia and Roxas] No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the threshold amount of P2,400,000, nle he a pa er main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in the operations. [RR No. 12-2012]

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Methods of computing depreciation allowance (cost- salvage value) ÷ Straight-line estimated life (cost salvage value) x Rate of Depreciation* Declining balance *rate = 1÷ estimated life (remaining life ÷ SYD) Sum-of-the-year-digit x (cost- salvage value) (SYD) ÷ Any other method which may be prescribed by the Secretary of Finance upon the recommendation of the CIR

i. j.

k.

l.

7. Charitable and other contributions Requisites for deductibility a. Actually PAID or made to the ENTITIES or institutions specified by law; b. Made within the TAXABLE year. c. It must be EVIDENCED by adequate receipts or records. d. For Contributions Other than Money: The amount shall be BASED on the acquisition cost of the property (i.e., not the fair market value at the time of the contribution). e. For Contributions subject to the statutory limitation: It must NOT EXCEED 10% (individual) or 5% (corporation) of he a pa er taxable income before charitable contributions AMOUNT THAT MAY BE DEDUCTED

TAXATION LAW

in accordance with a National Priority Plan determined by NEDA (otherwise, subject to statutory limit) Donations to Certain Foreign Institutions or International Organizations which are fully deductible in compliance with agreements, treaties or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws Donations to Accredited Non-government Organizations subject to conditions set forth in RR No. 13-98 NGO means a non-stock nonprofit domestic corporation or organization: Organized and operated exclusively for: 1. scientific, 2. research, 3. educational, 4. character-building and youth and sports development, 5. health, 6. social welfare, 7. cultural or 8. charitable purposes, or 9. a combination thereof,

No part of the net income of which inures to the benefit of any private individual Directly utilizes contributions for the active conduct of the activities constituting the purpose or function for which it is organized, not later than 15th day of the month following the close of its taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the CIR Administrative expense, on an annual basis, must not exceed 30% of total expenses for the taxable year

Kinds of Contributions: a. Contributions deductible in full; b. Contributions subject to the statutory limit. Contributions Deductible in Full: a. Donations to the Government of the Philippines, or to any of its agencies, or political subdivisions, including fully owned government corporations b. Exclusively to finance, provide for, or to be used in undertaking priority activities in c. Education d. Health e. Youth and sports development f. Human settlements g. Science and culture, and h. Economic development

Upon dissolution, its assets would be distributed to another accredited NGO organized for a similar purpose or purposes, OR to the State for public purpose, OR would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Contributions subject to the Statutory Limit: These contributions are not deductible in full as specified by the law or such deduction has not met the requirements to be deducted in full.

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a. Those made to: a. Government or any of its agencies or political subdivisions exclusively for public purposes (contributions for non-priority activities) b. Accredited domestic corporation or associations organized exclusively for c. Religious d. Charitable e. Scientific f. youth and sports development g. cultural h. educational purposes or i. rehabilitation of veterans j. Social welfare institutions k. Non-government organizations: No part of the net income of which inures to the benefit of any private stockholder or individual Statutory Limit: a. 10% in the case of an individual (individual donor), and b. 5% in the case of a corporation (corporate donor), of he a pa er' /donor income deri ed from trade, business or profession computed before the deduction for contributions and donations The amount deductible is the actual contribution or the statutory limit computed, whichever is lower

8. Contributions to pension trusts Contribution to a pension trust may be claimed as deduction as follows: a. Amount contributed for the present/normal service cost 100% deductible b. Amount contributed for the past service cost 1/10 of the amount contributed is deductible in year the contribution is made, the remaining balance will be amortized equally over nine consecutive years General Rule: An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction, a reasonable amount transferred or paid into such trust in excess of the contributions to such trust made during the taxable year.

There must be a pension or retirement plan established to provide for the payment of reasonable pensions to employees; b. The pension plan is reasonable and actuarially sound; c. It must be funded by the employer; d. The amount contributed must no longer be bjec o he emplo er con rol or di po i ion; and e. The payment has not theretofore been allowed before as a deduction.

9. Deductions under special laws a.

Special deductions for productivity bonus and manpower training under the Productivity Incentives Act of 1990 b. Deductions for training expenses of qualified jewelry enterprises (Jewelry Industry Development Act of 1998) c. Deductions under the Adopt-a-School Act of 1998 d. Deductions under the Expanded Senior Citizens Act of 2003. [Domondon]

d. Optional Standard Deduction 1. Individuals, except non-resident aliens May be taken by an individual in lieu of itemized deductions except those earning purely compensation income. If an individual opted to use OSD, he is no longer allowed to deduct cost of sales or cost of services. Amount: 40% of gross sales or gross receipts (under RA 9504, effective July 6, 2008) Requisites: a. Taxpayer is a citizen or resident alien; b. Ta pa er income i no en irel from compensation; c. Taxpayer signifies in his return his intention to elect this deduction; otherwise he is considered as having availed of the itemized deductions; d. Election is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years.

Requisites for deductibility of payments to pension trusts

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2. Corporations, except non-resident foreign corporations The option to elect Optional Standard Deduction granted is now granted to corporations (domestic and resident foreign corporations) by virtue of RA 9504. The OSD is 40% of its gross income. The domestic and resident foreign corporation shall keep such records pertaining to his gross income as defined in Sec. 32 of the NIRC during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance upon recommendation of the CIR. Corporations availing of OSD are still required to submit their financial statements when they file their annual ITR and to keep such records pertaining to its gross income. [RR 2-2010].

3. Partnerships General Co-Partnership For purposes of taxation, the Code considers general co-partnerships as corporations. Hence, rules on OSD for corporations are applicable to general copartnerships. General Professional Partnerships (GPP)13 GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP. The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-through" entity where its income is ultimately taxed to the partners comprising it. Section 26 of the Tax Code, as amended, likewise provides that "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." As such, a GPP may claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income.

13

This provision was inserted by TRAIN amending Sec. 34 (L): T a a a a a a a comprising such partnership may avail of the optional

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In computing taxable income defined under Section 31 of the Tax Code, as amended, the following may be allowed as deductions: a. Itemized expenses which are ordinary and necessary, incurred or paid for the practice of profession; OR b. Optional Standard Deduction (OSD). The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD. The share in the net income of the partnership, actually or constructively received, shall be reported as taxable income of each partner. The partners comprising the GPP can no longer claim further deduction from their distributive share in the net income of the GPP and are not allowed to avail of the 8% income tax rate option since their distributive share from the GPP is already net of cost and expenses. [RR No. 08-2018]

e. Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer Section 34 (M) of the NIRC has been repealed by TRAIN law. Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer are no longer deductions from gross income.

f. Personal and Additional Exemptions Section 35 of the NIRC has been repealed by TRAIN law. Personal Exemptions for individual taxpayers are no longer allowed.

g. Items Not Deductible General rule: In determining deductions, one of the general rules is that deductions must be paid or inc rred in connec ion i h he a pa er rade, business or profession. Capital expenditures (e.g. acquisition cost of a building) are also not deductible, because these are not expenses, but form part of assets.

standard deduction only once, either by the general professional partnership or the partners comprising the a .

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Exceptions: In computing taxable net income, no deduction shall be allowed with respect to: 1. Personal, living or family expenses (note: they are not deductible from compensation and business/professional income 2. Any amount paid out for new buildings or for permanent improvements (capital expenditures), or betterments made to increase the value of any property or estate 3. Any amount expended in restoring property (major repairs) or in making good the exhaustion thereof for which an allowance [for depreciation or depletion] is or has been made 4. Premiums paid on any life insurance policy covering the life of any officer, employee, or any person financially interested in the trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy 5. Interest expense and bad debts between related parties [Sec. 36(B), NIRC)] 6. Losses from sales or exchanges of property between related taxpayers. 7. Non-deductible interest should the taxpayer elect to deduct interest payments against its gross income, he cannot at the same time capitalize such interest and claim depreciation on the undepreciated cost which includes the interest. [PICOP v. Commissioner, G.R. No. 106949-50 (1995)] 8. Non deductible taxes 9. Non-deductible losses 10. Losses on Wash Sales (except if by dealer in securities in ordinary course of exempt corporations) These are: a. Proprietary Educational Institutions and hospitals b. Government owned and controlled corporations c. Others Related Parties [Sec. 34(B)] 1. Between members of a family (which shall include only his brothers and sisters, spouse, ancestors and lineal descendants) 2. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual except in the case of distributions in liquidation 3. Between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly by or for the same individual

4. 5. 6.

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Between the grantor and the fiduciary of a trust Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust Between the fiduciary of a trust and a beneficiary of such trust [Section 36(B), NIRC]

Relevant points regarding related taxpayers 1. Payment of interest is not deductible. 2. Bad debts are not deductible. 3. Losses from sales or exchanges of property are not deductible. Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens) Tax Classification Taxable Income Rates Income from Resident sources within and 0%-35% Citizen outside the Philippines Income from Non-Resident sources within the 0%-35% Citizen Philippines Income from Resident Alien sources within the 0%-35% Philippines

Non-resident Alien Engaged in Trade or Business Non-resident Alien Not Engaged in Trade or Business

Income from sources within the Philippines

0%-35%

Income from sources within the Philippines

25%

4. Income Tax on Individuals a. Income Tax on Resident Citizens, Non-Resident Citizens and Resident Aliens 1. Coverage Income from All Sources Within and Without the Philippines; Exception a. Resident Citizens A Filipino resident citizen is taxable on income from all sources (within and without the Philippines)

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a transient. If he lives in the Philippines and has no definite intention to stay, he is a resident.

b. Non-resident Citizens A non-resident citizen is taxable only on income derived from sources within the Philippines. A non-resident citizen is a Filipino citizen who: 1. Establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein 2. Leaves the Philippines during the taxable year to reside abroad (as immigrant or for employment on a permanent basis) 3. Works and derives income from abroad and whose employment requires him to be present abroad most of the time during the taxable year 4. Has been previously considered as a non-resident and arrives in the Philippines at any time during the taxable year to reside here permanently (only with respect to his income from sources abroad until the date of his arrival in the country) Other considerations: 1. A Filipino citizen working and deriving abroad as an Overseas Contract Worker is taxable only on income from sources WITHIN the Philippines. 2. OCW refers to Filipino citizens in foreign countries, who are physically present in a foreign country as a consequence of their employment in that country. Their salaries and wages are paid by an employer abroad and is not borne by an entity or person in the Philippines. They must be duly registered with the Philippine Overseas Employment Administration (POEA) with valid Overseas Employment Certificate (OEC). 3. An OCW income ari ing o of hi o er ea employment is exempt from income tax.

One who comes to the Philippines for a definite purpose which, in its nature, may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose of which he came has been consummated or abandoned. [Sec. 5, RR No. 2]

2. Taxation on Compensation Income Income arising from an ER-EE relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78(A)] It includes, but is not limited to salaries and wages, commissions, tips, allowances, bonuses, Fringe Benefits of rank and file EEs and other forms of compensation.

a. Inclusions

c. Resident Aliens A resident alien is taxable only on income from sources WITHIN the Philippines. A resident alien is an individual whose residence is in the Philippines and who is not a Filipino citizen. An alien actually present in the Philippine who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him

1.

Monetary compensation If compensation is paid in cash, the full amount received is the measure of the income subject to tax. a. Regular salary/wage Salary earnings received periodically for a regular work other than manual labor, such as monthly salary of an employee Wages all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78A, NIRC] b. Separation pay/retirement benefit not otherwise exempt Retirement pay a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b] General rule: Retirement pay is taxable

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Exceptions: 1. SSS or GSIS retirement pays. 2. Retirement pay (R.A. 7641) due to old age provided the following requirements are met: a. The retirement program is approved by the BIR Commissioner; b. It must be a reasonable benefit plan. (fair and equitable) c. The retiree should have been employed for 10 years in the said company; d. The retiree should have been 50 years old or above at the time of retirement; and e. It should have been availed of for the first time. Separation pay taxable if voluntarily availed of. It shall not be taxable if involuntary i.e. Death, sickness, disability, reorganization /merger of company and company at the brink of bankruptcy or for any cause beyond the control of the said official or employee c. Bonuses, 13th month pay, and other benefits not exempt Tips and Gratuities those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer. (taxable income but not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1] Thirteenth month pay and other benefits Not taxable if the total amount received is P90,000 or less. Any amount exceeding P90,000 is taxable. [Sec. 32(7)(e), NIRC] Overtime Pay premium payment received for working beyond regular hours of work which is included in the computation of gross salary of employee. It constitutes compensation. d. D Fees received by an employee for the services rendered to the employer including a director fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in the

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performance of their official duty over and above their regular salaries. 2.

Nonmonetary compensation - If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the measure of the income subject to tax.

b. Exclusions 1. Fringe benefit subject to tax (See Gross Income above for the discussion of Taxable and Non-taxable fringe benefits) If the recipient of the fringe benefits is a rank and file employee, and the said fringe benefit is not taxexempt, then the value of such fringe benefit shall be considered as part of the compensation income of such employee subject to tax payable by the employee. [Domondon] Where the recipient of the fringe benefit is not a rank and file employee, and the said benefit is not taxexempt, then the same shall not be included in the compensation income of such employee subject to tax. The fringe benefit [tax] is instead levied upon the employer, who is required to pay. [Domondon] Convenience of the ER Rule If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of he emplo ee ork or po i ion, he value of that privilege need not be included as compensation [Henderson v. Collector (1961)] 2. De minimis benefits Facilities or privileges of relatively small value furnished by an employer to his employees and are as a means of promoting the health, goodwill, contentment, or efficiency of his employees. These are exempt from fringe benefit tax and compensation income tax. 3. 13th month pay and other benefits and payments specifically excluded from taxable compensation income Gross benefits received by employees of public and private entities provided that the total exclusion shall not exceed P90,000 (amounts in excess are considered compensation income)

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Benefits include: 1. Benefits received by government employees under RA 6686; 2. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree); 3. Benefits received by employees not covered by PD 851 as amended by Memorandum Order No. 28; and, 4. Other benefits such as productivity incentives and Christmas bonus.

c. Minimum Wage Earners Minimum wage earners shall be exempt from the payment of income tax on their taxable income per RA 9504. MWEs receiving other income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax from their entire income earned during the taxable year. This rule, notwithstanding, the statutory minimum wage, holiday pay, overtime pay, night shift differential pay, and hazard pay shall still be exempt from withholding tax [RR No. 10-2008].

3. Taxation of Business Income/Income From Practice of Profession All income obtained from doing business and/or engaging in the practice of a profession shall be included in the computation of taxable income. (035% For citizens, resident aliens & NRA Engaged in trade or business or the 8% tax on gross sales or receipts, on the option of the taxpayer; 25% in case of NRANETB) Individuals earning professional income

purely

business

or

Individuals earning income purely from selfemployment and/or practice of profession whose 14

SECTION 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (2) Rates of Tax on Taxable Income of Individuals. The tax shall be computed in accordance with and at the rates established in the following schedule: xxx (b) Rate of Tax on Income of Purely Self-employed Individuals and/or Professionals Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed the Value-added Tax (VAT) Threshold as

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gross sales/receipts and other nonoperating income does not exceed the VAT threshold as provided under Section 109 (BB) of the Tax Code, as amended, shall have the option to avail of: a. The graduated rates under Section 24 (A) (2) (a) of the Tax Code, as amended; OR b. An eight percent (8%) tax on gross sales or receipts and other non-operating income in excess of two hundred fifty thousand pesos (P250,000.00) in lieu of the graduated income tax rates under Section 24 (A) and the percentage tax under Section 116 all under the Tax Code, as amended. Individuals earning mixed income For mixed income earners, the income tax rates applicable are: a. The compensation income shall be subject to the tax rates prescribed under Section 24 (A) (2) (a) of the Tax Code, as amended; AND b. The income from business or practice of profession shall be subject to the following: 1. If the gross sales/receipts and other nonoperating income do not exceed the VAT threshold, the individual has the option to be taxed at: a. Graduated income tax rates prescribed under Section 24 (A) (2) (a) of the Tax Code, as amended; OR b. Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating income in lieu of the graduated income tax rates and percentage tax under Section 116 of the Tax Code, as amended. 2. If the gross sales/receipts and other nonoperating income exceeds the VAT threshold, the individual shall be subject to the graduated income tax rates prescribed under Section 24 (A) (2) (a) of the Tax Code, as amended. [RR No. 08-2018 implementing RA No. 10963 (TRAIN Law) specifically Sec. 24 (A)(2)(b) & (c)14] Provided in Section 109(BB). Self-employed individuals and/or professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code. (c) Rate of Tax for Mixed Income Earners. Taxpayers earning both compensation income and income from

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4. Taxation of Passive Income

c. Dividends from domestic corporation

Passive Income Subject to Final Tax Final a mean a i hheld from o rce, and he amount received by the income earner is net of the tax already. The tax withheld by the income payor is remitted by him to the BIR. The income having been tax-paid already, it need not be included in the income tax return at the end of the year. These passive income items are as follows: a. Interest income b. Royalties c. Dividends from domestic corporations d. Prizes and other winnings

1. 2. 3. 4. 5. 6.

7.

a. Interest income 1. 2.

on any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements - 20% final tax under the expanded foreign currency deposit system (EFCDS) - 15% final tax for residents, exempt if non-residents15

Treatment of income from long-term deposits On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments, which have maturity of 5 years or more) exempt Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall be imposed on the entire income based on the remaining maturity: 4 years to less than 5 years 3 years to less than 4 years less than 3 years

5% 12% 20%

cash and/or property dividends actually or constructively received by an individual from a domestic corporation a joint stock company insurance or mutual fund companies regional operating headquarters of multinational companies share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner share of an individual member or co-venturer in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation

Rate: 1. 10% for residents (RC, RA) and non-resident citizens (NRC); 2. 20% for NRAETB (non-resident aliens engaged in trade or business) A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. [Sec. 73B, NIRC] In other words, stock dividends are generally not subject to tax as long as there are no options in lieu of the shares of stock.

b. Royalties (See summary table, infra) business or practice of profession shall be subject to the following taxes: (1) All Income from Compensation The rates prescribed under Subsection (A)(2)(a) of this Section. (2) All Income from Business or Practice of Profession (a) If Total Gross Sales and/or Gross Receipts and Other Non-operating Income Do Not Exceed the VAT Threshold as Provided in Section 109(BB) of this Code. The rates prescribed under Subsection (A)(2)(a) of this Section on taxable income, or eight percent (8%) income tax based on gross sales or gross receipts and other non-operating income in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code.

(b) If Total Gross Sales and/or Gross Receipts and Other Non-operating Income Exceeds the VAT Threshold as Provided in Section 109(BB) of this Code. The rates prescribed under Subsection (A)(2)(a) of this Section. 15 SECTION 24. Income Tax Rates. (B) Rate of Tax on Certain Passive Income: (1) Interests, Royalties, Prizes, and Other Winnings – x x x 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 fifteen percent (7 1/2%) (15%) 11 of such interest income x x x.

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On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented.

d. Prizes and other winnings 1. 2. 3. 4.

Winnings, except Philippine Charity sweepstakes / lotto winnings which does not exceed P10,000 20% Winnings from PCSO not more than P10,000 shall be exempt from tax.16 Prizes exceeding P10,000 20% Prizes not exceeding P10,000 shall be subjected to the graduated income tax rates.

Prize, differentiated from winnings: A prize is the result of an effort made (e.g., prize in a beauty contest), while winnings are the result of a transaction where the outcome depends upon chance (e.g., betting). For interest from foreign currency loans granted by FCDUs to residents other than Offshore Banking Units (OBUs) or other depository banks under the expanded system tax rate is 10% if payors are RESIDENTS, whether individuals or corporations. For interest from foreign currency loans granted by OBUs to residents other than OBUs or local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with OBUs - tax rate is 10% if payors are RESIDENTS, whether individuals or corporations. Gross income from all sources within the Philippines derived by non-resident cinematographic film owners, lessors or distributors tax rate is 25% if payee is: (a) non-resident alien individual, or (b) nonresident foreign corporation. The term cinema ographic film incl de mo ion picture films, films, tapes, discs and other such similar or related products. Informer re ard gi en o per on ho ol n aril provide definite and sworn information that lead to or was instrumental in the discovery of fraud or violation of the provisions of the NIRC or special laws being administered by the BIR and resulted in 16

SECTION 24. Income Tax Rates. (B) Rate of Tax on Certain Passive Income: (1) Interests, Royalties, Prizes, and Other Winnings – x x x prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under

TAXATION LAW

the actual recovery or collection of revenues, surcharges and fees and/or the conviction of the guilty party or parties, and/or the imposition of any fine or penalty or the actual collection of a compromise amount, in case of amicable settlement, shall be subject to income tax, collected as a final withholding tax, at the rate of 10%, pursuant to Sec. 282 of the NIRC [RR 16-2010] Passive income not subject to tax 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 BSP shall be exempt from tax But should the holder of the certificate pre-terminate the deposit or investment before the 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: 1. Four (4) years to less than five (5) years - 5%; 2. Three (3) years to less than four (4) years 12%; and 3. Less than three (3) years - 20%. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

5. Taxation of Capital Gains a. Income from sale of shares of stock of a Philippine corporation 1.

Shares traded and listed in the stock exchange exempt

The transaction is exempt from income tax regardless of the nature of business of the seller or transferor. However, it is subject to the one-half of one percent (0.6 of 1%) stock transaction tax imposed under Sec. 127(A) of the Tax Code based on the gross selling price or gross value in money of the shares of stock sold or transferred. Subsection (A) of Section 24; and other winnings (except winnings amounting to Ten thousand pesos (P10,000) or less from Philippine Charity Sweepstakes and Lotto winnings which shall be exempt), derived from sources within the Philippines x x x.

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Requirements: a. Sale or disposition by a natural person of his principal residence, b. The proceeds of which is fully utilized in acquiring/constructing a new principal residence, c. Such acquisition/construction taking place within 18 calendar months from the date of sale or disposition, d. The taxpayer notifies the Commissioner within 30 days from the sale/disposition through a prescribed return of his intention to avail of the exemption, e. The tax exemption can only be availed of once every 10 years.

2. Shares not listed and traded in the stock exchange subject to final tax On sale, barter, exchange or other disposition of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset On the net capital gain: Final Tax of 15% Tax on income derived from sale of shares not listed in the SE Rates before TRAIN Under TRAIN 5% on sale of stocks not over P100,000 plus 10% Final Tax of 15% on amount in excess of P100,000 Net capital gain: selling price less cost Selling price: consideration on the sale OR fair market value of the shares of stock at the time of the sale, whichever is higher Cost: original purchase price

b. Income from the sale of real property situated in the Philippines What property covered Property located in the PH classified as capital assets What transactions covered Sales, exchanges, or other disposition of real property (classified as capital assets), including pacto de retro sales and other forms of conditional sales of the following: citizens, resident aliens, NRAETB, NRANETB, domestic corporations. Tax rate General rule: 6% of whichever is higher of: 1. Gross selling price, or 2. Fair market value (determined in accordance with Sec. 6(E), NIRC). Exception: 1. In case of sales made to the government, any of its political subdivisions or agencies, or to GOCCs, it can be taxed either: a. Under Sec. 24(D)(1), NIRC 6% CGT, or b. Under Sec. 24(A), NIRC, at the option of the taxpayer. 2. In case of the sale of or disposition of their principal residence by natural persons

TAXATION LAW

Tax treatment: Exempt from capital gains tax (CGT). 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 CGT. How taxable portion and tax determined: 𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑜𝑟 𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒 The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired. Computation for the basis of new principal residence: Historical cost of old principal residence Add: Additional cost to acquire new principal residence* Adjusted cost bases of the new principal residence *Additional cost to acquire new principal residence: Cost to acquire new principal residence Less: Gross selling price of old principal residence Additional cost to acquire new principal residence

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XXX XXX XXX

XXX (XXX) XXX

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c. Income from the sale, exchange, or other disposition of other capital assets Other properties shall be subject to income tax 1. At the graduated income tax rates, if the seller is an individual; 2. Long-term capital gains: only 50% is recognized. 3. Short-term capital asset transactions: 100% subject to tax. [Sec. 39(B), NIRC] Determination of whether short- or long-term: Short-term if held for 12 months or less; otherwise, it is a long-term capital gain. At 30% corporate income tax, if the seller is a corporation. Rule: Capital gain/loss is recognized in full. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Section 39(A)(1) of the NIRC. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Section 39(A)(1) of the NIRC, namely: 1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or 4. Real property used in trade or business of the taxpayer

b. Income Tax on Non-Resident Aliens Engaged in Trade or Business A non-resident alien is an individual whose residence and citizenship is not in the Philippines. One who comes to the Philippines for a definite purpose which, in its nature, may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary

TAXATION LAW

for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose of which he came has been consummated or abandoned. [Sec. 5, RR No. 2] In general, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. Intended stay in the Philippines: 1. Up to 180 days Non-resident alien not engaged in trade or business 2. More than 180 days but less than 1 year Nonresident alien engaged in trade or business 3. 1 year or more Resident alien General Rule: Subject to an income tax in the same manner as an individual citizen and a resident alien individual on taxable income from all sources within the Philippines. Cash and/or property dividends The following shall be subject to an income tax of twenty percent (20%) on the total amount thereof:
 1. Cash and/or property dividends from: a. A domestic corporation; b. A joint stock company; c. An insurance or mutual fund company; d. A regional operating headquarters of multinational company; e. 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; f. 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 coventurer; 2. Interests 
 3. Royalties (in any form); and 
 4. Prizes (except prizes amounting to Ten 
thousand pesos (P10,000) or less which shall be subject to graduated tax) and other winnings (except PCSO / lotto winnings which shall not exceed P10,000)

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Except: 1. The following Royalties shall be subject to a final tax of ten percent (10%) on the total amount thereof:
 2. On books as well as other literary works; and 3. On musical compositions 4. Cinematographic films and similar works shall be subject to twenty-five percent (25%) of the gross income 
 5. 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 Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax 
 But should the holder of the certificate preterminate 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 four (4) years 12%; and 
 Less than three (3) years - 20%. 
 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 similar tax prescribed on citizens and resident aliens. 1.

Sale, barter or exchange of Shares of stock in domestic corporation not traded 15% of net capital gains 2. Sale, barter or exchange of real properties 6% of gross selling price or current FMV whichever is higher

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the PH 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 equivalent to 25% of such income. The preferential tax treatment 15% shall not be applicable to regional headquarters (RHQs), regional operating headquarters (ROHQs), offshore banking units (OBUs) or petroleum service contractors and subcontractors registering with the Securities and Exchange Commission (SEC) after January 1, 2018. [Sec. 25 (F), NIRC (this provision was added by TRAIN)]

d. Individual Taxpayers Exempt from Income Tax Individual Taxpayers exempt from income tax are: 1. Senior Citizens (with qualifications) 
 2. Minimum wage earners 
 3. Exemptions granted under international 
agreements 
 All individuals and entities claiming exemption from imposition of taxes on income and, consequently, from withholding taxes are required to provide a copy of a valid, current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment of the related income. The tax exemption certificate or ruling must explicitly recognize the grant of tax exemption, as well as the corresponding exemption from imposition of withholding tax. Failure on the part of the taxpayer to present the said tax exemption certificate or ruling as herein required shall subject him to the payment of appropriate withholding taxes due on the transaction. [RMC No. 8-2014]

1. Senior Citizens

c. Income Tax on Non-Resident Aliens Not Engaged in Trade or Business [Sec. 25 (B)]

Generally, Senior Citizens are still taxable individual. However, if they are considered as MWEs, rules on MWE will apply.

There shall be levied, collected, and paid for each taxable year upon the entire income received from all sources within the PH by every NRANETB within

Who are covered: any resident citizen a. At least 60 years old, and b. Who are considered minimum wage earners under RA 9504 (Sec. 4 (b) RA 7432, as amended by RA 9994) and/or the aggregate amount of

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gross income earned by the senior citizen during the taxable year does not exceed the amount of his personal exemptions (BPE and APE).

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Compensation income including overtime pay, holiday pay and hazard pay, earned by minimum wage earners who has no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504]

2. Minimum Wage Earners Rule: they shall be exempt from payment of income tax on their taxable income.


3. Exemptions Granted Under International Agreements

Limit: Ho e er, if he recei e o her benefi in excess of the allowable statutory amount of P90,000, then he shall be taxable on the exceeds benefits as well as his salaries, wages, and allowances, just like an employee receiving compensation income beyond the statutory minimum wage.

See RMC No, 31-2013, April 12, 2013 taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments/embassies/diplomatic missions and international organizations situated in the Philippines.

[T]he treatment of bonuses and other benefits that [a minimum wage earner] receives from the employer in excess of the [ 90,000] ceiling cannot but be the same as the prevailing treatment prior to R.A. 9504 anything in excess of 30,000 is taxable; no more, no less. The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the exemption explicitly granted by R.A. 9504. [Soriano v. Secretary of Finance, G.R. No. 184450 (2017)]

The Government of the Philippines is a signatory of certain international agreements and a party to different tax treaties which specifically provide for the exemption of certain persons or entities from taxes imposed by the Philippines. Examples of these tax exemptions are those accorded to diplomats or ambassadors of other countries here in the Philippines. The World Health Organization is also tax exempt upon an international agreement [CIR v. Gotamco, G.R. No. L-31092 (1987)]

TAXATION OF COMPENSATION INCOME OF A MINIMUM WAGE EARNER a. Statutory minimum wage earner shall refer to 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. [Sec.22 GG, as amended by RA 9504] b. Minimum wage earner shall refer 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. [Sec.22 HH, as amended by RA 9504] The minimum wage shall 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 c.

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

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SUMMARY TABLES OF RATES Interest, Royalties, Prizes and Other Winnings Interest from any currency bank deposit Yield or any other monetary benefit from deposit substitute Yield or any other monetary benefit from trust funds and similar arrangements Royalties, in general Royalties on books as well as other literary works and musical compositions Prizes exceeding P10,000 Other winnings (except Philippine Charity Sweepstakes and Lottowinnings not exceeding P10,000) Interest incomes received from a depositary bank under expanded foreign currency deposit system Interest income from long-term deposit or investment evidenced by certificates prescribed by BSP. If preterminated before fifth year, a final tax shall be imposed based on remaining maturity 4 years to less than 5 years 3 years to less than 4 years Less than 3 years Cash and/or Property Dividends Cash and/or property dividends actually or constructively received from a domestic corp. or from a joint stock corp., insurance or mutual fund companies and regional operation headquarters of multinational companies (beginning Jan. 1, 2000) Share of an individual in the distributable net income after tax of a PARTNERSHIP (other han a general professional partnership) (beginning Jan. 1, 2000) 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 a co-venturer (beginning Jan. 1, 2000)

Citizens, Residents 20% 20%

20% 20%

25% 25%

20%

20%

25%

20%

20%

25%

10%

10%

25%

20%

20%

25%

20%

20%

25%

15% Note: NRC exempt (RR 12011)

Exempt

Exempt

Exempt 5% 12% 20% Citizens, Residents

Exempt 5% 12% 20%

25% 25% 25% 25%

10%

20%

25%

10%

20%

25%

10%

20%

25%

Sec. 24 (C). Capital Gains Tax from Sale of Shares of Stock of a domestic corporation NOT TRADED in the Stock Exchange Tax base: Net Capital Gain

Citizens, Residents 15%

Sec. 24 (D). Capital Gains Tax from Sale of Real Property Classified as Capital Asset Tax base: Gross selling price or current fair market value, whichever is higher Tax Rate

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NRAETB

NRAETB

NRANETB

NRANETB

NRAETB

NRANETB

15%

15%

Citizens, Residents

NRAETB

NRANETB

6%

6%

6%

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Category of income Compensation/ Business/ Profession Prizes of P10,000 or less

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TAXATION LAW

Resident Alien Citizen Within the Within the All sources Philippines Philippines Based on Taxable (i.e. Net) Income Citizen

Non-Resident NRAETB Within the Philippines

NRANETB Within the Philippines

Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24, NIRC) (See table below) For those earning purely business or professional income or mixed income, the taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of graduated rates for the business/professional income portion upon the option of the taxpayer

Interest from any currency bank deposit, etc. Royalties, in general Winnings/ Prizes (except prizes P10,000 and below) Royalties from books, literary works, musical compositions Interest from long-term deposit or investment certificates, which have a maturity of 5 years or more Cash/ Property Dividends from a domestic corporation, etc., OR share in the distribute net income after tax of a partnership (except a general professional partnership), etc. Interest (Expanding Foreign Currency Deposit System) Prizes

Gross Income Within the Philippines (GIW) Tax

GIW

20% Final Withholding

GIW

10% Final Withholding Tax

EXEMPT; However: In case of pre-termination, with remaining maturity of: 4 years to less than 5 years -5% on entire income 3 years to less than 4 years 12% on entire income less than 3 years 20% on entire income

GIW

10% Final Withholding Tax

GIW

GIW

15% Final Withholding Tax

Exempt

Subject to schedular rates if not exceeding P10,000 Page 92 of 290

20%

25%

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Winnings on Philippine Sweepstakes/ Lotto Capital Gains on Sale of Shares of Domestic Corp (not traded in a domestic stock exchange Capital Gains on Sale of Real Property in the Philippines Sale of Shares of Domestic Corp. (traded in a domestic stock exchange) Sale of Real Property located Abroad Sale of Shares of Foreign Corp. Passive Income from Abroad

TAXATION I

TAXATION LAW

Exempt if P10,000 and below

Net capital gains: 15% Final Tax

Gross Selling Price or FMV, whichever is higher

6% Final Withholding Tax

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

Schedular Income Tax Rates (i.e. 0% to 35%) (Sec. 24, NIRC) For those earning purely business or professional income or mixed income, the taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of graduated rates for the business/professional income portion upon the option of the taxpayer

SCHEDULE OF INCOME TAX RATES FOR INDIVIDUAL CITIZENS, RESIDENTS, AND NRAETB RANGE OF TAXABLE INCOME

TAX DUE (a+b) Basic Amount (a)

0 to 250,000 Over 250,000 but more than 400,000 Over 400,000 but more than 800,000 Over 800,000 but over 2,000,000 Over 2,000,000 but over 8,000,000 Over 8,000,000

not not not not

30,000 130,000 490,000 2,410,000

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Additional Rate (b) 20% of excess over 250,000 25% of excess over 400,000 30% of excess over 800,000 32% of excess over 2,000,000 35% of excess over 8,000,000

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TAXATION LAW

COMPUTATIONS [RR 08-2018] Pure Compensation Income Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists of the overtime pay P80,000.00, night shift differential P30,000.00, hazard pay P15,000.00, and holiday pay P15,000.00. He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health, etc.) and P11,000 non-taxable benefits. Total Compensation Income Add: Overtime, night shift differential, hazard, and holiday pay Total Income Less: Mandatory contributions Non-taxable benefits

P135,000.00 140,000.00 P275,000.00 P5,000.00 11,000.00

16,000.00

Net taxable income

P259,000.00

Tax due (20% in excess of P250,000)

1,800

Mixed-income (i.e. compensation income and business income/income from the practice of profession opted to avail of 8% tax on business/professional income) Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018 of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00. a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income tax rate on his gross sales for his income from business: Total compensation income Less: Non-taxable 13th month pay and other benefits (max)

P1,500,000.00 90,000.00

Taxable Compensation Income

P1,410,000.00

Tax due: 1. On Compensation: On P800,000.00 On excess (P1,410,000 - P800,000) x 30%

P130,000.00 183,000.00

Tax due on Compensation Income

P313,000.00

2. On Business Income: Gross Sales Add: Non-operating Income

P2,400,000.00 100,000.00

Taxable Business Income Multiplied by income tax rate

P2,500,000.00 8%

Tax Due on Business Income

P200,000.00

Total Income Tax Due (Compensation and Business)

P513,000.00

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* The option of 8% income tax rate is applicable only to taxpayer's income from business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended. * The amount of P250,000.00 allowed as deduction under the law for taxpayers earning solely from self-employment/practice of profession, is not applicable for mixed income earner under the 8% income tax rate option. * The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. |||

Mixed-income (i.e. compensation income and business income/income from the practice of profession) Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating income: Total compensation income Less: Non-taxable 13th month pay and other benefits-max

P1,500,000.00

Taxable Compensation Income Add: Taxable Income from Business Gross Sales Less: Cost of Sales

P1,410,000.00 P2,400,000.00 1,000,000.00

Gross Income Less: Operating Expenses

P1,400,000.00 600,000.00

Net Income from Operation Add: Non-operating Income

90,000.00

P800,000.00 100,000.00

Total Taxable Income

900,000.00 P2,310,000.00

Tax Due: On P2,000,000.00 On excess (P2,310,000 - 2,000,000) x 32%

P490,000.00 99,200.00

Total Income Tax

P589,200.00

* The taxable income from both compensation and business shall be combined for purposes of computing the income tax due if the taxpayer chose to be subject under the graduated income tax rates.

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Pure Business/Professional Income (Opted to be taxed at 8% of gross sales or receipts) Illustration: Ms. EBQ operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She already signified her intention to be taxed at 8% income tax rate in her 1st quarter return. Her income tax liability for the year will be computed as follows: Gross Sales Convenience Store Gross Receipts Bookkeeping Total Sales/Receipts Less: Amount allowed as deduction under Sec. 24 (A) (2) (b) Taxable Income

P800,000.00 300,000.00 P1,100,000.00 250,000.00 P850,000.00

Tax Due: 8% of P850,000.00

P68,000.00

* The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00. * Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount allowed as deduction of P250,000.00 under Sec. 24 (A) (2) (b) of the Tax Code, as amended. * Income tax imposed herein is based on the total of gross sales and gross receipts. * Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and percentage tax due, by express provision of law. Pure Business/Professional Income (Opted to be taxed at schedular rates) Illustration: Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses amounting to P600,000.00 and P200,000.00, respectively, or a total of P800,000.00, the income tax shall be computed as follows: Gross Sales/Receipts Less: Cost of Sales

P1,100,000.00 600,000.00

Gross Income Less: Operating Expenses

P500,000.00 200,000.00

Taxable Income

P300,000.00

Tax Due: On excess (P300,000 - P250,000) x 20%

Page 96 of 290

P10,000.00

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TAXATION I

5. Income Tax on Corporations a. Income Tax on Domestic Corporations and Resident Foreign Corporations

TAXATION LAW

Normal Corporate Income Tax Rate: 30% of Taxable Income Gross Income Less: Allowable Deductions Taxable Income

Domestic Corporations 1. A corporation created and organized in the Philippines or under its laws (the law of incorporation test). [Sec. 22 (C), NIRC] 2. Taxable on all income derived from sources within and without the Philippines; and Resident Foreign Corporations 1. A corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines. [See Doing B ine defini ion nder he FIA abo e] 2. Taxable only on income derived from sources within the Philippines. 3. A Philippine branch of a foreign corporation duly licensed by the SEC is considered a resident foreign corporation. Thus, only the income of the Philippine branch from sources within the Philippines is subject to Philippine income tax. 4. As general rule, the head office of a foreign corporation is the same juridical entity as its branch in the Philippines following the single entity concept. Thus, the income from sources within the Philippines of the foreign head office shall thus be taxable to the Philippine branch. But, when the head office of a foreign corporation independently and directly invested in a domestic corporation without the funds passing through its Philippine branch, the taxpayer, with respect to the tax on dividend income, would be the non-resident foreign corporation itself and the dividend income shall be subject to the tax similarly imposed on nonresident foreign corporations. [Marubeni v. Commissioner, G.R. No. 76573 (1989)]

1. Regular Tax

Optional gross income tax (GIT) Section 27 (A), NIRC provides for an optional gross income tax of 15% based on gross income. The President, upon the recommendation of the Secretary of Finance, may allow corporations the option to be taxed at 15% of gross income as defined therein, after the following conditions have been satisfied: Tax effort ratio Ratio of income tax collection to total tax revenues VAT tax effort Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP

Applies equally to both: (a) Domestic corporations (on income from within and without the Philippines) and (b) Resident Foreign Corporations (on income from within the Philippines)

20% of GNP 40% 4% of GNP 0.90%

At present, the OGIT has not been implemented in the Philippines. The option of GIT is available to corporation whose ratio of Cost of Sales to Gross Sales does not exceed 55%. The election of GIT by a corporation is irrevocable for 3 consecutive taxable years during which it is qualified under the scheme. Note: Gross income for GIT is the same as Gross income for MCIT [see infra] except in GIT of sale of service, cost of services is not deducted.

2. Minimum Corporate Income Tax (MCIT) a.

Default income tax. Except as otherwise provided, income tax of 30% is imposed on taxable income.

xxx xxx xxx

Applies to domestic corporations and RFCs whenever such corporations (i) have zero or negative taxable income, or whenever the (ii) MCIT is greater than the normal income tax due. b. Imposed beginning the fourth taxable year from the taxable year the corporation commenced its business operations. For purposes of MCIT, the taxable year in which business operations commenced shall be the year when the

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c.

TAXATION I

corporation registers with the BIR (not in which the corporation started commercial operations). Tax rate: 2% of Gross Income

GROSS INCOME a. Merchandising and Manufacturing Gross Sales Less: Sales Returns Sales Discounts Allowances Cost of Goods Sold Gross Income

xxx xxx xxx xxx xxx

xxx xxx

Thi mean ha he erm gro income ill al o include all items of gross income enumerated under Section 32(A) of the NIRC, except: (a) income exempt from income tax, and (b) income subjected to FWT. Cost of goods sold 1. In general includes all business expenses directly incurred to produce the merchandise to bring them to their present location and use. 2. Trading or merchandising includes invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. 3. manufacturing include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

xxx xxx xxx xxx

Direct cost of services all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (i) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (ii) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies. In the case of banks, it includes interest expense. Pointers MCIT is in the nature of a tax credit, not an allowable deduction. Its purpose is to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income.

If apart from deriving income from core business activities there are other items of gross income realized or earned by the taxpayer which are subject to the normal corporate income tax, they must be included as part of gross income for computing MCIT. [Sec. 27 (E), NIRC; RR 12-2007]

b. Sale of Service Gross Receipts Less: Sales Returns Sales Discounts Allowances Cost of Services Gross Income

TAXATION LAW

Is the Minimum Corporate Income Tax (MCIT) an addition to the regular or normal income tax? No, the MCIT is not an additional tax. The MCIT is compared with the regular income tax, which is due from a corporation. If the regular income is higher than the MCIT, then the corporation does not pay the MCIT. Coverage The MCIT covers domestic and resident foreign corporations which are subject to the regular income tax. Corporations subject to a special corporate tax system do not fall within the coverage of the MCIT. These special corporations are those in G.3. Income Tax on Special Corporations. These include: Proprietary educational institutions, nonprofit hospitals, OBUs, FCDUs, ROHQs, firms registered in PEZA/BCDA/other ecozones, International Carriers 
 For corporations whose operations or activities are partly covered by regular income tax and special income tax system, MCIT shall apply on operations covered by the regular corporate income tax system.

xxx

What amount of income tax is paid by the corporation to the BIR?
 Whichever is higher between the normal tax and the minimum corporate income tax

xxx xxx

Illustration: E Co., a domestic trading corporation, in its fourth year of operations had a gross profit from sales of P300,000 and net taxable income of P100,000. How much was the income tax paid by the corporation for the year? Page 98 of 290

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MCIT (P300,000 x 2%) Normal Income Tax (P100,000 x 30%) Income Tax to be paid for the year (whichever is higher)

TAXATION LAW

Any excess of the minimum corporate income tax over the normal income tax shall be carried forward on an annual basis. The excess can be credited against the normal income tax in the next three (3) succeeding taxable years. [Sec. 27(E)(2)] In the year to which carried forward, the normal tax should be higher than the MCIT.

P6,000 P30,000 P30,000

Carry forward of excess minimum tax

Sample Computation of MCIT Carry Forward: A domestic corporation had the following data on computations of the normal tax (NT) and the minimum corporate income tax (MCIT) for five years. MCIT NT

Yr 4 80K 20K

Yr 5 50K 30K

Yr 6 30K 40K

Yr 7 40K 20K

Yr 8 35K 70K

The excess MCIT over NT carried-forward as follows: MCIT NT

Year 4 80,000 20,000

Year 5 50,000 30,000

Year 6 30,000 40,000

Year 7 40,000 20,000

Year 8 35,000 70,000

Excess MCIT over NT (MCIT NT)

60,000(a)

20,000(b)

n/a

20,000(c)

n/a

Income Tax to be paid (Higher of MCIT or NT) Less: MCIT carry forward

80,000 n/a

50,000 n/a

40,000 (40,000) (a)

40,000 n/a

Tax Due

80,000

50,000

0

40,000

70,000 (20,000) (a) (20,000) (b) 30,000

(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8. (b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8. (c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.

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Relief from MCIT [Sec. 27 (E)(3), NIRC] The Secretary of Finance may suspend imposition of MCIT on any corporation which sustained substantial losses on account of (LMB): a. Prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months and caused the temporary shutdown of operations), or b. Force majeure (acts of God and other calamity; includes armed conflicts like war or insurgency), or c. Legitimate business reverses (substantial losses due to fire, robbery, theft or other economic reasons). Quarterly MCIT Computation The computation and the payment of MCIT shall likewise apply at the time of filing the quarterly corporate income tax. In the computation of the tax due for the taxable quarter, if the quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT. Items allowed to be credited against quarterly MCIT due: (a) CWT, (b) Quarterly income tax payments under the normal income tax; and (c) MCIT paid in the previous taxable quarter(s). Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the quarterly MCIT tax due. Annual Income Tax Computation. The final comparison between the normal income tax payable and the MCIT shall be made at the end of the taxable year. The payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax returns whether this be MCIT or normal income tax. In the computation of annual income tax due, if the normal income tax due is higher than the computed annual MCIT, the following shall be allowed to be credited against the annual income tax: (a) quarterly MCIT payments, (b) quarterly normal income tax payments, (c) excess MCIT in the prior year/s (subject to the prescriptive period allowed for its creditability), (d) CWTs in the current year, (d) excess CWTs in the prior year. If in the computation of annual income tax due, the computed annual MCIT due is higher than the annual normal income tax due, the following may be credited

TAXATION LAW

against the annual income tax: (a) quarterly MCIT payments of current taxable quarter, (b) quarterly normal income tax payments in current year, (c) CWTs in the current year, (d) excess CWTs in the prior year. Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the annual MCIT due as the same can only be applied against normal income tax. Manner of Filing and Payment. The MCIT shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis.

3. Branch Profit Remittance Tax [Sec. 28 (A) (5), NIRC] a.

Applies to non-resident foreign corporations. Imposed on profits remitted by the Philippine branch to the head office. b. Collected as Final Withholding Tax [Sec.57, NIRC] Taxable transaction any profit remitted by a branch to its head office Tax Rate and Base 15% final tax based on the total profits applied or earmarked for remittance without any deduction for the tax component (except those activities registered with PEZA). a.

The following are not treated as branch profits unless effectively connected with the conduct of trade or business in the Philippines: b. Interests, dividends, rents, royalties (including remuneration for technical services), c. salaries, wages, d. premiums, annuities, emoluments, or e. other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received during each taxable year from all sources within the Philippines

4. Allowable Deductions a. Itemized Deductions 1. Expenses 2. Interest 3. Taxes 4. Losses 5. Bad debts 6. Depreciation 7. Depletion of oil and gas wells and mines

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6. Taxation of Capital Gains

8. Charitable and other contributions 9. Research and development 10. Pension trusts b. Optional Standard Deductions (OSD) In lieu of itemized deductions, standard deduction of 40% of gross income.

5. Taxation of Passive Income Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties a. 20% final tax on: (i) interest on any currency bank deposit, (ii) yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, and (iii) royalties b. same for Domestic Corporations and Resident Foreign Corporations c. Collected as Final Withholding Tax [Sec.57, NIRC] Interest Income derived by a domestic corporation from depository bank under the expanded foreign currency deposit system [Section 27 (D)(1), NIRC17] a. 15% final income tax b. same for Domestic Corporations and Resident Foreign Corporations c. Collected as Final Withholding Tax [Sec.57, NIRC] Inter-corporate dividends a. Exempt dividends received from a domestic corporation by a domestic corporation/resident foreign corporation b. same for Domestic Corporations and Resident Foreign Corporations

Capital gain from sale of shares of stock not traded in the stock exchange
 a. Final tax on net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation not listed and traded through a local stock exchange: 15% of net capital gains [Section 27 (D)(2), NIRC18] b. For Resident Foreign Corporations, and Nonresident Foreign Corporations c. First P100k 5% d. Amount in excess of P100k 10% [Section 28 (7)(c), NIRC] Capital gains realized from the sale, exchange, or disposition of lands and/or buildings a. 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 of 6% ; If it is a Resident Foreign Corp., it is subject to the regular corporate income tax rate of 30% b. The capital gains tax is applied on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain. c. applicable to domestic corporations only d. Tax treatment is similar to that of individuals.

b. Income Tax on Non-Resident Foreign Corporations [Sec. 28 (B), NIRC] Non-Resident Foreign Corporations

17

SECTION 27. Rates of Income Tax on Domestic Corporations.

to a final income tax at the rate of seven and one-half fifteen percent (7 1/2%) (15%) of such interest income.

(D) Rates of Tax on Certain Passive Incomes.

18

(1) Interest from Deposits and Yield or Any Other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. 17 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

SECTION 27. Rates of Income Tax on Domestic Corporations. (D) Rates of Tax on Certain Passive Incomes. (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. 18 A final tax at the rates prescribed below of fifteen percent (15%) 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.:

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1.

2. 3.

TAXATION I

A corporation organized under the laws of a foreign country, which is not engaged in trade or business in the Philippines. [See D g B e definition under the FIA in B.7.2. Corporations] Taxable only on income derived from sources within the Philippines. Income taxes on nonresident foreign corporations are collected as Final Withholding Tax under Sec.57, NIRC.

General rule 1. Except as otherwise provided, the tax is 30% of gross income received during each taxable year from all sources within the Philippines 2. This includes: 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 on the sale of shares not traded in the stock exchange) Tax on certain Nonresident Owners, Lessors or Distributors: 1. Non-resident cinematographic film owner, lessor or distributor 25% of gross income from all sources within the Philippines 2. Non-resident owner or lessor of vessels chartered by Philippine nationals 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Authority 3. Non-resident owner or lessor of aircraft, machineries and other equipment 7.5% of gross rentals, charters or other fees Tax on Interest on foreign loans: contracted on or after August 1, 1986 20% [Sec. 28 (B) (5) (a), NIRC] Tax on Intercorporate dividends 1. Intercorporate Dividend 15% on dividends received from domestic corporations, if the country in which the nonresident foreign corporation is domiciled allows a tax credit of at lea 15% for a e deemed paid in he Philippines 2. 15% foreign tax credit represents the difference between the regular income tax of 30% on corporations and the 15% tax on dividends ( a paring credi ) 3. If the country within which the NRFC is domiciled does NOT allow a tax credit, the tax is 30% on dividends received from a domestic corporation.

TAXATION LAW

Tax on Capital gain from sale of shares of stock not traded in the stock exchange
 1. Final tax on net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation not listed and traded through a local stock exchange: a. First P100k 5% b. Amount in excess of P100k 10% 2. same for Nonresident Foreign Corporations

c. Income Tax on Special Corporations 1. Domestic Corporations a. Proprietary Educational Institutions and Non-profit Hospitals [Sec. 27 (B), NIRC] Tax Rate and Base 10% tax on taxable income (except on income subject to capital gains tax and passive income subject to final tax) within and without the Philippines Caveat: If gross income from unrelated trade or business or other activity exceeds 50% of total gross income derived from all sources, the tax rate of 30% shall be imposed on the entire taxable income. Unrelated trade, business or other activity 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. Proprietary educational institution any private school maintained and administered by private individuals or groups with an issued permit to operate from the DECS, CHED or TESDA. [Sec. 27(B), NIRC]

b. Government-owned or Controlled Corporations, Agencies or Instrumentalities [Sec. 27 (C), NIRC] GOCCs General rule: GOCCs are taxable as any other corporation engaged in similar business, industry or activity Exceptions: Government Service Insurance System (GSIS) Social Security System (SSS) Philippine Health Insurance Corporation (PHIC) Local water districts (LWDs)

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[Sec. 27(C), NIRC19] Government agencies or instrumentalities General rule: The government is exempt from tax. Exception: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. [Mactan Cebu Airport v Marcos, G.R. No. 120082 (1996)]

c. Depository Banks (Foreign Currency Deposit Units) [Sec. 27 (D) (3), NIRC] Income derived by a depository bank under the expanded foreign currency deposit system from: 1. foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks authorized by the BSP to transact business with foreign currency depository system units and other depository banks under the EFCDS exempt from income tax except net income from transactions specified by the Secretary of Finance upon recommendation by the Monetary Board subject to regular income tax payable by banks 2. foreign currency loans granted to residents (other than offshore banking units in the Philippines) interest income subject to a final tax of 10% 3. income of nonresidents, individuals or corporations, from transactions with depository banks under the EFCDS exempt from income tax 4. same for Domestic Corporations and Resident Foreign Corporations 5. similar treatment to OBUs

2. Resident Foreign Corporations a. International Carrier Doing Business in the Philippines Tax Rate and Base Billings (GPB)

2.5% on Gross Philippine

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SECTION 27. Rates of Income Tax on Domestic Corporations. (C) Government-owned or -Controlled Corporations, Agencies or Instrumentalities.19 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 and Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation

TAXATION LAW

International Air Carriers, GPB means: 1. gross revenue derived from (a) carriage of persons, excess baggage, cargo and mail (b) originating from the Philippines in a continuous and uninterrupted flight, (c) irrespective of the place of sale or issue and the place of payment of the ticket or passage document 2. tickets revalidated, exchanged and/or indorsed to another international airline part of GPB if passenger boards a plane in a port or point in the PH 3. flights which originate from the PH, but transshipment of passenger takes place at a port outside PH on another airline part of GPB only the aliquot portion of the cost of the ticket corresponding to the leg flown from the PH to transshipment point [RR 15-2002] Air Canada vs. CIR (CTA Case No. 6572): 1. A foreign airline company selling tickets in the Philippines through their local agents shall be considered as resident foreign corporation engaged in trade or business in the country. 2. The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. 3. The test of taxability is the source, and the source is that activity which produced the income. International Shipping, GPB means:
 Gross revenue for (a) passenger, cargo or mail (b) originating from the Philippines up to final destination, (c) regardless the place of sale or payments of the passage or freight documents.

b. Off-shore Banking Units [Sec. 28 (A) (4), NIRC] Income derived by OBUs authorized by the BSP from: 1. foreign currency transactions with nonresidents, other OBUs, local commercial banks, including branches of foreign banks authorized by the BSP to transact business with OBUs exempt from income tax

(PHIC), and the local water districts (LWD) and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity.

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2.

3. 4. 5.

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except net income from transactions specified by the Secretary of Finance upon recommendation by the Monetary Board subject to regular income tax payable by banks foreign currency loans granted to residents (other than offshore banking units in the Philippines) interest income subject to a final tax of 10% income of nonresidents, individuals or corporations, from transactions with OBUs exempt from income tax similar treatment to FCDUs

c. Resident Depositary Banks Currency Deposit Units)

(Foreign

Income derived by a depository bank under the expanded foreign currency deposit system from: 1. foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks authorized by the BSP to transact business with foreign currency depository system units and other depository banks under the EFCDS exempt from income tax

2. 3.

except net income from transactions specified by the Secretary of Finance upon recommendation by the Monetary Board subject to regular income tax payable by banks foreign currency loans granted to residents (other than offshore banking units in the Philippines) interest income subject to a final tax of 10% income of nonresidents, individuals or corporations, from transactions with depository banks under the EFCDS exempt from income tax

4. 5.

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same for Domestic Corporations and Resident Foreign Corporations similar treatment to OBUs

d. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies [Sec. 28 (A) (6), NIRC] Regional or area headquarters 1. branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets [Sec. 22 (DD), NIRC] 2. not subject to income tax Regional operating headquarters 1. branch established in the Philippines by multinational companies which are engaged in any of the following services: (i) general administration and planning; (ii) business planning and coordination; (iii) sourcing and procurement of raw materials and components; (iv) corporate finance advisory services; (v) marketing control and sales promotion; (vi) training and personnel management; (vii) logistic services; (viii) research and development services and product development; (ix) technical support and maintenance; (x) data processing and communications; and (xi) business development. [Sec. 22 (EE), NIRC] 2. tax of 10% of their taxable income

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SUMMARY OF TAX BASES AND RATES OF SPECIAL CORPORATIONS Type of Corporation

Tax Base

Domestic Corporations Proprietary Educational Institutions and Hospitals (Nonprofit) Depository Banks (Foreign Currency Deposit Units) With respect to income derived under the expanded foreign currency deposit system from certain foreign currency transactions With respect to interest income from foreign currency loans to residents other than offshore banking units in the Philippines or other depository banks under the expanded system

Taxable income from all sources

10%

Exempt (except that net income from such transactions is subject to the regular income tax payable by banks)

Amount of interest income

10%

Gross Philippines Billings Exempt (except that net income from such transactions is subject to the regular income tax payable by banks)

2.5%

Amount of interest income

10%

Resident Foreign Corporation

International Carriers Offshore Banking Units With respect to income derived by offshore banking units from certain foreign currency transactions With respect to interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks Resident Depository Banks (Foreign Currency Deposit Units) With respect to income derived under the expanded foreign currency deposit system from certain foreign currency transactions With respect to interest income from foreign currency loans to residents other than offshore banking units in the Philippines or other depository banks under the expanded system Regional Operation Headquarters of Multinational Companies

Tax Rate

Exempt (except that net income from such transactions is subject to the regular income tax payable by banks)

Amount of interest income Taxable income from within the Philippines

10%

Gross income from the Philippines

25%

10%

Non-Resident Foreign Corporation

Non-resident cinematographic film owners, lessors or distributors Non-resident owner or lessor of vessels charted by Philippines nationals Non-resident owner or lessor of aircraft, machineries or other equipment

Gross rentals, lease and charter fees from the Philippines Gross rentals, lease and charter fees from the Philippines

4.5% 7.5%

corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

d. Improperly Accumulated Earnings Tax [Sec. 29, NIRC, as implemented by RR 2-2001] Rule: In addition to other income taxes, there is imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income. Applies to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other

Rationale: It is a tax in the nature of a penalty to the corporation for the improper accumulation of its earnings, and a deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation.

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TAXATION LAW

Sample computation (RMC No. 35-2011) Taxable Income for the Year Add: (a) Income subjected to Final Tax (b) NOLCO (c) Income exempt from tax (d) Income excluded from gross income

xxxx xxxx xxxx xxxx xxxx

Less: Income Tax paid Dividends declared/paid Total Add: Retained Earnings from prior years Accumulated Earnings as of end of current year Less: Amount that may be retained (100% of Paid-Up Capital) IAE Multiply by: IAET Rate IAET

Effect of imposition of IAET 1. Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years even if not declared as dividend. 2. Profits which have been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends. 3. In applying the above rules, dividends shall be deemed to have been paid out of the most recently accumulated profits (LIFO: last in, first out). Reasonable needs of the business: The use of undistributed earnings and profits for the reasonable needs of the business would generally not make the accumulated or undistributed earnings subject to the tax. Immediacy Test: The term "reasonable needs of the business" means (1) the immediate needs of the business, including (2) reasonably anticipated needs. The corporation should be able to prove (1) an immediate need for the accumulation of the earnings and profits, or (2) the direct correlation of anticipated needs to such accumulation of profits.

xxxx xxxx

xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx 10% xxxx

Accumulation for Reasonable needs under RR 22001 1. Accumulation of earnings up to 100% of paid-up capital; 2. Definite corporate expansion projects requiring considerable capital expenditure (approved by Board of Directors or equivalent body); 3. Building, Plant or Equipment Acquisition (approved by Board of Directors or equivalent body) 4. compliance with any Loan Covenant or preexisting obligation (established under a legitimate business agreement); 5. required by Law or applicable regulations to be retained; 6. in case of subsidiaries of foreign corporations in the Philippines, undistributed earnings reserved for Investments within the Philippines Coverage: 1. IAET applies to: domestic corporations classified as closely- held corporations. 2. IAET does not apply to: 1. Banks and other non-bank financial intermediaries; 2. Insurance companies; 3. Publicly-held corporations; 4. Taxable partnerships; 3. General professional partnerships; 4. Non- taxable joint ventures; and

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Enterprises registered with PEZA (RA 7916), BCDA (RA 7227), and other special economic zones declared by law which enjoy a special tax rate in lieu of other taxes.

Closely-held corporations are those: 1. at least 50% in value of the outstanding capital stock; or 2. at least 50% of the total combined voting power of all classes of stock entitled to vote 3. is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly- held corporations. N.B. the same definition and rules as in Tax on IPO in Sec. 127 (B), NIRC; not the same as close corporation under The Corporation Code] Rules in determining if a corporation is closelyheld: 1. Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. 2. Family and Partnership Ownership. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his famil , or b or for hi par ner. Famil of an indi id al incl de hi ibling ( he her b whole or half-blood), spouse, ancestors and lineal descendants. 3. Option to Acquire Stocks. - If any person has an option to acquire stock, such stock shall be considered as owned by such person. An option to acquire such an option and each one of a series of option shall be considered as an option to acquire such stock. 4. Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of (a) or (c) shall, for purposes of applying (1) or (2), be treated as actually owned by such person. But stock constructively owned by the individual by reason of the application of (b) shall NOT be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. BIR Ruling 025-02 The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company.

TAXATION LAW

Where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered as a publicly-held corporation, thus, exempt from IAET. Determination of Purpose to Avoid Income Tax 1. Being a holding or investment company is prima facie evidence of purpose to avoid dividend tax. Holding or investment company corporation having practically no activities except holding property, and collecting the income therefrom or investing the same; 2. Accumulation in excess of reasonable needs is determinative of the purpose to avoid dividend tax. Prima facie instances of this include: (i) investment of substantial earnings and profits in unrelated business or in stock or securities of unrelated business; (ii) investment in bonds and other long-term securities; (iii) accumulation of earnings in excess of 100% of paid-up capital 3. The controlling intention of the taxpayer is that which is manifested at the time of accumulation, not subsequently declared intentions which are merely the product of afterthought. 4. A speculative and indefinite purpose will not suffice. Definiteness of plan/s coupled with action/s taken towards its consummation are essential.

e. Exemption from Tax on Corporations Tax exempt corporations [Sec. 30, NIRC] 1. Labor, agricultural or horticultural organization non-profit 2. mutual savings bank or cooperative bank nonstock, non-profit, operated for mutual purposes 3. Beneficiary society, order, or association operating for the exclusive benefits of their members; includes: fraternal organization operating under the lodge system; or mutual aid association or a nonstock corporation organized by employees providing life, sickness, accident, or other benefits exclusively to the members 4. Cemetery company owned and operated exclusively for the benefit of its members 5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans, provided that no part of its income or asset belong to or inure to the benefit of any individual

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6.

Business league, chamber of commerce, or board of trade Non-profit; no part of net income inures to the benefit of an individual 7. Civic league or organization Non-profit; operating exclusively for the promotion of social welfare 8. Non-stock and non-profit educational institutions 9. Government educational institutions 10. Organizations of a purely local character whose income consists solely of assessment, duties and fees collected from their members to meet e pen e ; incl de : farmer or o her m al typhoon or fire insurance company, mutual ditch or irrigation company and mutual or cooperative telephone company 11. Farmer , fr i gro er , and like association whose primary function is to market the product of their members Notwithstanding the provisions in the preceding paragraphs, the income of the foregoing organizations from (1) their properties, real or personal, or from (2) their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under the NIRC. N.B. this means capital gains tax, tax on passive income, etc. applies to these otherwise exempt organizations.

f. Tax on General Partnerships, General Professional Partnerships, Co-Ownerships, Joint Ventures and Consortiums 1. General Partnerships Partnerships where all or part of their income is derived from the conduct of trade or business. It is treated as a corporation. [Sec.22 (B), NIRC]. General rule: The partnership is subject to the same rules and rates as corporations. Exceptions: A par ner hare in he par ner hip distributable net income is deemed actually or constructively received by the partners in the same taxable year. [Sec. 73(D), NIRC]. Consequently: a. such share will be subjected to dividend tax (10%) whether actually distributed or not. b. there can never be an instance of improperly accumulated taxable income; note that RR 2-

TAXATION LAW

2001 provides that IAET does not apply to taxable partnerships. Distributable net income of the partnership is its taxable income less the normal corporate income tax (30%). A Pa b to the general partnership fund is a capital investment and is not taxable income of the partnership.

2. General Professional Partnerships Partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. [Sec 22 (B), NIRC] Rules a. A GPP as such shall not be subject to the income tax. It is not a taxable entity for income tax purposes. b. The partners shall be liable for income tax only in their separate and individual capacities. c. Each partner shall report as gross income his distributive share in the net income of the GPP, actually or constructively received. d. In computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. [Sec. 26, NIRC] e. If the partnership sustains a net operating loss, the partners shall be entitled to deduct their respective shares in the net operating loss from their individual gross income. GPP is not a taxable entity The GPP is deemed to be no more than 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, G.R. No. 109289 (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%.

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Because the principle of constructive receipt is applied to undistributed profits of GPPs, the actual distribution to the partners of such tax-paid profits in another year should no longer be liable to income tax. [Mamalateo]

3. Co-ownerships There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. [Art. 484, NCC] It may be created by succession or donation. When Co-ownership is not subject to tax When the co-o ner hip ac i i ie are limi ed merel to the preservation of the co-owned property and to the collection of the income from the property. Each co-owner is taxed individually on his distributive share in the income of the co-ownership. [De Leon] When Co-ownership is subject to tax The following circumstances would render a coownership subject to a corporate income tax: a. When a co-ownership is formed or established voluntarily, or upon agreement of the parties; b. When the individual co-owner reinvested his share, and c. When the inherited property remained undivided for more than ten years, and no attempt was ever made to divide to same among the co-heirs, nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership. [Valencia and Roxas] Automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived from them are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. [Ona v. CIR, G.R. No. L-19342 (1972)]

4. Joint Ventures and Consortiums To con i e a join en re, cer ain fac or are essential. Each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; profits must be shared among the parties; there must be a joint proprietary interest and right of mutual control

TAXATION LAW

over the subject matter of the enterprise; and usually, there is single business transaction. General rule: An unincorporated joint venture is taxed like a corporation. The share of the joint venture partners will no longer be taxable to them because they partake in the nature of intercorporate dividends. Exception: an unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations pursuant to the consortium agreement with the Philippine Government is not subject to the corporate income tax. Only the joint venture partners will be taxed on their respective shares in the income of the joint ventures. [Sec. 22(B), NIRC] Two elements necessary to exempt a joint venture or consortium from tax a. The joint venture must be an unincorporated entity formed by two or more persons b. The joint venture was formed for the purpose of undertaking a construction project, or engaging in the petroleum and other energy operations with operating contract with the government.

6. Filing of Returns and

Payment of Income Tax

a. Definition of a Tax Return and Information Return Tax Return Tax return refers to a formal report prepared by the taxpayer or his agent in a prescribed form showing an enumeration of taxable amounts and description of taxable transactions, allowable deductions, amount of tax and tax payable to the government. Examples of tax returns are: 1. BIR Form Nos. 1700 and 1701 Annual Income Tax Returns for Individual 2. BIR Form No. 1702 Annual Income Tax Return for Corporations and Partnerships 3. BIR Form No. 1800 Donor Ta Re rn 4. BIR Form No. 1801 Estate Tax Return Information Return 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. [Sec. 51(A)(3), NIRC]

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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. [Sec. 58(C), NIRC] 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. [Sec. 83(B), NIRC]

b. Period to File Income Tax Return of Individuals and Corporations 1. Individuals Income tax return of an individual who is not on a substituted basis shall be filed on or before April 15 of each year covering income of the preceding taxable year. [Sec. 51 (C)(1), NIRC] An individual whose taxable income does not exceed Two hundred fifty thousand pesos (P250,000) under Section 24(A)(2)(A): 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. [Sec. 51 (A)(2)(a), NIRC20] Individuals subject to capital gains tax [Sec. 51 (C)(2), NIRC]: a. Sale of shares not traded thru a local stock exchange file a return within 30 days from the transaction, and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year 20

SECTION 51. Individual Return (A) Requirements. (2) The following individuals shall not be required to file an income tax return: (a) An individual whose gross taxable income does not exceed Two hundred fifty thousand pesos (P250,000) his total personal and additional exemptions for dependents under Section 35 24(A)(2)(a): Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of gross income.

TAXATION LAW

b. Sale of real property days from each sale

file a return within 30

Individuals deriving self-employment income (as sole source of income or mixed) must file quarterly return of summary declaration of gross income and deductions, and a final or adjustment [Sec. 74 (A), NIRC21]. Period Q1 Return Q2 Return Q3 Return Annual Return

Due Date for Filing Return May 15 of the same year August 15 of the same year November 15 of the same year April 15 of the following year

Self-employment income consists of earnings derived by the individual from the practice of profession or conduct of trade or business, as a sole proprietor or as a member in a general professional partnership. [Sec. 74 (A), NIRC] Filing of these returns shall be in lieu of filing of a declaration of estimated income under Sec. 74, NIRC, primarily for the reason that the procedure prescribed in Sec. 74 may not reasonably approximate the correct amount of tax to be paid. [De Leon citing Rev. Regs. No. 2-93]

2. Corporations Domestic corporations and resident foreign corporations shall file quarterly corporate income tax returns within 60 days after the end of the calendar or fiscal quarter used, and annual corporate income tax return on or before the 15th day of the fourth month following the close of the calendar year or fiscal year, as the case may be [Sec. 74, NIRC].

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SECTION 74. Declaration of Income Tax for Individuals.

(A) In General. Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April May 15 of the same taxable year.

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The filing of the tax returns by a corporation using the calendar year: Period Q1 Return Q2 Return Q3 Return Annual Return

Due Date for Filing Return May 31 of the same year August 31 of the same year November 30 of the same year April 15 of the following year

Return of Corporation Contemplating Dissolution or Reorganization. within 30 days after the adoption of the plan for dissolution or reorganization (including corporations notified of possible involuntary dissolution by the SEC), render a correct return to the CIR, verified under oath, setting forth the terms of such plan and such other information required by rules and regulations. Prior to the issuance by the SEC of the Certificate of Dissolution or Reorganization, the corporation shall secure a certificate of tax clearance from the BIR which shall be submitted to the SEC. [Sec. 52 (C), NIRC] Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange file a return within 30 days from the transaction, and a final consolidated return on or before the 15th day of the fourth month following the close of the taxable year [Sec. 52 (D), NIRC] PAYMENT OF INCOME TAX General rule: The total amount of tax imposed by this Title (Tax on Income) shall be paid by the person subject thereto at the time the return is filed. Exception: When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in 2 equal installments: the first installment paid at the time the return is filed and the second installment, on or before October 15 following the close of the calendar year. [Sec. 56 (A)(2), NIRC22]

TAXATION LAW

c. Persons Liable to File Income Tax Returns 1. Individual Taxpayers a. General Rule and Exceptions (Sec. 51(A), NIRC) General Rule: The following are required to file income tax return: 1. Resident citizen 2. Non-resident citizen, on income from sources within the Philippines 3. Resident alien, on income from sources within the Philippines 4. Non-resident alien engaged in trade or business or in the exercise of profession in the Philippines, on income from sources within the Philippines Exceptions: The following shall not be required to file income tax return: 1. Individuals whose gross income does not exceed P250,000 except citizen and alien individuals engaged in business or practice of profession within the Philippines who shall file income tax returns regardless of the amount of gross income. 2. Individuals with respect to pure compensation income from sources within the Philippines, the income tax on which has been withheld; except when such compensation has been derived from more than one employer. 3. Individuals whose sole income has been subjected to final withholding tax (pursuant to Sec. 57(A), NIRC). 4. Minimum wage earner (as defined in Sec. 22(HH), NIRC) 5. Individuals who are exempt from income tax pursuant to the provisions of the Tax Code and other laws. SPECIAL PROVISIONS Married individuals (whether citizens, resident or nonresident aliens) who do not derive income purely from compensation, shall file only one consolidated return to cover the income of both spouses for the taxable year, 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

22

(2) Installment Payment.22 When the a 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 October 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.

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be consolidated by the BIR for verification. [Sec. 51 (D), NIRC] The income of unmarried minors is a tax liability of the minor but where such income is derived from property received from a living parent, the income shall be included in the return of the parent except (a) hen he donor a ha been paid on ch property, or (b) when the transfer of such property is e emp from he donor a . [Sec. 51 (E), NIRC] If the taxpayer is unable to make his return, such as when he suffers from disability, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of the taxpayer or his property; the principal and his representative or guardian assuming responsibility for penalties for erroneous, false or fraudulent returns. [Sec. 51 (F), NIRC]

b. Substituted Filing Applicable to individual taxpayers: 1. receiving purely compensation income, regardless of amount 2. from only one employer in the Philippines for the calendar year, and 3. the income tax of which has been withheld correctly by the employer The certificate of withholding filed by their respective emplo er , d l amped recei ed b he BIR, shall be tantamount to the substituted filing of income tax returns by the employee. [Sec. 51-A, NIRC23 (new provision added by TRAIN)]

c. Corporate Taxpayers [Sec. 52(A), NIR] All corporations subject to income tax shall render quarterly income tax returns and a final or adjustment return, except foreign corporations not engaged in trade or business in the Philippines.

TAXATION LAW

d. Where to File Income Tax Returns 1. Individuals Except in cases where the CIR 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 [Sec. 51(B), NIRC]

2. Corporations Except in cases where the CIR 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 having jurisdiction over the place where the corpo a principal office is located and where its books of accounts and other data are kept; otherwise, the returns shall be filed and the tax paid thereon with the Office of the Commissioner of Internal Revenue. [Sec. 77(A), NIRC]

e. Penalties for Non-Filing of Returns Failure to file any return and pay the tax due: a penalty equivalent to 25% of the amount due. [Sec. 248(A)(1), NIRC] Willful neglect to file the return: a penalty equivalent to 50% of the tax or deficiency tax. [Sec. 248(B), NIRC] Failure to file information returns: P1,000 for each failure upon notice and demand by the CIR unless due to reasonable cause not willful neglect provided the aggregate amount for all such failures during the calendar year shall not exceed P25,000. [Sec. 250, NIRC]

The return shall be filed by the President, VicePresident or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

23

SECTION. 51-A. Substituted Filing of Income Tax Returns by Employees Receiving Purely Compensation Income. Individual taxpayers receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer (tax due equals tax withheld) shall not

be required to file an annual income tax return. The certificate of withholding filed by the respective emplo ers, dul stamped recei ed b the BIR, shall be tantamount to the substituted filing of income tax returns by said employees.

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income tax due from the payee on the said income.

7. Withholding of Taxes

The liability for payment of the tax rests primarily on the payor as withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income.

a. Concept of Withholding Taxes Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. It is a systematic way of collecting taxes at source, an indispensable method of collecting taxes to ensure adequate revenue for the government. In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. The amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. In an ad valorem tax, the tax paid or withheld is not deducted from the tax base, except when the law clearly spells out in defining the tax base.

2.

Creditable Withholding tax Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature.

The duty to withhold is different from the duty to pay income tax. The revenue officers generally disallow the expenses claimed as deduction from gross income, if no withholding of tax as required by law or the regulations was withheld and remitted to the BIR within the prescribed dates.

WITHHOLDING TAXES IN THE NIRC

In addition, the withholding tax that should have been withheld and remitted to the BIR as well as the penalties for non-, late or erroneous payment of the withholding tax such as surcharges and deficiency interest are assessed by the BIR. [Mamalateo]

Withholding of final tax of certain income Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the CIR, the tax imposed or prescribed by the NIRC on certain specified items of income shall be withheld by payor-corporation and/or person.

The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the governments cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies. [C a be f Rea E a e a d B de A c., Inc. v. Romulo, G.R. No. 160756 (2010)]

b. Kinds of Withholding Taxes IN GENERAL 1. Final Withholding tax The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the

1.

Withholding tax at source [Sec 57, NIRC]

N.B. Sec. 57 contains an extensive list of taxes. This items of income include taxes on certain passive incomes (interest, dividends), capital gains tax (shares not traded, real property), branch profit remittance tax, and certain payments to nonresident aliens /foreign corporations.] Withholding of creditable tax at source The Secretary of Finance may, upon the recommendation of the CIR, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than 1% but not more than 32%, which shall be credited against the income tax liability of the taxpayer for the taxable year. Provided, That, beginning January 1, 2019, the rate of withholding shall not be less than one percent (1%) but not

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more than fifteen percent (15%) of the income payment. [Sec. 57 (B), NIRC24] 2. Withholding tax on wages [Sec 79(A), NIRC] Except in the case of minimum wage earner, 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 CIR. 3. Withholding of VAT [Sec 114 (C), NIRC] The government (political subdivisions, instrumentalities, agencies, GOCCs) shall deduct and withhold final VAT of 5% of gross payment on purchase of goods and services subject to VAT. If the payment is for lease or use of properties to a nonresident owner, withholding tax shall be 12%. Note: Beginning January 1, 2021, the VAT withholding system shall shift from final to a creditable system. (Under the TRAIN Law)

24

As amended by TRAIN

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C. Transfer Taxes 1. Estate Tax a. Basic Principles, Concept, and Definition Death is the source of the taxing power. It is the power to transmit or the transmission from the dead to the living on which the tax is based. The tax accrues as of the death of the decedent by operation of law. [Lorenzo v. Posadas, G.R. No. L-43082 (1937)] 1.

2.

3.

E a e a accr e a he ime of he deceden death, but the obligation to pay the same is different and is fixed by law. The tax is measured by the value of the property AT THE TIME OF DEATH. Estate tax is measured (i.e., tax base) by the value at that time of such property as passes to him (i.e., death). Subsequent appreciation or depreciation is immaterial; Estate taxation is governed by the statute in force at the time of the death of the decedent. Tax laws cannot be given retroactive effect unless they explicitly provide for it. [Sec. 5, RR-2-2003]

Inheritance taxes, which were imposed on the right of the heirs to receive property upon the death of the decedent (Act No. 2601 effective on July 1, 1916), were repealed by PD 69 on January 1, 1973 and were integrated into the estate tax. They are no longer imposed under the current NIRC. Estate tax is an excise tax on the right of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death. [Vitug and Acosta at 211]

b. Nature, Purpose, and Object It is a transfer tax (i.e. an excise tax on the right of transmitting property), not a property tax. Compared to old inheritance, it is a tax on the right to transfer and not the right to inherit property. Purpose: To tax the shift of economic benefits and enjoyment of property from the dead to the living.

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Taxable objects/subjects: 1. Right/privilege of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death; 2. Certain transfers, during his lifetime, which are made by law as equivalent to testamentary disposition. Justification Theories for the Imposition of Estate Tax 1. Benefits-received theory The State collects the tax because of the services it renders in the distribution of the estate of the decedent, either by law or in accordance with his will. 2. Privilege theory or state partnership theory Succession to the property of a deceased person is not a right but a privilege granted by the State and consequently, the legislature can constitutionally burden such succession with a tax. The State collects the tax because of the protection it provides in the acquisition of large e a e . Hence, he S a e i a ilen or pa i e par ner in he acc m la ion of aid large property. 3. Ability-to-pay theory Receipt of inheritance, which is in the nature of unearned wealth or windfall, places assets into the hands of the heirs and beneficiaries. This creates an ability to pay the tax and thus contributes to government income. 4. Redistribution of wealth theory The imposition of estate tax reduces the property received by the successor, which helps promote a more equitable distribution of wealth in society. The taxes paid by the rich are programmed for disbursement by Congress for the benefit of the poor in terms on social services, education, health, etc.

c. Time and Transfer of Properties The rights to the succession are transmitted from the moment of the death of the decedent. [Art. 777, Civil Code] The deceden e a e incl de proper o he e en of the interest therein of the decedent at the time of his death. [Sec. 85(A)] Estate taxation is governed by the statute in force at the time of death of the decedent. 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

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place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. [Sec. 3, RR 2-2003] N.B. Note that in transfers for insufficient consideration, the value to be included in the estate is the excess of the FMV at time of death over the value of the consideration received at the time of transfer. The executor or administrator shall not deliver a distributive share to any party interested in the estate despite the transfer of properties and rights at the time of death, unless there is a certification from CIR that estate tax has been paid. [Sec.94, NIRC] Time of death governs: 1. The determination of he e en of he deceden interest for computing his gross estate. 2. The statute that governs estate taxation. 3. The accrual of the estate tax. TAXABLE TRANSFERS Taxable transfers are complete when the transferor divests himself of all economic beneficial interest in himself or his estate. 1.

Transfers Mortis Causa. These are gratuitous transfers that take effect after death, either testate or intestate. These transfers are subject to estate tax. A donation which purports to be one inter vivos but withholds from the donee the right to dispose of the donated property during the donor's lifetime is in truth one mortis causa. In a donation mortis causa, the right of disposition is not transferred to the donee while the donor is still alive. The requisites of a testamentary disposition should be fulfilled. [Maglasang v Heirs of Cabatingan, G.R. No. 131953 (2002)] Characteristics: a. It conveys no title or ownership to the transferee before the death of the transferor; or what amounts to the same thing, that the transferor should retain the ownership (full or naked) and control of the property while alive; b. That before his death, the transfer should be revocable by the transferor at will, ad nutum; but revocability may be provided for indirectly by means of a reserved power in the donor to dispose of the properties conveyed;

TAXATION LAW

c.

2.

That the transfer should be void if the transferor should survive the transferee. [Maglasang v Heirs of Cabatingan, supra.]

Transfers Inter Vivos. Gratuitous transfers that take effect during the lifetime of the donor. (See Donor Ta for req i i e ) General Rule: Donation Inter Vivos are subject to Don Ta . Exceptions: Donation Inter Vivos are subject to Estate Tax when it is treated by law as substitutes for testamentary dispositions (i.e., transfers which are inter vivos in form but mortis causa in substance) a. Transfers in Contemplation of Death [Sec. 85(B), NIRC] b. Revocable transfers [Sec. 85(C), NIRC] c. Transfers of property arising under general power of appointment [Sec. 85(D), NIRC] d. Transfers for insufficient consideration [Sec. 85(G), NIRC] Note: These transfers would be included in the computation of the gross value of estate. See further discussion in the valuation of Gross Estate.

d. Classification of Decedent Estate Tax applies only to individuals. The decedent may be classified into: 1. Citizen (RC/NRC) 2. Resident alien (RA); or 3. Non-resident alien (NRA). Concept of residence For p rpo e of e a e a a ion, re idence refer o domicile, the permanent home or the place to which whenever absent, one intends to return (animus revertendi), and depends on facts and circumstances, in the sense that they disclose intent. It is therefore, not necessarily the actual place of residence. [Corre v Tan Corre, G.R. No. L-10128 (1956)] Situs of Intangible Personal Properties General Rule: Mobilia Sequuntur Personam Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits promissory notes, and corporate stocks) follows the residence/domicile of owner thereof. Situs is the domicile or residence of the owner. [Collector v Fisher, G.R. No. L-11622 (1961)]

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5.

Exception:

When it is inconsistent with express provisions of law. Exception to the exception; Rule of Reciprocity. Intangible Properties which are considered situated in the Philippines [Sec 104, NIRC] 1. Franchise which must be exercised in the Philippines 2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws 3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines 4. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines

TAXATION LAW

Shares or rights in any partnership, business or industry established in the Philippines

Rule of Reciprocity There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: 1. 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 2. Allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country If there is reciprocity, the intangible personal property of an NRA shall not be included in his gross estate. If there is no reciprocity, such intangible personal property will be included. [Sec. 104, NIRC]

e. Gross Estate vis-à-vis Net Estate Gross Estate

Net Estate

Value at the time of a a property wherever situated HOWEVER, in the case of a NRA at the time of his death, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. [Sec 85, NIRC]

Value of the estate after all deductions have been made against the gross estate; subject to the graduated tax rates. [Sec. 6, RR 2-2003] This is the TAX BASE.

Formula for Estate Tax Gross Estate (Sec. 85) Less: Deductions (Sec. 86) ------------------------------------------------------Net estate before share of surviving spouse (if married) Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C)) ------------------------------------------------------= Net taxable estate Multiply by: Tax rate (Sec. 84) ------------------------------------------------------= Estate Tax Due Less: Tax Credit, if any (Sec. 86(E), or 110 (B)) ------------------------------------------------------= Estate Tax Due, if any

f. Determination of Gross Estate and Net Estate (and Composition) Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom RC/NRC/RA NRA

Composition and Determination of GROSS Estate [Sec. 85, NIRC] The al e of he follo ing a he ime of he deceden death:

The al e of he follo ing a he ime of he deceden death:

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a. Real property wherever situated b. Tangible personal property wherever situated c. Intangible personal property wherever situated

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a. Real property located in the Phil. b. Tangible personal property located in the Phil. c. Intangible personal property with a situs in the Phil. (subject to the rule of reciprocity) Note: If there is reciprocity, intangible assets are excluded from gross estate

Exclusions from Gross Estate [Sec 85(H) and Sec 87, NIRC] a. b. c. d. e. f. g. h. i. j.

Separate property of the surviving spouse [Sec. 85 (H), NIRC] GSIS proceeds/ benefits Accruals from SSS Proceeds of life insurance where the beneficiary is irrevocably appointed Proceeds of life insurance under a group insurance taken by employer War damage payments and Benefits received from US Veterans Administration Transfer by way of bona fide sales Transfer of property to the National Government or to any of its political subdivisions Merger of usufruct in the owner of the naked title [Sec. 87 (A), NIRC] Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee to the fideicommissary [Sec. 87 (B), NIRC] k. Transmission from the first heir, legatee, or done in favor of another beneficiary, in accordance with the desire of their predecessor [Sec. 87 (C), NIRC] l. Acquisition and/or transfer expressly declared as not taxable m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that not more than 30% of said transfer shall be used for administration purposes [Sec. 87 (D), NIRC]

Deductions from GROSS estate to arrive at the NET estate Ordinary deductions a. Expenses, losses, indebtedness, taxes. (ELIT) Funeral expenses* Judicial expenses* Claims against the estate Claims against insolvent persons Unpaid mortgage and debt Taxes Losses b. Vanishing deductions c. Transfers for public use d. Amounts received under R.A. 4917 Special deductions e. Family home (max P10M) f. Standard deduction (P5M) g. Medical expenses*

Ordinary deductions25 a. Proportionate deductions for (ELIT)26 Funeral expenses* Judicial expenses* Claims against the estate Claims against insolvent persons Unpaid mortgage and debt Taxes Losses b. Vanishing deductions c. Transfers for public use

No Amounts received under R.A. 4917 No special deductions except Standard Deduction of P500,000.

Share in conjugal property

Share in conjugal property * Funeral expenses, judicial expenses, and medical expenses are no longer allowed under the TRAIN ACT.

25

No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the return required to be filed under Section 90 of the Code the value at t a a a a NOT a Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003] 26

Formula for Proportionate Deductions of NRA:

Allowable Deduction =

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VALUATION OF GROSS ESTATE [Sec. 88, NIRC] General Rule: Gross Estate = FMV at the time of the deceden dea h Real Property 1. Appraised value, whichever is higher between: a. FMV, as determined by the Commissioner of Internal Revenue (CIR) (zonal value) or b. FMV, as shown in the schedule of values fixed by the Provincial or City Assessor. 2.

If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration.

Personal Property 1. FMV at the time of death. 2. If none, acquisition cost for recently acquired properties or the current market price for the previously acquired properties. [Sec. 40(B), NIRC] 3. Stocks, bonds, and other securities. a. If listed and traded stocks = value is the mean between the highest and lowest quoted selling prices at the date of death; if none, nearest the date of death [Sec. 5, RR 022003] b. If unlisted stocks = book value at time of death (ordinary common shares) or par value (preferred shares)

4.

N.B: Bonds, mortgages, and Certificates of Stocks are taxable at the place where they are physically located. Proceeds of Life Insurance with Revocable Beneficiary: face value of policy (not cash surrender value)

Right to Usufruct use or habitation, and annuity Probable life of the beneficiary in accordance with the latest basic standard mortality table shall be taken into account.

g. Items to be Included in Gross Estate Items to be included in the Gross Estate [Sec. 85, NIRC]

27

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1.

Property owned by the decedent actually and physically present in his estate at the time of his death; 2. Deceden in ere ; 3. Properties not physically in the estate, such as: 4. Transfers in contemplation of death [Sec. 85(B), NIRC]; 5. Transfers with retention or reservation of certain rights [Sec. 85(B), NIRC]; 6. Revocable transfers [Sec. 85(C), NIRC]; 7. Property passing under general power of appointment [Sec. 85(D), NIRC]; 8. Transfers for insufficient consideration [Sec. 85(G), NIRC]; 9. Proceeds of life insurance [Sec. 85(E), NIRC]; 10. Claims against insolvent persons [Sec. 86(A)(3)27]; and DECEDENT S INTEREST [S . 85(A), NIRC] This includes any interest having value or capable of being valued which is owned by the decedent existing at the time of death, such as dividend declared on or before death, but is received by the estate after death, partnership profits which have accrued before his death, but received after death. This also includes those transferred by the decedent at the time of his death. Note: When decedent had relinquished his interest BEFORE his death, he could not be deemed to have transmitted interest in such property at his death. TRANSFERS IN CONTEMPLATION OF DEATH [Sec. 85(B), NIRC] The erm in con empla ion of dea h , a ed in estate taxation, does not refer to the general expectation of death. The words mean that it is the thought of death, as a controlling motive, which induces the disposition of the property for the p rpo e of a oiding he a . The deceden mo i e i a question of fact. Thus, the imminence of death may afford convincing evidence of the impelling cause of transfer. However, it is a contemplation of death and not necessarily contemplation of imminent death to which the statute refers. These transfers should be without or with insufficient considerations. The law does not specify the number of years prior to a deceden dea h within which a transfer can be considered in contemplation of death. [De leon]

Renumbered by TRAIN Law.

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TRANSFERS WITH RETENTION OR RESERVATION OF CERTAIN RIGHTS These are transfers with retention or reservation of certain rights that result to the incapacity of transferee to freely enjoy and dispose of the property until the ran feror dea h, and he ran fer ma be regarded as having been intended to take effect in possession or enjo men a he ran feror dea h. The e do no include bona fide sale for an adequate and full consideration. REVOCABLE TRANSFERS [Sec. 85(C), NIRC] General Rule: A transfer is a revocable transfer where: 1. There is a transfer by trust or otherwise, 2. The enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by: a. The decedent alone; b. 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 c. Where any such power is relinquished in contemplation of the decedent death. Exception: Bona fide sale for an adequate and full consideration in money or mone or h Note: The power to alter, amend or revoke shall be con idered o e i on he da e of he deceden death even though: 1. The exercise of the power is subject to a precedent giving of notice, or 2. 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 he deceden dea h notice has been given or the power has been exercised. If notice has not been given or the power has not been exercised 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.

1.

2.

TAXATION LAW

General Power of Appointment: when it gives to the decedent the power to appoint any person he pleases including himself. He had a power exercisable in favor of himself, his creditors or creditors of his estate [AmJur] Special Power of Appointment: when the decedent a. can appoint only among a designated class of persons other than himself, his estate, the creditors of his estate, or b. if the power of appointment is expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his estate.

General Rule: Property over which the decedent held a power of appointment is excluded in his gross estate Exception: Included in the gross estate if the property arises 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 enjoy or possess the property or the income therefrom. TRANSFERS FOR INSUFFICIENT CONSIDERATION [Sec. 85(G), NIRC] Transfers, trusts, interests, rights, or powers (denominated as transfer in contemplation of death, revocable transfer and property passing under general power of appointment) made, created, exercised or relinq i hed for a con idera ion in mone or mone worth, but is NOT a bona fide sale for an adequate and f ll con idera ion in mone or mone or h.

TRANSFER OF PROPERTY UNDER GENERAL POWER OF APPOINTMENT [Sec. 85(D), NIRC]

The value to be included in the gross estate is the excess of the fair market value of the property at the ime of he deceden dea h o er he con idera ion received.

Power of Appointment the right to designate the person or property who shall enjoy and possess certain property from a donor or a prior decedent.

Example: Case A: If bona fide sale no value shall be included in the gross estate

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Case B: If not a bona fide sale - the excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. Case C: If inter vivos transfer is proven fictitious/simulated total value of the property at the time of death included in the gross estate. 2. Over

Case Case Case A B C

3.

FMV, transfer

2,000 1,500 2,500

4.

FMV, death

2,500 2,000 2,000

Consideration received

2,000 800

Value included in the 0 Gross Estate

0

1,200 2,000

The transfer for insufficient consideration must fall under any of the following: 1. Transfer in contemplation of death; 2. Revocable transfer, or 3. Property passing under a GPA. Otherwise, the tax imposed is donor

a .

PROCEEDS OF LIFE INSURANCE [Sec. 85(E), NIRC] Inclusion of proceeds of life insurance to the gross estate depends on i) designated beneficiary; ii) revocability of the insurance; iii) period and source of funds used in premiums.

5.

6. 7. 8.

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change the beneficiary he designated in the polic (i.e., i re ocable), nle he ha expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable. Accident insurance proceeds as the Tax Code specifically mentions only life insurance policies Proceeds of a group insurance policy taken out by a company for its employees. Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. The transfer is absolute and the insured did not retain any legal interest in the insurance Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. The transfer is absolute and the insured did not retain any legal interest in the insurance Proceeds of insurance policies issued by the GSIS to government officials and employees, which are exempt from all taxes; [PD 1146] Benefits accruing under the SSS law [RA 1161] Proceeds of life insurance payable to heirs of deceased members of military personnel [RA 360]

CAPITAL OF THE SURVIVING SPOUSE [Sec.85(H), NIRC] It is NOT part of the gross estate of the deceased spouse.

When included in the gross estate Proceeds of life insurance taken out by the decedent on his own life shall be included in the gross estate in the following cases: 1. Beneficiary is the estate of the deceased, his executor or administrator, irrespective of whether or not the insured retained the power of revocation; or 2. Beneficiar i o her han he deceden e a e, executor or administrator, when designation of beneficiary is not expressly made irrevocable.

To determine the conjugal or separate character of proceeds, the following factors are considered: 1. Policy was taken before marriage Source of funds determines ownership of the proceeds of life insurance 2. Policy was taken during marriage 3. Beneficiary is estate of the insured Proceeds are presumed conjugal; hence, one-half share of the surviving spouse is not taxable 4. Beneficiary is third person Proceeds are payable to beneficiary even in premiums were paid out of the conjugal

When not taxable 1. Irrevocably designated; how done a. By expressly stating it in the policy (the designation of a beneficiary is PRESUMED to be revocable); b. By not changing the beneficiary during the lifetime of the insured. This was added in Sec. 11, RA 10607 (2013) which provides ha , The in red hall ha e he right to

CLAIMS AGAINST INSOLVENT PERSONS For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy, whether fully or partially, his debts. A judicial declaration of insolvency is not required but the incapacity of the debtor should be proven. As a rule, regardless of the amount the debtor is unable to pay, the full amount of the claim against the insolvent person should be included in the gross estate of the decedent.

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The portion of the claim which is not collectible should be allowed as a deduction from the gross estate.

h. Deductions and Exclusions from Estate Deductions and/or losses already deducted from gross income can no longer be deducted from gross estate. Further, deductions should not be compensated for by any insurance or extrajudicial settlement. Otherwise, they are not valid deductions.

1.

Indebtedness

and

In case of simple loan (including advances): a.

FUNERAL EXPENSES [Sec. 86 (A)(1)(a)]

Funeral expenses are no longer allowed as deductions under TRAIN LAW. 2. JUDICIAL EXPENSES OF ESTAMENTARY AND INTESTATE PROCEEDINGS [Sec. 86 (A)(1)(b)] Judicial expenses are no longer allowed as deductions under the TRAIN LAW. 3. CLAIMS AGAINST THE ESTATE [Sec. 86 (A)(2)28] Claim generall mean: (i) deb or demand of a pecuniary nature (ii) which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgements. These are liabilities of the estate or indebtedness of such (iii) arising out of: contract, tort, or operation of law. [Dizon v CTA, G.R. No. 140944 (2008)] Requisites for Deductibility of Claims Against the Estate: [Sec. 86 (A)(3)(i), RR 2-2003]. a. The liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses (i.e., expenses incurred up to the time of internment) and unpaid medical expenses which are classified under a different category of deductions. (NOTE: Funeral expenses, judicial expenses, 28

and medical expenses are no longer allowed as deductions under the TRAIN ACT.) b. The liability was contracted in good faith and for adequate and full consideration in money or mone or h c. The claim must be a debt or claim which is valid in law and enforceable in court; d. The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed. e. They must be reasonably certain in amount, and substantiated. Substantiation Requirements [Sec. 86 (A)(2)(ii), RR 2-2003].

1. Ordinary Deductions a. Expenses, Losses, Taxes, Etc. (ELIT)

TAXATION LAW

The debt instrument must be duly notarized at the time the indebtedness was incurred, such as promissory note or contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender. b. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is: CORPORATION: sworn certification should be signed by the President, or Vice-President, or other principal officer of the corporation. PARTNERSHIP: sworn certification should be signed by any of the general partners. BANK/FINANCIAL INSTITUTIONS: Certification shall be executed by the branch manager of the bank/financial institution which monitors and manages the loan of the decedentdebtor. INDIVIDUAL: sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the 4th civil degree, either by consanguinity or affinity, except when a copy of the promissory note or other evidence of the indebtedness must is filed with the RDO having jurisdiction over the borrower within 15 days from the execution thereof.

Renumbered by TRAIN Law.

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c.

TAXATION II

Proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor In case the creditor is an individual who is no longer required to file ITRs with the Bureau, a duly notarized declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor. If the creditor is a non-resident, the executor/ administrator or any of the legal heirs must submit a duly notarized declaration by the creditor of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the country where the non-resident creditor is a resident

d. A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if it was contracted within 3 years prior to the death of the decedent.

If the unpaid obligation arose from purchase of goods or services: a.

Pertinent documents evidencing the purchase of goods or service, such as sales invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of services), as duly acknowledged, executed and signed by decedent-debtor and creditor, and statement of account given by the creditor as duly received by the decedent-debtor b. Duly notarized certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. c. Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. Moreover, a certified true copy of the updated latest subsidiary ledger/records of the debtor-decedent, should likewise be submitted. Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the 29

Renumbered by TRAIN Law.

TAXATION LAW

claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the documents mentioned in the preceding paragraphs. 4. CLAIMS AGAINST INSOLVENT PERSONS [Sec. 86 (A)(3)29, NIRC] These are claims of the estate (i) against insolvent persons (ii) which are not collectible. To be deductible from the gross estate: Additional Requirements: 1. The incapacity of the debtor to pay his obligation should be proven, although a judicial declaration of insolvency is not required; 2. The full amount owed by the insolvent must first be incl ded in he deceden gro e a e; and 3. If the insolvent could only pay a partial amount, the full amount owed shall be included in the gross estate, and the amount uncollectible shall be allowed as a deduction. 5. UNPAID MORTGAGES, LOSSES AND TAXES [Sec. 86(A)(4), NIRC30] Unpaid Mortgages Requisites for Deductibility [Sec. 6(A)(5)(a), RR 2-2003] a. The al e of he deceden in ere herein, undiminished by such mortgage or indebtedness, is included in the value of the gross estates. b. The mortgages were contracted bona fide and for an adequate and full consideration in money or mone or h. In case the loan of the decedent is only an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to recognize the same as a receivable of the estate, the said unpaid obligation shall not be allowed as a deduction. In all instances, the mortgaged property, to the extent of the deceden in ere herein, ho ld al a form par of the taxable gross estate. [Sec. 6(5), RR 2-2003] Unpaid Taxes Requisites for Deductibility a. Taxes which have accrued as of or before the death of the decedent (if it was incurred after, it is chargeable to the income of the estate), and 30

Id.

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b. Unpaid as of the time of his death, regardless of whether or not it was incurred in connection with trade or business Not included: a. Income tax upon income received after death, or b. Property taxes not accrued before his death, or c. The estate tax due from the transmission of his estate Casualty Losses Requisites for Deductibility a. Incurred during the settlement of the estate b. Arising from fires, storms, shipwreck, or other casualties from robbery, theft, or embezzlement c. Not compensated by insurance or otherwise d. At the filing of the estate tax return, such losses have not been claimed as a deduction for income tax purposes in an income tax return e. Incurred not later than the last day for the payment of the estate tax as prescribed by law. 6 MONTHS from deceden dea h; 1 r. under the TRAIN Act. Therefore, all casualty losses AFTER the prescribed period from the payment of tax are not deductible. Casualty loss can be allowed as deduction in one instance only, either for income tax purposes or estate tax purposes. [Sec. 6(A)(5)), Rev. Reg 22003] Note: See Formula for computing Ordinary Deductions of NRA above.

b. Property Previously Taxed [Sec. 86(A)(5)31] a.k.a. VANISHING DEDUCTIONS This is an amount allowed to reduce the taxable estate of a decedent where property: 1. Received by him from a prior decedent by gift, bequest, device, or inheritance 2. Transferred to him by gift, has been the object of previous transfer transaction, subject to transfer a , ei her donor a or e a e a . Conditions: 1. There must be 2 deceased persons and the first one is the donor 2. The second decedent dies within 5 years after the death of a prior decedent, or in case of gift, the decedent-donee dies within the same period after the date of the gift. 31

TAXATION LAW

Requisites: 1. Death The present decedent died within 5 years from the date of the prior decedent OR date of gift. 2. Identity of the property The property with respect to which deduction is sought can be identified as the one who received from prior decedent, or from the donor, or as the property acquired in exchange for the original property so received. 3. Inclusion of the property The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or have been included in the total amount of the gifts of the donor made within 5 years prior to the pre en deceden dea h. 4. Previous taxation of property The estate tax on he prior cce ion, or he donor a on he gift must have been finally determined and paid by the prior decedent or by the donor, as the case may be. 5. No previous vanishing deduction on the property No such deduction on the property, or the property given in exchange therefor, was allowed in determining the value of the net estate of the prior decedent. This is intended to preclude the application of the vanishing deduction on the same property more than once. Limitations: 1. Value of property The deduction is limited by the value of property previously taxed or the aggregate value of such property if more than one item, as finally determined for the purpose of the prior estate tax (or gift tax) or the value of such proper in pre en deceden gro e a e, whichever is lower. 2. Deduction for mortgage or lien The initial value (in number 1 above) shall be reduced by the total amount paid, if any, by the present decedent on any mortgage or other lien on the property where a deduction was allowed, by reason of the payment, of such mortgage or other lien from the gross estate of the prior decedent, or gift or donor, in determining the estate tax of the prior deceden or he donor a . 3. Deductions for expenses, etc. The value as reduced in #2 shall be further reduced by an amount which bears the same ratio to the amounts allowed as deductions for:

Renumbered by TRAIN Law.

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a.

4.

Expenses, losses, indebtedness, and taxes (ordinary deductions), and b. Transfers for public use as the amount otherwise deductible for property previously a ed bear o he al e of he deceden gross estate; and Percentage of deductions The vanishing deduction shall be the value (final basis) in #3 multiplied by the ff. percentages:

VD Rate

100% 80% 60% 40% 20%

If received by inheritance or gift Within 1 year prior to the death of the present decedent More than 1 year but not more than 2 years prior to the death of the decedent More than 2 years but not more than 3 years prior to the death of the decedent More than 3 years but not more than 4 years prior to the death of the decedent More than 4 years but not more than 5 years prior to the death of the decedent

FORMULA FOR VANISHING DEDUCTIONS: (please take note of the limitations above) Value Taken of Property Less: Mortgage debt paid, if any = Initial Basis Less: Proportionate Deduction**

the share of surviving spouse. It is deducted from the exclusive property of the decedent.

c. Transfers for 86(A)(6)32]

Public

Purpose

[Sec.

These are: 1. dispositions in a last will and testament or transfers to take effect after death 2. in favor of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. The whole amount of all the bequests, legacies, devises, or transfers to or for the use of shall be deductible from gross estate, 3. provided such amount or value had been included in the computation of the gross estate. Thus, there is no limitation for the amount to be deducted.

d. Amounts Received by Heirs Under RA 491733 [Sec. 86(A)(8), NIRC34] An amo n recei ed b he heir from he deceden employer as a consequence of the death of the decedent-employee in accordance with RA 4917, provided that such amount is included in the gross estate of the decedent. These include: 1. Retirement benefits from private firms with private benefit plan, if the retiring employee is 50 years old or older. This can only be availed once. 2. Benefits granted in case of separation beyond the control of the employee.

= Final Basis Multiplied by Deduction Rate

2.

VANISHING DEDUCTION

a. Family Home [Sec. 86(A)(7), NIRC;35 6(D), RR 2-2003]

**Proportionate Deduction: 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐵𝑎𝑠𝑖𝑠 𝑥 𝐸𝐿𝐼𝑇 𝐺𝑟𝑜𝑠𝑠 𝑒𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡

𝑇𝑃𝑈

Note: Amount of Vanishing Deductions is NOT subtracted from the value of the CPG to determine 32

TAXATION LAW

Renumbered by TRAIN Law. An Act Providing that Retirement Benefits of Employees of Private Firms shall not be subject to attachment, levy, execution or any tax whatsoever 34 Renumbered by TRAIN Law. 35 SECTION 86. Computation of Net Estate. For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (A) Deductions Allowed to the Estate of a Citizen or a Resident. In the case of a citizen or resident of the

Special Deductions

It is the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside, as certified to by the Barangay Captain of the locality. It is deemed constituted on the house and lot from the time it is actually occupied as the family residence and Philippines, by deducting from the value of the gross estate

33

(4)(7) The Family Home. An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One Ten million pesos (P1,000,000) (P10,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home a a a the barangay captain of the locality.

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considered as such for as long as any of its beneficiaries actually resides therein. [Arts. 152 and 153, Family Code] Temporary absence from the constituted family home due to travel or studies or work abroad, etc. does not interrupt actual occupancy. The family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return. [Sec. 6(D), RR 22003] It must be part of the ACP or CPG, or the exclusive property of the decedent. It may also be constituted by an unmarried head of a family on his or her own property. For purposes of availing this deduction, a person may constitute only one family home. [Sec. 6(D), RR 22003 citing Art. 161, Family Code] Requisites for Deductibility [Sec. 6(D)(b), RR 22003] 1. 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.36 2. The total value of the family home must be included as part of the gross estate of the decedent 3. Allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included in the gross estate, or the exten of he deceden in ere ( he her conjugal/community or exclusive property), whichever is lower, but in no case shall the deduction exceed P10,000,000. The decedent was married or if single, was a head of the family. 4. Along with the decedent, any of the beneficiaries must be dwelling in the family home. 5. The family home as well as the land on which it stands must be owned by the decedent. Therefore, the FMV of the family home should have been included in the computation of the deceden gro e a e. 36

The requirement for certification by the barangay captain has been removed by TRAIN. 37 SECTION 86. Computation of Net Estate. For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (A) Deductions Allowed to the Estate of a Citizen or a Resident.39 In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate

TAXATION LAW

Beneficiaries of a Family Home [Sec. 6(D)(a), RR 2-2003] 1. The husband and wife, or an unmarried person who is the head of a family; and 2. Their parents, ascendants, descendants, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support.

b. Standard NIRC37]

Deduction

[Sec.

86(A)(1),

An amount equivalent to five million pesos (P5,000,000) shall be deducted from the gross estate without need of substantiation. For Nonresident Aliens, the Standard Deduction is P500,000 [Sec. 86 (B)(1)38].

c. Medical Expenses [Sec. 86(A)(6); Sec. 6(F), RR 2-2003] Under TRAIN LAW, medical expenses are no longer allowed as deduction.

3. Net Share Of Surviving Spouse In Cpg/Acp [Sec. 86(C), Nirc In Relation To Sec. 6(H), Rr 2-2003] (Compare with Capital of Surviving Spouse which is excluded from the gross estate). The amount deductible is the net share of the surviving spouse in the CPG. The net share is equivalent to ½ of 50% of the conjugal property after deducting the obligations chargeable to such property. Net share of the surviving spouse is neither an ordinary nor a special deduction.

38

SECTION 86. Computation of Net Estate. For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (B) Deductions Allowed to Nonresident Estates. In the case of a nonresident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines: (1) Standard Deduction. An amount equivalent to Five hundred thousand pesos (P500,000);

(1) Standard Deduction. An amount equivalent to Five million pesos (P5,000,000).

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TAXATION LAW

2. EXCLUSIONS a. Capital of the Surviving Spouse [Sec. 85(H), NIRC] Capital: property of the spouses brought into marriage. Strictly speaking, capital under the Civil Law refers to the property brought by the husband to the marriage while that brought into the marriage by the wife known is as paraphernal property. [Domondon] b. Exemptions under special laws 1. Benefits received by members from the GSIS and the SSS by reason of death

3. 4.

5.

Exclusive Property of Each Spouse If ACP governs property relations

Amounts received from the Philippines and US governments for damages suffered during the last war. Benefits received by beneficiaries residing in the Philippines under laws administered by the US Veteran Administration Bequests, legacies, or donations mortis causa to social welfare, cultural, or charitable organizations. Bequests to be used actually, directly and exclusively for educational purposes are also exempt from tax. Grants and donations to the Intramuros Administration

If CPG governs property relations

The community of property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. [Art. 91, Family Code]

The husband and wife place in a common fund the proceeds, products, fruits, and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in marriage settlements. [Art. 106, Family Code]

The following are excluded from the community property: Property acquired by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by The following are exclusive property of each spouse: the donor, testator, or grantor that they shall That which is brought to the marriage as his or form part of the community property. her own Property for personal and exclusive use of either That which each acquires DURING the marriage spouse; however, jewelry shall form part of the by gratuitous title community property. That which is acquired by right of redemption, Property acquired before the marriage by either by barter or by exchange with property spouse who has legitimate descendants from a belonging to only one of the spouses former marriage, and the fruits as well as the That which is purchased with exclusive money of income, if any, of such property. [Art. 92 Family the wife or the husband [Art. 109, Family Code] Code] Property bought on instalments paid partly from Property acquired during the marriage is exclusive funds of either or both spouses and presumed to belong to the community, unless it partly from conjugal funds belong to the buyer is proved that it is one of those excluded or buyers if full ownership was vested BEFORE therefrom. the marriage subject to reimbursement advanced by the conjugal partnership or by either or both spouses. [Art. 118, Family Code] Whenever an amount or credit payable within a period of time belongs to one of the spouses, the sums collated during the marriage in partial payments or by instalments on the principal are considered the exclusive property of the spouse. However, interest falling due during the marriage on the principal belong to the conjugal partnership. Page 128 of 290

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TAXATION LAW

All property acquired during the marriage whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses, is presumed to belong to the conjugal partnership, unless it is proved that it pertains exclusively to the husband or to the wife.

If separation of property governs property relations Separation of property: present or future property or both; total or partial. In the latter case, the property not agreed upon as separate shall pertain to the absolute community. [Art. 144, Family Code] To each spouse shall belong all earnings from his or her profession, business or industry, and all fruits, natural, industrial, or civil, due or received during the marriage from his or her separate property. [Art. 145, Family Code]

Exemptions:

Where net estate does not exceed P200,000. [Sec. 84, NIRC] [THIS IS NO LONGER APPLICABLE UNDER THE TRAIN ACT.] The following transmissions shall not be taxed: 1. Merger of the usufruct in the owner of the naked title 2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicomissary 3. The transmission from the first heir, legatee, or done in favor of another beneficiary in accordance with the desire of the predecessor 4. All bequests, devises, legacies, or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, and provided that not more than 30% of the said bequests, etc. shall be used by such institution for administration purposes. Note: Effectivity of Family Code (Aug 3, 1988)

i. Tax Credit for Estate Taxes Paid in a Foreign Country It is a remedy against international double taxation. To minimize the onerous effect of taxing the same property twice, tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries. Who may claim: RC/NRC/RA. Only the estate of a decedent who was a citizen or a resident of the Philippines at the time of his death can claim tax credit for any estate tax paid to a foreign country. General Rule: The estate tax imposed by the NIRC shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.

LIMITATIONS ON CREDIT 1.

For Estate Taxes paid to one foreign country (Specific Country Limitation) 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 decedent's net estate situated within such country taxable under the tax code bears to his entire net estate. Tax Credit Limit (Computation) 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑥 𝑃ℎ 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 2. For estate taxes paid to 2 or more foreign countries (Global Limitation) The total amount of the credit shall not exceed the same proportion of the tax against which such credit

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is taken, which the decedent's net estate situated outside the Philippines taxable under the tax code bears to his entire net estate. Tax Credit Limit (Computation) 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑥 𝑃ℎ 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it becomes the final allowable tax credit. If there is only one foreign country involved, both limitations will yield the same answer. The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will be the final allowable tax credit.

Illustration: Net Estate Philippines (reduced by P1,050,000 all allowable deductions, except standard deduction) Country G Net Estate

300,000

Country H Net Estate

150,000

Tax paid/incurred: Philippines Country G Country H

15,000 5,000 1,400

Net Estate Philippines (reduced by P1,050,000 all allowable deductions, except standard deduction)

TAXATION LAW

The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under Limitation a. Amount allowed (whichever is lower) Country G (300/1500 x 15,000) Actually paid to Country G Country H (150/1500 x 15,000) Actually paid to Country H Tax Credit allowed Limitation a

3,000 3,000 5,000 1,500 1,400 1,400 under

4,400

Solution Limitation b:

Apply Formula b. The result after applying the formula above is compared to the tax actually paid in total to foreign countries. The lower of the two amounts will be added to get the total tax credit allowed under Limitation b. 450/1500 x 15,000 Total foreign income taxes paid Tax credit allowed under Limitation a

4,500 6,400 4,400

j. Filing of Notice of Death

Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 1,000,000 standard deduction). The Philippine estate tax on P500,000 is P15,000.

[Sec. 89, NIRC] 10963)

Solution Limitation a

k. Estate Tax Return

Apply Formula a. The result after applying the formula above is compared to the tax actually paid for each foreign country.

39

SECTION 90. 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

Repealed by the TRAIN ACT (RA

[Secs. 90-91, NIRC]

When Required (Copies in duplicate) [Sec. 90 (A), NIRC39]

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 x x x

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Regardless of the gross value of the estate, when 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. Contents [Sec. 90 (A), NIRC40] 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 net taxable estate; 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. 4. For estate tax returns showing a gross value exceeding P5,000,000 - there must be 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 non-resident, 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. Period for Filing [Sec. 90 (B), NIRC41] General Rule: Filed within 1 year from the decedent's death. 40

SECTION 90. Estate Tax Returns. (A) Requirements. x x x 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 Five million pesos (P2,000,000) (P5,000,000) shall be supported with a statement duly

TAXATION LAW

Exception [Sec. 90 (C), NIRC] The CIR shall have authority to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return. Who will file: executor, administrator, or any of the legal heirs, as the case may be, under oath. If there is no executor or administrator appointed, qualified, and acting within the Philippines, any person in actual or constructive possession of any property of the decedent may file this return. Where to file the estate tax return and pay the tax due [Sec. 9, RR 2-2003] Resident Citizen (RC and RA) The executor or administrator shall register the estate of the decedent and secure a new TIN from the RDO where the decedent was domiciled at the time of his death and shall file the estate tax return and pay the corresponding estate tax with: 1. An authorized agent bank (AAB), or 2. Revenue District Officer (RDO), or 3. Collection Officer, or 4. Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death Non-resident decedent (NRA/NRC) with executor or administrator in the Philippines The estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO where such executor or administrator is registered. If the executor or administrator is not registered, the estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO having

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. 41 SECTION 90. Estate Tax Returns. (B) Time for Filing. For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within six (6) months one (1) year from the death.

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jurisdiction over the execu or or admini ra or legal residence. Non-resident decedent does not have an executor or administrator in the Philippines The estate tax return shall be filed with and the TIN for the estate shall be secured from the Office of the Commissioner through RDO 39 QC. The foregoing provisions notwithstanding, the CIR may continue to exercise his power to allow a different venue/place in the filing of tax returns. Payment: Pay as you file At the time the return is filed by the executor, administrator or the heirs. The executor or administrator, or if there is none appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. The estate tax shall be paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary. Exception: In meritorious cases, the CIR may grant a reasonable extension not exceeding 30 days from filing. Extension of Payment [Sec. 9(E), RR 2-2003] The CIR may allow an extension of payment, if he 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: 1. Extension not to exceed 5 years, in case the estate is settled judicially, or 2. 2 years in case the estate is settled extrajudicially. 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 CIR. If extension granted, the CIR 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 CIR deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.

TAXATION LAW

Effects of granting an extension 1. Payment of the amount in respect of which the extension is granted on or before the date of the expiration of the period of the extension 2. Suspension of the running of statute of limitations for deficiency assessment for the period of any extension 3. Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to interest but not to surcharge. Can estate tax be paid in installments? Yes! In case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the corresponding/computed tax on which has been paid. [Sec. 9(F), RR 2-2003] Who are liable for the payment of estate taxes Primarily, the estate, through the executor or administrator. 1. Payment shall be made before the delivery of the distributive share in the inheritance to any heir or beneficiary. 2. If there are two or more executors or administrators, all of them are severally liable for the payment of the tax. 3. The estate tax clearance issued by the CIR or the RDO having jurisdiction over the estate, will serve as the authority to distribute the remaining properties/share in the inheritance to the heir or beneficiary. Subsidiarily, heirs or beneficiaries, for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance. Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent, xxx. The heirs shall be liable therefor, in proportion to their share in the inheritance. [Marcos v. CA, G.R. No. 120880 (1997)] Tax deficiency after distribution of properties 1. Sue all the heirs and collect from each of them the amount of tax proportionate to the inheritance received 2. By virtue of a lien created under Sec 219, sue only one heir and subject the property he received

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from the estate to the payment of estate tax. Such heir may go against the other heirs.

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.

Tax Rate FLAT RATE OF 6% ON AN AMOUNT IN EXCESS OF P5,000,000. [Sec. 84, NIRC42] Exempt: If ne a able e a e P5,000,000. ADDITIONAL AMENDMENTS BY TRAIN: Sec. 91(C) Payment by Installment. In case the available cash of the estate is insufficient to pay the total estate tax due, payment by installment shall be allowed within two (2) years from the statutory date for its payment without civil penalty and interest. Sec 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, subject to a final withholding tax of six percent (6%) unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of 42

SECTION 84. Rates of Estate Tax.38 There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax at the rate of six percent (6%) based on the value of such net estate., as computed in accordance with the following schedule: If the net estate is: Over

But Over

Not

The Tax Shall Be

Plus Over

Of the Excess

P200,000

Exempt

P200,000

500,000

0

5%

P200,000

500,000

2,000,000

P15,000

8%

500,000

2,000,000

5,000,000

135,000

11%

2,000,000

5,000,000

10,000,00 0

465,000

15%

5,000,000

TAXATION LAW

2. D

Ta

a. Basic Principles, Concept, and Definition A donor a i le ied, a e ed, collec ed and paid upon the transfer by any person, resident or nonresident, of the property by gift. [Sec. 98(A), NIRC]. It 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. [Sec. 98(B), NIRC] It is the tax on donations. Thus, it is a tax on 1. An act of the donor disposing gratuitously of a thing/right in favor of a donee; and 2. Sales, exchanges or other transfers of properties, other than real property (defined in Sec. 24D) classified as capital asset within the Philippines, for less than an adequate and full consideration in mone or mone or h. [Sec. 100, NIRC4344]

10,000,00 0 43

And Over

1,215,000

20%

10,000,00 0

SECTION 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D), 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 by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.: Provided, however, That a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm s length, and free from any donative intent), will be considered as made for an adequate and full consideration in mone or mone s orth. 44 Note: In the RR for Train Law, there is added provision: Provided, that the sale, exchange or other transfer of property is not made in the ordinary course of business (i.e. at arm s length and free of donati e intent). [Sec. 16, RR 12-2018]

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Donor a i no a proper a b a a impo ed on the transfer of property by way of gift inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR (1965)]

b. Nature, Purpose, and Object To prevent avoidance of income tax through the device of splitting income among numerous donees, who are usually members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of income tax.

c. Time and Transfer of Properties Donor a hall no appl nle and n il here i a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed by delivery, either actually or constructively, of the donated property, to the donee. Thus, the law in force at the time of the perfection/completion of the donation hall go ern he impo i ion of he donor a . [Sec. 11, RR 2-2003] A gift that is incomplete because of reserved powers becomes complete when either: the donor renounces the power OR his right to exercise the reserved power ceases because of the happening of some event or contingency or the fulfillment of some condition, o her han beca e of he donor dea h. [Sec. 11, RR 2-2003]

d. Requisites of Valid Donation Art. 725, NCC. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it.

Requisites of a VALID and COMPLETE donation 1. Donative intent of the donor45 45

Note: The transfers which may be constituted as donation is exempt from the donative intent requirement. 46

SECTION 100. Transfer for Less Than Adequate and Full Consideration. Where property, other than real property referred to in Section 24(D), 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 by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.: Provided, however, That a sale, exchange,

2. 3. 4. 5.

TAXATION LAW

Capacity of the donor Delivery of the donated property Acceptance of the donee Donation must be in the proper form a. Movable: orally or in writing if value is equal to or less than P5,000. Otherwise, it shall be in writing. b. Immovable: must be made in a public document.

Re: Acceptance [Sec. 11, RR 2-2003] 1. For movables exceeding 5K Acceptance shall be in writing [Art. 748, Civil Code] 2. For immovable [Art. 749, Civil Code] a. Must be in the same deed of donation; or b. In a separate public document the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments c. But it shall not take effect unless it is done during the lifetime of the donor.

e. Transfers which May be Constituted as Donation 1. Sale, Exchange or Transfer of Property for Insufficient Consideration Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration, then the amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Provided, however, that a sale, exchange, or other transfer of property made in the ordinary course of business (a transac ion hich i a bona fide, a arm leng h, and free from any donative intent), will be considered as made for an adequate and full consideration in money or mone or h. [Sec. 100, NIRC4647]

or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm s length, and free from any donative intent), will be considered as made for an adequate and full consideration in mone or mone s orth. 47 N.B. Provided, that the sale, exchange or other transfer of property is not made in the ordinary course of business (i.e. a a a a ). O , be considered as made for an adequate and full consideration . [S . 16, RR 12-2018]

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2. Condonation or Remission of Debt Where the Debtor Did Not Render Service in Favor of the Creditor

f. Transfer for Less Than Adequate and Full Consideration

Condonation or remission of debt is defined as an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives. [Dizon v. CTA, G.R. No. 140944, 2008]

3. Others a.

Renunciation in favor of other heirs [Sec 11, RR 2-2003] 1. Renunciation by the surviving spouse of their share in the ACP/CPG after the dissolution of the marriage in favor of heirs of the deceased spouse or any other person/s 2. Renunciation by an heir, specifically and categorically in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate b. However, general renunciation by an heir, including the surviving spouse, of their share in the hereditary estate left by the decedent is NOT subject to DT [Sec 11, RR 2-2003] Sale of shares not listed and traded in a local stock exchange below FMV. Sec. 7.c.1.4, RR 6-2008 pro ide : In ca e he fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall b a b a under Sec. 100 of the Tax Code, a amended. 48

TAXATION LAW

A transfer of real or personal property will be con idered a dona ion and bjec o donor a when: 1. The transfer was for less than adequate and full consideration; 2. Such transfer was effective during his lifetime (inter vivos); and 3. Other than real property classified as capital asset within the Philippines as defined in Sec. 24(D). [Sec. 100, NIRC48] In this case, the amount by which the fair market value of the property exceeds the value of the consideration shall be considered a gift.

g. Classification of Donor Donor Ta applie o indi id al and corpora ion (in their secondary purpose). They may be classified into: 1. Residents (RC/RA/DC/RFC) 2. Non-Residents (NRC/NRA/NRFC) Such classification is important in determining the deductions from the gross gift of the donor, and in filing the return. If donor is: 1. RC/NRC/RA = liable for donor a REGARDLESS of where the gift was made or where property is located 2. NRA = liable for donor a onl if he proper donated is within the Philippines. Situs of Intangible Personal Properties General Rule: Mobilia Sequuntur Personam Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits promissory notes, and corporate stocks) follows the residence/domicile of owner thereof. Situs is the domicile or residence of the owner. [Collector v. Fisher, supra.] Exceptions: When it is inconsistent with express provisions of law Rule of Reciprocity Same as in Estate Tax, supra.

Supra note 24.

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TAXATION LAW

h. Determination of Gross Gift (including Composition of Gross Gift) RC/NRC/RA

NRA

Composition and Determination of Gross Gift Real property wherever situated Tangible personal property wherever situated Intangible personal property wherever situated

Real property located in the Phil. Tangible personal property located in the Phil., Intangible personal property with a situs in the Phil. (subject to the rule of reciprocity) Note: If there is reciprocity, intangible assets are excluded from gross gifts

Exemptions from GROSS gift to arrive at NET Gifts Deductions (These are exempt donations but are deductible from, and not treated as exclusions from the gross gift): Dowries or donations made: On account of marriage Before its celebration or within one year thereafter By parents to each of their legitimate, recognized natural, or adopted children To the extent of the first P10,000 NOTE: DOWRIES ARE NO LONGER ALLOWED AS DEDUCTION UNDER THE TRAIN LAW. 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. [Sec. 101 (A)(1), NIRC] 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 not more than 30% of said gifts will be used by such donee for administration purposes. For the purpose of this 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: 1. school, college or university and/or charitable corporation, 2. accredited nongovernment organization, or; 3. trust or philanthropic organization and/or research institution or organization, that is: a. incorporated as a non-stock entity, b. paying no dividends, c. governed by trustees who receive no compensation, and d. 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. [Sec. 101 (A)(2), NIRC]

Common Exemptions 1. 2.

Encumbrances on the property donated if assumed by the donee in the deed of donation. Donations made to entities exempted under special laws

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NOT SUBJECT TO DONOR S TAX 1. Contributions to candidate or political party for campaign purposes duly reported to COMELEC. [Sec. 99 (B), NIRC49] 2. Gift to Parish Priest or Church (applies only to real property tax) 3. Onerous Donations or Donations in exchange for goods/services (since they are subject to income tax) SUBJECT TO DONOR S TAX Gra i o Dona ion o Homeo ner A ocia ion

i. Valuation of Gifts Made in Property TAXABLE BASE: Net gifts i.e., net economic benefit from the transfer that accrues to the donee AT THE TIME OF DONATION 1. 2.

If gift is personal property = FMV at the time of donation If gift is real property = whichever is HIGHER a.

FMV as determined by the CIR (Zonal Value) or

b. FMV in the latest schedule of values fixed by the provincial and city assessor (MV per Tax Declaration) [Sec. 102 in relation to Sec. 88(B), NIRC] Note: Real property considered as capital assets under the Tax Code are exempted from this rule because the taxable value taken into account in the computation of tax is the higher of either the zonal value or the FMV per the latest tax declaration; not the consideration. Therefore, the insufficiency and inadequacy of the consideration paid would not affect the computation of the tax due and payable [Sec. 100 in relation to Sec. 24(d), NIRC] Under Section 24(d), the fair market value itself, if higher than the gross selling price, is the basis for computing the capital gains tax imposed upon the sale of such capital assets.

3.

4.

TAXATION LAW

If there is an improvement = construction cost (based on the building permit and/or occupancy permit) + 10% per year after the year of construction; or the FMV based on the latest tax declaration. If unlisted stocks = Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the adjusted liability value is the indicated value of the equity.

Note: Where property is transferred for less than an adequate and full consideration in money or , then the amount by which the FMV of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. [Sec. 11, RR 2-2003] N.B. Applies also to sale, barter, or exchange of shares of stock not listed and traded in a local stock exchange at prices below the FMV. [Sec. 7, RR 62008] However, where the consideration is fictitious, the en ire al e of he proper hall be bjec o donor tax. Donation to a Political Candidate Prior to RA 7166, a donation for a political candidate a bjec o donor a . [ACCRA CIR, G.R. No. 120721 (2005)] Under RA 7166, contributions duly reported to the BIR are no bjec o donor a , a long a i i utilized in his campaign. Unutilized/excess campaign funds, that is, campaign contributions net of the candida e campaign e pendi re , hall be considered as subject to income tax and as such, must be incl ded in he candida e a able income a a ed in his/her ITR filed for the subject taxable year [Sec. 2, RR 7-2011]

j. Ta C D Ta Paid in a Foreign Country Who may claim the tax credit: 1. Resident citizen

49

As renumbered by TRAIN.

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2. 3.

TAXATION II

Non-resident citizen Resident alien

Per Country Limit 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡

Worldwide Limit 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 𝐴𝑙𝑙 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡

k. Exemptions of Gifts from D Ta 1. 2.

Encumbrances on the property donated if assumed by the donee in the deed of donation. Donations made to entities exempted under special laws. a. Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines b. Development Academy of the Philippines c. Integrated Bar of the Philippines d. International Rice Research Institute e. National Museum f. National Library g. National Social Action Council h. Ramon Magsaysay Foundation i. Philippine In en or Commission j. Philippine American Cultural Foundation k. Task Force on Human Settlement on the donation of equipment, materials and services

l. Person liable Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. [Sec. 98, NIRC]

50

N : OFFICE OF THE COMMISSIONER a refer to the Revenue District Office (RDO) having jurisdiction over the BIR-National Office Building which houses the Office

TAXATION LAW

DONOR S TAX RETURN Separate return is filed for each gift made on different dates during the year reflecting therein any previous net gifts made in the same calendar year. If the gift involves CPG, each spouse shall file separate return with respect to his/her respective share in the CPG. Contents 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; 5. Relationship of the donor to the done; 6. Such further information as the CIR may require. Period for Filing General Rule: The return must be filed within 30 days after the date when the gift was made or completed. The tax due thereon shall be paid at the same time that the return is filed. Who will file: Any person who made a gift, such must be filed under oath. W F T The Tax Due

D

Ta R

A

Pa

1. Resident Unless the CIR permits otherwise, the return shall be filed and tax paid to: a. To Authorized Agent Bank (AAB) or the Revenue District Officer having jurisdiction over the place of the domicile of the donor at the time of the transfer. b. If no AAB = to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer, c. if no legal residence in Phil or NRA = with Revenue District No. 39 - South Quezon City or with the Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer. 2. Non-residents 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.50 of the Commissioner, or presently, to the Revenue District Office No. 39 South Quezon City

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Payment: Pay as you file. Notice of donation to donee institutions duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC) Requisites to be e emp from donor a and o claim full deduction: 1. Donor must give notice if donation is at least P50K 2. Notice is given to RDO which has jurisdiction over place of business 3. Notice must be given within thirty (30) days after receipt of Certificate of Donation 4. Certificate of Donation must be attached to the Notice 5. Notice must state that not more than thirty percent (30%) of the donation shall be used by done institution (qualified-donee institution) for administration purposes [Sec. 13 (C), RR 2-2003]

m. Tax Basis The tax for each calendar year shall be computed on the basis of the total gifts in excess of P250,000 made during the calendar year. [Sec. 99, NIRC51]

51

SECTION 99. Rates of Tax Payable by Donor. (A) In General. The tax for each calendar year shall be six percent (6%) computed on the basis of the total net gifts in excess of Two hundred fifty thousand pesos (P250,000) exempt gift made during the calendar year. in accordance with the following schedule: If the net gift is: Over But Not Over

P100,000 200,000 500,000 1,000,000 3,000,000

P100,000 200,000 500,000 1,000,000 3,000,000 5,000,000

The Tax Shall Be Exempt 0 2,000 14,000 44,000 204,000

Plus Ove r

Of the Excess

2% 4% 6% 8% 10%

P100,000 200,000 500,000 1,000,000 3,000,000

TAXATION LAW

General Formula Total Gifts Multiply by: Tax rate ----------------------------------------------------= Estate Tax Due Less: Tax Credit, if any ----------------------------------------------------= Donor Ta D e, if an If there are several gifts during the year Gifts made on a certain date Less: Deductions from gross gifts ----------------------------------------------------Gifts made on a certain date Add: Prior gifts during the year ----------------------------------------------------= Aggregate Gifts Multiply by: Tax rate ----------------------------------------------------= Donor Ta on Aggrega e Gif Le : Donor Ta Paid on Prior Gif ----------------------------------------------------Donor Ta D e on he Gif o Da e Less: Tax Credit, if any ----------------------------------------------------= Donor Tax Due, if any

5,000,000

10,000,00 0

404,000

12%

5,000,000

10,000,00 1,004,00 15% 10,000,00 0 0 0 (B) Tax Payable by Donor if Donee is a Stranger. When the donee or beneficiary is a 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)(B) 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.

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TAXATION LAW

SUMMARY OF TRANSFER TAXES TRANSFER TAXES Estate Tax

D

Ta

Time for filing a return and payment of tax FILED: within one (1) year from the decedent's death. E: not exceeding 30 days (in meritorious cases)

NOTE: separate return is filed for each gift made on different dates during the year reflecting therein any previous net gifts made in the same calendar year.

PAID: before the delivery of the distributive share in the inheritance to any heir or beneficiary; upon filing of return.

FILED: within thirty (30) days after the gift (donation) is made

Extension: (when payment on the due date would impose undue hardship) not to exceed: 15 years, in case the estate is settled through the courts; or 2 years in case the estate is settled extra-judicially. N.B. when extension is granted, a bond may be required by CIR 2x amount of tax

If the gift involves CPG, each spouse shall file separate return with regard to his/her respective share in the CPG.

Where to file and to whom paid

General Rule: to the Authorized Agent Bank (AAB), Revenue Collection Officer (RCO) or duly authorized Treasurer of the city or municipality in the Revenue District Office having jurisdiction over the place of domicile of the decedent at the time of his death

Resident General Rule: to AAB of the RDO having jurisdiction over the place of the domicile of the donor at the time of the transfer.

Exception: If NRA/NRC, If w/ Administrator (Aor), Executor (Eor) in Phil = to the AAB of the RDO where such Aor, Eor is registered/domiciled, if not yet registered with the BIR. If w/o Aor,Eor in Phil = to AAB under the jurisdiction of RDO No. 39

Exception: If no AAB = to the RCO or duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer, If no legal residence in Phil or NRA = with Revenue District No. 39 - South Quezon City or with the Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer. Non-resident 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.

Who should file The Eor/Aor or any of the legal heirs of the decedent, whether resident or non-resident of the Philippines, under any of the following situations: 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 BIR is required as a

Any person, natural or juridical, resident or nonresident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.

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condition precedent for the transfer of ownership therof in the name of the transferee; or If there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. N.B: Eor/Aor has the primary obligation to pay the estate tax but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance.

Page 141 of 290

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ESTATE TAX EXCLUSIVE Gross Estate52 Add: Taxable Transfers & Others Revocable Transfers/Donation Mortis Causa Transfers in contemplation of death Property passing under GPoA Transfers for insufficient consideration53 Deceden In ere Accr ed54 Proceeds of Life Insurance w/ revocable beneficiary55 Family Home Claims against an Insolvent Person56 Amount received by heirs

COMMUNITY

TOTAL

Value Taken of Property Less: Mortgage debt paid, if any Initial Basis Less: Proportionate Deduction** Final Basis Multiplied by Deduction Rate VANISHING DEDUCTION **Proportionate Deduction: 𝑰

=

Less: (Ordinary Deductions)

𝑩

𝑮𝑬

𝑳𝑰𝑻

𝑻𝑷𝑼

LIT Vanishing Deductions Transfers for Public Use Retirement Benefits received by heirs Net Estate Less: (Special Deductions57) Standard Deduction Family Home Amounts received by heirs

If only 1 country is involved: (whichever is lower) Estate Tax Credit =

Net Taxable Estate (before share of surviving spouse) Less: Share of Surviving Spouse (Community Property less Ordinary Deductions =Net Community Property Divided by 2) Net Taxable Estate Multiply by Tax Rate Estate Tax Due Less: Tax Credit58, if any ESTATE TAX DUE

𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑊𝑜𝑟𝑙𝑑 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

OR actual estate tax paid to foreign country If two or more countries are involved: (whichever is lower) Estate Tax Credit =

𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

OR 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝐴𝐿𝐿 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

OR actual estate tax paid to foreign country

52

DO NOT INCLUDE: Exemptions

53

Amount included in the GE = FMV at the time of death consideration amount Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death; par ne hip p ofi earned on/before and received after, accrued interest and rents on/before and collected after death 54

55

Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part of conjugal funds. Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT. 57 These are not allowable deductions when TP is NRA. 58 Applies only to RC/NRC/RA 56

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Illustration: [RR 12-2018] (1) Decedent is unmarried, family home more than P10,000,000: Real and personal properties Family Home Gross Estate

P 14,000,000 30,000,000 P44,000,000

Less: Deductions Ordinary Deductions Unpaid real estate tax

(2,000,000)

Special Deductions Family Home Standard Deduction Total Deductions

(10,000,000) (5,000,000) (17,000,000)

NET TAXABLE ESTATE P27,000,000 Although the family home is valued at P30 million, the maximum allowable deduction for the family home is P10million only. (2) Decedent is married, the family home is conjugal property, more than P10,000,000: Exclusive Conjugal Properties: Family Home Real and personal properties Exclusive Properties: Gross Estate

P30,000,000 14,000,000 5,000,000 5,000,000

Less: Ordinary Deductions Conjugal Ordinary Deductions Net Conjugal Estate Special Deductions Family Home Standard Deduction Total Deductions Net Estate Less: ½ Share of Surviving Spouse Conjugal Property Conjugal Deductions Net Conjugal Estate

Conjugal

44,000,000

(2,000,000) 42,000,000

Total P30,000,000 14,000,000 5,000,000 P49,000,000

(2,000,000) (10,000,000) (5,000,000) (17,000,000) 32,000,000 (21,000,000)

P44,000,000 (2,000,000) P42,000,000 (P42,000,000/2)

NET TAXABLE ESTATE

P11,000,000

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(3) Decedent is married, the family home exclusive property, more than P10,000,000: Exclusive Conjugal Properties: Real and personal properties Exclusive Properties: Family Home Gross Estate

30,000,000 30,000,000

Less: Ordinary Deductions Conjugal Ordinary Deductions Net Conjugal Estate Special Deductions Family Home Standard Deduction Total Deductions Net Estate Less: ½ Share of Surviving Spouse Conjugal Property Conjugal Deductions Net Conjugal Estate

Conjugal

Total

14,000,000

14,000,000

14,000,000

30,000,000 P44,000,000

(2,000,000) 12,000,000

(2,000,000) (10,000,000) (5,000,000) (17,000,000) 27,000,000 (6,000,000)

P14,000,000 (2,000,000) P12,000,000 (P12,000,000/2)

NET TAXABLE ESTATE

P21,000,000

(4) Decedent is unmarried, the family home is below P10,000,000: Real and personal properties Family Home Gross Estate

14,000,000 9,000,000 P23,000,000

Less: Deductions Ordinary Deductions Special Deductions Family Home Standard Deduction Total Deductions

(2,000,000) (14,000,000) (9,000,000) (5,000,000) (16,000,000)

NET TAXABLE ESTATE

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(7,000,000)

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TAXATION LAW

(5) Decedent is married, the family home is conjugal property and is below P10,000,000: Exclusive Conjugal Properties: Family Home Real and personal properties Exclusive Properties: Gross Estate

5,000,000 5,000,000

Less: Ordinary Deductions Conjugal Ordinary Deductions Net Conjugal Estate Special Deductions Family Home Standard Deduction Total Deductions Net Estate Less: ½ Share of Surviving Spouse Conjugal Property Conjugal Deductions Net Conjugal Estate

Conjugal

Total

P9,000,000 14,000,000

P9,000,000 14,000,000 5,000,000 P28,000,000

23,000,000

(2,000,000) 21,000,000

(2,000,000) (4,500,000) (5,000,000) (11,500,000) 16,500,000 (10,500,000)

P23,000,000 (2,000,000) P21,000,000 (P21,000,000/2 )

NET TAXABLE ESTATE

P6,000,000

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TAXATION LAW

(6) Decedent is married, the family home exclusive property and below P10,000,000: Exclusive Conjugal Properties: Real and personal properties Exclusive Properties: Family Home Gross Estate

9,000,000 9,000,000

Less: Ordinary Deductions Conjugal Ordinary Deductions Net Conjugal Estate Special Deductions Family Home Standard Deduction Total Deductions Net Estate Less: ½ Share of Surviving Spouse Conjugal Property Conjugal Deductions Net Conjugal Estate

Conjugal

Total

14,000,000

14,000,000

14,000,000

9,000,000 P23,000,000

(2,000,000) 12,000,000

(2,000,000) (9,000,000) (5,000,000) (16,000,000) 7,000,000 (6,000,000)

P14,000,000 (2,000,000) P12,000,000 (P12,000,000/2)

NET TAXABLE ESTATE

P1,000,000

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TAXATION LAW

DONOR S TAX ON FIRST DONATION Gross Gift Less: Deductions (those not beneficial to the done e.g., mortgage)

xxx

Net Gift Less: Exemptions, if applicable

xxx xxx

Net Taxable Gift Multiply by Tax Rate

xxx xxx

Donor Ta D e Less: Tax Credit59, if any DONOR S TAX DUE

xxx xxx xxx

xxx

ON SUBSEQUENT DONATIONS w/in the same calendar year Gross Gift Less: Deductions (those not beneficial to the done e.g., mortgage)

xxx

If only 1 country is involved: (whichever is lower)

xxx

Tax Credit =

Net Gift Less: Exemptions, if applicable

xxx xxx

Net Taxable Gift Add: All previous net gifts during the year Aggregate Net Gifts Multiply by Tax Rate

xxx xxx xxx xxx

Donor Ta on Aggrega e Ne Gif Le : Donor a on pre io ne gif d ring he ear

xxx xxx

Donor Ta D e Less: Tax Credit60, if any DONOR S TAX DUE

xxx xxx xxx

𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑃ℎ𝑖𝑙 𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜

If two or more countries are involved: (whichever is lower) Tax Credit = 𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜

60

Applies only to RC/NRC/RA Applies only to RC/NRC/RA

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𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 OR

/ /

59

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′ 𝑠 𝑇𝑎𝑥

/

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 𝑠 𝑇𝑎𝑥

OR ac al donor s a paid o foreign co n r

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TAXATION LAW

Illustration: [RR 12-2018] Donations were made on January 30, 2018 at P2,000,000; on March 30, 2018 at P1,000,000; and August 15, 2018 at P500,000. Solution/computation: Date of donation 1. January 30, 2018 January 30, 2018 donation Less: Exempt Gift

Amount P2,000,000

2. March 30, 2018 March 30, 2018 donation Add: January 30, 2018 donation Less: Exempt Gift Total

1,000,000

D 2,000,000 (250,000) 1,750,000

Ta

P105,000

1,000,000 2,000,000 (250,000) 2,750,000

Tax Due Thereon Less: Tax due/paid on January donation Tax due/payable on the March donation 3. August 15, 2018 August 15, 2018 donation Add: January 2018 donation March 2018 donation Less: Exempt Gift Total

165,000 105,000 60,000 500,000 500,000 2,000,000 1,000,000 (250,000) 3,250,000

Tax Due Thereon Less: Tax due/paid on Jan./March donation Tax due/payable on the August donation

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195,000 165,000 30,000

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ESTATE TAX

DEATH

w/in 1 year after death

Get TIN for ESTATE

Prepare the LIST of assets and liabilities and their supporting documents

ESTATE TAX RETURN + PAYMENT

CANCEL TIN Transfer properties to the heirs

DONOR S TAX NO TAX RETURN NECESSARY

Full Exemption COMPLETION/ PERFECTION OF DONATION

Exempt Partial Exemption w/in 30d after gift was made

DONOR S TAX RETURN + PAYMENT (NB: Date of payment may be extended 6 months)

Liable

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D. Value-Added Tax (VAT) and Percentage Taxes 1. VAT 5.

a. Concept, Characteristics/ Elements of VAT-taxable Transactions

6.

VAT is a consumption tax imposed at every stage of distribution process on (i) the sale, barter, exchange, or lease of goods or properties and (ii) rendition of services in the course of trade or business, or the (iii) importation of goods, whether such imported goods are for use in business or non-business purposes. [Sec. 4.105-2, RR 16-2005] The taxpayer (seller) determines his tax liability by computing the tax on sthe gross selling price or gross receipt (output tax), and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the purchase of service (input tax) against the tax due on his own sale CONSTITUTIONALITY OF VAT

ABAKADA Guro Party List, et. al. v. Ermita, G.R.

No. 168056 (2005): 1. The validity of raising the VAT rate from 10% to 12% by the President was upheld by SC. 2. With respect to Sec. 8, amending Sec. 110 (A), which provides for 60-month amortization of the input tax on capital goods purchased: It is not oppressive, arbitrary, and confiscatory. The taxpayer is not permanently deprived of his privilege to credit the input tax. For whatever is the purpose, it involves executive economic policy and legislative wisdom in which the Court cannot intervene. 3. The tax law is uniform: it provides a standard rate of 0% or 10% (or 12% now) on all goods or services. The law does not make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax on purchase of capital goods, or the 5% final withholding tax by the government. 4. It is equitable: The law is equipped with a threshold margin (P1.5M; now P3M under the TRAIN Law). Also, basic marine and agricultural

TAXATION LAW

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 taxes (which is essentially regressive). What it simply provides is that Congress shall e ol e a progre i e em of a a ion .

Tolentino v. Secretary of Finance, G.R. No.

115455 (1995): 1. Regressivity is not a negative standard for courts to enforce. What Congress is required by the Con i ion o do i o e ol e a progre i e em of a a ion. 2. This provision is placed in the Constitution as moral incentives to legislation, not as judicially enforceable rights. 3. 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. 4. The regressive effects are corrected by the zero rating of certain transactions and through the exemptions. CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE TRANSACTION General Characteristics/Nature: 1. Privilege/Percentage Tax imposed by law directly not on the thing or service but on the ACT (sale, barter, exchange, lease, importation, or performance of service) 2. Ad Valorem Tax the amount is based on the gross selling price or gross value in money of the goods or service, including the use or lease or properties. 3. Indirect Tax The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. 4. Excise Tax - a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods Nature VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties

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and services in the Philippines and on importation of goods into the Philippines.

of services is not regular [Section 4.105-3, RR No. 162005]

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. However, in the case of importation, the importer is the one liable for the VAT. [Sec. 4.105.2, RR 16-2005]

b. Impact and Incidence of Tax

General Features: 1. VAT uses the Tax Credit Method 2. All goods, properties and services (except exempt transactions) including goods subject to excise taxes, and use or lease of properties, whether real or personal, are subject to tax at all levels of distribution. 3. Although tax is levied at all stages, the cumulative effect is that the final value of the goods sold to the ultimate consumers is taxed only once. 4. VAT, as a general rule, follow the destination principle (goods and services are taxed only in the country where they are consumed). Therefore, no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. Elements of a VAT-taxable transaction in general 1. There must be a sale, barter, exchange, or lease in the Philippines 2. The subject matter must be taxable goods or properties or services General rule: The sale must be made by a taxable person in the course of trade or business or in the furtherance of their profession. Exception: In the case of importation of goods, the transaction is taxable whether or not done in the course of business. Mea g f e c e f ade b e Means the regular conduct of 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 nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. N.B. Services rendered by non-resident foreign persons shall be considered as being rendered in the course of trade or business, even if the performance

Impact The statutory taxpayer, the one from whom the government collects. Seller/Importer Seller/Importer is the one who collects the tax and pays to the government

Incidence One who bears the burden of taxation Buyer/Final Consumer the buyer is the one who bears the burden of the taxation.

c. Tax Credit Method A a pa er a pa able i over input tax: OUTPUT VAT PAYABLE

he e ce

of o p

a

INPUT VAT = VAT

Under the VAT method of taxation, which is invoicebased, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports. [CIR v. Seagate, G.R. No. 153866 (2005)].

d. Destination Principle/ Cross Border Doctrine As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zerorated, while imports are taxed. [CIR v. American Express International, G.R. No. 152609 (2005)] N.B. 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.

Atlas Consolidated Mining & Dev. Corp. v. CIR,

G.R. Nos. 141104 and 148763 (2007): Actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposed with 12% VAT.

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Exception to destination principle

TAXATION II

Sec. 108(b)(2)61

Sec. 108(b)(2), which subjects certain services rendered in the Philippines to a zero-rated VAT, is an exception under the destination principle. The Court in CIR v. AMEX (2005) enumerated the requisites to fall under that provision. 1. The service is performed in the Philippines; 2. the service falls under any of the categories provided in Section 102(b)62 of the Tax Code; and 3. it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the BSP. In that case, the Court held that a ruling providing ha he er ice m be de ined for con mp ion o ide of he Philippine in order o q alif for ero rating contravenes both the law and the regulations issued pursuant to it. The Court held that such ruling was ultra vires and therefore void. The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the S a e nece aril ha o ha e a b an ial connec ion o i , in order o enforce a ero ra e. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used. [CIR v. American Express International, G.R. No. 152609 (2005)]

e. Persons Liable Transactions subject to VAT: 1. Sale, Barter or Exchange of Goods or Properties 2. Sale of Services, including Lease or use of Properties 3. Importation of Goods.

61

Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or a nonresident person not engaged in business who is outside the Philippines when the services were 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. 63

TAXATION LAW

SECTION 119. Tax on Franchises. Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all

Persons Liable: 1. Any person who sells, barters, exchanges, or leases goods or properties, or who renders services, in the course of trade or business Exceptions: a. A non-VAT-registered person whose annual gross sales or receipts does not exceed P3M. b. Franchise grantees under Sec 11963 of this code and are not VAT-registered. 2. 3.

Any person who imports goods, whether or not in the course of business Any person who voluntarily registers its business under the VAT system, regardless of level of sales.

The erm per on refer o an indi id al, r , estate, partnership, corporation, joint venture, cooperative or association [Sec. 4.105-1, RR 16-2005]. General Rule: VAT and Percentage Tax cannot be charged together. I ei her he ran ac ion i nder VAT or Other Percentage Tax. Exception: When one erroneously declares himself to VAT registered.

f. Imposition of VAT 1. On Sale of Goods or Properties Sale of goods or properties in general Rate: 12% VAT beginning 1 February 2006 [RMC No. 7-06] [Sec. 106, as amended by TRAIN] Transactions: Every sale, barter or exchange (actual sale and in the course of trade or business) Tran ac ion deemed ale of taxable goods or properties [RR 16-2005]

franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year do not exceed Ten million pesos (P10,000,000), subject to Section 236 of this Code, a tax of three percent (3%) and on gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once the option is exercised, said option shall be irrevocable.

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Basis: Gross selling price or gross value in money of the goods or properties sold, bartered or exchanged. Who Pays: Paid by SELLER/TRANSFEROR. [Sec. 106, NIRC]; N.B. the end-user is the one who is actually burdened with the tax since the tax is passed on to him. Meaning of goods or properties Goods or properties all tangible and intangible objects which are capable of pecuniary estimation, including: a. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; b. The right or the privilege to use patent, copyright, design, or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; c. The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; d. The right or the privilege to use motion picture films, films tapes and discs; e. Radio, television, satellite transmission and cable television time. Goods/Personal Properties a. Actual/deemed sale for a valuable consideration b. For use or consumption in the Phil (regardless of the payment arrangements) c. Not exempt from VAT (NIRC, special law, special agreement) Special rules Sale of Real Properties (RP) Casual sale Subject to CGT (6%) (Capital Assets) Regular sales (Ordinary Assets): Commercial Property Subject to 12% VAT (Sale/Lease) If monthly rental P15,000 = VAT and OPT-exempt If monthly rental > P15,000 b aggrega e ann al ren al Residential Units P3M = subject to OPT (Lease) If monthly rental > P15,000 and aggregate annual rentals > P3M = subject to VAT If SP > P1.5M = Residential Lot subject to VAT

Residential House and Lot

If SP P1.5M = VAT-exempt If SP > P2.5M = subject to VAT If SP P2.5M = VAT-exempt

Sales of real properties subject to VAT Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. [Sec. 4.106-3, RR 16-2005] TYPES OF SALES OF REAL ESTATE; EFFECTS a.

Cash sale entire selling price taxable in the month of the sale. Note: Ini ial pa men mean pa men or payments which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year when the sale or disposition of the real property was made. It covers any down payment made and includes all payments actually or constructively received during the year of sale, the aggregate of which determines the limit set by law.

b. Installment sales 1. Meaning of installment sale initial payments of which in the year of sale 25% Gross Selling Price (GSP) 2. Effect VAT is recognized based on collection, including interest and penalties, actually and/or constructively received by the seller. c. Deferred sales 1. Meaning initial payments exceed 25% of the GSP 2. Effect VAT will be recognized outright in full at the time of sale as though the sale was a cash sale.

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d. Tax free exchanges under Sec. 40(C)(2)64 are not subject to VAT. [Sec. 4.106-3, RR 16-2005] Meaning of Gross Selling Price (GSP) total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding VAT. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

TAXATION LAW

Includes: Excise tax paid, initial payments65, interests and penalties (if installment), commission income (if exported), purchase price, charges for packing, delivery and insurance If goods/personal properties, GSP = amount paid in consideration IF DEEMED SALE: FMV at the time of the transaction

In the case of sale, barter or exchange of real property subject to VAT, GSP shall mean: a. The consideration stated in the sales document or b. The fair market value (FMV) whichever is higher.

N.B. in retirement/cessation, inventory (raw materials, finished goods, machinery, equipment, furniture, fixture), tax base = whichever is lower, acquisition cost current market price of goods

Meaning of FMV Whichever is higher of the following: a. The fair market value as determined by the CIR (zonal value) or b. The fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax declaration).

N.B.: CIR has the power to determine the appropriate tax base in 1) SBE in deemed sales and 2) when GSP is unreasonably lower than AMV66

General Rule: GSP is the total amount of money paid in consideration of sale, barter, exchange, or lease. Excludes: VAT, sales discounts and, allowances and returns (See Section on Allowable Discounts) 64

(a) 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; or (b) 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; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property. 65 Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost of the property), notes and other evidence of indebtedness issued by the purchaser at the time of the sale 66 GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same quantity or quality sold in the immediate locality or the nearest date of sale. 67 SECTION 109. Exempt Transactions.

Not taxable: [Sec. 109 (P)67(Q)68] a. Not primarily held for sale or lease in the course of trade or business b. Low cost or socialized housing c. Residential lot when value does not exceed P1.5M d. House and lot/other residential dwelling < P2.5M e. Lease (rental per unit < 15,000/month

(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)77 and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000)78 and below: Provided, That, beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling price of not more than Two million pesos (P2,000,000): Provided, further, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to their its present values using the Consumer Price Index, as published by the National Statistics Office (NSO) Philippine Statistics Authority (PSA); 68 (Q) Lease of a residential unit with a monthly rental not exceeding Ten Fifteen thousand pesos (P10,000) (P15,000); 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);

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f.

TAXATION II

Transmission to a trustee (Except: transmission is deemed sale transaction) Note: That, beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling price of not more than Two million pesos (P2,000,000). General Rule: Transmission of property to a trustee shall NOT be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary.

Exception: However, if the property transferred is originally intended for sale, lease or use in the ordinary course of trade or business AND the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale transaction. The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary. g. Transfer to corporation in exchange of shares of stocks [see Sec. 40, NIRC for Tax-free exchange] h. Security deposits for lease agreements provided it does not form part of Gross Receipt or Official Receipt.69 [See RMC 16-2013] Allowable Deductions from GSP The following are deductible from the gross selling price: a. Sales returns and allowances the selling price of the goods or properties returned and not sold necessarily reduces the gross sales on which the rate is applied. 1. Sales returns and allowances for which a proper credit/refund was made during the month or quarter to the buyer for sales previously recorded as table sales are allowed as a deduction in the period when they are made. Excess may be carried over to the succeeding period.

TAXATION LAW

2.

b. Sales Discounts bona fide or regular discounts given to purchasers, which are ascertainable and definitely agreed upon between the vendor and the vendee at the time of sale are deductible from the GSP. 1. If given after the sale or are in the nature of a rebate or partial remission of indebtedness, they will not be allowed as a deduction from the GSP. 2. Furthermore, the discount must be expressly indicated in the sales invoice and the amount forming part of the gross sales duly recorded in the books of accounts. 3. Credits for allowances to cover roll back in prices and other adjustments are not deductible.

2. On Importation of Goods Rate: 12% VAT Basis: total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges (such as postage, commission). Where the customs duties are determined on the basis of the quantity or volume of the goods, VAT shall be based on the landed cost plus excise taxes, if any. Who Pays: IMPORTER prior to the release of such goods from customs custody (Sec. 107 (A), NIRC) Importer: any person who brings goods into the Philippines, whether or not made in the course of his trade or business, including non-exempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies (RR 16-2005)

69

SUBJECT TO VAT

The value of goods or properties sold and subsequently returned or for which allowances were granted by a VATregistered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum is issued.

NOT SUBJECT TO VAT Loan to the lessor from the lessee

Pre-Paid Rental

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Security deposit when applied to the rental

Security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, if not part of Gross Receipt.

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TAXATION II

Importation of Goods Importation of goods BEGINS when the carrying vessel/aircraft enters the Philippine jurisdiction with an intention to unload its cargoes. It ENDS when there is already payment of duties/taxes/other charges and issuance of permit to withdraw. Note: Importation of goods to bonded warehouse for processing is not importation. Importation connotes permanency and gain. Thus, if goods are only for exhibit, such goods are VAT-exempt.

Customs duty amount of customs duty legally due and paid by the importer. Therefore, if importer is entitled to 90% customs duty exemption, the 10% duty paid should be the base in computation of the VAT.

Other similar chargers specific charges which an importer has to pay. a. Other taxes (special import tax) b. Bank charges c. Arrastre charges d. Wharfage dues e. Brokerage fees f. All other charges or expenses

Landed Cost - invoice amount including costs of

loading, shipping and unloading, customs duties, freight, insurance, other charges, excise tax (if any) Expenses incurred after the release of the goods such as those incurred in delivering goods do not form part of the landed cost. Transfer of Goods by Tax-Exempt Persons: a. 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. b. 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.

3. On Services [Sec 108] Rate: 12% Basis: Gross receipts derived from the sale or exchange of services, including the use or lease of properties.

TAXATION LAW

Gross Receipts - the total amount of money or its

equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. [Sec. 108 (A), NIRC] Con r c i e receip occ r hen he mone consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. a. Deposit in banks which are made available to the seller of services without restrictions b. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered c. Transfer of the amounts retained by the contractee to the account of the contractor. [RR 16-2005] Requisites for taxability a. The service must be performed or is to be performed (which may be performed by a subcontractor) in the course of trade or business in the Philippines; b. For a valuable consideration actually or constructively received; and c. The service is not exempt under the Tax Code, special law or international agreement d. Person selling or rendering service is liable to VAT Sale/Exchange of Services : mean he performance of all kinds of services in the Philippines for o her for a fee, rem nera ion or con idera ion. [Sec 108 (A); Diaz v Secretary of Finance, G.R. No. 193007 (2011)] It includes: a. Construction and service contractors b. Stock, real estate, commercial, customs and immigration brokers c. Lessors of property, whether personal or real d. Persons engaged in warehousing service. e. Lessors or distributors of cinematographic films f. Persons engaged in milling, processing, manufacturing or repacking goods for others are subject to VAT, EXCEPT palay into rice, corn into corn grits, and sugarcane into raw sugar (not subject to VAT) g. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters, and movie houses

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h. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers i. Dealers in securities including pre-need companies Gro receip mean gro elling price le cost of the securities sold. j. Lending investors: All persons OTHER than banks, non-bank financial intermediaries, finance companies and other financial intermediaries NOT performing quasi-banking functions who make a practice of lending money for themselves or others at interest. k. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes l. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines m. Sales of electricity by generation, transmission by any entity, and/or distribution companies, including electric cooperatives (as amended by Train Law) EXCEPT 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, which shall be subject to 0% rate of VAT (zero-rated). n. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees (including PAGCOR and its licensees/franchisees) EXCEPT franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) (which shall be subject to 3% franchise tax under Sec. 119, subject to optional registration), and franchise grantees of gas and water utilities (under Sec. 109, subject to 2% franchise tax) With respect to franchise grantees of telephone and telegraph services, amounts received for overseas dispatch, message, or conversation originating from the Philippines are subject to the

TAXATION LAW

percentage tax under Sec. 120 and hence exempt from VAT o. Non-life insurance companies including surety, fidelity, indemnity and bonding companies; EXCEPT crop insurance, life and disability insurance, and health and accident insurance Insurance and reinsurance commissions, as opposed to premiums, whether life or non-life, are subject to VAT while non-life insurance premiums are subject to VAT. p. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties

Lease of Properties : subject to the VAT imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. a. The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret b. formula or process, goodwill, trademark, trade brand or other like property or right c. The lease of the use of, or the right to use of any industrial, commercial or scientific equipment d. The supply of scientific, technical, industrial or commercial knowledge or information e. 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 #2 or any such knowledge or information as is mentioned in #3 f. 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 g. The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme h. The lease of motion picture films, films, tapes and discs i. The lease or the use of or the right to use radio, television, satellite transmission and cable television time

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Additional services subject to VAT: a. Services performed in the exercise or practice of profession or calling by individuals subject to professional tax under the LGC, and professional services rendered by general professional partnerships (GPPs); b. Services performed by actors/actresses, talents, singers, emcees, radio/television broadcasters, choreographers, musical/radio/movie/television/stage directors, and professional athletes; c. Services rendered by customs, real estate, stock, immigration and commercial brokers; d. Services rendered by doctors, and lawyers. e. Lease/use of sports facilities and equipment [RA 6847]

TAXATION LAW

2. Distribution or Transfer to Shareholders, Investors or Creditors As regards distribution to shareholders or investors as share in the profits of the VAT-registered persons, 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 at the time of the distribution, whichever is applicable. [RR 16-2005]

3. Consignment of Goods Consigned goods returned by the consignee within the 60-day period are not deemed sold. [RR 16-2005]

The performance of the services should not be in pursuit of an employer-employee relationship between the service-provider and the servicerecipient.

4. Retirement from or Cessation of Business with Respect to Inventories on Hand

g. Transactions Deemed Sale

With respect to ALL goods on hand, whether capital goods, stock-in-trade, supplies or materials, as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor ARE CONSIDERED DEEMED SALES

[Sec 106 (B)] Rate: 12% VAT Basis: Market value of the goods deemed sold as of the time of the occurrence of the transactions or as the CIR shall prescribe. In the case of retirement/cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is lower. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base. The gross selling price is unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale. [RR 16-2005]

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 Example: when a VAT-registered person withdraws goods from his business for his personal use. [RR 162005]

Examples: change of ownership of the business (e.g., when a sole proprietorship incorporates, or the proprietor sells his entire business) and dissolution of a partnership and creation of a new partnership which takes over the business. [RR 16-2005]

5. Transmission of Property to a Trustee IF: Property is for sale, lease or use in the ordinary course of business The transfer is a completed gift (transferor divested from himself absolute control of property)

h. Change or Cessation of Status as VAT-Registered Person [Sec 106[C]] Rate: 12% VAT Basis: the acquisition cost or the current market price of the goods or properties, whichever is LOWER.

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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 CIR, the status of a person as a VAT-registered person changes or is terminated.

1. Subject to VAT [RR 16-2005, Sec. 4.106 (b)] 12% VAT is 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: a. Change of business activity from VAT taxable status to VAT-exempt status Example: A VAT-registered person engaged in a taxable activity like wholesaler or retailer who decides to discontinue such activity and engages instead in life insurance business or in any other business not subject to VAT. b. Approval of request for cancellation of a registration due to reversion to exempt status c. Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2)

2. Not Subject to VAT Goods or properties existing as of the occurrence of the following: a. Change of control of a corporation by acquisition of the controlling interest of such corporation by another stockholder (individual or corporate) or group of stockholders. Note: Exchange of goods or properties including the real estate properties used in business or held for sale or for lease by the transferor, for shares of stocks, whether resulting in corporate control or not, is SUBJECT TO VAT [RR 10-2011] b. Change in the trade or corporate name of the business c. Merger or consolidation of corporations: The unused input tax of the dissolved corporation, as

TAXATION LAW

of the date of merger or consolidation, shall be absorbed by the surviving or new corporation. Note: The INPUT VAT of the dissolved corporation will be absorbed by the surviving corporation

i. Zero-Rated Sales of Goods or Properties, Effectively ZeroRated Sales of Goods or Properties, and Zero-Rated Sale of Services Rate: 0% Output VAT; 12% Input VAT Transactions: Every sale, barter or exchange, or ran ac ion deemed ale of taxable goods or properties as well as services [RR 16-2005; RR 132018] Concept A zero-rated sale of goods, properties, or services by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund. Transaction is subject to VAT but at 0% instead of 12%. 1. Export Sales 2. Sales of Goods or Property to persons or entities who are tax-exempt/Effectively Zero-Rated Sales 3. Zero rated sale of services Export Sales [Sec. 106(A)(2)(a), NIRC] 1. The (i) sale and actual shipment of goods from the Philippines to a foreign country AND (ii) paid for in acceptable foreign currency or its equivalent in goods or services, AND (iii) accounted for in accordance with the rules and regulations of the BSP 2. Sale of raw materials or packaging materials to a nonresident buyer (ii) for delivery to a resident local export-oriented enterprise (iii) to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods AND (iv) paid for in acceptable foreign currency AND (v) accounted for in accordance with the rules and regulations of the BSP.

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3.

TAXATION II

Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production. Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an exportoriented enterprise [RR 13-2018]

4.

Those considered export sales under the Omnibus Investment Code of 1987, and other special laws (e.g. Bases Conversion & Development Act of 1992) Under Omnibus Investment Code (EO 226): Considered Export Sales a. Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer; OR b. Net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same (only when actually exported by the latter) evidenced by landing certificates. Constructive Exports (without actual exportation): a. Sales to bonded manufacturing warehouses of export-oriented manufacturers; b. Sales to export processing zones [RA 7916]; c. Sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products [RA 7227] d. Sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products, whether paid for in foreign currency or not. e. Sales by a VAT-registered supplier to a manufacturer/producer whose products are 100% exported are considered export sales. A certification to this effect must be issued by the Board of Investment which shall be good for 1 year unless subsequently reissued. Export sales of registered export traders shall include commission income, and that exportation of goods on consignment shall not

5.

TAXATION LAW

be deemed export sales until the export products consigned are in fact sold by the consignee. [RR 16-2005; RR 13-2018] The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations: Provided, That the goods, supplies, equipment and fuel shall be used for international shipping or air transport operations. (as amended by Train Law) a. Limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Phil. directly to a foreign port without docking or stopping at any other port in the Phil. b. If any portion of such fuel, goods, or supplies is used for purposes other than that mentioned, such portion of fuel, goods, and supplies shall be subject to 12% VAT. [RR 16-2005; RR 13-2018]

Note: items (c), (d), and (e) above shall be subject to the twelve percent (12%) value-added tax and no longer be considered export sales subject to zero percent (0%) VAT rate upon satisfaction of the following conditions: 1. The successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau: Provided, That, to determine the effectivity of item no. 1, all applications filed from January 1, 2018 shall be processed and must be decided within ninety (90) days from the filing of the VAT refund application; and 2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019. Provided, That the Department of Finance shall establish a VAT refund center in the Bureau of Internal Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the processing and granting of cash refunds of creditable input tax. An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the BOC from the immediately preceding year shall be automatically appropriated annually and shall be treated as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refund:

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Provided, That any unused fund, at the end of the year shall revert to the General Fund.

2.

Provided, further, That the BIR and the BOC shall be required to submit to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims for refund and any unused fund. [last paragraphs of Sec. 106 (A)(2)(a), NIRC (such provisions were added by TRAIN Law)] Effectively Zero-Rated Sales [Sec. 106 (A)(2)(b), NIRC] 1. 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. 2. The local sale of goods and properties (ii) by a VAT-registered person (iii) to a person or entity who was granted indirect tax exemption under special laws or international agreement. [RR 162005[ ECOZONES The ECOZONES shall be managed and operated by the PEZA as separate customs territory. [Sec. 8, RA 7916 Special Economic Zone Ac of 1995 ]. Consequently, sales made by a person in the customs territory to a PEZA-registered entity are considered exports to a foreign country and thus, zero-rated. Conversely, sales by a PEZA-registered entity to a person in the customs territory are deemed imports from a foreign country. Tax treatment of sales to & by PEZA-registered enterprise within & without the ecozone [RMC 74-99]: 1. Any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, REGARDLESS of the class or type of he la er PEZA regi ra ion, i ac all qualified and thus LEGALLY ENTITLED TO THE 0% VAT. Customs Territory hall mean he na ional territory of the Philippines outside of the proclaimed boundaries of the ECOZONES except those areas specifically declared by other laws and/or presidential proclamations to have the status of special economic zones and/or free ports. [Sec. 2(g), Rule 1, Part I, RA 7916-IRR]

TAXATION LAW

By a VAT-Exempt Supplier from the Customs Territory to a PEZA registered enterprise Sale of goods, property and services by VATExempt supplier from the Customs Territory to a PEZA registered enterprise shall be treated EXEMPT FROM VAT, regardless of whether or not the PEZA registered buyer is subject to taxes under the NIRC or enjoying the 5% special tax regime.

3.

By a PEZA Registered Enterprise a. Sale of Goods by a PEZA registered enterprise to a buyer from the Customs Territory (i.e., domestic sales) -- this case shall be treated as a technical IMPORTATION made by the buyer. Such buyer shall be treated as an IMPORTER thereof and shall be imposed with the corresponding VAT. b. Sale of Services by a PEZA registered enterprise to a buyer from the Customs Territory this is NOT embraced by the 5% special tax regime, hence, such seller shall be SUBJECT TO 12% VAT. c. Sale of Goods by a PEZA registered enterprise to Another PEZA registered enterprise (i.e. Intra-ECOZONE Sales of Goods) this shall be EXEMPT from VAT.

4.

Sale of Services by ECOZONE enterprise, to Another ECOZONE enterprise (IntraECOZONE enterprise Sale of Service) a. if PEZA registered seller is subject to 5% special tax regime - EXEMPT from VAT b. if PEZA registered seller is subject to taxes under NIRC (i.e. not subject to 5% special tax regime) subject to 0% VAT pursuant o cro border doc rine

Zero Rated Sale of Services [Sec. 108 (B), NIRC] 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 Bangko Sentral ng Pilipinas (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

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3.

4.

5.

6. 7.

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consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); 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; Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof: Provided, That these services shall be exclusively for international shipping or air transport operations (as amended by TRAIN Law); Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production; Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country (as amended by TRAIN Law); and 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.

Note: items (a) and (e) above shall be subject to the twelve percent (12%) value-added tax and no longer be considered export sales subject to zero percent (0%) VAT rate upon satisfaction of the following conditions: 1. The successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau: Provided, That, to determine the effectivity of item no. 1, all applications filed from January 1, 2018 shall be processed and must be decided within ninety (90) days from the filing of the VAT refund application; and 2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019. Provided, That the Department of Finance shall establish a VAT refund center in the Bureau of Internal Revenue (BIR) and in the Bureau of Customs

TAXATION LAW

(BOC) that will handle the processing and granting of cash refunds of creditable input tax. An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the BOC from the immediately preceding year shall be automatically appropriated annually and shall be treated as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refund: Provided, That any unused fund, at the end of the year shall revert to the General Fund. Provided, further, That the BIR and the BOC shall be required to submit to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims for refund and any unused fund. [last paragraphs of Sec. 108 (B), NIRC (such provisions were added by TRAIN Law)] Difference between Zero-rated and VAT-exempt Zero-rated VAT-exempt It is a taxable transaction Not subject to output tax but does not result in an output tax The input VAT on the The seller in an exempt purchases of a VAT- transaction is not entitled registered person with to any input tax on his zero-rated sales may be purchases despite the allowed as tax credits or issuance of a VAT refunded invoice or receipt; Persons engaged in Registration is optional transactions which are for VAT-exempt zero-rated, being subject persons. to VAT, are required to register

j. VAT-Exempt Transactions 1. Vat-Exempt Transactions, in General a.

Sale of goods or properties and/or services and the use or lease of properties that is NOT subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. b. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers. [RR 16-2005] c. But, the VAT-registered person may elect that the exemption not apply to its sale of goods or properties or services; provided that the election made shall be irrevocable for a period of three

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(3) years from the quarter the election was made [Sec. 109(2), NIRC].

2. Exempt Transactions, Enumerated [4.109-1 of RR 16-2005 as amended by RR 13-2018] a.

Sale/import of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as or yielding or producing foods for human consumption and breeding stock and genetic materials therefor; 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. Also includes preservation using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetrapack, and other similar packaging methods [RR 16-2005] Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, AND COPRA shall be considered in their original state Livestock or poultry do not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. b. Sale/ 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 pets); c. Importation of personal and household effects belonging to Philippine residents returning from abroad and non-resident citizens coming to resettle in the Philippines; provided, that such goods are also exempt from customs duties under the TCC (now CMTA); d. Importation of professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing said items for their own

TAXATION LAW

use and not for sale, barter or exchange, accompanying such persons, or arriving within 90 days before or after their arrival a reasonable time: Provided, That the Bureau of Customs may, upon production of satisfactory evidence that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide the goods are brought from their former place of abode, exempt such goods from payment of duties and taxes (as amended by Train Law); EXCEPT vehicles, vessels, aircrafts, machineries, and other goods for use in manufacturing and merchandise of any kind in commercial quantity) e. Services subject to percentage tax under the NIRC; Sale of services of non-VAT-registered persons (other than the other VAT-Exempt transactions) where the gross annual sales and/or receipts of which does not exceed P3M. f. Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar; Note: RMC 10-2010: Toll processing that are VAT exempt pertain only to services to clients from which growing of animals were contracted. g. Medical, dental, hospital and veterinary services, except those rendered by professionals: Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. [RR 16-2005] Note: RR-2004 granting VAT-exemption to doctors registered with the PRC and lawyers registered with the IBP was superseded by RA 9337 and RR 16-2005. h. Educational services rendered by private educational institutions, duly accredited by DepED, CHED, TESDA, and those rendered by government educational institutions; Ed ca ional er ice doe no incl de seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, CHED, and/or TESDA. [RR 162005] i. Services rendered by individuals pursuant to an employer-employee relationship; j. Services rendered by regional or area headquarters established in the Philippines by

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k.

l.

m. n.

o. p.

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multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under PD No. 529 (Petroleum Exploration Concessionaires under the Petroleum Act of 1949); Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members, as well as sale of their produce, whether it is original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; Sale by agricultural cooperatives to nonmembers can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT. [RR 16-2005] Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA; Sales by non-agricultural, non- electric and noncredit cooperatives duly registered and in good standing with the CDA; Provided, that the share capital contribution of each member does not exceed P15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members. BUT their importation of machineries and equipment, including spare parts thereof, to be used by them are SUBJECT to VAT; Export sales by persons who are not VATregistered; Sale of real properties as follows: 1. Sale of real properties NOT primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction inciden al o he a pa er main b ine . [RR 4-2007; RR 13-2018]

TAXATION LAW

2.

3.

4.

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Sale of real properties utilized for low-cost housing as defined by RA 7279, ("Urban Development and Housing Act of 1992") and other related laws, such as RA 7835 and RA 8763; Lo -cost housing" refers to housing projects intended for homeless lowincome 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 220, PD 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of as set by the Housing and Urban Development Coordinating Council (HUDCC) pursuant to RA 7279, and other laws, such as RA 7835 and RA 8763. Sale of real properties utilized for socialized housing as defined under RA 7279, and other related laws, such as RA 7835 and RA 8763, wherein the price ceiling per unit is P225,000 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 7279 and RA 7835 and RA 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and 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. Sale of residential lot valued at P1.5M and below, or house & lot and other residential dwellings valued at P2.5M and below, as

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TAXATION II

adjusted in 2011 using the 2010 Consumer Price Index values. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots does not exceed P1.5M. [RR 13-2012] 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. [RR 132018] Sale, transfer or disposal within a 12month period of 2 or more adjacent residential lots, house and lots or other residential dwellings to one buyer, whether from the same or from different sellers shall be considered one single transaction. Hence, the sale of the adjacent lots shall be subject to VAT if the aggregate value exceeds P1.5M for residential lots and P2.5M for residential house lots or residential dwellings, notwithstanding that the value of the individual properties do not exceed the VAT exemption thresholds. Sale/purchase of parking lots shall not be considered a sale of residential lot/dwelling. Hence, it shall be subject to VAT regardless of its selling price. [RR 13-2012] 5.

q.

Note: That beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling price of not more than Two Million Pesos (P2,000,000.00) [provision added by TRAIN Law amending Sec. 109 (1)(P), NIRC] Lease of residential units with a monthly rental per unit not exceeding P15,000, regardless of the amount of aggregate rentals received by the lessor during the year.

r.

s. t.

TAXATION LAW

Lease of residential units where the monthly rental per unit exceeds P15,000 but the aggregate of such rentals of the lessor during the year do not exceed P3M shall likewise be exempt from VAT, however, the same shall be subjected to 3% percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P15,000 while others are leased out for more than P15,000 per unit, his tax liability will be as follows: o The gross receipts from rentals not exceeding P15,000 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. o The gross receipts from rentals exceeding P15,000 per month per unit shall be subject to VAT IF the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P15,000) exceeds P3M. Otherwise, the gross receipts will be subject to the 3% tax imposed under Sec. 116 of the Tax Code. 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, lodging houses, inns and pension houses. 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 13-2018] 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; Transport of passengers by international carriers Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; The exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be subject to the

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requirements on restriction on vessel importation and mandatory vessel retirement program of Maritime Industry Authority (MARINA) [RR 13-2018] u. Importation of fuel, goods, and supplies by persons engaged in international shipping or air transport operations: Provided, That the fuel, goods, and supplies shall be used for international shipping or air transport operations (as amended by TRAIN Law); The said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; If any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 12%. [RR 13-2018] v. Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries (such as money changers and pawnshops [RR 132018]) subject to Percentage Tax; w. Sale or lease of goods and services to senior citizens and persons with disability, as provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges of Persons with Disability), respectively [Added by TRAIN Law]; x. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended [Added by TRAIN Law]; y. Association dues, membership fees, and other assessment and charges collected by homeowners association and condominium corporations [Added by TRAIN Law]; z. Sale of gold to the Bangko Sentral ng Pilipinas (BSP) [Added by TRAIN Law]; aa. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019 [Added by TRAIN Law]; bb. 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 P3M; For purposes of the threshold of P3M, the husband and the wife shall be considered

TAXATION LAW

separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. The VAT-exempt sales shall NOT be included in determining the threshold. [RR 16-2005] cc. Self-employed individuals and professionals availing of the 8% tax on gross sales and/or receipts and other non-operating income, under Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC [added exemption by TRAIN Law as stated in RR 18-2018]. Other Services Exempt from VAT such services are those subject to percentage tax (see Percentage Tax, infra) a. Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages [Sec. 117, NIRC]; b. Services rendered by international air/shipping carriers [Sec. 118, NIRC]; c. Services rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10,000,000 and by franchise grantees of gas and water utilities [Sec. 119, NIRC]; N.B. Compare with other franchise grantees which are subject to VAT d. Services rendered for overseas dispatch, message, by franchise grantees or conversation originating from the Philippines [Sec. 120, NIRC]; e. Services by any person, company or corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines [Sec. 123, NIRC]; f. Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies [Sec. 124, NIRC]; g. Services rendered by proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, jai-alai and race tracks [Sec. 125, NIRC]; and h. Receipts on sale, barter for exchange of shares of stock listed and traded through the local stock exchange or through initial public offering [Sec. 127, NIRC].

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TAXATION LAW

SUMMARY TABLE OF VAT-EXEMPTIONS [SEC. 109, NIRC] A B

Sale importation

or

C Importation D

Of agricultural and marine products in their original state Of fertilizers; seeds, seedlings and fingerlings; prawn, livestock and poultry feeds. Exception: specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered pets. Of personal and household effects belonging to the residents of the Philippines returning from abroad Of professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals and personal household effects, belong to persons coming to settle in the Philippines for their own use and not for

sale, barter or exchange. E F G

Services

H I J K L

Sales

M

Services

N

Sales

O

Export sales

P

Sales

Q

Lease Sale, importation, printing, or publication

R S T

Sale, importation, or lease

U

Importation

V

Services

W

Collection

X

Transfer

Y

Subject to percentage tax By agricultural contract growers and milling for others of palay into rice, corn into grits and sugarcane into raw sugar Medical, dental, hospital and veterinary services Exception: those rendered by professionals Educational services rendered by private educational institutions duly accredited by DepEd, CHED, and TESDA, and those by governmental educational institutions Rendered pursuant to an employer-employee relationship Rendered by a RAHQ established in the Philippines Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under PD 529 (Petroleum concessionaires) By agricultural cooperatives duly registered with the CDA Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA whose lending is limited to members By non-agricultural, non-electric, and non-credit cooperatives duly registered and in good standing with the CDA. Provided, the share capital contribution of each member does not exceed 15K By persons who are not VAT-registered Of real property not primarily held for sale to customers or held for lease in the ordinary course of business or sales within the low-cost cap of below P1.5M for a residential lot and P2.5M for a house and lot and other residential building Of a residential unit with a monthly rental not exceeding P15,000 Books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and is not devoted principally to publication of paid advertisements. Transport of passengers by international carriers Of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations Fuel, goods, and supplies by persons engaged in international shipping or air transport operations Of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries Of Association dues, membership fees, and other assessment and charges by homeowners association and condominium corporations; Of property pursuant to Section 40(C)(2) of the NIRC, as amended Association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations Page 167 of 290

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Z AA BB

Sale Sale Sale or lease Services

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TAXATION LAW

Of gold to the Bangko Sentral ng Pilipinas (BSP); Of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019 other than the transactions mentioned in Of goods or properties the preceding paragraphs, the gross annual sales and/or receipts do not Performance of services exceed the amount of P3M 4.

k. Input and Output Tax 1. Definition Input tax the VAT due on or paid by a VATregistered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business. a. It includes the transitional input tax and the presumptive input tax as determined in accordance with Section 111 of the Code. b. It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. c. Input tax must be evidenced by a VAT invoice or official receipt issued by a VAT-registered person in accordance with Secs. 113 and 237 of the Code. [RR 16-2005]

b. c. d. e.

Persons or firms engaged in the processing of (1) sardines, (2) mackerel and (3) milk, and in manufacturing (1) refined sugar, (2) cooking oil and (3) packed noodle based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to FOUR PERCENT (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

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 236 of the Code. If at the end of any taxable month or quarter: a. The output tax exceeds the input tax, the excess shall be paid by the VAT-registered person b. The input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters [Sec. 110(B), NIRC]

2. Sources of Input Tax a. Purchase or importation of goods (evidenced by VAT invoice/receipt) 1. For sale; or 2. For conversion into or intended to form part of a finished product for sale including packaging materials; or 3. For use as supplies in the course of business; or

For use as materials supplied in the sale of service; or 5. For use in trade or business for which deduction for depreciation or amortization is allowed under the Code. Purchase of real properties for which VAT has actually been paid Purchase of services in which VAT has actually been paid Transactions deemed sale Presumptive Input Tax [Sec. 111(B), NIRC]

Proce ing mean pa e ri a ion, 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. f.

Transitional Input Tax [Sec 111(A), NIRC]

Who may avail: (i) By a person who becomes VAT-liable for the 1st time, or (ii) any person who elects to be a VAT-registered person Rate: 2% Input VAT of the value of the beginning inventory on hand or actual VAT paid on such, goods, materials and supplies, whichever is HIGHER, which amount shall be creditable against the output tax of VAT-registered person. Tax base: The value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% transitional input tax,

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EXCLUDING goods that are exempt from VAT under Sec. 109 of the Tax Code. [RR 16-2005] Note: A real estate dealer is entitled to claim transitional input VAT based on the value of the entire (including the value of the land and the improvements thereon) real property sold regardless of whether there was in fact actual payment of VAT on the purchase of the real property. At the time the purchase was made, there was still no VAT imposed. [Fort Bonifacio Development Corp. v. CIR, G.R. Nos. 158885 and 170680 (2009)]

3. Persons Who Can Avail of Input Tax Credit Input tax on domestic purchase or importation of goods or properties shall be creditable: a. To the importer upon payment of the VAT prior to the release of the goods from the custody of the Bureau of Customs. b. To the purchaser upon consummation of sale and on importation of goods or properties; Claims for Input Tax on Depreciable Goods 1. The input tax on capital goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under the Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months (60 month period) if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000). If the aggregate acquisition cost does not exceed P1,000,000, the total input taxes will be allowable as credit against output tax in the month of acquisition. 2. However, if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period 3. The amortization of the input VAT shall only be allowed until December 31, 2021 after which taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized: Provided, That in the case of purchase of services, lease or use of properties, the input tax shall be 70

G

P a I

a

Ca .

I

Ta

D

c.

TAXATION LAW

creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee. 70 [RR 13-2018] To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee.

Input tax on purchase of services, lease or use of properties shall be creditable: a. To the purchaser upon payment of the compensation, royalty or fee b. To lessee or licensee upon payment of the compensation, royalty or fee c. Claiming of input Tax on motor vehicles subject to the following conditions: a. Purchase of vehicle must be substantiated with official receipts and other records; b. Taxpayer has to prove the direct connection of the motor vehicle to the business; c. Only one vehicle for land transport is allowed for the use of an official/employee with value not exceeding P2.4 million; d. No depreciation shall be allowed for yachts, helicopters, airplanes

4. Determination of Output/Input Tax; VAT Payable; Excess Input Tax Credits Output VAT Input VAT = VAT Payable Determination of output tax [RR 16-2005] Output VAT in a sale of goods/properties shall be computed by multiplying the total amount indicated in the invoice or receipt by 12%. 𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇 𝐺𝑟𝑜𝑠𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 𝑜𝑟 12%

a

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Output VAT in a sale of services shall be computed by multiplying the total amount indicated in the invoice or receipt by 12%. 𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇 𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 𝑜𝑟 12% Determination of input tax creditable a. 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. b. The claim for tax credit referred to includes not only those filed with the BIR but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs. Allocation of input tax on mixed transactions71 There are four possible transactions a VAT-registered person may enter into: a. VAT taxable, b. VAT-exempt, c. zero-rated VAT and d. sale to governments. 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: a. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit. 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 GOCCs shall not be credited against output taxes arising from sales to nonGovernment entities b. 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. 71

P a transactions Illus a

A

a .

TAXATION LAW

Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits If at the end of any taxable month or quarter: a. The output tax exceeds the input tax, the excess shall be paid by the VAT-registered person b. The input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters [Sec. 110(B), NIRC] Illustration: For a given taxable quarter ABC Corp. has output VAT of 100 and input VAT of 80. Since output tax exceeds the input tax for such taxable quarter, all of the input tax may be utilized to offset against the output tax. Thus, the net VAT payable is 100 minus 80 = 20.

l. Substantiation of Input Tax Credits 1.

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: a. For the importation of goods = Import entry or other equivalent document showing actual payment of VAT on the imported goods. b. For the domestic purchase of goods and properties = Invoice showing the information required under Secs. 113 (Invoicing and Accounting Requirements for VAT-Registered Persons) and 237 (Issuance of Receipts or Sales or Commercial Invoices) of the Tax Code. c. 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. d. For the purchase of services = official receipt 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.

a

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2. 3. 4.

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TRANSITIONAL INPUT TAX shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR. Input tax on "deemed sale" transactions shall be substantiated with the invoice required. Input tax from payments made to non-residents (such as for services, rentals and royalties) shall be supported by a copy of the Monthly

5.

TAXATION LAW

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. Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT.

Claims for Input Tax on Depreciable Goods Illustration: [RR 13-2018] (1) ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling price, including the VAT, shall be payable in five (5) equal monthly installments with the first installment to be paid on October 1, 2018. The data pertinent to the sold assets are as follows: Selling Price Passed on VAT Original Cost of Asset Accumulated Depreciation Unutilized Input Tax (Sold Asset)

5,000,000.00 (exclusive of VAT) 600,000.00 3,000,000.00 1,000,000.00 100,000.00

Accounting: SELLER October 1, 2017 Cash P1,120,000 Installment Receivable 4,480,000 Accumulated Depreciation 1,000,000 Output Tax Asset Gain on sale of set To record VAT liability: Output Tax Input Tax VAT Payable Periodic receipt of installment Cash

BUYER October 1, 2017 Asset Input Tax 600,000 3,000,000 3,000,000

P5,000,000 500,000

Cash Installment Payable

1,120,000 4,480,000

600,000 100,000 500,000 1,120,000 1,120,000

Periodic receipt of installment Installment payable 1,120,000 Cash

1,120,000

* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on October 2018 of purchase. If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer was made.

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(2) A manufacturer purchased capital goods on different occasions as follows: Month of Purchase

Amount

12% Input Tax

Useful Life

January 2018 February 2018 December 2018 January 2018

P8,500,000 P8,500,000 P10,000,000 P10,000,000

P1,020,000 P1,020,000 P1,020,000 P1,020,000

6 Years 4 Years 5 Years 5 Years

No. of Monthly Amortization 60 48 60 -

Last Month of Amortization December 2022 January 2022 November 2022 *Outright claim on January 2022

a.

For purchase made on January 2018, the amortization shall be for the shorter period of 5 years only or up to December 2022 although the useful life is 6 years. b. For purchase made on February 2018, the amortization shall be for period of 4 years only or up to January 2022 since the useful life of the asset is shorter than 5 years. c. For purchase made on December 2021, the amortization shall be for the period of 5 years or up to November 2026. d. For purchase made on January 2022, no amortization shall be made and the input VAT shall be claimed on the month of purchase or January 2022. Allocation of input tax on mixed transactions Illustration: ERA Corporation has the following sales during the month: Sale to private entities subject to 12% Sale to private entities subject to 0% Sale of exempt goods Sale to government subjected to 5% final VAT (withholding) Total sales for the month

100,000.00 100,000.00 100,000.00 100,000.00 400,000.00

The following input taxes were passed on by its VAT supplies: Input tax on taxable goods (12%) Input tax on zero-rated sales Input tax on sale of exempt goods Input tax on sale to government Not attributable to any specific activity (monthly amortization for 60 months)

5,000.00 3,000.00 2,000.00 4,000.00 20,000.00

The creditable input tax for the month shall be computed as follows: Input tax on sale subject to 12% 5,000.00 Input tax on zero-rated sale 3,000.00 Ratable portion of the input tax not directly attributable to any activity: 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑠𝑎𝑙𝑒𝑠 0% 𝑎𝑛𝑑 12% 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠

𝑋 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒

100,000.00 𝑋 20,000.00 400,000.00

Total input tax attributable to salesto government: 9,000.00

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The input tax attributable to sales to government for the month shall be computed as follows: Inp a on ale o go . P 4,000.00 Ratable portion of the input tax not directly attributable to any activity: 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑠𝑎𝑙𝑒𝑠 𝑡𝑜 𝑡ℎ𝑒 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑋 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 100,000.00 𝑋 20,000.00 400,000.00

5,000.00

Total input tax attributable to salesto government: 9,000.00 The input tax attributable to VAT-exempt sales for the month shall be computed as follows: Input tax on VAT-exempt sales 2,000.00 Ratable portion of the input tax not directly attributable to any activity: 𝑉𝐴𝑇 𝑒𝑥𝑒𝑚𝑝𝑡 𝑠𝑎𝑙𝑒𝑠 𝑋 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 100,000.00 𝑋 20,000.00 400,000.00

5,000.00

Total input tax attributable to VAT-exempt sales: 7,000.00

c.

m. Refund or Tax Credit of Excess Input Tax 1. Who May Claim for Refund/Apply for Issuance of Tax Credit Certificate Zero-Rated Sales [Sec. 112(A), NIRC] a. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate/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, within two (2) years after the close of the taxable quarter when the sales were made. b. The acceptable foreign currency exchange proceeds must have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) in the case of zero-rated transactions paid for in acceptable foreign currency and requiring that such be accounted for in accordance with BSP rules & regulations [Sec. 106(A)(2)(a)(1)&(2); 106(A)(2)(b) and 108(B)(1)&(2), NIRC].

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. d. In the case of a person engaged in the transport of passenger and cargo by air or sea vessels from the Philippines to a foreign country, the input taxes shall be allocated ratably between his zerorated sales and non-zero-rated sales (sales subject to regular rate, subject to final VAT withholding and VAT-exempt sales). Requirements a. The claimant should be a VAT-registered person b. There should be an application filed with the BIR or DOF center, as the case may be, within 2yrs after close of taxable quarter. c. The claimed input tax must not have been applied to any output tax during the period covered and subsequent periods covered by the claim. d. The claimed input tax must have been declared from the VAT quarterly return.

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e.

The claimed input tax are directly attributable to 0%-rated transactions. f. Acceptable foreign currency exchange proceeds must have been duly accounted for g. Claimed input tax must be duly supported by VAT invoices/receipts. h. VAT returns for the succeeding quarters must have been submitted. Cancellation of VAT Registration a. A person whose registration has been cancelled due to (i) retirement from or cessation of business, or due to changes in or (ii) cessation of status under Section 106(C) of the 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. b. He shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized. c. That the date of cancellation being referred hereto is the date of issuance of tax clearance by the BIR, after full settlement of all tax liabilities relative to cessation of business or change of status of the concerned taxpayer. d. The filing of the claim shall be made only after completion of the mandatory audit of all internal revenue tax liabilities covering the immediately preceding year and the short period return and the issuance of the applicable tax clearance/s by the appropriate BIR Office which has jurisdiction over the taxpayer. [RR 13-2018]

2. Period to File Claim/Apply for Issuance of Tax Credit Certificate This period must be distinguished from normal tax refunds for erroneous payments where an administrative claim and judicial claim may be made together, and the reckoning point of the 2 years is from the date of the erroneous payment. 72

SECTION 112. Refunds or Tax Credits of Input Tax. (C) 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) ninety (90) days from the date of submission of complete documents the official receipts or invoices and other documents in support of the application filed in accordance with Subsections (A) and (B) hereof: Provided, That should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial. x x x 73 SECTION 112. Refunds or Tax Credits of Input Tax.

TAXATION LAW

a.

Application for issuance of tax credit certificate or refund of creditable input tax (except transitional input tax) b. WITHIN 2 YEARS after the close of the taxable quarter when the sales were made, to apply for the issuance of a Tax Credit Certificate or refund of creditable input tax due or paid attributable to such sales. [Sec. 112 (A), NIRC] c. If the VAT registration has been cancelled due to retirement or cessation of business, or change of status, the 2 year period shall be after the date of cancellation [Sec. 112 (B), NIRC] d. Administrative Claim [Sec 112 (C), ¶1, NIRC72] e. The CIR shall grant the refund within 90 days from the date of submission of the official receipts or invoices and other documents in support of the application filed in accordance with Sec. 112 (A) and (B). f. Should the CIR find that the grant of refund is not proper, the CIR must state in writing the legal and factual basis for the denial g. The 90-day period to process and decide, pending the establishment of the enhanced VAT Refund System shall only be up to the date of approval of the Recommendation Report on such application for VAT refund by the Commissioner or his duly authorized representative h. Judicial Claim [Sec 112 (C), ¶2, NIRC73] i. In case of full or partial denial of the claim for tax refund or the expiry of the 90 days, the taxpayer affected may appeal to the CTA within 30 days from the receipt of decision. j. failure on the part of any official, agent, or employee of the BIR to act on the application within the ninety (90)-day period shall be punishable under Section 269 of this Code (Violations Committed by Government Enforcement Officers).

3. Manner of Refund

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. xxx 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.: Provided, however, That failure on the part of any official, agent, or employee of the BIR to act on the application within the ninety (90)-day period shall be punishable under Section 269 of this Code.

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Revenue Memorandum Circular no. 57-2013 (August 23, 2013): Unutilized creditable input taxes attributed to zero-rated sales can only be recovered through the application for refund or tax credit. There is no other mode of recovering unapplied input taxes aside from an application for refund or tax credit. The Memorandum Circular also instructed the disallowance of unutilized creditable input taxes attributable to VAT zero-rated sales that is claimed as a deduction for income tax purposes. Refunds shall be made upon warrants drawn by the CIR 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 notwithstanding: provided that refunds shall be subject to post audit by the Commission on Audit. [Sec. 112(D), NIRC]

n. Invoicing Requirements [Sec. 113, NIRC]

1. In General A VAT-registered person shall issue: a. A VAT invoice for every sale, barter or exchange of goods or properties; and b. A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services Only VAT-registered persons are required to print heir TIN follo ed b he ord VAT in heir invoice or ORs. Said documents shall be considered a a VAT In oice or VAT official receip . All purchases covered by invoices/receipts other than VAT Invoice/VAT OR shall not give rise to any input tax. [RR 16-05] Note: VAT component of all transactions shall be separately indicated in the VAT invoice or receipt. [RR 18-2011]

TAXATION LAW

Information Contained in the VAT Invoice or VAT Official Receipt: 1. A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); 2. The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT: a. The amount of the tax shall be shown as a separate item in the invoice/receipt; b. If the sale is exempt from VAT, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt; c. If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; d. If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VATexempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. 3. The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and 4. In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client. 5. Name of buyer and seller

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TAXATION LAW

2. In Deemed Sale Transactions Transaction 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 Distribution or transfer to shareholders/investors or creditors Consignment of goods if actual sale is not made within 60 days Retirement from or cessation of business with respect to all goods on hand

3. Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt Issuance of a VAT Invoice or VAT Receipt by a non-VAT person 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", the erroneous issuance shall result to the ff: a. The non-VAT person shall be liable to: 1. Percentage taxes applicable to his transactions; 2. VAT due on transactions under Section 106 or 108 of the Code, without the benefit of any input tax credit; and 3. A 50% surcharge under Section 248 (B) of the code; b. The VAT shall, if the other requisite information required is shown on the invoice/receipt, be recognized as an input tax credit to the purchaser. Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a VAT-registered Person If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction,

Invoicing Requirement Memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use Invoice, at the time of the transaction, which should include all the info prescribed above; data in the invoice shall be duly recorded in the subsidiary sales journal Invoice, at the time of the transaction, which should include all the info prescribed above; data in the invoice shall be duly recorded in the subsidiary sales journal An inventory shall be prepared and submitted to the RDO ho ha j ri dic ion o er he a pa er principal place of business not later than 30 days after retirement or cessation from business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the 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. but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale: a. the transaction shall become taxable and the b. issuer shall be liable to pay VAT thereon. c. The purchaser shall be entitled to claim an input tax credit on his purchase. [RR 16-05]

o. Filing of Return and Payment [Sec 114, NIRC]

VAT returns - VAT paid on a monthly basis. Payments in the monthly VAT declarations shall be credited in the quarterly VAT return to arrive at the net VAT payable or excess input tax/over-payment as of the end of a quarter. 1. Filed by person liable to pay the VAT 2. Quarterly return of the amount of his gross sales or receipts within twenty-five (25) days after the close of each taxable quarter prescribed for each taxpayer. 3. The monthly VAT Declarations of taxpayers whether large or non-large shall be filed and the taxes paid not later than the 20th day following the end of each month. 4. That beginning January 1, 2023, the filing and payment required under this Subsection shall be

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done within twenty-five (25) days following the close of each taxable quarter. [Added by TRAIN Law] Note: VAT paid on a monthly basis. Payments in the monthly VAT declarations shall be credited in the quarterly VAT return to arrive at the net VAT payable or excess input tax/over-payment as of the end of a quarter. Administrative and Penal Provisions [Sec. 115, NIRC] 1. Suspension of business operations. In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the CIR or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations: a. Failure to issue receipts and invoices. b. Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code. c. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter. d. Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code. 2. Surcharge, interest and other penalties. The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code (VAT).

p. Withholding of Final VAT on Sales to Government

Exceptions: 1. Gross payments by the government shall be subject to the 5% final withholding tax; 2. Gross payments by resident VAT-taxpayers to non-resident foreign persons of rentals, royalties, reinsurance premiums, and services done in the Philippines 12% Sales to Government The Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall, before making payment on account of each purchase of goods and services which are subject to the VAT (Secs. 106 and 108, NIRC), deduct and withhold the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. Beginning January 1, 2021, the VAT withholding system under this Subsection shall shift from final to a creditable system. The payment for lease or use of properties or property rights to nonresident owners shall be subject to 12% withholding tax at the time of payment. Payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under Republic Act No. 8182, o her i e kno n a he Official De elopmen A i ance Ac of 1996 , a amended, hall no be subject to the final withholding tax system as imposed in this Subsection. The payor or person in control of the payment is considered as the withholding agent.

[RR 16-2005; RR 13-2018; Sec. 114(C), NIRC74] General Rule: Withholding tax does not apply on transactions subject to VAT. 74

TAXATION LAW

SECTION 114. Return and Payment of Value-added Tax. (C) Withholding of Value-added Tax. 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 and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That beginning January 1, 2021, the VAT withholding system under this Subsection shall shift from final to a creditable system: Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten

The 5% final VAT shall represent the net VAT payable of the seller. The remaining 7% effectively twelve percent (10%) (12%) withholding tax at the time of payment.: Provided, finally, That payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under Republic Act No. 8182, other ise kno n as the Official De elopment Assistance Act of 1996 , as amended, shall not be subject to the final withholding tax system as imposed in this Subsection. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.

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accounts for the standard input VAT, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. (This means that where the 5% final VAT applies, the basic formula of output tax less input tax does not apply.) Should actual input VAT exceed 7% of the gross payments, the excess may form part of the expense or cost. On the other hand, if actual input VAT is less than 7% of gross payment, the difference must be closed to income. However, 12% final VAT shall be withheld with respect to the following: 1. Lease or use of properties or property rights owned by non-residents; 2. Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents; and; 3. Other services rendered in the Philippines by non-residents

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TAXATION LAW

VAT FORMULA (IN GENERAL) Actual Sales/Receipts xxx Add: Excise Tax xxx Remaining Merchandise (Cessation of VAT-registered Status) xxx Transactions Deemed Sale xxx xxx Less: Sales Returns and Allowances Sales Discounts

xxx xxx

Total Sales (Taxable Base) Multiplied by 12% Output VAT on sales or gross recipts Less: Input VAT on purchases and services Transitional Input VAT, if applicable Presumptive Input VAT, if applicable Input VAT Carry-over from previous period Creditable VAT withheld Net VAT payable (refundable) MONTHLY RETURN Gross Sales/Receipts for the Month Multiplied by VAT rate Output VAT Less Input Taxes: Transitional/Presumptive Input Tax On taxable goods/services Net VAT Payable Add Penalties: Surcharge Interest Compromise Total Amount Payable

xxx xxx 12% xxx

xxx xxx xxx xxx

xxx xxx xxx xxx 12% xxx

xxx xxx xxx xxx xxx

xxx xxx

xxx xxx

INVOLVING GOVERNMENT When Actual Input VAT > Standard Input VAT: e ce form par of eller e pen e/co When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income Sales Output VAT (Sales x 12%) Purchases Input VAT (Purchases x 12%)

xxx xxx xxx xxx

OUTPUT VAT Payable: Output VAT Less: Actual Input VAT Standard Input VAT (Sales x 7%) Net VAT Payable Less: Creditable Withholding Tax (Sales x 5%) Output VAT Payable

xxx xxx xxx

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QUICK NOTES ON VAT Transactions subject to VAT General Requirements 1. Done in the course of trade or business (w/n profit-oriented): rule of regularity + incidental thereto (including isolated) EXCEPTION: a. NRC/NRA who perform services in Phil, even if no regularity b. Importation of Goods may be for business or non-business use 2. Gross sales or receipts for the past 12 months or the next 12 months > 3,000,000php Taxable Transactions and Specific Requirements 1. Sale, Barter, Exchange or Importation (SBEL) of Goods or Properties75 Goods/Personal Properties a. Actual/deemed sale for a valuable consideration b. for use or consumption in the Phil (regardless of the payment arrangements) c. not exempt from VAT (NIRC, special law, special agreement) Real Properties76: d. Seller (w/n natural) executes contract to sale, barter, or exchange of RP e. RP is in the Phil f. Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to his vatable activity (NOT a capital asset) not exempt from VAT (NIRC, special law, special agreement 2. Sale of Services77 a. for a valuable consideration (actually/constructively received) 75 76

3.

TAXATION LAW

b. performed ICTB in the Phil. c. not exempt from VAT (NIRC, special law, special agreement) d. person rendering service is VAT-liable e. no ER-EE relationship Importation of Goods

Persons Liable to pay VAT 1. Any person who Sells, Barters, Exchanges or Leases (SBEL) goods or properties if real property: persons engaged in real estate business: a. Any person who SBE real properties in the course of trade or business (ICT/B) b. Real estate lessors/ sub-lessors c. NRA/NRC lessors when Real Property is in the Phil d. Non-stock, non-profit corporations engaged in SBE of real properties ICT/B, regardless of disposition of income e. Go inc GOCC in SBEL of RP ICT/B 2. Renders services 3. Imports goods a. if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to nonexempt persons, purchasers/recipients = importer b. if the Philippine branch of an NRFC impor ed , fir local b er = impor er Tax Bases of VAT 1. Gross (Sales) Selling Price: total amount of money paid in consideration of SBEL excludes: VAT, sales discounts78 and, allowances and returns includes: Excise tax paid, initial payments79, interests and penalties (if instalment), commission income (if exported), purchase

Sec 106 Casual sale (Capital Assets) Regular sales (Ordinary Assets): Commercial Property (Sale/Lease)

Residential Units (Lease)

Residential Lot

Subject to CGT (6%)

Residential House and Lot

Subject to 12% VAT I a 15,000 = VAT and OPT-exempt If monthly rental > 15,000 but aggregate annual a P3M = subject to OPT If monthly rental > 15,000 and aggregate annual rentals > P3M subject to VAT

77

If SP > P1.5M = subject to VAT I SP P1.5M = VATexempt If SP > P2.5, = subject to VAT I SP P2.5M= VATexempt

Sec 108 It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening of a future event 79 Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale 78

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price, charges for packing, delivery and insurance If goods/personal properties, o GSP = amount paid in consideration o IF DEEMED SALE: FMV at the time of the transaction N.B. in retirement/cessation, inventory (raw materials, finished goods, machinery, equipment, furniture, fixture), tax base = whichever is lower, (i) acquisition cost OR (ii) current market price of goods If real property, GSP = amount higher: o consideration stated in the sales document o FMV, whichever is higher of o Zonal value: FMV as determined by CIR o Real Property Tax Value: FMV as determined by provincial & city assessors 2. Gross Value in money of goods 3. Gross Receipts derived from transaction: total amount of money/equivalent = contract price + compensation + service fee + rental fee + royalties + amount charged for materials supplied with the services + deposits and advanced payments actually or constructively received + costs items of construction projects (VAT + amounts earmarked for payments to unrelated 3rd party + amounts received as reimbursement + monies/receipts held in trust w/c do not redound to the benefit of taxpayer + universal charge passed on and collected by distribution companies and electric coop (if sale of electricity) + receivables + local taxes) IF DEALER IN SECURITIES: gross selling price cost of securities sold 4. Total Value/Landed Cost (determined on the basis of quantity/volume of goods) Total Value used by Customs: tariff and customs duties + custom duties +excise tax + charges Landed Cost: invoice amount inc. cost of loading, shipping, unloading, + custom duties + freight + insurance + other charges +excise tax expenses incurred after release of goods (e.g., cost of delivery) Customs duty: amount of customs duty legally due and paid by the importer Charges: special import tax,foreign marginal fees, bank and arrastre charges, wharfage dues, broker fees, other charges paid to complete importation

TAXATION LAW

Rates of VAT 1. Output Tax (Sale/Barter/Exchange/Lease) a. 12% standard rate: applied directly to TB b. 0%: applied directly to TB 2. Input Tax (Purchase from VAT-registered businesses/Importation of goods) a. 12% standard rate: applied directly to TB b. 0%: applied directly to TB c. 2% transitional VAT (: applied to the (inventory on hand) value of goods (exc. VAT-exempt good) existing at the date a person commences business and/or becomes liable to VAT) or 12% actual input tax rate, higher d. 4% presumptive input tax rate: applies to purchases of VAT-exempt goods used as inputs by a VAT-registered person in manufacturing or processing certain food products e. 7% FWT (standard input VAT, when government sale), 5% withholding Creditable Input VAT Requirements 1. Proper documentation 2. No double input tax credit is allowed. 3. Input VAT on a particular purchase transaction can be claimed once only upon consummation of the sale of goods and based on the entire GSP (whether paid on cash, credit or instalment) 4. Ignore erroneous VAT rate. The correct rate of input VAT can still be claimed. 5. Transactions should have been made with VATregistered persons. 6. IF MIXED TRANSACTIONS and input VAT cannot be directly attributable: Input Tax Formula Treatment Untraceable Input Creditable Input VAT x VAT Input VAT Credit, Untraceable Input eligible for tax VAT x refund or TCC Untraceable Input Cost of Sales or VAT x Operating Expense Compare to Standard Input VAT Untraceable Input (Creditable against VAT x Standard input VAT)

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N.B. Creditable Input VAT is 1. increased by any input VAT carried over from the preceding month or quarter 2. decreased by a. amount of the claim for refund or tax credit for VAT filed during the same period

TAXATION LAW

b. input tax attributable to exempt sales and unauthorized input tax attributable of depreciable capital goods c. amount of input VAT with regard to uncollected portion of instalment receivable in instalment sales

VAT-EXEMPT and 0% VAT VAT-Exempt Non-VAT taxable transaction Taxpayer is relieved from payment of VAT for w/c he is directly liable NO output and input VAT Optional VAT Registration Partial relief Only removes VAT at the exempt stage On Sales: No VAT Not within the VAT system Not subject to VAT

0% VAT Taxable transaction No output VAT, but input VAT is available as tax credit or refund Total relief All VAT is removed at whatever stage On Sales: No VAT Still within the VAT system Subject to 0% VAT

On Purchases: VAT passed is on cost Input tax is a cost component thus item of deduction reducing only taxable income

On Purchases: VAT passed on is input tax Input tax is creditable against output tax thus reducing VAT liability

SALE OF SERVICES 1.

2.

3.

4.

VAT-Exempt For lease of property =exempt if advance payment = loan, security deposit NB: if security deposit is applied to rental = VAT For persons engaged in milling, processing, manufacturing or repacking goods = exempt if palay rice; corn corn grits; sugar cane raw sugar For franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting = exempt if annual gross receipts <= 10M; franchise grantees of gas and water utilities; of telephone & telegraph services, amounts received for overseas dispatch from Phil. For PREMIUMS of insurance companies = exempt IF life and disability insurance; crop insurance; health and accident insurance

0% VAT

1. 2. 3. 4. 5. 6. 7. 8.

Processing, manufacturing, repacking goods to non-resident Processing, manufacturing, repacking goods to export-oriented Services other than processing, manufacturing, repacking Services to exempted persons: effectively 0-rate Sale of power/fuel-generated through renewable resources Ser ice rendered o in l hipping/air ran por Transport of passengers and cargo by air from Phil to Foreign Transactions of VAT-reg person to foreign embassies

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(included are only those with exceptions) 1. Sale/import of agricultural & marine food products in their original state; livestock and poultry (used/yield for human consumption); breeding stock and genetic materials 2. Import of professional instruments, implements, wearing apparel, domestic animals, and personal household effects 3. Transactions exempt pursuant to special laws 4. Cooperatives 5. Residential lots P1.5M & lot & dwellings P2.5M 6. lease of residential units, if 15,000/unit/month (regardless of aggregate amount); if 15,000/unit/month (AND aggregate amount is P3M) 7. importation of fuels, goods, supplies by international shipping or air transport

TAXATION LAW

Exceptions to the Exemptions (Subject to VAT) 1. Livestock and poultry DOES NOT INCLUDE fighting cocks, race horses, zoo animals and pets 2. DOES NOT INCLUDE vehicles, vessels, aircrafts, machineries, and other goods for use in manufacturing in commercial quantities 3. DOES NOT INCLUDE those under Petroleum Exploration Concessionaires under Petroleum Act of 1949 4. For sales by agricultural coops to non-members, if seller is the member = VAT 5.

For sales by non-agri, non-electric and non-credit, importation of machineries and equipment = VAT 6. DOES NOT INCLUDE parking lot If any portion of such goods are used for purposes other than those stated = VAT

SALE OF GOODS VAT-Exempt

0% VAT

Real Property 1. Not primarily held in connection with Trade or Business (ICT/B) 2. Low-cost or socialized housing 3. Residential lot <= P1.5M 4. House and/or other residential dwellings <= P2.5M 5. Lease (15,000/unit/year or total P3M/year) 6. Transmission to a trustee 7. Except: if transmission is deemed sale 8. Transfer to corporation in exchange of SoS 9. Advance payments/Security Deposits in lease 10. Except: if applied to the rent As regards ecozones and PEZA-registered entities 1. Made by VAT-exempt supplier from customs territory to any registered enterprise inside ecozone 2. Intra-ecozone enterprise sale of service, if PEZA registered seller is subject to 5% special tax regime 3. Intra-ecozone sales of goods

Actual Export Sales Deemed Export Sales 1. Internal or constructive export sales Raw/Packaging materials to non-resident buyer Raw/Packaging materials to export-oriented Phil. Port FOB value of export products80 Net selling price of export products81 sales to bonded manufacturing warehouses82 sales to export processing zones83 sales to enterprises duly accredited by Subic Bay Metropolitan Authority sales to registered export traders sales to diplomatic missions etc. sale by VAT-supplier to manufacturer/producer whose products are 100% exported Sale of gold to BSP Sale of goods/supplies/equipment/fuel to persons engaged in in l hipping/air ran por 2. Docking/Undocking services to foreign vessels Effectively-zero rated sales 1. Made by VAT registered supplier from customs territory to any registered enterprise inside ecozone 2. Intra-ecozone enterprise sale of service, if PEZA registered seller is subject to NIRC taxes

80

Under Omnibus Investment Code (EO226) Ibid 82 RA7227 83 RA 7916 81

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Taxable Activity/Property Actual SBE of Goods or Properties Goods/ Personal Properties Real Properties IF sale is on instalment plan AND ZV/FMV > SP (excluding VAT) Deemed Sale Transactions Not ICB/T, but originally intended for sale/use ICB/T Transfer to SH in share of profit or Cr in payment of debt Consignment after 60d Retirement/Cessation of business Sale of Services

TAXATION II

TR

1. 2. 3.

Tax Base

Tax Payable

Gross Selling Price = amt. paid to the seller 12%

= consideration/FMV, higher = 𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉 𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑜𝑛 VAT Payable paid by seller/transferor

12%

FMV (at the time of transaction) E: if FMV is unreasonably lower (by more than 30% of AMV) = AMV or determined by CIR

Acquisition Cost or current market price, lower 12%

Importation of Goods In general When custom duties are based on quantity or volume

TAXATION LAW

Gross receipts derived Total Value used by BOC =tariff & custom duties + custom duties + excise tax + charges

12% = landed cost + excise tax

VAT Payable paid by performer VAT paid by importer PRIOR to the release of goods in Customs custody

Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. The cancellation for registration will be effective from the first day of the following month the cancellation was approved. What is the treatment for Withholding of VAT on Government Money Payments? a. The government or any of its political subdivisions, instrumentalities or agencies, including governmentowned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment. b. 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 sales to government exceeds seven percent (7%) of gross payments, the excess may form part of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost.

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c.

TAXATION II

TAXATION LAW

The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT with respect to the following payments: Lease or use of properties or property rights owned by non-residents; and Other services rendered in the Philippines by non-residents.

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VAT-Exempt

TAXATION II

Person

(cannot be cancelled w/in 3years; franchise of radios/tv broadcasting, irrevocable)

Before start of business or within 10d before the beginning of taxable quarter

Optional Registration

Before start of business and every year thereafter (on/before Jan 31)

Person Liable for VAT

Register to RDO for every separate and distinct establishment

Did not register: I. Still liable for VAT II. No input credit

TAXATION LAW VAT-registered Person (w/ TIN)

VAT AND NON-VAT REGISTRATION Registration Fee (500php) to authorized bank agent, RDOfficer, Rev Collection Officer, authorized city/municipal treasurer EXEMPT from 500php 1. if aggregate gross sales/receipts 100,000; 2. cooperative; 3. individuals earning pure compensation income; 4. overseas workers

Compliance activities after registration: III. Registration of books of accounts (3) of the business/occupation/calling including practice of profession, before using the same. IV. Registration of sales invoices and official receipts (If there are transactions not subject to VAT, registration of non-VAT invoices or nonVAT official receipts) V. Annual Registration: Pay registration fee for every place of business that generates sales after updating the registration records. VI. Filing of the Monthly VAT Declaration and Quarterly VAT Return to be submitted to RTO/LTDO

Certificate of Registration

APPROVE

DENY CANCELLATION/UPDATE OF VAT REGISTRATION

(registration of a taxpayer of a franchise grantee of radio and/or tv broadcasting hose gross annual receipts 10,000,000 = irrevocable)

Certificate of Non-VAT

Before start of business or within 10d before the beginning of taxable quarter

Register to RDO for every separate and distinct establishment

Registration Fee (500php) to authorized bank agent, RDOfficer, Rev Collection Officer, authorized city/municipal treasurer

Cancellation/Update necessitating cancellation

APPROVE

w/in 25d from cancellation

Filing of Short Period Return (for the remaining period that he was VAT-reg)

Minor change in original registration w/in 15d from change

Notice of Change (f change of address)

DENY

EXEMPT from 500php if aggregate gross sales/receipts 100,000; cooperative; individuals earning pure compensation income; overseas workers

Instances when a taxpayer may

CANCEL his registration:

VII. When TP s gross sales/receipts for the follo ing 12 months 1,919,500 VIII. When TP has ceased to carry on his T/B and does not expect to recommence within 12m IX. In case of a single proprietorship, a change of ownership X. Dissolution of a partnership or corporation XI. Merger/consolidation wrt dissolved corporations XII. Person who registered prior to planned business commencement but failed to actually start business

RE applications for VAT zero-rating: Taxpayers shall file their application directly with the Audit Information, Tax Exemption and Incentives Division (AITEID) under the Assessment Service, or with the LTAID I and II, BIR National Office, as the case may be.

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UPDATE his registration:

XIII. When TP s business has become e empt XIV. When there is a change of the nature of business (from vatable to exempt) XV. When TP a tax-exempt individual who applied for optional registration and cancelled his registration after 3yrs. XVI. When TP is a VAT-registered person hose gross sales/receipts for 3 consecutive ears 1,919,500

U.P. LAW BOC

TAXATION II

TAXATION LAW

VAT REFUND OR VAT CREDIT CERTIFICATE

Input Tax wrt Zero-rated and Effectively zero-rated Sales VAT-registered Taxpayer If VAT-exempt changes his status to VATregistered = transitional input tax

w/in 2 years after close of the taxable quarter when sales are made

Direct Tax Credit Presumptive Input Tax Transitional Input Tax Actual Input Tax not related to zero-rated sales

Carry-over Tax Credit

VAT- registered cancelling their registration (regardless of the source of input tax) Application for refund or TCC to CIR + supporting docs

w/in 2 years after close of the taxable quarter when sales are made

w/in 90 days from submission

w/in 90 days from submission

GRANTED DENIED

VAT-exempt Transactions Apply against OUTPUT VAT

Non-VAT Taxpayer

w/in 30 days from receipt of denial

INACTION w/in 30 days from expiration of 90-days

ISSUANCE

Appeal to CTA

NO INPUT TAX

Related INPUT VAT shall be treated as a cost of sale or operating expense DENIED

Related INPUT VAT shall be treated as cost of purchases

Related OUTPUT VAT shall be treated as an operating expense

GRANTED

Tax Credit Certificate

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Tax Refund

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TAXATION II

TAXATION LAW

Illustration of the VAT System VAT System (All VAT) Raw Material (VAT) SP (100+12) 100 112 Cost 50 Profit 50 OT 12% IT VAT Payable VAT to BIR

12 0 12 12

Manufacturer (VAT) SP (300 + 36) 300 336 Cost (100 + 12) 100 112 Profit 200 Purchase 112 Input VAT 12 OT 12% 36 IT 12 Vat Payable 24 VAT to BIR 24

VAT System (VAT Exempt 1st chain) Raw Material Manufacturer (VAT Exempt) SP (100+ 0) 100 SP (300 + 36) 300 336 Cost 50 Cost (100) 100 Profit 50 Profit 200 Purchase 100 Input VAT 0 OT 12% 0 OT 12% 36 IT 0 IT 0 VAT Payable 0 Vat Payable 36 VAT to BIR 0 VAT to BIR 36 VAT System (VAT Exempt mid-chain) Manufacturer (VAT Raw Material Exempt) SP (100+12) 100 112 SP (300) 300 Cost 50 Cost (100 + 12) 100 112 Profit 50 Profit 188 Purchase 112 No Input VAT 0 OT 12% 12 OT 12% 0 IT 0 IT 0 VAT Payable 12 Vat Payable 0 VAT to BIR 12 VAT to BIR 0

Trader (VAT) SP (450 +54) 450 504 Cost (300+36) 300 336 Profit 150 Purchases 336 12% VAT 36 OT 12% 54 IT 36 VAT Payable 18 VAT to BIR 18

Trader SP (450 +54) 450 504 Cost (300+36) 300 336 Profit 150 Purchases 336 12% VAT 36 OT 12% 54 IT 36 VAT Payable 18 VAT to BIR 18

Trader SP (450 +54) 450 504 Cost (300) 300 Profit 150 Purchases 300 No VAT 0 OT 12% 54 IT 0 VAT Payable 54 VAT to BIR 54

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End-User

Purchases 12% VAT

504 54

Total VAT

54

End-User

Purchases 12% VAT

Total VAT

504 54

54

End-User

Purchases 12% VAT

Total VAT

504 54

66

U.P. LAW BOC

TAXATION II

VAT System (VAT zero-rate mid-chain) Manufacturer Raw Material (VAT Zero-rate) SP (100+12) 100 112 SP (300+ 0) 300 Cost 50 Cost (100 + 12) 100 112 Profit 50 Profit 188 Purchase 112 No Input VAT 12 OT 12% 12 OT 12% 0 IT 0 IT 12 VAT Payable 12 Vat Payable (12) VAT to BIR 12 VAT to BIR (12) CARRIERS BY LAND / AIR / SEA Area Object Person By Land Cargo/Goods

Trader SP (450 +54) 450 504 Cost (300) 300 Profit 150 Purchases 300 No VAT 0 OT 12% 54 IT 0 VAT Payable 54 VAT to BIR 54

Kind Domestic Domestic

Business Tax 3% Percentage Tax 12% VAT Domestic flight 12% VAT International flight 0% VAT

Domestic By Air

Person / Cargo / Goods International

3% Percentage Tax Domestic flight 12% VAT International flight 0% VAT

Domestic By Sea

Person / /Goods

Cargo International

2. Percentage Taxes84

Percentage tax is a business tax imposed on persons, entities, or transactions specified under Sections 116 to 127 of the NIRC.

Sec. 117

84

3% Percentage Tax Sec. 118 Sec. 119

CONCEPT A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. It is not subject to withholding. [CIR v. Solidbank Corp., G.R. No. 148191 (2003)]

NIRC Sec. 116

TAXATION LAW

Persons/Entities/Transactions Persons exempt from VAT Domestic Carriers; Keepers of Garages

Sec. 120 Sec. 121 Sec. 122 Sec. 123 Sec. 124 Sec. 125 Sec. 126 Sec. 127

End-User

Purchases 12% VAT

504 54

Total VAT

54

Income Tax Regular Tax Regular Tax Regular Tax Regular tax Gross Billing

Philippine

Regular Tax Regular tax Gross Billing

Philippine

International Carriers Franchises Overseas Dispatch, Message or Conversation Originating in the Philippines Banks and Non-bank Financial Intermediaries Finance Companies Life Insurance Premiums Agents of Foreign Insurance Companies Proprietors of amusement places Winnings from horse races and jai alai Sale of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering.

NATURE By its nature, a gross receipts tax applies to the entire receipts without any deduction, exemption or

Not Included in the Bar Examination Coverage for 2019.

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TAXATION II

exclusion, unless the law clearly provides otherwise. [China Banking Corp. v. CA, G.R. No. 146749 (2003)] PURPOSE It was devised to maintain simplicity in tax collection and to assure a steady source of state revenue even during periods of economic slowdown. Such a policy frowns upon erosion of the tax base. Deductions, exemptions, or exclusions complicate the tax system and lessen the tax collection. [De Leon]

3. Excise Tax and

Documentary Stamp Tax85

a. Excise Taxes CONCEPT Excise taxes are taxes imposed on certain specified goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported as well as services performed in the Philippines. [Sec. 129, par. 1, NIRC86] Kinds of excise taxes [Sec. 129, par. 2, NIRC87] 1. Specific tax tax due is computed based on the: Weight volume capacity any other physical unit of measurement. 2. Ad valorem tax tax due is computed based on the: selling price other specified value of goods. The NIRC enumerates the specific goods and services that are subject to Excise Tax: NIRC Goods/Services Sec. 141 Distilled Spirits Sec. 142 Wines Sec. 143 Fermented Liquor Sec. 144 Tobacco Products Sec. 145 Cigars and Cigarettes Sec. 148 Manufactured Oils and Other Fuels Sec. 149 Automobiles Sec. 150 Non-essential Goods 85

Not Included in the Bar Examination Coverage for 2019. SECTION 129. Goods and Services Subject to Excise Taxes. Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported as well as services performed in the Philippines. The excise tax imposed herein shall be in addition to the value-added tax imposed under Title IV. 86

TAXATION LAW

Sec. 150Non-essential Services* A Sec. 150-B Sweetened Beverages* Sec. 151 Mineral Products *Added by TRAIN Law NATURE Excise taxes are imposed directly on certain specified goods, manufactured or produced locally or imported. They are, therefore, taxes on property. Excise taxes, whether under the specific or the ad valorem tax system, is basically an indirect tax imposed on consumption of certain types or classes of goods, whether locally manufactured or imported. While the tax is directly levied upon the manufacturer/importer upon removal of the taxable goods from its place of production or from the customs custody, the tax, in reality, is actually passed on to the end consumer as part of the transfer value or selling price of the goods, sold, bartered or exchanged. [Silkair (Singapore) Pte. Ltd. v. CIR, G.R. No. 173594 (2012)] In the refund of indirect taxes, the proper party to question or seek a refund of the tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even when he shifts the burden thereof to another. The tax liability remains with the manufacturer/ producer/importer that is primarily, directly, and legally liable for the payment of excise taxes. [Id.] PURPOSE The selective application and imposition of excise taxes may be justified on any of the following grounds: 1. To curtail consumption of certain commodities, excessive or indiscriminate use of which is considered harmful to the individual or community. Taxes of this kind are sumptuary in nature and are exemplified by the taxes on alcoholic beverages and tobacco products. 2. To protect a domestic industry the products of which face competition from similar imported articles; 3. To distribute the tax burden in proportion to benefit derived from a particular government 87

SECTION 129. Goods and Services Subject to Excise Taxes. x x x For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any other a a a a specific tax a a a a a selling price or other specified value of the good or service performed a a ad valorem tax .

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4.

5.

TAXATION II

service. Examples are the excise taxes on gasoline, lubricating oils and denatured alcohol for motive power; and To raise revenue. The excise taxes have on many occasions been justified on the pretext of any of the three mentioned above to minimize the opposition to the tax. In reality, however, the main purpose is to raise revenue. [De Leon]

b. Documentary Stamp Taxes

NIRC Sec. 174 Sec. 175 Sec. 176 Sec. 177 Sec. 178

CONCEPT Documentary stamp tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right, or property thereto. [Sec. 173, NIRC] The NIRC enumerates the specific documents that are subject to DST:

Sec. 179

Sec. 180 Sec. 181 Sec. 182 Sec. 183 Sec. 184 Sec. 185 Sec. 186 Sec. 187 Sec. 188 Sec. 189 Sec. 190 Sec. 191 Sec. 192 Sec. 193 Sec. 194 Sec. 195 Sec. 196 Sec. 197 Sec. 198

TAXATION LAW

Documents Debentures and Certificates of Indebtedness Original Issue of Shares of Stocks Sales of Due-bills, Certificates of Obligation, or Shares of Stock Bonds, Debentures, Certificates of Stock or Indebtedness Issued in Foreign Countries Certificates of Profits or Interest in Property or Accumulations Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government Acceptance of Bills of Exchange and Others Foreign Bills of Exchange and Letters of Credit Life Insurance Policies Policies of Insurance Upon Property Fidelity Bonds and Other Insurance Policies Policies of Annuities and Pre-Need Plans Indemnity Bonds Certificates Warehouse Receipts Jai-alai, Horse Race Tickets, Lotto or Other Authorized Numbers Games Bills of Lading or Receipts Proxies Powers of Attorney Leases and Other Hiring Agreements. Mortgages, Pledges, and Deeds of Trusts Deeds of Sale and Conveyances of Property Charter Parties and Similar Instruments Assignment and Renewals of Certain Instruments

NATURE DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Hence, in imposing the DST, not only the document but also Page 191 of 290

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TAXATION II

the nature and character of the transaction is considered. [Phil. Banking Corp. v. CIR, G.R. No. 170574 (2009)] Being an excise tax, it is paid only once. Since DST is not a tax on income, an exemption from income tax does not include DST. [BIR Ruling No. DA-106-08, August 4, 2008] The tax base is the document itself, not the transaction or the property described in the document. Thus, the validity or invalidity of the transaction, or the extent of the right to the property is not affected by payment or non-payment of the DST. [Vitug & Acosta] PURPOSE The purpose of the law imposing stamp documents, instruments, and papers is revenue and not to invalidate contracts penalties, and courts should give it construction. [33 C.J.S. 315-316]

taxes on to raise or inflict a liberal

TAXATION LAW

E. TAX REMEDIES UNDER THE NIRC 1. General Concepts ADMINISTRATIVE (BIR) Before payment o Filing a petition or reconsideration or reinvestigation; and o Entering into a compromise After payment o Filing a claim for refund; and o Filing a claim for tax credit JUDICIAL (CTA/RTC) Civil action o Appeal to the CTA o Action to contest forfeiture of chattel; and o Action for damages Criminal action Filing a criminal complaint against erring BIR officials and employees Periods: Assessment (3 or 10 years) Return was filed o Not false or fraudulent 3 years after the last day of the prescribed period OR 3 years from the date of actual filing of the return if paid beyond the prescribed period. [Sec. 203, NIRC] o False or Fraudulent or Failure to file a return (FFF) 10 years from date the fraud or falsity or omission was discovered [Sec. 222(a), NIRC] Collection (3 or 5 years) o Collections with assessments 5 years from issuance of FAN (Final Assessment Notice) or FLD (Final letter of Demand) [Sec. 222(c), NIRC] o Collections without assessments must be made within the period of making an assessment. If the return filed was false or fraudulent or if no return was filed a proceeding in court may be filed within 10 years from date of discovery of fraud or falsity [Sec. 222(a), NIRC] Criminal offense [Sec. 281, NIRC] o 5 years from date of commission, and if same is unknown then, from discovery and the

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institution of judicial proceedings for its investigation and punishment. The prescription period shall not run when the offender is absent from the Philippines

a. Assessment 1. Definition and Requisites of a Valid Assessment To assess means to impose a tax; to charge with a tax; to declare a tax to be payable; to apportion a tax to be paid or contributed, to fix a rate; to fix or settle a sum to be paid by way of tax; to set, fix or charge a certain sum to each taxpayer; to settle determine or fix the amount of tax to be paid (84 C.J.S 74-750) An assessment is the notice to the effect that the amount therein stated is due from a taxpayer as a tax with a demand for payment of the same within a stated period of time. [CIR v. CTA, 27 SCRA 1159] Forms of assessment a. Self-assessment Assessments made by taxpayers who then file returns. b. Deficiency assessment Assessments made by the BIR after the conduct of an investigation or audit when it finds that the tax return filed by the taxpayer contains an under-declaration of income or when the taxpayer does not at all file a tax return. c. Jeopardy assessment [Section C, infra] Requisites for valid assessment a. The taxpayer shall be informed in writing of the law and the facts on which the assessment is made [Sec. 228, NIRC] b. An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period [CIR v. PASCOR, G.R. No. 128315 (1999)] c. An assessment must be served on and received by the taxpayer [CIR v. PASCOR, supra.] Note: The presumption of the correctness of assessment CANNOT be made to rest on another presumption, e.g., presumption of regularity of performance of official functions. Constructive methods of income determination a. Rely upon circumstantial evidence of determining the correct income or transaction of a taxpayer (Indirect Method) b. Expenditure Method: It proceeds on the theory that where the amount of money which a

TAXATION LAW

taxpayer spends during a given year exceeds his reported income, and the source of such money is otherwise unexplained, it may be inferred that such expenditures represent unreported income. c. Percentage Method: This method is a computation whereby determinations are made by the use of percentages or ratios considered typical of the business under investigation. By reference to similar business or situations, percentage computations are secured to determine sales, gross profit or even net profit. d. Unit and Value Method: The determination of gross receipts may be computed by applying price and profit figures to the known ascertainable quality of business done by taxpayer Inventory method for income determination (Net Worth Method) Holland v. US: In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an "opening net worth" or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination, and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income. Formula Increase in Net worth Add: Non-deductible Item Less: Non-taxable income or receipts subjected to final tax transfer taxes Taxable Net Income Less: Personal and additional exemptions NET INCOME SUBJECT TO TAX Notices (Preliminary Assessment Notice, Final Letter of Demand, Final Assessment Notice, Final Decision on a Disputed Assessment) may be served in the following modes: Personal Service (by personal delivery to known address of taxpayer) preferred mode Substituted Service (by leaving the notice with omeone a a pa er kno n addre ); or

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TAXATION II

Service by mail Service to the tax agent shall be deemed service to the taxpayer (RR 18-2013) (p.391 Ingles)

administratively by distraint or levy or by judicial action [p. 405, Ingles]

2. Tax Delinquency as Distinguished from Tax Deficiency Deficiency is defined as the amount still due and collectible from a taxpayer upon audit or investigation; whereas delinquency is defined as the failure of the taxpayer to pay the tax due on the date fixed by law or indicated in the assessment notice or letter of demand. Deficiency interest is imposed for the shortage of taxes paid, while delinquency interest is imposed for the delay in payment of taxes. [Takenaka Corporation Philippine Branch v. CIR, G.R. No. 193321 (2016); First Lepanto Taisho Insurance Corporation v. CIR, G.R. No. 197117 (2013)] Deficiency Base

Reckoning date

Rate

Delinquency Basic tax + deficiency Basic tax interest and surcharge From the due From the date date appearing in prescribed for its the notice and payment until demand of the the full payment CIR until the thereof amount is fully paid 12% p.a. (double the legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas) NOTE: deficiency and the delinquency interest SHALL NOT be imposed simultaneously

Tax Delinquency v. Tax Deficiency Tax Delinquency Tax Deficiency It is when: It is when: Self-assessed taxpayer The amount of tax filed his tax return but imposed by law is did not pay or only greater than the amount partially paid the tax shown in the tax return Deficiency Tax assessed by the BIR became final and executory Delinquency Tax can be collected

If no amount is shown in the return, or if there is no return, amount by which the tax as determined by the CIR exceeds the amount

SUBJECT to administrative penalties of: 25% surcharge interest compromise penalty [Mamalateo]

TAXATION LAW

previously assessed as a deficiency Deficiency tax must be assessed prior to collection, as the deficiency has to be determined first [p.405, Ingles] SUBJECT to administrative penalties of: interest compromise penalty

3. Jeopardy Assessment Under BIR Regulations, a jeopardy assessment is a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized b dela beca e of he a pa er fail re o compl with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return. (As defined in Sec. 3(1)(a), RR 30-2002 for the purposes of entering into a compromise)

4. Prescriptive Period for Assessment (Sec. 203, NIRC) General Rule: 3 years If the taxpayer filed a return: internal revenue taxes shall be assessed within 3 years after the last day prescribed by law for the filing of the return. If a return is filed beyond the period prescribed by law: the 3-year period shall be counted from the day the return was filed. Exceptions (FFF) False return deviation ; Fraudulent return/intentional or deceitful entry with intent to evade tax; and Failure to file a return. [Sec. 222, NIRC] Note: Prescriptive period in these exceptions is within 10 years from discovery of falsity, fraud, or failure or omission to file the return. Waiver

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The taxpayer and the CIR may agree in writing, before the expiration of the time prescribed in Sec. 203, to extend the period of assessment [Sec. 222(b), NIRC] a. The waiver of prescription must be executed properly, otherwise, invalid and results to prescription of the right to assess/collect. [Philippine Journalists Inc. vs. CIR, G.R. No. 162852 (2004)] b. Requirements for a valid waiver under RMO 2090 and RMO 14-2016: 1. In writing (may be but need not be notarized); 2. Indicate the date of execution by the taxpayer, which must be before the expiration of the period to assess or collect taxes, or before the lapse if the period previously agreed upon in a prior agreement; 3. Indicate the date agreed upon within which an assessment may still be issured; 4. Indicate the date of acceptance, which must be before the expiration of the period to assess or to collect taxes, or before the lapse of the period agreed upon in a prior agreement; and 5. Taxpayer must be furnished with a copy of the waiver.

Determining if prescriptive period has set in In determining if prescription to assess has indeed set in, the important date to remember is the date when the demand letter or notice is released, mailed or sent by the CIR to the taxpayer (Basilan Estates, Inc. v. CIR, G.R. No. L-22492, September 5, 1967) Provided the release was effected BEFORE prescription sets in, the assessment is deemed made on time even if the taxpayer actually receives it AFTER the prescriptive period Mailing of the assessment before the prescriptive period sets in must be proved with substantial evidence by the CIR. If taxpayer makes a direct denial of receipt of a mailed demand letter, such denial shifts the burden to the Government to prove that such letter was indeed received by the taxpayer (Republic v. CA, G.R. No. L-38549, April 30, 1987). (pp. 394-395 Ingles)

Suspension of running of statute of limitations a. Period during which the CIR is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty (60) days thereafter; b. When the taxpayer requests for a reinvestigation which is granted by the CIR; c. When the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected, BUT if the taxpayer informs the CIR of any change in address, the running of the statute of limitations shall not be suspended; d. When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property is located; e. When the taxpayer is out of the Philippines.

In General 12% per annum (double the interest rate for loans or forbearance of any money as set by BSP) on the unpaid amount of tax, interest at the rate of twenty percent (12%) per annum from the date prescribed for payment until the amount is fully paid. [Sec. 249(A), NIRC88]

88

SECTION 249. 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, double the legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas from the date prescribed for payment until the amount is fully paid.: Provided, That in no case shall the deficiency and the delinquency interest prescribed under

5. Civil Penalties, Additions to the Tax [Sec. 248, NIRC] [RR 21-2018] DELINQUENCY INTEREST DEFICIENCY INTEREST

AND

Deficiency Interest 12% per annum on any deficiency tax due, which interest shall be assessed and collected from the date prescribed for its payment until: (a) full payment thereof; (b) or upon issuance of a notice and demand by the Commissioner or his authorized representative, whichever comes first. [Sec 249(B), NIRC;89 Sec. 3, RR 21-2018] Delinquency interest 12% per annum on the unpaid amount in case of failure to pay: Subsections (B) and (C) hereof, be imposed simultaneously. 89 SECTION 249. Interest. (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, or upon issuance of a notice and demand by the Commissioner of Internal Revenue, whichever comes earlier.

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a.

The amount of the tax due on any return required to be filed; or b. The amount of the tax due for which no return is required; or c. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the CIR or his authorized representative until the amount is fully paid, which interest shall form part of the tax [Sec. 249(C), NIRC] Interest on extended payment 12% per annum on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid if any person required to pay the tax is: a. Qualified and elects to pay the tax on installment but fails to pay the tax or any installment or any part of such amount or installment or before the date prescribed for its payment; or b. Where the CIR has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof [249(D), NIRC] In no case shall deficiency and delinquency interest be imposed simultaneously. [Sec. 249(A), NIRC] However, the double imposition of both deficiency and delinquency tax shall continue TRANSITORY PROVISION [Sec. 6, RR 2018] In cases where the tax liability or deficiency tax became due before the effectivity of the TRAIN Law on January 1, 2018, and the full payment thereof will only be effected after such date, the rates shall be applied as follows: Applicable Interest Period Type and Rate Deficiency and/or For the period up to delinquency interest at Dec. 31, 2017 20% For the period Deficiency and/or beginning January 21, delinquency interest at 2018 until full payment 12% SURCHARGE

TAXATION LAW

Surcharge penalty imposed in addition to the tax required to be paid [Sec. 24, NIRC] Rates of Surcharge (25% or 50%) 25% of the amount due in the following cases: a. Failure to file any return and pay the tax due on the date prescribed; or b. Filing a return with an internal revenue officer other than those with whom the return is required to be filed unless the CIR authorizes otherwise; or c. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or d. Failure to pay the full or part of the amount of tax due on or before the date prescribed for its payment [Sec. 248 (A), NIRC] 50% of the tax or of the deficiency tax in case any payment has been made, in the following cases: a. Willful neglect to file the return within the period prescribed; or b. A false or fraudulent return is willfully made [Sec. 248(B), NIRC]

Prima facie evidence of a false or fraudulent

return: Substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions. Failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration or for overstatement. [Sec. 248(B), NIRC] COMPROMISE PENALTY Compromise penalty an amount of money paid by a taxpayer to compromise a tax violation that he has committed, which may be the subject of criminal prosecution. The basis of the amount paid is the gross sales or receipts during the year or the tax due. Compromise an amount of money paid by the taxpayer to settle his civil liability for tax assessed by the government. The basis of the amount paid is the basic tax assessed. [Mamalateo]

ILLUSTRATION Mr. A has been assessed deficiency income tax of P1,000,000, exclusive of interest and surcharge, for taxable year 2015. The tax liability remained unpaid despite the lapse of June 30, 2017, the deadline for payment stated in the notice and demand issued by the Commissioner. Payment was made by Mr. A on February 10, 2018. The civil penalties are computed as follows: Page 196 of 290

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Basic Tax Due Add: 25% surcharge for late 20% Deficiency Interest from April 16,2016 to June 30, 2017 (441 days) Total Amount Due, June 30,2017 Add: 20% Deficiency Interest from July 1, 2017 to December 31, 2018 (184 days based on P1M) Add: 20% Delinquency Interest on tax from July 1,2017 to December 31,2017 (225days) based on total amount as of June 30, 2017 12% Delinquency Interest from January 1,2018 to February 10,2018 (41 days, based on total amount due as of June 30,2017 Total Amount Due, February 10, 2021

6. Assessment Process and Reglementary Periods Assessment process [Sec. 228, NIRC; RR 12-99; RR 18-13; RR 7-18] 1.

LETTER OF AUTHORITY AND TAX AUDIT

Letter of Authority: An official document that empowers a Revenue Officer to examine and cr ini e a a pa er book of acco n and o her accounting records, in order to determine the a pa er correc in ernal re en e a liabili ie . Cases which need not be covered by a valid LA: a. Cases involving civil/criminal tax fraud which fall under the jurisdiction of the tax fraud division of the Enforcement Services, and b. Policy cases under audit by the special teams in national offices. Tax audit In a tax audit, revenue officers examine the books of account and other accounting records of taxpayers to determine the correct tax liability. Absence of an LOA violates right to due process. [Medicard Philippines, Inc. vs CIR, G.R. No. 222743, (2017)] There must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity. [CIR vs. Sony Philippines, Inc., G.R. No. 178697 (2010)]

P

TAXATION LAW

P

1,000,000.00

P

491,643.84 1, 491,643.84

250,000.00 241,643.84

100,821.92 150,390.39 20,106.54 P

2. NOTICE OF CONFERENCE

271,318.85 1,762,962.90

INFORMAL

N.B. RR 7-2018 reinstated the notice of informal conference. The Revenue Officer who audited the taxpayer's records shall state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, of the discrepancies in the taxpayer's payment of his internal revenue taxes for the purpose of "lnformal Conference," in order to afford the taxpayer with an opportunity to present his side of the case. The Informal Conference shall in no case extend beyond thirty (30) days from receipt of the notice for informal conference. lf it is found that the taxpayer is still liable for deficiency tax or taxes after presenting his side, and the taxpayer is not amenable, the, case shall be endorsed within seven (7) days from the conclusion of the Informal Conference for the issuance of a deficiency tax assessment. 3. ISSUANCE OF PRELIMINARY ASSESSMENT NOTICE (PAN) General rule The Assessment Division issues a PAN if it determines that there exists sufficient basis to assess the taxpayer for any deficiency tax. It shall show in detail the facts and the law on which the proposed assessment is based.

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Exceptions to issuance of preliminary assessment notice (PAN) The notice for informal conference and the PAN shall not be required in any of the following cases, in which case, issuance of the Formal Assessment Notice (FAN) shall be sufficient: a. 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. A discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or c. 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. The excise tax due on excisable articles has not been paid; or e. An 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 a non-exempt person. Reply to preliminary assessment notice (PAN) Taxpayer is given 15 days from date of receipt of PAN to respond If he/she fails to respond: taxpayer is considered in default; a formal letter of demand and assessment notice shall be issued to the taxpayer N.B. In Oakwood Management Services, Inc. v. CIR (2013), the CTA held that the issuance of the FAN before the lapse of the 15-day period to reply to PAN does not violate due process. A protest against the PAN, unlike the protest against the FAN, is not indispensable. A PAN may or may not be protested by the taxpayer, and the non-filing of such protest does not render the PAN final and unappealable. Therefore, the issuance of the FAN before the lapse of the 15day period for the taxpayer to file its protest to the PAN does not inflict prejudice on the taxpayer, for as long as the BIR properly served a FAN and the taxpayer was able to intelligently contest the FAN by filing a protest letter within the period provided by law. If he/she responds: a FAN/FLD shall be issued within 15 days from filing/submission of the a pa er re pon e, calling for pa men of he a pa er deficienc a liabili , incl i e of he applicable penalties.

TAXATION LAW

4. ISSUANCE OF FORMAL LETTER OF DEMAND AND FINAL ASSESSMENT NOTICE (FAN/FLD) A Final Assessment Notice (FAN) is a declaration of deficiency taxes 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. The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void [Sec. 228, NIRC] An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. 5. DISPUTED ASSESSMENT The taxpayer or his duly authorized representative may protest administratively against the formal letter of demand and assessment notice within thirty days (30) from date of receipt. The taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation. RECONSIDERATION refers to a plea of reevaluation of the assessment on the basis of existing records without need of additional evidence. It may involve both question of fact or of law or both. REINVESTIGATION refers to a plea of reevaluation of an assessment on the basis of newly-discovered evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both. Failure to file a protest against FLD/FAN within 30 days, the assessment shall become final, executory and demandable. If there are several issues in the FLD/FAN and the taxpayer disputes or protests only some of them, the assessment relating to the undisputed issue(s) shall become final, executory and demandable. Moreover, if the taxpayer disputes or protests issues in the FLD/FAN but he fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest, the issues shall be considered undisputed and the related assessment

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shall likewise demandable.

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become

final,

executory

TAXATION LAW

and

A final decision on disputed assessment (FDDA) that is declared void does not necessarily result in a void assessment A deci ion differ from an a e men and fail re of the FDDA to state the facts and law on which it is based renders the decision void but not necessarily the assessment. [CIR vs. Liquigaz Philippines Corp., GR No. 215534, April 18, 2016]

2. Collection a. Requisites and Types Generally, the government can initiate to collect administratively or judicially once the FAN and FLD are issued. [Sec. 203, NIRC] The Government has two ways to collect: Summary or administrative remedies o Distraint on personal property o Levy on real property Judicial remedies (civil or criminal)

Suspension of running of statute of limitations Period during which the CIR is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty (60) days thereafter; When the taxpayer requests for a reinvestigation which is granted by the CIR; When the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected, BUT if the taxpayer informs the CIR of any change in address, the running of the statute of limitations shall not be suspended; When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property is located; When the taxpayer is out of the Philippines. [Sec. 223, NIRC]

b. Prescriptive Periods; Suspension of Running of Statute of Limitations Collections with assessments FIVE YEARS after the issuance of FAN and FLD. Collections without assessments In case of false or fraudulent return with intent to evade tax or of failure to file a return, collection without assessment (or assessment) may be made within 10 years from discovery of falsity, fraud or omission. [Sec. 222(a), NIRC] o An assessment may also be made which carries its own 5-year prescriptive period to collect. Collections without assessment may be made within the period for making an assessment (3 years from the required date of filing or actual filing, whichever is later) [See Sec. 203, NIRC] Waiver of prescriptive period If tax was assessed within the different period agreed upon by the CIR and the taxpayer, it may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the 5-yr period. [Sec. 222(d), NIRC] Page 199 of 290

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F. Ta

a

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R

1. Protesting the Assessment a. Protested Assessment After issuance of FAN, taxpayer may protest the assessment either by a request for reconsideration or reinvestigation.

b. Period to File Protest

TAXATION LAW

Rele an ppor ing doc men documents necessary to support the legal and factual bases in disputing a tax assessment as determined by the taxpayer A e men hall become final taxpayer is barred from disputing the correctness of the issue assessment by introduction of newly discovered or additional evidence, and the FDDA shall consequently be denied. Only applies to request for reinvestigation

e. Effect of Failure to Protest FAN/FLD becomes final and demandable.

30 days after receipt of FAN/FLD. Request for RECONSIDERATION Effect on prescriptive period to COLLECT A request for reconsideration does not toll the running of the prescriptive period for the collection of an assessed tax. [CIR vs. Philippine Global Communication Inc., G.R. No. 167146 (2006)] Request for REINVESTIGATION Effect on prescriptive period to COLLECT A Request for Reinvestigation will only toll the prescriptive period to COLLECT if the request for reinvestigation is granted by the BIR.

c. Form, Content, and Validity of Protest The protest shall state: (Failure to state shall render protest null and void) Nature of protest, whether reconsideration or reinvestigation, specifying new or additional evidence if request for reinvestigation Date of the assessment notice Applicable law, rules and regulations, or jurisprudence on which his protest is based.

d. Submission of Supporting Documents If request for REINVESTIGATION is GRANTED Submission of documents within 60 days from filing of protest Within sixty (60) days from filing of the protest, all relevant supporting documents must be submitted, otherwise the assessment shall become final.

f. Rendition of Decision by CIR Period to act upon or decide protest filed 180 DAYS from 1. Submission of documents if request for REINVESTIGATION; or 2. Filing of protests if request for RECONSIDERATION N.B. An administrative appeal to the CIR may only be availed of upon the denial of the protest to the FAN by the CIR representative. Under RR 18-2013, there is no administrative appeal to the CIR for inaction by the CIR representative. The remedy is to await the decision or file a petition for review to the CTA 30 days after the lapse of 180-day waiting period. Denial of protest Issuance of a Final Decision on a disputed assessment (FDDA): The decision of the CIR or his duly authorized representatives shall state the facts, the applicable law, rules and regulations or jurisprudence on which such decision is based, and that the same is his final decision. CIR ac ion eq i alen o denial of protest: Filing of collection suit against taxpayer [CIR v. Union Shipping, G.R. No. L-66160 (1990)] Issuing a warrant of distraint and levy [CIR v. Algue, G.R. No. L-28896 (1998)] Where there is a request for reconsideration, final demand letter from BIR [CIR v. Isabela Cultural Corp., G.R. No. 172231 (2007)] Notice of delinquency [CIR v. Ayala Securities, G.R. No.L-29485 (1976)] Inaction by CIR - If the protest is not acted upon within one hundred eighty (180) days from submission of documents, the inaction by the CIR is considered as a denial of protest. Filing of criminal action against taxpayer

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Assessment becomes final and demandable.

Issuing a warrant of distraint and levy REMEDIES OF TAXPAYER TO IN CASE THE COMMISSIONER DENIED THE PROTEST OR FAILS TO ACT ON THE PROTEST 1.

In case of denial of protest If the protest is denied, in whole or in part, by the CIR d l a hori ed repre en a i e, he taxpayer may either: a. Appeal to the CTA within 30 days from the date of receipt of the decision b. Elevate his protest through request for reconsideration to the CIR (the only case where an administrative appeal is possible) If the CIR denies the protest filed by the taxpayer, the latter may appeal to the CTA within 30 days from receipt of the decision denying the protest. A motion for reconsideration of the CIR denial of he pro e hall no oll he 30 day period to appeal to the CTA.

2.

In case of inaction by CIR within 180 days from submission of documents If he pro e i no ac ed pon b he CIR d l authorized representative within 180 days from filing of the protest or from submission of required documents, the taxpayer may either: a. Appeal to the CTA within 30 days after the expiration of the 180 days, b. A ai he final deci ion of he CIR d l authorized representative. If the CIR did not act upon the petition within 180 days from the time the documents were submitted, the taxpayer may either: a. Appeal to the CTA within thirty days from the lapse of the 180-day period OR b. Wait until the CIR decides before he elevates the case to the CTA. These options are mutually exclusive, and resort to one bars the application of the other. [Rizal Commercial Banking Corporation vs. CIR, G.R. No. 168498 (2007)] N.B. if the protest is a request for RECONSIDERATION, count the 180 days from the filing of the protest. The submission of documents is only for a request for reinvestigation.

Effect of failure to appeal

TAXATION LAW

2. Compromise and Abatement

of Taxes

Compromise

to reduce the amount of tax payable

Cases which may be compromised: [Sec. 2, R.R. 30-2002] a. Delinquent accounts b. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office c. Civil tax cases being disputed before the courts d. Collection cases filed in courts e. Criminal violations, other than those already filed in court or those involving criminal tax fraud Cases which cannot be compromised: [Sec. 2, R.R. 30-2002] a. Withholding tax cases, unless the applicanttaxpayer invokes provisions of law that cast doubt on the taxpayer's obligation to withhold b. Criminal tax fraud cases confirmed as such by the CIR or his duly authorized representative c. Criminal violations already filed in court d. Delinquent accounts with duly approved schedule of installment payments e. Cases where final reports of reinvestigation ore reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis f. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and g. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer Authority of the CIR to compromise and abate taxes Grounds for a compromise The CIR may compromise the payment of any internal revenue tax in the following cases:

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a.

A reasonable doubt as to the validity of the claim against the taxpayer exists; or b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (financial incapacity)

Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at the time that payment is made. Taxes are illegally collected when payments are made under duress.

L a.

a. Tax Refund as Distinguished from Tax Credit

CIR : For cases of financial incapacity: a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax b. For other cases: a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax Note: When 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 must be approved by the National Evaluation Board (composed of the CIR and 4 Deputy Commissioners) The compromise offer shall be paid by the taxpayer upon filing of the application for compromise settlement. No application for compromise settlement shall be processed without the full settlement of the offered amount. In case of disapproval of the application for compromise settlement, the amount paid upon filing of the aforesaid application shall be deducted from the total outstanding tax liabilities, [RR 9-2013] Abatement payable.

REFUND takes place when there is actual reimbursement while 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.

b. Grounds, Requisites, and Period for Filing a Claim for Refund or Issuance of a Tax Credit Certificate 1.

2.

to cancel the entire amount of tax

When the CIR may abate or cancel a tax liability: a. The tax or any portion thereof appears to be unjustly or excessively assessed; or b. The administration and collection costs do not justify the collection of the amount due. (e.g., when the costs of collection are greater than the amount of tax due)

3. Recovery of Tax Erroneously

or Illegally Collected

3. 4. 5.

Nature of a claim for refund It partakes of the nature of an exemption and is strictly construed against the claimant. The burden of proof is on the taxpayer claiming the refund that he is entitled to the same. [CIR v. Tokyo Shipping, G.R. No. L-68252 (1995)] Nature of erroneously-paid tax/illegally assessed collected

There is a tax collected erroneously or illegally, or a penalty collected without authority, or a sum excessively or wrongfully collected [see Section 229, NIRC] There must be a written claim for refund filed by the taxpayer to the CIR [see Vda. De Aguinaldo v. CIR, G.R. No. L-19927 (1965)] Exceptions a. When on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid, the CIR may refund or credit the tax even without a written claim [Sec. 229, NIRC] b. A return filed showing an overpayment shall be considered as a written claim for credit or refund. [Sec. 204(C), NIRC] The
claim must be a categorical claim for reimbursement [see Bermejo v. CIR, G.R. No. L3029 (1950)] The claim for refund must be filed within 2 years from the date of the payment of the tax regardless of any supervening cause [Sec. 229, NIRC] Taxpayer must show proof of the payment of tax [Sec. 229, NIRC]

Requirements for refund as laid down by cases 1. Necessity of written claim for refund 2. Claim containing a categorical demand for reimbursement 3. Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause

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The claim for refund must be filed within 2 years from the date of payment of the tax regardless of any supervening cause [Sec. 229, NIRC] Judicial remedy for refund File with suit with the CTA Within 30 days from receipt of denial by the CIR; and Before the expiration of the 2-year period Simultaneous filing allowed If the 2 year period is about to lapse, the taxpayer may already appeal to the CTA even if the CIR has not yet made any decision on the claim for refund. In Gibbs v. CIR [G.R. No. L-17406 (1965)], the Supreme Court noted that if the CIR takes time in deciding the claim and the period of two years is about to end, the suit or proceeding must be started in the CTA before the end of the 2 year period without awaiting the decision of the CIR. N.B. Compare with the rule on refunds of input VAT. The awaiting of the decision of CIR or the lapse of the 90-day period is mandatory. [Mandatory 90+30 Day Period: The taxpayer affected may file an appeal in one of two ways: (1) file the judicial claim within 30 days after the Commissioner denies the claim within the 90-day period, or (2) file the judicial claim within 30 days from the expiration of the 90-day period if the Commissioner does not act within such period. Legal basis of tax refunds solutio indebitii and the rules on quasi-contracts (prevention of unjust enrichment) Prescriptive period for recovery of tax erroneously or illegally collected Note: Under Sec. 229, there is no exception to the 2year prescriptive period. Two-year period when counted: From the date that the tax was paid. How date of payment determined: If the income tax is withheld at source payment is at the end of the taxable year. If the income is paid on a quarterly basis payment is from the time of filing the final adjustment return. CIR vs. TMX Sales [G.R. No. 83736 (1992)]: When a tax is paid in installments, the prescriptive period should be counted from the date of final payment or the last installment. This rule proceeds from the theory that there is no payment until the entire tax

TAXATION LAW

liability is completely paid. Installments should be treated as advances or portions of the annual tax due.

c. Statutory Basis and Proof for Tax Refund or Tax Credit [Sec. 204(C) and Sec. 229, NIRC] Scope of claims for refund The CIR may: Credit or refund taxes erroneously or illegally received or penalties imposed without authority; Refund the value of internal revenue stamps when they are returned in good condition by the purchaser; and In he CIR di cre ion, redeem or change n ed stamps that have been rendered unfit for use and refund their value upon proof of destruction Necessity of proof for claim or refund No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the CIR a claim for credit or refund within two (2) years after the payment of the tax or penalty. [Sec. 204, NIRC] A return filed showing an overpayment shall be considered as a written claim for credit or refund.[Sec. 204, NIRC]

d. Proper Party to File Claim for Refund or Tax Credit Taxpayer/withholding agents of non-resident foreign corporation the withholding agent is directly and independently liable for the correct amount of tax that should be withheld and for deficiency assessments, surcharges and penalties. General Rule: The taxpayer must file a written claim for refund stating a categorical demand for reimbursement before the CIR within two years from the date of payment. [Sec. 229, NIRC] When it comes to recovery of unutilized input VAT, Section 112 [two (2) years after the close of the taxable quarter when the sales were made], and not Section 229 of the 1997 Tax Code, is the governing law. Second, prior to 8 June 2007, the applicable rule is neither Atlas nor Mirant, but Section 112(A). The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in

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Mirant. [CIR v. San Roque Power Corp, G.R. No 187485 (2013)]

Exceptions to requirement of a written claim: When on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid (e.g., mathematical errors), the CIR may refund or credit the tax even without a written claim therefore. [Sec. 229, NIRC]

Tax credit certificates (TCCs) can be applied against all internal revenue taxes, excluding withholding tax. TCCs which remain unutilized after five years from the date of issue shall be considered as invalid, unless revalidated. If not revalidated, the amount covered by the TCC shall revert to the general fund. [Sec. 230, NIRC] All tax credit certificates issued by the BIR shall not be allowed to be transferred or assigned to any [other] person. [RR 14-11]

A return filed showing an overpayment shall be considered as a written claim for credit or refund. [Sec. 204(C), NIRC] Note: Once the option to carry over and apply the excess income tax payments to succeeding quarters/year is taken, that option is irrevocable, pursuant to the irrevocability rule found in Section 76 of the Tax Code. Consequently, a taxpayer is barred from securing a refund of, or tax credit certificate for, the excess amount that it has initially opted to carry-over. OTHER CONSIDERATION TAX REFUNDS

TAXATION LAW

AFFECTING

Remedy of the taxpayer upon denial or inaction on the claim for refund: 1. CIR denies claim - appeal to the CTA within hir (30) da from he receip of he CIR decision and within two years from the date of payment. 2. CIR does not act on the claim and the 2-year period is about to lapse - file a claim before the CTA before the 2-year period lapses. Otherwise, he may no longer file a claim before the CTA in case the CIR renders an adverse decision beyond the 2-year period. [Revised Rules of the CTA, as amended] Period for claiming refund once granted: Within five years from the date such warrant or check was mailed or delivered, otherwise it shall be forfeited in favor of the government and the amount thereof shall revert to the general fund. [Sec. 230, NIRC] Period for using the Tax Credit Certificate (TCC): Page 204 of 290

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G.G

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1. Administrative Remedies a. Tax Lien 1.

2.

When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the CIR until paid with interest, penalties, and costs that may accrue in addition thereto upon ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING to the taxpayer. HOWEVER, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until NOTICE of such lien shall be filed by the CIR in the Office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located. [Sec. 219, NIRC]

Seizure under forfeiture vs. Seizure to enforce a tax lien In the former all the proceeds derived from the sale of the thing forfeited are turned over to the Collector of Internal Revenue; in the latter, the residue of such proceeds over and above what is required to pay the tax sought to be realized, including expenses, is returned to the owner of the property. [BPI v. Trinidad, G.R. No. L-16014 (1921)]

b. Distraint and Levy DISTRAINT OF PERSONAL PROPERTY Distraint remedy enforced on the goods, chattels, or effects, and other personal property of whatever character including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property [Sec. 205(a), NIRC] Kinds of Distraint: 1. Constructive Distraint 2. Actual Distraint /

TAXATION LAW

Grounds for Constructive Distraint: When in the opinion of the CIR, 1. the taxpayer is retiring from any business subject to tax; or 2. the taxpayer is intending to leave the Philippines; or 3. the taxpayer is intending to remove his property from the Philippines or to hide or conceal his property; or 4. the taxpayer is planning to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him [Sec. 206, NIRC] HOW CONSTRUCTIVE EFFECTED: 1.

DISTRAINT

IS

Signing of receipt by the taxpayer 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 CIR.

2. If the taxpayer refuses to sign the receipt: signing of receipt by revenue officer in the presence of two witnesses In case the taxpayer or the person having the possession and control of the property refuses or fails to sign the receipt, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnesses, leave a copy thereof in the premises where the property distrained is located [Sec. 206, NIRC] Note: In constructive distraint, the property is not actually confiscated or seized by the revenue officer. Actual distraint - placed on a person who owes any delinquent tax or delinquent revenue [see Sec. 207, NIRC]; involves actual seizure of the property

RMC

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wot

Constructive Distraint may be placed by the CIR or any taxpayer to safeguard the interest of the Government [Sec. 206, NIRC]. Delinquency of the taxpayer is not necessary.

Garnishment taking of personal properties, usually cash or sums of money, owned by a delinquent taxpayer which is in the possession of a third party DISTRAINT OF INTANGIBLE PROPERTIES [Sec. 208, NIRC] 1. Stocks and other securities: by serving a copy of the warrants of distraint on the taxpayer, AND

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2.

3.

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upon the president, manager, treasurer or other responsible officer of the corporation, company or association which issued the stocks or securities. Debts and credits: 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 person owing the debts shall then pay the CIR instead of his creditor (taxpayer) on the strength of such warrant. Bank accounts: by serving a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank. The bank shall then turn over to the CIR so much of the bank accounts as may be sufficient to satisfy the claim of the Government. (NOTE: distraint of bank accounts is called GARNISHMENT)

Summary remedy of distraint of personal property 1. Purchase by the government at sale upon distraint 2. Report of sale to the Bureau of Internal Revenue (BIR) 3. Constructive distraint to protect the interest of the government PROCEDURE FOR ACTUAL DISTRAINT 1.

Commencement of Distraint Proceedings Who issues the warrant of distraint: a. CIR or his duly authorized representative where the amount involved is more than P1M b. Revenue District Officer where the amount involved is P1M or less [Sec. 207(A), NIRC]

2. Service of Warrant of Distraint How actual distraint is effected: The proper officer shall 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 of the taxpayer in sufficient quantity to satisfy the tax, expenses of distraint and the cost of the subsequent sale. [Sec. 207(A), NIRC] 3. Report on the Distraint A report shall be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director.

TAXATION LAW

4. Power of the CIR or proper officer to lift the order of distraint The taxpayer may request that the warrant be lifted. The CIR may, in his discretion, allow the lifting of the order of distraint. He may ask for a bond as a condition for the cancellation of the warrant. [Sec. 207(A), NIRC] 5. Notice of Sale of Distrained Properties The Revenue District Officer or his duly authorized representative (not the officer who served the warrant), shall cause a notification of the public sale to be posted in not less than two (2) public places in the municipality or city (one of which is the Office of the Mayor) where the distraint was made. The notice shall specify the time and place of the sale. The time of sale shall not be less than twenty (20) days after notice to the owner and the publication or posting of such notice. [Sec. 209, NIRC] 6.

Sale at Public Auction a. At the time of the public sale, the revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained at a PUBLIC AUCTION, to the HIGHEST BIDDER for CASH or with the approval of the CIR, through a DULY LICENSED COMMODITY or STOCK EXCHANGES. b. Any residue over and above what is required to pay the entire claim, including expenses of sale and distraint, shall be RETURNED to the owner of the property sold. Expenses shall be limited to actual expenses of SEIZURE and PRESERVATION of the property pending the sale, no charge shall be imposed for the services of the local internal revenue officer or his deputy. [Sec. 209, NIRC] c. If the proceeds from the sale of the distrained properties are not sufficient to satisfy the tax delinquency, the CIR or his duly authorized representative shall within thirty (30) days after execution of the distraint, proceed with the levy on the a pa er real proper . [Sec. 207(B), NIRC]

7. Release of the Properties from Distraint If at any time prior to the consummation of the sale all proper charges are paid to the officer

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conducting the sale, the goods or effects distrained shall be restored to the owner. [Sec. 210, NIRC] 8. Purchase by the government at sale upon distraint If the amount offered by the highest bidder 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 CIR or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due. The property so purchased may be resold by the CIR or his deputy. [Sec. 212, NIRC] 9. 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 CIR and shall himself preserve a copy of such report as an official record. [Sec. 211, NIRC] /SUMMARY

REMEDY OF LEVY ON REAL PROPERTY 1.

Release of the Properties from Distraint 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. [Sec. 210, NIRC]

2. Purchase by the government at sale upon distraint If the amount offered by the highest bidder 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 CIR or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due. The property so purchased may be resold by the CIR or his deputy. [Sec. 212, NIRC]

TAXATION LAW

the GOVERNMENT in satisfaction of the claim. [Sec. 215, NIRC] 5. Redemption of Property Sold At any time before the day fixed for the sale, the taxpayer may discontinue all proceeding by paying the taxes, penalties and interest. [Sec. 213, NIRC] Within one (1) year from the date of sale, the taxpayer or anyone for him, may pay to the Revenue District Officer the total amount of the following: public taxes + penalties + interest from the date of delinquency to the date of sale + interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of sale to the date of redemption. [Sec. 214, NIRC] Note: If the property was forfeited in favor of the government, the redemption price shall include only the taxes, penalties and interest plus costs of sale (no interest on purchase price since the Go ernmen did no p rcha e he proper anyway, it was forfeited) The taxpayer-owner shall not be deprived of possession of the said property and shall be entitled to rents and other income until the expiration of the period for redemption [Sec. 214, NIRC] 6. Final Deed of Purchaser After the period of redemption, a final deed of sale is issued in favor of the purchaser. 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. [Sec. 217, NIRC]

c. Forfeiture of Real Property

3. 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 CIR and shall himself preserve a copy of such report as an official record. [Sec. 211, NIRC]

Forfeiture implies a divestiture of property without compensation in consequence of a default or offense. The effect of forfeiture is to transfer the title of the specific thing from the owner to the government. [De Leon]

4. Forfeiture in Favor of the Government If there is no bidder for the real property OR if the highest bid is not sufficient to pay the taxes, penalties and costs, the IR Officer conducting the sale shall declare the property FORFEITED to

Instances when forfeiture is appropriate 1. All chattels, machinery, and removable fixtures of any sort used in the unlicensed production of articles [Sec. 268, NIRC] 2. Dies and other equipment used for the printing or making of any internal revenue stamp, label or

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3.

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tag which is in imitation of or purports to be a lawful stamp, label or tag. [Sec. 268, NIRC] Liquor or tobacco shipped under a false name or brand [Sec. 262, NIRC]

REMEDY OF ENFORCEMENT OF FORFEITURES 1. Forfeiture of chattels and removable fixtures: enforced by the seizure, sale or destruction of the specific forfeited property. 2. Forfeiture of real property: enforced by a judgment of condemnation and sale in a legal action or proceeding civil or criminal as the case may require [Sec. 224, NIRC] Resale of real estate taken for taxes [RR No. 222002] 1. All acquired/forfeited properties transferred in the name of the Republic of the Philippines, having passed the one-year redemption period, shall be converted into cash from the date of acquisition or forfeiture. 2. The sale of acquired/forfeited real properties shall be by sealed bids in a public auction to be witnessed by a representative of the COA. 3. The Notice of Sale of the acquired real properties shall be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the Philippines which must be completed at least 20 days prior to the date of such public auction. 4. Unless the CIR provides otherwise, the Minimum Bid Price/Floor Price shall be the latest fair market value as determined by the CIR or the fair market value shown in the latest tax declaration issued by the provincial, city or municipal assessor, whichever is higher, pursuant to Sec. 6(E) of the Tax Code. 5. Anyone could bid except foreign nationals, corporate or otherwise, and those qualified under existing laws, rules and regulations, including employees of the Bureau of Internal Revenue. 6. Bidders shall be required to post a bond in cash or manager check in an amo n repre en ing 10% of the minimum bid price at least one day before the scheduled public auction. 7. Unless the CIR allows extension of time to pay, in meritorious cases, the winning bidder shall pay the full amount of his bid ca h or manager check within two days after receipt of notice of award. 8. All taxes and expenses relative to the issuance of title shall be borne by the winning bidder. 9. The winning bidder shall be responsible at his own expense for the ejectment of squatters

10. 11. 12. 13.

TAXATION LAW

and/or occupants, if any, of the auctioned property. Negotiated or private sale shall be resorted to as a consequence of failed public bidding for two consecutive times. Negotiated or private sale shall in all cases be approved by the Secretary of Finance. Public auction sale shall be approved by the CIR or his authorized representative. The Government reserves the right to reject or cancel any or all bids.

When property to be sold or destroyed 1. Forfeited chattels and removable fixtures: sold 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 nonpayment of taxes 2. Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco and all apparatus used in or about the illicit production of such articles: destroyed by the order of the CIR when the sale or use would be injurious to public health or prejudicial to the enforcement of the law 3. All other articles subject to excise tax manufactured or removed in violation of the Code, dies for the printing or making of internal revenue stamps and labels: sold or destroyed in the discretion of the CIR 4. Forfeited property shall not be destroyed until at least 20 days after seizure. [Sec. 225, NIRC] 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 CIR or his authorized deputies as the taxes themselves are required to be paid, and except as specially provided, shall be accounted for and dealt within the same way. [Sec. 226, NIRC]

d. Suspension of Business Operation In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the CIR or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations: 1. Failure to issue receipts and invoices.

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2. 3. 4.

TAXATION II

Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter. Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code.

e. 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. [Sec. 218, NIRC]

2. Judicial Remedies

Criminal Action

Civil or

CIVIL ACTION Two ways by which civil liability is enforced: a. By filing a civil case for the collection of sum of money with the proper regular court; and b. By filing an answer to the petition for review filed by the taxpayer with the Court of Tax Appeals. [Mamalateo] Criminal Action Any person convicted of a crime under the Code shall: a. Be liable for the payment of the tax, and b. Be subject to the penalties imposed under the Code. [Sec. 253(A), NIRC] Form and Mode of Proceeding: Civil and criminal action and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the BIR: a. Shall be BROUGHT IN THE NAME OF THE GOVERNMENT of the Philippines; and b. Shall be CONDUCTED BY LEGAL OFFICERS OF THE BIR c. Shall be filed in court with the approval of the CIR. [Sec. 220, NIRC] Criminal action as a collection remedy The judgment in the criminal case shall impose the penalty; and order payment of the taxes subject of the criminal case as finally decided by the CIR. [Sec. 205, NIRC] Assessment not necessary before filing a criminal charge for tax evasion

TAXATION LAW

An assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of a wilful attempt to file taxes, such as failure to file a required tax return. [CIR v. Pascor,G.R. No. 128315 (1999)] Suit to recover tax based on false or fraudulent returns A proceeding in court for the collection of the tax assessed may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission. Provided, that in a fraud assessment which has become final and executor, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. [Sec. 222, NIRC] False Return v. Fraudulent Return A false returns is due to mistakes, carelessness or ignorance and a fraudulent return is filed with intent to evade taxes. The fraud contemplated by law is actual and not constructive, and must amount to intentional wrongdoing with the sole object of avoiding the tax. [Aznar v. CTA, G.R. No. L-20569 (1974)] Payment of tax not defense Payment of the tax due after a case has been filed shall not constitute a valid defense in any prosecution for violation of the provisions under the Code. [Sec. 253(A), NIRC] Liability of person who aids or abets: Any person who willfully aids or abets in the commission of a crime penalized under the Code or who causes the commission of any such offense by another shall be liable in the same manner as the principal. [Sec. 253(B), NIRC] Offender Not a citizen of the Philippines

A public officer or employee

CPA

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Penalty he shall be deported immediately after serving the sentence the maximum penalty prescribed for the offense shall be imposed on him shall be dismissed from public office, and perpetually disqualified from holding any public office, to vote, and to participate in any election his license shall be automatically revoked or

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Corporations, associations, partnerships etc.

TAXATION II

cancelled once he is convicted imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation [Sec. 253, NIRC]

Minimum amount of fine: The fines imposed for any violation of the Code shall not be lower than the fines imposed herein or twice the amount of taxes, interests and surcharges due from the taxpayer, whichever is higher. [Sec. 253, NIRC] Prescriptive period for criminal action: All violations of any provision of the Code shall prescribe after five (5) years. [Sec. 281, NIRC]

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III. LOCAL GOVERNMENT CODE OF 1991, AS AMENDED

autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. [Sec. 5, Art. X, 1987 Constitution] 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. (Sec. 129, LGC)

A. Local Government Taxation

b.rAuthority to Prescribe Penalties for Tax Violations

1. /Fundamental Principles

(UEPIP)

Vested in the sanggunian 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). [Sec. 516, LGC]

O

a.

Taxation shall be Uniform in each local government unit; b. Taxes, fees, charges and other impositions shall: (EPUC) be Equitable and based as far as practicable on the taxpayer's ability to pay; be levied and collected only for Public purposes; not be Unjust, excessive, oppressive, or confiscatory; not be Contrary to law, public policy, national economic policy, or in the restraint of trade; c. The collection of local taxes, fees, charges and other impositions shall not be let to any Private person; d. The revenue collected shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other Imposition, unless otherwise specifically provided herein; and, e. Each local government unit shall, as far as Practicable, evolve a progressive system of taxation. (SEC. 130, LGC)

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c.-Authority to Grant Local Tax Exemptions

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LGUs may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. [Sec. 192, LGC]

O

d. - Withdrawal of exemptions Local tax exemptions, in general General rule: Unless otherwise provided, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or judicial, including government-owned or controlled corporations are withdrawn upon the effectivity of the LGC. [Sec. 193, LGC]

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2. Nature and Source of Taxing

Power

a./Grant of Local Taxing Power under the Local Government Code

*

Each local government unit shall have the power to create its own sources of revenues and subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local

Exceptions: Tax exemptions not withdrawn 1. Local water districts 2. Cooperatives duly registered under R.A. No. 6938, 3. Non-stock and non-profit hospitals and education institutions Note: The LGC took effect on January 1, 1992.

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[Sec. 193 is] an express and general repeal of all statutes granting exemptions from local taxes, withdrew the sweeping tax privileges previously enjoyed by the National Power Corporation under its Charter. [NPC v. Cabanatuan, G.R. No. 149110 (2003)] Real property tax exemptions General Rule: Any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or controlled corporations are hereby withdrawn upon the effectivity of the LGC. Exceptions: 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, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes; 3. All machineries 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 water; 4. All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and 5. Machinery and equipment used for pollution control and environmental protection. [Sec. 234, LGC] Note: Section 234 applies specifically to real property tax exemptions, while Section 193 applies to exemptions from all other local taxes.

e. Authority to Adjust Local Tax Rates LGUs shall have the authority to adjust the tax rates as prescribed not oftener than once every five (5) years, but in no case shall the adjustment exceed ten percent (10%) of the rates fixed by the Code. [Sec. 191, LGC]

TAXATION LAW

f. Residual Taxing Power of Local Governments LGUs may exercise the power to levy taxes, fees, or charges on ANY base or subject not otherwise specifically enumerated in the LGC or taxed under NIRC or other applicable laws: Requisites: 1. Not unjust, excessive, oppressive, confiscatory, or contrary to declared national policy; 2. Pursuant to an ordinance enacted with public hearing conducted for the purpose (Sec. 186, LGC); and 3. Subject to the limitations provided under Section 133 of the LGC.

g. Authority to Issue Local Tax Ordinances The power to impose a tax, fee, or charge, or to generate revenue under this Code shall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance. [Sec. 132, LGC]

3. Local Taxing Authority a. Power to Create Revenues Exercised thru Local Government Units [LGUs] Each LGU shall exercise its power to create 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. [Sec. 129, LGC] The power to impose a tax, fee, or charge or to generate revenue under this Code shall be exercised by the Sanggunian concerned through an appropriate ordinance. [Sec. 132, LGC] Ordinances issued in the exercise of such power, or any particular item/s therein, may be vetoed by local chief executives of the LGUs, except the Punong Barangay, on the ground that it is ultra vires or prejudicial to public welfare. His reasons shall be stated in writing. [Sec. 55 (a) and (b), LGC]

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b. Procedure for Approval and Effectivity of Tax Ordinances

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4. Scope of Taxing Power LGU

A public hearing must be conducted prior to the enactment of a tax ordinance. [Sec. 187, LGC] Within ten (10) days after the approval of the ordinance, certified true copies of all tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local circulation.

Provinces [Sec. 134, LGC]

In provinces, cities and municipalities where there are no newspapers of local circulation, it must be posted in at least two (2) conspicuous and publicly accessible places. [Sec. 188, LGC] Copies shall be furnished the respective local treasurers for public dissemination [Sec. 189, LGC] N.B. Requisites for substantive validity of an ordinance: 1. It must not contravene the Constitution or any statute; 2. It must not be unfair or oppressive; 3. It must not be partial or discriminatory; 4. It must not prohibit but may regulate trade; 5. It must be general and consistent with public policy; and 6. It must not be unreasonable [Magtajas v. Pryce Properties, G.R. No. 111097 (1994)]

Municipalities

Cities

Barangays

Scope of Taxing Power May levy only: Transfer of Real Property Ownership [Sec. 135, LGC] Business of Printing and Publication [Sec. 136, LGC] Franchise Tax [Sec. 137, LGC] Tax on Sand, Gravel and Other Quarry Resources [Sec. 138, LGC] Professional Tax [Sec. 139, LGC] Amusement Tax [Sec. 140, LGC] Annual Fixed Tax for every delivery truck or van [Sec. 141, LGC] May levy taxes, fees and charges not otherwise levied by provinces [Sec. 142, LGC] May levy taxes, fees and charges which the province or municipality may impose [Sec. 151, LGC] May levy only: Taxes on stores or retailers Service fees or charges Barangay clearance Other fees and charges [Sec. 152, LGC]

But all LGUs may also impose reasonable service fees, rates for operation of public utilities, and toll fees and charges. (See letter e below) [Sec. 153-155, LGC]

5. Specific Taxing Power of LGUs Tax on Transfer of Real Property

(135)

Tax on Business of Printing and Publication Franchise tax Tax on sand, gravel and other quarry resources Professional tax Amusement tax Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products Tax on Business Fees and charges on regulation/licensing of business and occupation Fees for Sealing and Licensing of Weights and Measures Fishery Rentals, Fees and Charges Community Tax Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers

(136) (137) (138) (139) (140)

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(151)

(141) (143) (147) (148) (149) (156) (152a)

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Service Fees on the use of Barangay-owned properties Barangay Clearance Other Fees and Charges (on commercial breeding of fighting cocks, cockfights, cockpits; places of recreation which charge admission fees; outside ads) Service Fees and Charges (153) Public Utility Charges (154) Toll Fees or Charges (155)

(152b) (152c) (152d)

Real Property Tax May exceed the maximum rates allowed for the province or municipality amusement taxes [Sec. 151, LGC]

(w/in Metro Manila) 50%, except rates of professional and

a. Taxing Powers of Provinces Tax Imposed

Rate/Amount

TAX ON TRANSFER OF REAL PROPERTY Imposed on the sale, donation, Not more than barter, or any other mode of 50% of 1% transfer of ownership or title to real property (Sec 135 LGC)

Base

Exemptions

Others Evidence of payment of tax is to be required by Register of Deeds as a requisite to registration; and by the provincial assessor Total as a condition for Sale, transfer, or acquisition price cancellation of old tax other disposition of or fair market declaration. real property value if pursuant to R.A. monetary value Notaries public shall 6657 is not furnish the provincial (Comprehensive substantial, treasurer with a copy Agrarian Reform whichever is of the subject deed Law) higher within 30 days from notarization. Tax must be paid 60 days from the date of execution of deed or from the date of decedent's death.

TAX ON BUSINESS OF PRINTING AND PUBLICATION [Sec 136, LGC]

Printing by DECS

Imposed on the business of persons engaged in printing, and/or publication of books, Not exceeding cards, posters, leaflets, 50% of 1% handbills, certificates, receipts, pamphlets, and others of similar nature Newly started business

Not exceeding 1/20 of 1%

Gross annual receipts for the preceding calendar year

Capital investment

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Receipts from printing and/or publishing of books and other reading materials prescribed by the DECS as school texts or references In the succeeding calendar year, regardless of when

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Tax Imposed

TAXATION II

Rate/Amount

FRANCHISE TAX [Sec 137, LGC] Notwithstanding any exemption granted by any law or any other special law, tax may be imposed on business enjoying a franchise Note: The case of San Pablo v. Reyes [G.R. No. 127708 (1999)] states that the explicit language Not exceeding of Section 137 of LGC, which 50% of 1 authorizes the province to impose franchise tax "notwithstanding any exemption granted by any law or other special law", is allencompassing and clear, even ho gh he phra e in lie of all a e i con ained in he MERALCO franchise upon the withdrawal of tax exemptions in the LGC.

Newly-started business

Not more than 1/20 of 1%

TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES. Levied on ordinary stones, gravel, earth and other quarry resources as defined in the Not more than NIRC, extracted from public 10% lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction (Sec 138, LGC)

Base

TAXATION LAW

Exemptions

Others business started operating, tax shall be based on gross receipts for preceding calendar year, or any fraction thereof.

Gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction

Capital investment

Fair market value in the locality per cubic meter of resources referred to in Column 1

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In the succeeding calendar year, regardless of when business started operating, tax shall be based on gross receipts for preceding calendar year, or any fraction thereof. Permit to extract sand, gravel and other quarry resources to be issued exclusively by the provincial governor pursuant to an Ordinance by the Sangguniang Panlalawigan Distribution of proceeds: Province - 30% Component City/Municipality

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Tax Imposed

PROFESSIONAL TAX. Provinces may levy annual professional tax on each person engaged in the exercise of a profession requiring government examination (Sec 139, LGC)

TAXATION II

Rate/Amount

Such amount as the Sangguniang Panlalawigan may determine, in no case to exceed P300.00

Base

Such reasonable classification by the Sangguniang Panlalawigan

TAXATION LAW

Exemptions

Professionals exclusively employed by the government

Others where resources were extracted - 30% Barangay where resources were extracted - 40% To be paid to the province where the profession is practiced, or where a principal office is maintained. A person who pays for professional tax may practice his profession anywhere in the country without being subjected to similar taxes. Employers shall require payment of professional tax as a condition for employment and annually thereafter. Payable annually, on or before Jan 31. Any person first beginning to practice a profession after January must pay the full tax before engaging therein.

AMUSEMENT TAX. Collected from proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement (Sec 140, LGC)

Not more than 10% (amended by RA 9640, 2009)

Note: The case of Alta Vista Golf and Country Club v. City of Cebu [G.R. No. 180235 (2016)] states that golf courses are not subject to amusement tax beca e people do no en er a golf course to see or view a show or performance. TAX ON DELIVERY Amount not TRUCK/VAN.. Imposed on exceeding P500

Holding of operas, concerts, dramas, recitals, painting, and art exhibitions, flower shows, musical programs, Gross receipts literary and from admission oratorical fees presentations Exception to exemption: Pop, rock, or similar concerts Every truck, van, vehicle

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In case of theaters or cinemas, tax shall first be deducted and withheld by their proprietors, lessees and operators Proceeds to be shared equally by the province and municipality where amusement places are located. Manufacturers, producers,

U.P. LAW BOC

Tax Imposed vehicles used for the delivery of distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the sanggunian, to sales outlets, or consumers in the province, whether directly or indirectly [Sec 141, LGC]

TAXATION II

Rate/Amount

Base

TAXATION LAW

Exemptions

Others wholesalers, dealers and retailers referred to in column 1 shall be exempt from tax on peddlers

b. Taxing Powers of Cities The City may levy taxes, fees, charges which the province or municipality may impose. Those levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of LGC. Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by not more than 50%; Exception: Rates of professional and amusement taxes. [Sec. 151, LGC]

c. Taxing Powers of Municipalities TAX ON VARIOUS TYPES OF BUSINESSES [SEC. 143, LGC] Rate/Amount and Base Manufacturers, assemblers, In accordance with the schedule in repackers, processors, brewers, Section 143 [a], LGC, at a rate not distillers, rectifiers, and exceeding 37 ½% of 1% of gross sales compounders of liquors, distilled or receipts for the preceding calendar spirits, and wines or year manufacturers of any article of commerce of whatever kind or nature

Wholesalers, distributors, or dealers in any article of

Schedule in Article 143 [b], LGC, at a rate not exceeding 50% of 1% of gross

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Other Information Man fac rer incl de e er person who: by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or product in such manner as to have been put in its original condition, or by any such process alters the quality of such raw material or product to reduce it to marketable shape or prepare it for any of the use of industry, or by any such process combines such material or product with others of the same or of different kinds that the finished products can be put to a special use or uses to which such material or products in their original condition could not have been put, and alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption [Sec. 131, LGC]

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commerce of whatever kind or nature Exporters and on manufacturers, millers, producers, wholesalers, distributor, dealers or retailers of essential commodities enumerated below: [RWCCLAPS] Rice and corn Wheat and or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt, and other agricultural, marine, and fresh water products, whether in original state or not Cooking oil and cooking gas Cement Laundry soap, detergents, and medicine Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs; Poultry feeds and other animal feeds; School supplies Retailers

Contractors and other independent contractors Banks and other financial institutions =

Peddlers engaged in the sale of any merchandise or article of commerce Any business which the sanggunian concerned may deem proper to tax

TAXATION II

TAXATION LAW

Rate/Amount and Base sales or receipts for the preceding calendar year Not exceeding 1/2 of rates prescribed in the schedule in Sec 143 [a, b, d], LGC (Manufacturers. Wholesalers, Retailers)

Other Information

Gross sales or receipts for the preceding calendar year of: 400k or less: 2% per annum more than 400k: 1% per annum

Barangays have the exclusive power to tax gross receipts amounting to: 50k or less: in cities 30k or less: in municipalities [Sec. 143 [d], Sec. 152, LGC]

In accordance with the schedule in Sec. 143 [e], LGC, at a rate not exceeding 50% of 1% of gross receipts for the preceding calendar year Not exceeding fifty percent 50% of 1% on the gross receipts of the preceding calendar year 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. Not exceeding P50.00 per peddler annually. Catch-all provision. If on any business subject to excise, value-added or percentage tax, rate of tax shall not exceed 2% of gross

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TAXATION II

Rate/Amount and Base

TAXATION LAW

Other Information sales or receipts of the preceding calendar year

The Sanggunian concerned may prescribe a schedule of graduated rates but in no case to exceed the rates prescribed herein

Ceiling on Business Tax Imposable on Municipalities within Metro Manila Such municipalities may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed in sec 143. [Sec. 144, LGC] TAX ON RETIREMENT ON BUSINESS Upon termination of a business subject to tax under Sec.143 and 144, a sworn statement of its gross sales or receipts for the current year shall be submitted. If the tax paid is less than the tax due, the difference shall be paid before the business is considered officially retired. [Sec. 145, LGC] *

Sec 143 f

Banks &

financial

institutions

RULES ON PAYMENT OF BUSINESS TAX 1. Taxes in Sec. 143 shall be paid for every separate or distinct establishment or place where business subject to tax is conducted. 2. One line of business is not exempted by being conducted with some other businesses for which such tax has been paid. 3. The tax on a business must be paid by the person conducting it. 4. If a person operates 2 or more businesses mentioned in Sec 143 which are taxed; computation shall be based on: a. combined total gross sales/receipts IF subject to the same tax rate b. separate reports on gross sales/receipts if subject to different tax rates Condominium corporations are not business entities, and are thus not subject to local business tax. Even though the corporation is empowered to levy assessments or dues from the unit owners, these amounts are not intended for the incurrence of profit by the corporation, but to shoulder the multitude of necessary expenses for maintenance of the condominium. [Yamane vs. BA Lepanto Condominium Corp., G.R. No. 154993 (1995)] Business tax must be based on gross receipts, it being different from gross revenue. The right to receive income, and not the actual receipt determines when to include the amount in gross income. [Ericsson Telecoms vs. City of Pasig, G.R. No. 176667 (2006)]

FEES AND CHARGES FOR REGULATION & LICENSING General rule: As a condition to the conduct of business or profession, the municipality may impose reasonable fees and charges not yet imposed by the province, commensurate with the cost of regulation, inspection and licensing. [Sec. 147, LGC] Exception: Professional tax in Sec. 139 Specific rules: 1. Municipality has power to impose reasonable rates for sealing and licensing of weights and measures [Sec. 148, LGC] 2. The Municipality has exclusive authority to grant fishery privileges in municipal waters. The sangguniang bayan may: a. 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 b. Grant marginal fishermen 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 free of rental, fee, charge or imposition. c. Issue licenses for the operation of fishing vessels of three [3] tons or less d. Penalize the use of explosives, noxious or poisonous substances, electricity, muro-ami, and other deleterious methods of fishing and prescribe a criminal penalty therefor [Sec. 149, LGC] SITUS OF TAX COLLECTED According to Sec. 150 of the LGC, situs shall be determined by the following rules: RULE 1: In case of persons maintaining/operating a branch or sales outlet making the sale or transaction, the tax shall be recorded in said branch or sales outlet and paid to the municipality/city where the branch or sales outlet is located.

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TAXATION II

RULE 2: Where there is NO branch or sales outlet in the city/municipality where the sale is made, sale shall be recorded in the principal office and the tax shall be paid to such city/municipality. RULE 3: In the case of manufacturers, contractors, producers, and exporters having factories, project offices, plants, and plantations, proceeds shall be allocated as follows: 1. 30% of sales recorded in the principal office shall be made taxable by the city/municipality where the principal office is located 2. 70% shall be taxable by the city/municipality where the factory, project office, plant, or plantation is located Illustration of Rules 1 to 3 A company has a principal office in Mandaluyong, while its sales office and factory are in Sta. Rosa: 1. Sales made in Mandaluyong will be recorded Mandaluyong; 2. Sales made in Sta. Rosa by the Sta. Rosa sales office will be recorded in Sta. Rosa; 3. Sales made in Los Baños, Calamba or Cabuyao [i.e., delivered to customers located in those places and not made by the Sta. Rosa sales office], will be recorded in Mandaluyong; 4. Aside from sales made in Sta. Rosa, 70% of sales recorded in Mandaluyong shall be taxable by Sta. Rosa since a factory is located there. RULE 4: In case the plantation is located in a place other than the place where the factory is located, the 70% in Rule 3 will be divided as follows: 60% to the city/municipality where the factory is located 40% to the city/municipality where the plantation is located RULE 5: In case of 2 or more factories, plantations, etc. in different localities, the 70% shall be prorated among the localities where the factories, plantations, etc. are located in proportion to their respective volume of production. Illustration: A company has a principal office in Valenzuela and has its factory in Bulacan. It also has branches selling merchandise in Muntinlupa, Bacolod, Cebu. 1. Sales made in Valenzuela will be recorded in Valenzuela; 2. Sales made in Muntinlupa, Bacolod and Cebu shall be taxable by the said cities;

3.

TAXATION LAW

Sales in all other places which do not have a sales branch shall be distributed as follows: 30% to Valenzuela and 70% to Bulacan.

Note: The sales allocation shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant, or plantation is located. Excise Tax: Tax is imposed on the performance of an act or occupation, enjoyment of a privilege. The power to levy such tax depends on the place in which the act is performed or the occupation is engaged in; not upon the location of the office. [Allied Thread Co., Inc. v. City Mayor of Manila, G.R. No. L-40296 (1984)] Sales Tax: It is the place of the consummation of the sale, associated with the delivery of the things which are the subject matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place of the perfection of the contract. [Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur, G.R. No. L-12680 (1959)] Branch or Sales Office a fixed place in a locality which conducts operations of the business as an extension of the principal office. Offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received thereat, are not branch or sales offices as herein contemplated. A warehouse which accepts orders and/or issues sales invoices independent of a branch with sales office shall be considered as a sales office. [Art. 243(a)(2) of the LGC IRR]

d. Taxing Powers of Barangays The following shall exclusively accrue to the barangays: 1. Taxes on Stores or Retailers with Fixed Business Establishments. a. Rate: not greater than one percent (1%) b. Base: 1. Cities: gross sales or receipts of the preceding calendar year of P50,000.00 or less 2. Municipalities: gross sales or receipts of P30,000.00 or less 2. Service Fees or Charges. For services rendered in connection with the regulations or the use of barangay-owned properties or facilities such as palay, copra, or tobacco dryers.

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3.

4.

TAXATION II

Barangay Clearance. A city or municipality cannot issue a permit for business without a clearance from the barangay concerned. The sangguniang barangay may impose a reasonable fee on the clearance. Other Charges Allowed. a. charges on commercial breeding of fighting cocks, cockfights and cockpits; b. charges on places of recreation which charge admission fees; and c. charges on billboards, signboards, neon signs, and outdoor advertisements. [Sec. 152, LGC]

e. Common Revenue Raising Powers 1.

Service fees and charges LGUs may impose and collect such reasonable fees and charges for services rendered. [Sec. 153, LGC]

TAXATION LAW

3. Toll fees or charges a. The sanggunian may prescribe the terms and conditions and fix the rates for the imposition of toll fees or charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the local government unit concerned. b. The sanggunian may also discontinue the collection of the tolls when public safety and welfare requires. c. No toll fees or charges shall be collected from: 1. Officers and enlisted men of the AFP and members of the PNP on mission 2. Post office personnel delivering mail 3. Physically-handicapped 4. Disabled citizens who are sixty-five (65) years or older. [Sec. 155, LGC]

2. Public utility charges LGUs may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction. [Sec. 154, LGC]

f. Community Tax Who may levy [Sec. 156, LGC]

Cities or municipalities 1.

Persons Liable [Sec. 157 & 158, LGC]

Rates [Sec. 157 & 158, LGC]

Individuals who are: Inhabitants of the Philippines 18 years of age or over Either: Regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year Engaged in business or occupation Owns real property with an aggregate assessed value of P1,000 or more Is required by law to file an income tax return 2. Juridical Persons Every corporation no matter how created or organized, Whether domestic or resident foreign, Engaged in or doing business in the Philippines 1. Individuals a. Annual community tax of P5.00 PLUS annual additional tax of P1.00 per P1,000.00 of income regardless whether from business, exercise of profession or property b. Never to exceed P5000 c. Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based on total property owned by them and the total gross receipts or earnings derived therefrom Page 221 of 290

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TAXATION II

TAXATION LAW

2.

Persons Exempt [Sec. 159, LGC] Place of Payment [Sec. 160, LGC]

Juridical Persons a. Annual community tax of P500.00 PLUS annual additional tax of not more than P10,000.00 according to the ff. schedule: P2.00 for every P5,000 worth of real property in the Philippines owned during the preceding year based P2.00 for every P5,000.00 of gross receipts derived from business in the Philippines during the preceding year. b. Dividends received by a corporation from another corporation shall be deemed part of the gross receipts or earnings for purposes of computing additional tax. 1. Diplomatic and consular representatives 2. Transient visitors who stay in the Philippines for not more than 3 months Where individual resides, or where the principal office of the juridical entity is located. Accrues on the 1st day of January of each year to be paid not later than the last day of February of each year.

Time of Payment [Sec 161, LGC]

Penalty

If a person reaches 18 years of age or otherwise loses the benefit of exemption on or before June 30, he shall be liable on the day he reaches such age or upon the day the exemption ends; if on or before the March 31, he shall have 20 days to pay without being delinquent. Persons who come to reside in the Philippines, or reach 18 years old, or ceases to belong to an exempt class on or after July 1, shall not be subject to community tax for that year. Corporations established and organized on or before June 30 shall be liable to community tax for that year; those on or before March 31 shall have 20 days to pay without becoming delinquent; if on or after July 1, shall not be subject to community tax for that year. If unpaid within the prescribed period, an interest of 24% shall be added per annum from the due date until payment. [Sec. 161, LGC]

Presentation of Community Tax Certificate is necessary when an individual subject to community tax: 1. Acknowledges any document before a notary public 2. takes the oath of office upon election or appointment to any position in the government service 3. receives any license, certificate, or permit from any public authority 4. pays any tax or fee 5. receives any money from any public fund 6. transacts other official business 7. receives any salary or wage from any person or commission Presentation of certificate is not needed in the registration of a voter. [Sec. 163, LGC] The city or municipal treasurer shall deputize the barangay treasurers to collect, provided the latter be bonded.

If: actually and directly collected by the city or municipal treasurer, community tax accrues entirely to the general fund. If: collected through the barangay treasurers, apportioned equally. [Sec. 164, LGC]

6. Common Limitations on the

÷

Taxing Powers of LGUs

Unless otherwise provided, the following cannot be levied by the local governments: [IDEC-GAPEPGRR-ECN]: a. Income tax, except when levied on banks and other financial institutions; b. Documentary stamp tax; c. Estate tax, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided; d. O Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the LGU concerned;

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e.

TAXATION II

Taxes, fees or charges on Goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or otherwise Sec.133(e) prohibits the imposition, in the guise of wharfage, of fees, as well as all other taxes or charges in any form whatsoever, on goods or merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited. [See Palma Development Corp. v. Municipality of Managas, G.R. No. 152492 (2003)]

f. g.

h. i. j.

k. l.

m. n.

o.

Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen; Taxes on business enterprises certified to by the Board of Investments as Pioneer or non-pioneer for a period of 6 and 4 years, respectively from the date of registration; Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; Taxes on the Gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in the Code; Taxes on premiums paid by way or Reinsurance or retrocession; Taxes, fees or charges for the Registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles; Taxes, fees, or other charges on Philippine products actually Exported, except as otherwise provided; Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under the Cooperative Code of the Philippines; and Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. [Sec. 133, LGC]

TAXATION LAW

Doctrine of Preemption. Preemp ion in he ma er of taxation simply refers to an instance where the national government elects to tax a particular area, impliedly withholding from the local government the delegated power to tax the same field. This doctrine primarily rests upon the intention of Congress. Conversely, should Congress allow municipal corporations to cover fields of taxation it already occupies, then the doctrine of preemption will not appl . [Victorias Milling v. Municipality of Victoria, G.R. No. L-21183 (1968)]

7. Collection of Business Tax a. Tax Period and Manner of Payment Based on calendar year, unless otherwise provided. May be paid annually or in quarterly instalments. [Sec. 165, LGC]

b. Accrual of Tax General rule: Accrues on the first day of January of each year Except: New taxes, fees or charges, or changes in the rates thereof which shall accrue on the first day of the quarter next following the effectivity of the ordinance imposing such new levies or rates. [Sec. 166, LGC]

c. Time of Payment Within the 20 days of January or of each subsequent quarter. [i.e., Jan 20, Apr 20, July 20, and Oct 20]. It may be extended by the sanggunian for justifiable reasons, without surcharges or penalties. Extension cannot exceed 6 months. [Sec. 167, LGC]

d. Penalties on Unpaid Taxes, Fees or Charges 1. 2. 3.

Surcharge not exceeding 25% on taxes, fees or charges NOT paid on time; and Interest not exceeding 2% per month of the unpaid taxes, fees or charges including surcharges, until the amount is fully paid In no case shall the total interest exceed 36 months. [Sec. 168, LGC]

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TAXATION II

TAXATION LAW

e. Authority of Treasurer in Collection and Inspection of Books

written protest with the local treasurer contesting the assessment; otherwise it shall become final and executory. The local treasurer shall decide within 60 days from the time of filing.

All local taxes, fees and charges shall be collected by the local treasurer or their duly authorized deputies [Sec. 170, LGC]

If the protest is found to be wholly or partly meritorious, a notice cancelling wholly or partially the assessment will be issued. If the protest was denied or when the 60-day period already lapsed, the taxpayer shall have 30 days from the receipt of denial or the end of the 60-day period to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable. [Sec. 195, LGC]

The local treasurer may, by himself or through his deputies duly authorized in writing, examine the books, accounts, and other pertinent records of any person subject to local taxes, fees and charges in order to ascertain, assess and collect the correct amount of the tax, fee or charge. Examination must be done during business hours, only once for every tax period and shall be certified to by the examining official. [Sec. 171, LGC]

8. Ta

a

R

a. Periods of Assessment and Collection of Local Taxes, Fees or Charges Assessment: Within 5 years from the date they become due In case of Fraud or Intent to Evade Tax: Within 10 years from discovery of fraud or intent to evade payment. [Sec. 194, LGC] Collection: 5 years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of said period. Instances When Running of Prescription Periods is Suspended 1. When the treasurer is legally prevented from making the assessment or collection 2. When taxpayer requests for reinvestigation and executes a waiver in writing before lapse of the period for assessment or collection. 3. When the taxpayer is out of the country or otherwise cannot be located [Sec. 194 (d), LGC]

b. Protest of Assessment Within 60 days from the receipt of the notice of assessment issued by the local treasurer or his duly authorized representative, the taxpayer may file a

The court of competent jurisdiction where an appeal can be made is the Regional Trial Courts then Court of Tax Appeals via a Petition for Review to the CTA Division under Rule 42 (if from RTC acting original), or Petition for Review under Rule 43 (if from RTC acting in its appellate jurisdiction).

c. Question the newly enacted ordinance Procedure: 1. Appeal within 30 days from effectivity of the ordinance to the Secretary of Justice 2. Secretary must render a decision within 60 days from receipt of appeal 3. Within 30 days from the lapse of the 60 days without any action from the Secretary of Justice, or within 30 days from receipt of decision, the aggrieved taxpayer may go to court NOTE: Secretary of Justice can only review the constitutionality or legality of the tax ordinance, and, if warranted, to revoke it on either or both of these grounds and there is no need for a written protest when disputing an ordinance [Ingles, p. 537]

d. Claim for Refund of Tax Credit for Erroneously or Illegally Collected Tax, Fee or Charge Requires a written claim for refund or credit to be filed with local treasurer before protest is entertained, which must be brought within 2 years from payment of tax or from the date the taxpayer became entitled to refund or credit. After the expiration of the 2-year period, no case or proceeding shall be entertained in any court. An appeal can be filed before the court of

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TAXATION II

competent jurisdiction 30 days from receipt of denial of claim. [Sec. 196, LGC]

9. Civil Remedies by the LGU

for Collection of Revenues

TAXATION LAW

(agent if absent from the Philippines, or occupant of the property in question if none) c. Report on any levy d. Annotation of the levy on the tax declaration and the certificate of title e. Advertisement and Sale [Sec. 178, LGC]

a. L a G L Delinquent Taxes, Fees or Charges

Further distraint or levy The remedies by distraint or levy may be repeated if necessary until the full amount due, including all expenses, is collected [Sec. 184, LGC]

Non-payment of a tax, fee or charge creates a lien superior to all liens or encumbrances in favor of any other person, enforceable by administrative or judicial action.

Note: Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the local government unit concerned [Sec. 174, LGC]. 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. [Sec. 176, LGC]

The lien may only be extinguished upon full payment of the delinquent local taxes, fees, and charges including related surcharges and interests. [Sec. 173, LGC]

b. Civil Remedies, in General 1. Administrative action DISTRAINT OF PERSONAL PROPERTY Personal properties subject to distraint: goods, chattels or effects and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property Procedure: [Sec. 175, LGC] a. Seizure of personal property b. Accounting of distrained goods c. Publication of time and place of sale and the articles distrained d. Release of distrained property upon payment prior to sale e. Procedure of sale f. Disposition of proceeds LEVY OF REAL PROPERTY: Levy upon Real Property and Interest in or Rights to Real Property Procedure [Sec. 176, LGC] a. Preparation of a duly authenticated certificate by the LGU Treasurer effecting the levy on the real property b. Service of written notice of levy to the assessor, Register of Deeds, and delinquent taxpayer

Exemption of personal property from distraint or levy (ToB-CUPLA) a. Tools and implements necessarily used by the taxpayer in his trade or employment b. One 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 P10,000 e. Provisions, including crops, actually provided for individual or family use sufficient for 4 months f. the professional Libraries of doctors, engineers, one fishing boat and net, not exceeding the total value of P10,000 by the lawful use of which a fisherman earns his livelihood g. any material or Article forming part of a house or improvement of any real property Appeal before the Secretary of Justice (Procedure) a. Appeal to the Secretary of Justice within 30 days from effectivity b. The Secretary of Justice has 60 days to decide but an appeal does not suspend the effectivity of the ordinance

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I

c.

TAXATION II

Wi hin 30 da from he Secre ar of J ice decision or after 60 days inaction, an appeal may be filed with the RTC. [Sec. 187, LGC]

0

Penalty on local treasurer for failure to issue and execute warrant of distraint or levy Automatically dismissed from the service after due notice and hearing [Sec. 177, LGC]

B. Real Property Taxation 1. Fundamental Principles a.

The civil action shall be filed by the local treasurer. [Sec. 183, LGC] LGC does not contain a provision prohibiting courts from enjoining the collection of local taxes. Such lapse may have allowed preliminary injunction under Rule 58, ROC where local taxes are involved. [Valley Trading Co. vs. CFI of Isabela, G.R. No. L-49529(1989); Angeles City v. Angeles City Electric Corporation, G.R. No. 166134 (2010)]

Current fair market value is the basis for assessment 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. [Sec. 201, LGC]

2. Judicial Action The local government may institute an ordinary civil action with regular courts of proper jurisdiction for the collection of delinquent taxes, fees, charges or other revenues.

TAXATION LAW

b. Actual use shall be the basis of classification for assessment 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. Actual Use- refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof [Sec. 199 (b), LGC] MCIAA v. Marcos [G.R. No. 120082 (1996)]: U age mean direc , immedia e and ac al application of the property c. Private persons cannot be left to the appraisal, assessment, levy and collection of real property tax. d. Uniform classification within each local government unit shall be observed. e. equitable appraisal and assessment is required. [Sec. 197, LGC]

2. Nature of Real Property Tax a.

It is a direct tax on the ownership or use of real property. b. It is an ad valorem tax. Value is the tax base. c. It is proportionate because the tax is calculated on the basis of a certain percentage of the value assessed. d. It creates a single, indivisible obligation. e. It attaches on the property [i.e., a lien] and is enforceable against it. f. With respect to LGUs, it is levied thru a delegated power

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TAXATION II

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 may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted. [Sec. 232, LGC] The following may levy real property tax: 1. Province 2. City 3. A municipality within the Metro Manila area Coverage; for a Province, or a City or Municipality within Metro Manila 1. Land 2. Building 3. Machinery 4. Other improvements not specifically exempted [Sec. 232, LGC] The rate shall be as follows: 1. Province: not exceeding one percent (1%) of the assessed value of real property; and 2. City or municipality within Metro Manila: not exceeding two percent (2%) of the assessed value of real property. [Sec. 233, LGC] Special Levy on Idle Lands A province, or city or municipality within Metro Manila may levy an annual tax on idle lands at the rate not exceeding five percent [5%] of the assessed value of the property in addition to the basic tax Lands covered 1. Agricultural Lands More than one hectare in area suitable for cultivation, dairying, inland fishery, and other agricultural uses, one-half of which remain uncultivated or unimproved 2. Other than Agricultural More than one thousand square meters in area one half of which remain unutilized or unimproved [Sec. 236 and 237, LGC] 3. Residential lots in subdivisions Regardless of land area; lot owner shall be liable if ownership of the lot has been transferred; otherwise, developer shall be liable for the additional tax.

TAXATION LAW

Exempt Idle Lands Lands exempt by reason of Force majeure, Civil disturbance, Natural calamity or Any cause or circumstance which physically or legally prevents improving, utilizing or cultivating the same. [Sec. 238, LGC] Special Levy for Public Works A tax ordinance shall describe with reasonable accuracy the nature, extent and location of the public works to be undertaken, the estimated cost, the metes and bounds by monuments and lines and the number of annual installments which should not be less than 5 nor more than 10 years. The sanggunian may fix different rates for different parts or sections thereof, depending on whether such land is more or less benefited by the proposed work. [Sec. 241, LGC] Special Education Fund (SEF) A province, or city or municipality within Metro Manila may levy and collect an annual tax of one percent (1%) on the assessed value of real property which shall be in addition to the basic real property tax.

b. Exempt from Real Property Tax 1.

2.

3.

4. 5.

Owned by the Republic of the Philippines or any of its political subdivisions except when beneficial use is granted for a consideration or to a taxable person. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, nonprofit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes. Machinery and equipment actually, directly and exclusively used by local Water utilities and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power. Real property owned by duly registered cooperatives as provided for under Republic Act No. 6938 [Cooperative Code of the Philippines]. Machinery and equipment used for pollution control and Environmental protection. [Sec. 234, LGC]

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Provincial Assessor of Marinduque v. CA [G.R. No. 170532 (2009)]: A claim for exemption under Sec. 234 (e) should be supported by evidence that the property sought to be exempt is actually, directly and exclusively used for pollution control and environmental protection. Proof of Exemption 1. Documentary evidence such as affidavits, bylaws, contract, articles of incorporation 2. Given to local assessor 3. Within 30 days from date of declaration 4. Failure to file, will be listed as in Assessment Rolls as taxable GOCCs GOCCs are not covered by the exemption since the exemption only refers to instrumentalities without personalities distinct from the government. [Philippine Ports Authority vs. City of Iloilo, G.R. No. 109791 (2003)]

Mactan Airport Authority vs. Marcos, G.R. No. 1120082 (1996)

Manila Airport Authority vs. CA, G.R. No. 155650 (2006)

Provision involved Sec 133 (o), LGC. LGUs not allowed to le [o] taxes/fees/ charges of any kind on the na ional go , its agencies, instrumentalities and LGUs. Sec 234 (a), LGC. Properties exempt from RPT: real properties owned by the Republic or any of its political subdivisions.

Sec 133 (o), LGC Sec 234 (a), LGC

TAXATION LAW

Provision involved Mactan Airport Authority vs. City of LapuLapu, G.R. No. 181756 (2015)

SC Ruling The Mactan Airport is a government instrumentality; only portions of the land leased to taxable persons like private parties are subject to real estate tax.

Charitable Institutions A charitable institution does not lose its character and its exemption simply because it derives income from paying patients so long as the money received is devoted to the charitable object it was intended to achieve, and no money inures to the benefit of persons managing the institution. [Lung Center of the Philippines vs. Quezon City, G.R. No. 144104 (2004)] Property leased to private entities is not exempt from RPT, as it is not actually, directly and exclusively used for charitable purposes. Portions of the land occupied by the hospital and portions used for its patients, whether paying or non-paying, are exempt from real property taxes.

SC Ruling

Airport Authority is a GOCC, not exempt from RPT. Legislature in amending the law specifically deleted GOCCs from the enumeration in Sec 234 (a).

MIAA falls under the term instrumentality outside the scope of LGS local taxing powers under Sec 133[o].

4. Appraisal and Assessment of

Real Property Tax

a. Rule on Appraisal of Real Property Tax at Fair Market Value All real property shall be appraised at the current and fair market value prevailing at the locality where the property is situated. [Sec. 201, LGC] FMV is the price at which property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy. [Sec. 199(l), LGC]

b. Declaration of Real Property Declaration by the Owner or Administrator Prepare a sworn statement declaring the true value of the property which shall be the current and fair market value of the property.

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TAXATION LAW

It must contain a sufficient description of the property to enable the assessor or his deputy to identify the same for assessment purposes

Real property of a corporation, partnership or association Same manner as an individual

The declaration must be filed with the assessor once every three (3) years during the period from January 1 to June 30. [Sec. 202, LGC]

Real property owned by the Republic of the Philippines, its instrumentalities, political subdivision, the beneficial use has been granted to a taxable person

Declaration by Any Person Acquiring Real Property or Making Improvements The sworn statement declaring the true value of the property must be filed to the provincial, city or municipal assessor within sixty [60] days after the acquisition or upon completion or occupancy of the improvement, whichever comes earlier. [Sec. 203, LGC] Declaration by the Provincial or City or Municipal Assessor When the person required to file the sworn declaration refuses or fails to make such declaration, the provincial, city or municipal assessor shall declare the property in the name of the defaulting owner. Notice of Transfer of Real Property Any person who shall transfer real property ownership to another shall notify the provincial, city or municipal assessor within sixty [60] days from the date of such transfer. The notification shall include: 1. Mode of transfer, 2. Description of the property alienated, and 3. Name and address of the transferee [Sec. 208, LGC]

In the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease. [Sec. 205, LGC]

d. Preparation of Schedules of FMV Authority of assessor to take evidence The assessor of the province, city or municipality or his deputy may summon the owners or persons having legal interest therein and witnesses, administer oaths, and take deposition concerning the property, its ownership, amount nature, and value. [Sec. 213, LGC] Amendment of schedule of fair market value Before any general revision of property assessment is made, there shall be prepared a schedule of FMV by the provincial, city or municipal assessors; which shall be published in a newspaper of general circulation or in the absence thereof, shall be posted in the provincial capital, city or municipal hall and in two other conspicuous public places therein. [Sec. 212, LGC]

e. Classes of Real Property 1.

c. Listing of Real Property in the Assessment Rolls

2.

The local assessor must maintain an assessment roll wherein all real property, whether taxable or exempt, located within the territorial jurisdiction of the LGU, is listed. Real property in general Shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property. For undivided real property May be in the name of the estate or of the heirs and devisees, or in the name of one or more co-owners

3.

4.

Residential Is land principally devoted to habitation Agricultural Is land devoted principally to the planting of trees, raising of crops, livestock and poultry, dairying, salt making, inland fishing and similar aquaculture activities and other agricultural activities and is not classified as mineral, timber, residential, commercial or industrial land Commercial Is land devoted principally for the object of profit and is not classified as agricultural, industrial, mineral, timber or residential land Industrial Is land devoted principally to industrial activity as capital investment and is not classified as agricultural, commercial, timber, mineral or residential land

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5.

6. 7.

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Mineral Are lands in which minerals exist in sufficient quantity or grade to justify the necessary expenditures to extract and utilize such minerals Timberland Special all lands, buildings and other improvements actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and GOCCs rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power [Sec. 216, LGC]

N.B. The Local Government Code contains no defini ion of he erm real proper . Therefore, reference should be made to the enumeration of real property under Art. 415 of the Civil Code, as follows: 1. Land, buildings, roads and constructions of all kinds adhered to the soil; 2. Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; 3. Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; 4. Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; 5. Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; 6. Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included; 7. Fertilizer actually used on a piece of land; 8. Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant; 9. Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast; 10. Contracts for public works, and servitudes and other real rights over immovable property.

TAXATION LAW

Machinery

Brand New

All other Cases

Depreciation Allowance

The FMV is the acquisition cost If the machinery is imported, the acquisition cost includes freight, insurance, bank and other charges, brokerage, arrastre and handling, duties and taxes, plus cost of inland transportation, handling, and installation charges at the present site. [Sec. 224, LGC] FMV is determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement/ reproduction cost. [Sec. 224, LGC] Rate not exceeding five percent (5%) of its original cost or replacement cost, for each year of use The remaining value shall be fixed at not less than twenty percent (20%) of such original, replacement or reproduction cost for so long as the machinery is useful and in operation. [Sec. 225, LGC]

f. Actual Use of Property as Basis of Assessment Real property shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it. [Sec. 217, LGC] Unpaid realty taxes attach to the property and are chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the RPT on the subsequent owner which was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. [Estate of Lim v. City of Manila, G.R. No. 90639 (1990)]

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TAXATION II

TAXATION LAW

5. Collection of Real Property

g. Assessment of Real Property Assessment levels Assessment level is the percentage applied to the fair market value to determine the taxable value of the property [Sec. 199(g), LGC] Assessment levels shall be fixed by ordinances of the sanggunian at rates not exceeding those prescribed in Sec. 218 Assessed Value/ Taxable Value = Fair Market Value x Assessment Level [Sec. 199(h), LGC] General revisions of assessments and property classification The local assessor shall undertake a general revision of real property assessments every 3 years. [Sec. 219, LGC] Date of effectivity of assessment or reassessment General rule: All assessments or reassessments made after the first day of January of any year shall take effect on the first day of January of any year Exceptions: Reassessments due to 1. partial or total destruction 2. major change in actual use; 3. great and sudden inflation or deflation of real property values; 4. gross illegality of the assessment when made; or 5. any other abnormal cause shall be made within ninety (90) days from the date of any cause and shall take effect at the beginning of the quarter next following the reassessment. [Sec. 221, LGC] Assessment of property subject to back taxes Property declared for the first time: assessed for taxes for the period during which it would have been liable but in no case for more than ten [10] years prior to the date of initial assessment [Sec. 222, LGC] 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 local assessor shall within thirty [30] days give written notice of the new or revised assessment to the person in whose name the property is being declared. Notice may be given personally or by registered mail or through the assistance of the punong barangay to the last known address of the person to be served. [Sec. 223, LGC]

Tax

a. Date of Accrual of Real Property Tax and Special Levies Real property tax for any year shall accrue on the first day of January. [Sec. 246, LGC]

b. Collection of Tax Collecting authority: The local treasurer He may deputize the barangay treasurer to collect all taxes upon filing of a bond. [Sec. 247, LGC] Duty of assessor to furnish local treasurer with assessment rolls The provincial, city or municipal assessor shall prepare and submit to the local treasurer, on or before the 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. [Sec. 248, LGC] Notice of time for collection of tax On or before the 31st of January or on any date prescribed, the local treasurer shall 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. The notice shall also be published in a newspaper of general circulation in the locality once a week for two consecutive weeks. [Sec. 249, LGC]

c. Period Within Which to Collect Real Property Tax Within five years from the date they become due. Within ten years from discovery of fraud, in case there is fraud or intent to evade. It shall be suspended when: 1. The local treasurer is legally prevented to collect tax. 2. The owner or property requests for reinvestigation and writes a waiver before expiration of period to collect.

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3.

TAXATION II

The owner of property is out of the country or cannot be located. [Sec. 270, LGC]

d. Special Rules on Payment Payment of real property tax in installments Payment of real property tax and the additional tax for the Special Education Fund, without interest, may be made in four [4] equal instalments: 1st : March 31st 2nd : June 30th 3rd : September 30th 4th : December 31st This shall not apply to special levies which shall be governed by ordinance of the sanggunian concerned. Payments of real property taxes shall first be applied to prior years delinquencies, interests and penalties, if any, and only after the delinquencies are settled may tax payments be credited for the current period. [Sec. 250, LGC] Interests on unpaid real property tax In case of failure to pay the basic real property tax or any other tax when due shall subject the taxpayer to the payment of interest at the rate of two percent per month on the unpaid amount or a fraction thereof until the delinquent tax shall have been fully paid. But the total interest on the unpaid tax shall not exceed thirty-six months. [Sec. 255, LGC] Condonation of real property tax By SANGGUNIAN: in case of general failure of crops or substantial decrease in the price of agricultural or agri-based products or calamity in any LGU [Sec. 276, LGC] By the PRESIDENT of the Philippines: when public interest so requires [Sec. 277, LGC]

e. Remedies of LGUs for Collection of Real Property Tax 1.

Issuance of notice of delinquency for real property tax payment

2. L a G L The basic real property tax shall constitute 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

TAXATION LAW

and may only be extinguished upon payment of the tax and the related interests and expenses. [Sec. 257, LGC] 3. Levy Upon the failure to pay the tax when due, the local treasurer shall issue a warrant levying the real property subject to tax. The warrant shall include a duly authenticated certificate showing the name of the owner or person having legal interest therein, description of the property, amount of the tax due and interest thereon. Warrant must be mailed or served to owner or person having legal interest in the property. Written notice of levy must be mailed or served to the assessor and the Register of Deeds where the property is located. The Register of Deeds must annotate the levy on the tax declaration and certificate of title. [Sec. 258, LGC] Failure to issue or execute the warrant of levy within one year from the time the tax becomes delinquent or within thirty days from the date of the issuance thereof shall be dismissed from service. [Sec. 259, LGC] 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. [Sec. 264, LGC] 5. Further levy until full payment of amount due Levy may be repeated if necessary until the full due, including all expenses, is collected. [Sec. 265, LGC]

6. Refund or Credit of Real

Property Tax

PAYMENT UNDER PROTEST This is resorted to when the taxpayer questions the excessiveness of the amount of tax imposed on him.

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Procedure 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." b. The protest in writing must be filed within thirty (30) days from payment of the tax with the local treasurer. c. The treasurer shall decide the protest within sixty (60) days from receipt. d. In the event that the protest is denied or upon the lapse of the 60-day period, the taxpayer may avail of the procedure in questioning an assessment: Appeal to the LBAA within 60 days; Then appeal to the CBAA within 30 days; Appeal to the CTA En Banc within 30 days. [Sec. 252, LGC] Repayment of excessive collections When an assessment of real property tax 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 local treasurer shall decide the claim within sixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, the taxpayer may follow the procedure in questioning an assessment (Appeal to LBAA, and then CBAA, and then CTA En Banc). [Sec. 253, LGC]

7. Ta

a

R

a. Contesting an Assessment of Value of Real Property APPEAL TO THE LOCAL BOARD OF ASSESSMENT APPEALS (LBAA) 1. Appeal must be filed within 60 days from the date of receipt of the written notice of assessment 2. By filing a petition under oath in the form prescribed for the purpose 3. Copies of tax declarations and other affidavits or documents must be submitted [Sec. 226, LGC] The LBAA shall decide the appeal within 120 days from the date of receipt of such appeal.

TAXATION LAW

The LBAA shall have the power to summon witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena duces tecum and/or subpoena The LBAA must furnish the appellant a copy of the decision of the board. [Sec. 229, LGC] Fels Energy v. Province of Batangas [G.R. No. 168557 (2007)]: Under Section 226 of R.A. No 7160, the last action of the local assessor on a particular assessment shall be the notice of assessment; it is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure likewise does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor. Victorias Milling v. CTA [G.R. No. L-24213 (1968)]: The failure to appeal within the statutory period renders the assessment final and unappealable. A taxpayer who is not satisfied with the assessment of his property should appeal to the Local Board of Assessment Appeals within 60 days from receipt of the written notice of assessment. The filing of a petition for injunction in the Regional Trial Court upon the issuance of a warrant of levy is not in accordance with the remedies provided in the LGC. [Republic vs. City of Kidapawan, G.R. No. 166651 (2005)] APPEAL TO THE CENTRAL BOARD OF ASSESSMENT APPEALS (CBAA) Appeal must be filed within 30 days from the receipt of the decision of LBAA [Sec. 229, LGC] EFFECT OF PAYMENT OF TAX Appeal on assessments of real property shall not suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city assessor without prejudice to the subsequent readjustment depending upon the final outcome of the appeal. [Sec. 231, LGC]

b. Payment of Real Property tax under protest a. File protest with local treasurer Protest must be filed with the local treasurer. No protest shall be entertained unless the tax is first paid. The protest must be in writing and filed within 30 days from payment of the tax to the local treasurer.

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b. c. d.

e.

TAXATION II

Meralco v. Nelia Barlis [G.R. No. 114231 (2001)]: The trial court has no jurisdiction to issue a writ of prohibition which seeks to set aside the warrant of garnishment over petitioner bank deposit in satisfaction of real property taxes without paying first under protest the tax assessed and without exhausting available administrative remedies. The local treasurer shall decide the protest within 60 days from receipt. Appeal to the Local Board of Assessment Appeals Appeal to the Central Board of Assessment Appeals Appeal to the CTA En Banc Appeal must be filed through a petition for review within 30 days from the receipt of the decision of CBAA [Sec. 11, R.A. 1125 as amended] Appeal to the SC Appeal must be filed within 15 days from receipt of decision of the CTA [Rule 45, Rules of Court]

TAXATION LAW

The appeal shall not have the effect of suspending the effectivity of the tax ordinance and the accrual and payment of the tax. Within 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. [Sec. 187, LGC] Assailing the validity of a tax sale No court shall entertain any action assailing the validity of any sale at public auction until the taxpayer shall have deposited with the court the amount for which the real property was sold, together with interest of two percent per month from the date of sale to the time of the institution of the action. [Sec. 267, LGC]

Erroneous Assessment vs. Illegal Assessment An erroneous assessment presupposes that the taxpayer is subject to the tax but is disputing the correctness of the amount assessed. With an erroneous assessment, the taxpayer claims that the local assessor erred in determining any of the items for computing the real property tax, i.e., the value of the real property or the portion thereof subject to the tax and the proper assessment levels. In case of an erroneous assessment, the taxpayer must exhaust the administrative remedies provided under the LGC. On the other hand, an assessment is illegal if it was made without the authority under the law. In case of an illegal assessment, the taxpayer may directly resort to judicial action without paying under protest the assessed tax and filing an appeal with the Local and Central Boards of Assessment Appeals. [City of LapuLapu v. PEZA, G.R. Nos. 184203 and 187583 (2014)]

c. Judicial Question on the legality of a tax ordinance Any question on the constitutionality or legality of a tax ordinance may be raised on appeal within 30 days from effectivity to the Secretary of Justice who shall render a decision within 60 days from the date of receipt of the appeal.

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TAXATION LAW

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax Purposes-L a G C For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto Owner declares real property once every 3 years (sec. 202) w/n Jan 1 to June 30

START

Submit documents supporting exemption w/ in 30 days from declaration (sec. 206)

Required Documents submitted w/in 30 days? No

Property proven as tax exempt?

Yes

Property shall be listed as taxable in the assessment roll (sec. 206)

Assessor prepares assessment rolls wherein real property shall be listed, valued and assessed (sec. 205)

Assessor declares real property if owner/ administrator fails to do so (sec. 204)

Owner may claim for tax exemption (sec. 206)

Yes

Is real property tax exempt?

Property shall be dropped from assessment roll (sec. 206)

Yes

No END

Within 30 days from assessment, assessor sends notice to owner (sec. 223)

No

Owner may protest assessment within 60 days from receipt of notice to the Local Board of Assessment Appeals (LBAA) (Sec. 226)

END

Appeal to the Supreme Court w/ in 15 days

LBAA must decide within 120 days from receipt of appeal (sec. 229)

If CBAA rejects protest, owner may appeal to the CTA en banc within 30 days from receipt of decision

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If LBAA rejects protest, owner may appeal to the Central Board of Assessment Appeals (CBAA) w/in 30 days from receipt of notice (Sec. 229)

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TAXATION II

Flowchart VI: Ta a Tax-L G C

R

I

TAXATION LAW

C

R a P

For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto LT- Local Treasurer LGU - Local Government Unit LBAA- Local Board of Assessment Appeals CBAA- Central Board of Assessment Appeals CTA- Court of Tax Appeals

START

Assessor submits assessment roll to local treasurer (sec. 248)

Amount of tax protested shall be refunded or applied as tax credit (Sec. 252)

LT posts notice of deadline for payment at a conspicuous place at the LGU hall OR publish the same in a newspaper of general circulation in the LGU 1x a week for 2 consecutive weeks (sec. 249)

Yes

LT grants protest?

Yes

LT collects the tax starting Jan 1 of the calendar year. (Sec. 257)

LT decides w/in 60 days?

Owner pays the tax. Written protest must be filed with the local treasurer w/in 30 days from payment. (sec. 252)

LT must decide w/ in 60 days from receipt of protest (sec. 252)

No Refund or tax credit must be claimed with the local treasurer w/in 2 years from the date taxpayer is entitled to such (sec. 253)

LT acts on claim for refund/tax credit w/in 60 days?

No

Taxpayer may appeal within within 60 days from receipt of notice (or expiration of 60 days) to the LBAA (Sec. 226) LBAA must decide within 120 days from receipt of appeal (sec. 229)

Yes

LT grants refund/tax credit?

Yes

Taxpayer happy. END

If LBAA rejects protest/ refund, owner may appeal to the CBAA w/ in 30 days from receipt of notice (Sec. 229)

No

No

Taxpayer may appeal w/in 60 days from receipt of notice (or expiration of 60 days) to LBAA (Sec. 226)

END

Appeal to the Supreme Court w/ in 15 days

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If CBAA rejects protest/ refund, owner may appeal to the CTA en banc within 30 days from receipt of decision (Rule 43, ROC)

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TAXATION LAW

Flowchart VII: Procedure for Levy for Purposes of Satisfying Real Property Taxes-L a G C START

Tax constitutes a lien on the property superior to all liens & may only be extinguished upon payment of the tax and charges. (sec. 257)

Before the date of sale, the owner may stay the proceedings by paying the delinquent tax, interest & the expenses of sale.

Sale is held: 1. at the main entrance of the LGU building, OR 2. on the property to be sold, OR at 3. any other place specified in the notice

Is there a bidder?

Yes Bidder pays & 30 days after the sale, the LT shall report the sale to the sanggunian

LT shall deliver to purchaser certificate of sale

Proceeds of sale in excess of delinquent tax, interest & expenses of sale remitted to the owner (sec. 260)

For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

Time for payment of real property taxes expires

Warrant of Levy issued by the Local Treasurer (LT), which has the force of legal execution in the LGU concerned. (sec. 258)

30 days from service of warrant, local treasurer shall advertise sale of the property by: 1. posting notice at main entrance of LGU hall/bldg and in a conspicuous place in the barangay where prope is located AND 2. by publication once a week for 2 weeks (sec. 260) (Note: In cases of levy for unpaid local taxes publication is once a week for 3 weeks)

Warrant is mailed to or served upon the delinquent owner (sec. 258)

written notice of the levy & the warrant is mailed/served upon the assessor and the Registrar of Deeds of the LGU (sec. 258)

LT shall purchase the property in behalf of the LGU (sec. 263) (Note: in cases of levy for unpaid local taxes, LT may purchase if there is no bidder or if the highest bid is insufficient-sec. 181)

No

w/in 1 year from sale, owner may redeem upon payment of the 1. delinquent tax, 2. interest due, 3. expenses of sale (from date of delinquency to date of sale) and 4. a 2% per month on the purchase price from date of sale to date of redemption. (sec. 261) Delinquent owner retains possession and right to the fruits (sec. 261)

LT returns to the purchaser/bidder the price paid + interest of 2% per month (sec. 261)

If property is not redeemed, the local treasurer shall execute a deed of conveyance to the purchaser (sec. 262)

Registrar of Deeds shall transfer the title of the forfeited property to the LGU w/o need of a court order (sec. 263)

W/n 1 year from forfeiture, the owner, may redeem the property by paying to the local treasurer the full amount of the tax and the related interest and the costs of sale otherwise the ownership shall be vested on the local government unit concerned. (sec. 263)

Sanggunian concerned may, by ordinance sell and dispose of the real property acquired under the preceding section at public auction. (sec. 264)

Levy may be repeated until the full amount due, including all expenses, is collected. (sec. 265)

END

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TAXATION II

IV. JUDICIAL REMEDIES

4.

[R.A. No. 1125, as amended by R.A. No. 3457 and further amended by R.A. No. 9282 and R.A. No. 9503, and A.M. No. 05-11-07-CTA or the Revised Rules of the Court of Tax Appeals (RRCTA)]

A. Jurisdiction of the Court of Tax Appeals

TAXATION LAW

Division in the exercise of its exclusive original jurisdiction over tax collection cases; and 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.

b. Civil Cases within the Jurisdiction of the Court in Divisions [Sec. 3(a), Rule 4, RRCTA]

1. Exclusive Appellate

Jurisdiction over Civil Tax Cases

a. Civil Cases within the Jurisdiction of the Court En

Banc

[Sec. 2(a-e), Rule 4, RRCTA] The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the following: 1. Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: a. Cases arising from administrative agencies Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture; b. Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and c. 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. 2. Decisions, resolutions or orders of the Regional Trial Courts in local tax cases and in tax collection cases decided or resolved by them in the exercise of their appellate jurisdiction; 3. Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in

The Court in Divisions shall exercise 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 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

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3.

4.

5.

6.

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under Section 229 of the National Internal Revenue Code; 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; 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; 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 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.

2. Criminal Cases a. Exclusive Original Jurisdiction in Criminal Cases The Court in Divisions shall exercise exclusive 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 or the Bureau of Customs, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more. [Sec. 3(b)(1), Rule 4, RRCTA]

b. Exclusive Appellate Jurisdiction in Criminal Cases The Court in Divisions shall exercise exclusive appellate jurisdiction over appeals from the judgments, resolutions or orders of the Regional Trial Courts in their original jurisdiction in criminal offenses arising from violations of the National

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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. [Sec. 3(b)(2), Rule 4, RRCTA] Criminal cases within the jurisdiction of the Court En Banc [Sec. 2(f-h), Rule 4, RRCTA] The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the following: 1. 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; 2. 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 3. Decisions, resolutions or orders of the Regional trial Courts in the exercise of their appellate jurisdiction over criminal offenses mentioned in subparagraph (f). Does the CTA have jurisdiction over a special civil action for certiorari assailing an interlocutory order issued by the RTC in a local tax case? YES. While there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law and that judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA includes that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases

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falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these cases. [City of Manila v. Grecia-Cuerdo, G.R. No. 175723 (2014)]

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B. Judicial Procedures 1. Judicial Action for Collection

of Taxes

a. Internal Revenue Taxes The remedies for the collection of internal revenue taxes, fees or charges, and any increment thereto resulting from delinquency can be through the institution of a civil or criminal action. [Sec. 205, NIRC] Note: See Ta pa er Remedie

Collection above.

When this remedy is resorted to: The tax assessment becomes final and executory because of the failure to appeal. Even pending decision of the administrative protest [CIR v. Union Shipping, G.R. No. L-66160 (1990)]

b. Local Taxes The LGU concerned may enforce the collection of delinquent taxes, fees, charges or other revenues by civil action in any court of competent jurisdiction. The civil action shall be filed by the local treasurer. [Sec. 183, LGC] MTC/RTC depending on jurisdictional threshold amount. Prescriptive period Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. No action for the collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of such period In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment. Local taxes, fees, or charges may be collected within 5 years from the date of assessment by administrative or judicial action No judicial or administrative action for collection can be instituted after lapse of the period for assessment Page 240 of 290

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except when there is fraud or intent to evade tax. [Sec. 194 LGC]

property of the taxpayer for the satisfaction of his tax liability as provided under existing laws.

The running of the periods of prescription shall be suspended for the time during which: 1. The treasurer is legally prevented from making the assessment of collection; 2. The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and 3. The taxpayer is out of the country or otherwise cannot be located. [Sec. 194, LGC]

Exception: Where the collection of the amount of the a pa er liabili , o gh b mean of a demand for payment, by levy, distraint or sale of any property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the Government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability [Sec. 11, RA 1125, as amended] Injunction not available to restrain collection No court shall have authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Code. [Sec. 217, NIRC] Exception: Sec. 11, RA 1125, supra.

2. Civil Cases a. Who May Appeal, Mode of Appeal, Effect of Appeal Appeal to CTA Division 1. A party aggrieved or adversely affected by the decision or ruling or inaction of a. CIR; b. Commissioner of Customs; c. Secretary of Finance; d. Secretary of Trade and Industry; e. Secretary of Agriculture; or f. RTC exercising original jurisdiction 2. May appeal within 30 days from the receipt of the copy of the decision or ruling, or the expiration of the period fixed by law for the Commissioner to decide, to the Court of Tax Appeals Division. Mode of Appeal: Rule 42 Aggrieved party may file a motion for reconsideration or new trial within 15 days from receipt of the copy of the decision. Appeal to CTA en Banc 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 within 15 days from receipt of the copy of the decision. Mode of Appeal: Rule 43 A party adversely affected by a decision or ruling of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of their appellate jurisdiction may appeal within 30 days from the receipt of the copy of the decision. SUSPENSION OF COLLECTION OF TAX General rule: No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any

Note: The LGC does not have a provision prohibiting injunction in the collection of tax. The requirement for depositing an amount or posting a surety bond as a condition for the suspension of the collection of taxes may be dispensed with. The CTA has ample authority to dispense with the deposit of the amount claimed or the filing of the required bond, whenever the method employed by the BIR in the collection of tax jeopardizes the interest of the taxpayer for being patently in violation of law. [Sps. Pacquiao v. CTA First Division, G.R. No. 213394 (2016)] TAKING OF EVIDENCE The Court may receive evidence in the following cases: 1. In all cases falling within the original jurisdiction of the Court in Division pursuant to Section 3, Rule 4 of these Rules; and 2. In appeals in both civil and criminal cases where the Court grants a new trial pursuant to Section 2, Rule 53 and Section 12, Rule 124 of the Rules of Court. [Sec. 2, Rule 12, A.M. No. 05-11-07] TAKING OF EVIDENCE BY: 1. Justice The Court may, motu proprio or upon proper motion, direct that a case, or any issue therein, be assigned to one of its members for the taking of evidence, when the determination of a question of fact arises at 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

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account. The hearing before such justice shall proceed in all respects as though the same had been made before the Court. Upon the completion of such hearing, the justice concerned shall promptly submit to the Court a written report thereon, stating therein his findings and conclusions. Thereafter, the Court shall render its decision on the case, adopting, modifying, or rejecting the report in whole or in part, or, the Court may, in its discretion, recommit it to the justice with instructions, or receive further evidence. [Sec. 12, RA No. 1125, as amended; also Sec. 3, Rule 12, A.M. No. 05-11-07] 2. Court Official In default or ex parte hearings, or in any case where the parties agree in writing, the Court may delegate the reception of evidence to the Clerk of Court, the Division Clerks of Court, their assistants who are members of the Philippine bar, or any Court attorney. The reception of documentary evidence by a Court official shall be for the sole purpose of marking, comparison with the original, and identification by witnesses of such documentary evidence. The Court official shall have no power to rule on objections to any question or to the admission of exhibits, which objections shall be resolved by the Court upon submission of his report and the transcripts within ten days from termination of the hearing. [Sec. 4, Rule 12, A.M. No. 05-11-07] MOTION FOR RECONSIDERATION OR NEW TRIAL [Rule 15, A.M. No. 05-11-07] Who: Any aggrieved party may seek a reconsideration or new trial of any decision, resolution or order of the Court. May be opposed by: The adverse party may file an opposition to the motion for reconsideration or new trial within ten days after his receipt of a copy of the motion for reconsideration or new trial of a decision, resolution or order of the Court. When: He shall file a motion for reconsideration or new trial within fifteen days from the date he received notice of the decision, resolution or order of the Court in question. The Court shall resolve the motion for reconsideration or new trial within three months from the time it is deemed submitted for resolution.

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How: The motion shall be in writing stating its grounds, a written notice of which shall be served by the movant on the adverse party. A motion for new trial shall be proved in the manner provided for proof of motions. A motion for the cause mentioned in subparagraph [a] of the preceding section shall be supported by affidavits of merits which may be rebutted by counter-affidavits. A motion for the cause mentioned in subparagraph (b) of the preceding section shall be supported by affidavits of the witnesses by whom such evidence is expected to be given, or by duly authenticated documents which are proposed to be introduced in evidence. A motion for reconsideration or new trial that does not comply with the foregoing provisions shall be deemed pro forma, which shall not toll the reglementary period for appeal. Effect: The filing of a motion for reconsideration or new trial shall suspend the running of the period within which an appeal may be perfected. Grounds: A motion for new trial may be based on one or more of the following causes materially affecting the substantial rights of the movant: Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against and by reason of which such aggrieved party has probably been impaired in his rights; or Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial and, which, if presented, would probably alter the result. A motion for new trial shall include all grounds then available and those not included shall be deemed waived. Restrictions: No party shall be allowed to file a second motion for reconsideration of a decision, final resolution or order; or for new trial.

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

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CTA and disposed of in accordance with the provisions of this Act.

Instituted by the filing an information in the name of the People of the Philippines

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. [Sec. 18, RA No. 1125 as amended]

Those involving violations of the NIRC and other laws enforced by the BIR: Must be approved by the CIR Those involving violations of the tariff and Customs Code and other laws enforced by the Bureau of Customs: Must be approved by the Commissioner of Customs

The CTA En Banc cannot annul a final and executory judgment of a division of the court The laws creating the CTA and expanding its j ri dic ion, and he CTA o n r le of proced re do not provide for a scenario where the CTA sitting en banc is asked to annul a decision of one of its divisions. Similarly, the SC or the CA divisions are not considered separate and distinct courts but are divisions of one and the same court. There is no hierarchy of courts within the SC and the CA. Annulment by a collegial court, sitting En Banc is tantamount to allowing a court to annul its own judgment and acknowledging that a hierarchy exists within such court. A proper remedy would have been an original action for Certiorari under Rule 65. [CIR v. Kepco Ilijan Corp., G.R. No. 199422 (2016)]

c. Petition for Review on Certiorari to the Supreme Court [Rule 16, A.M. No. 05-11-07] A party adversely affected by a decision or ruling of the Court en banc may appeal 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 fi ed hall r n from he par receip of a cop of the resolution denying the motion for reconsideration or for new trial. The motion for reconsideration or for new trial filed before the Court shall be deemed abandoned if, during its pendency, the movant shall appeal to the Supreme Court.

3. Criminal Cases a. Institution and Prosecution of Criminal Actions Institution of criminal action

Institution shall interrupt the running of the period of prescription Prosecution of criminal action Conducted and prosecuted under the direction and control of the public prosecutor Those involving violations of the NIRC and other laws enforced by the BIR or violations of the tariff and Customs Code and other laws enforced by the Bureau of Customs - The prosecution may be conducted by their respective duly deputized legal officers. INSTITUTION OF 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 such civil action separately from the criminal action shall be allowed or recognized.

b. Appeal and Period to Appeal in Criminal Cases Deciding Body Regional Trial Court in the exercise of its original jurisdiction [to CTA Division] CTA Division [to CTA En Banc]

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Period to Appeal 15 days from receipt of decision 15 days from receipt of decision

Mode of Appeal Appeal pursuant to Sec. 3[a] and 6, Rule 122 of the Rules of Court Petition for review as provided in

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May be extended for good cause for not more than 15 days Regional Trial Courts in the exercise of their appellate jurisdiction [To CTA division]

15 days from receipt of decision

Rule 43 of the Rules of Court The Court En Banc shall act on the appeal. Petition for review as provided in Rule 43 of the Rules of Court

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 deputize 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.

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. [Sec. 19, R.A. No. 1125 as amended]

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On December 19, 2017, the President signed into law package 1 of the Tax Reform for Acceleration and Inclusion ( TRAIN ) bill or Rep blic Ac ( R.A. ) No. 10963. The la con ain amendments to several provisions of the National In ernal Re en e Code of 1997 ( NIRC or Ta Code ) on indi id al income a a ion, pa i e income for bo h individuals and corporations, e a e a , donor a , al e-added a ( VAT ), e ci e a , and documentary stamp tax ( DST ), among o her . Belo i a compari on of he old NIRC pro i ion and he change in rod ced b TRAIN. (PWC Tax Alert No. 34-2018) Tax Particulars

NIRC

TRAIN Law (RA 10963)

On powers and authority granted to the Commissioner of Internal Revenue

Power to obtain information, and to summon, examine, and take testimony of persons

Sec. 5 (B) Commi ioner po er o ob ain informa ion from an 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.

Examination of returns and determination of tax due

Sec. 6 (A) The Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax after a return has been filed.

Authority to prescribe real property values

Sec. 6 (E) The Commissioner is authorized to determine the fair market value of real properties.

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Added: Cooperatives Development Authority required to submit a tax incentive report to the BIR and Dep of Finance. The report shall include information on the income tax, VAT and other tax incentive availed of. The report shall be included in the database created under the Tax Incentives Management and Transparency Act (TIMTA) (RA 10708). Added: Exercise of this authority notwithstanding any law requiring the prior authorization of any government agency or instrumentality. Added: Now requires mandatory consultation from both public and private appraisers, and with prior notice to affected parties. There is an automatic adjustment of the zonal valuation once every three years through issuance of regulations by the Secretary of Finance. No adjustment in zonal valuation shall be valid unless published or posted. The basis of valuation, as well as records of consultation, shall be public records

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available for inquiry of any taxpayer.

Adjustments in personal income taxation (A) Reduced personal income tax rates

Sec. 24 (A) (2) Personal income tax Not over 10k

Individual income tax rates

5% 500 + 10% of the excess over Over 10k but not over 30k 10k 2.5k + 15% of the excess over Over 30k but not over 70k 30k 8.5k + 20% of the excess over Over 70k but not over 140k 70k 22.5k + 25% of the excess over Over 140k but not over 250k 140k 50k + 30% of the excess over Over 250k but not over 500k 250k 125k + 32% of the excess over Over 500k 500k

Effective 1 Jan 2018 Not over 0% 250k Over 250k20% of the but notexcess over over 400k 250k Over 400k30k + 25% but notof the excess over 800k over 400k Over 800k130k + 30% but notof the excess over 2M over 800k Over 2M490k + 32% but notof the excess over 8M over 2M 2.41M + 35% of the Over 8M excess over 8M Effective 1 Jan 2019 Not over 0% 250k Over 250k15% of the but notexcess over over 400k 250k Over 400k22.5k + 20% but notof the excess over 800k over 400k 102.5k + Over 800k 25% of the but not excess over over 2M 800k 402.5k + Over 2M 30% of the but not excess over over 8M 2M 2,202.5k + 35% of the Over 8M excess over 8M (B) New: Purely selfemployed and professionals If gross sales/receipts and other non-operating

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income do not exceed the 3M VAT threshold, taxpayer may opt to be taxed at: (i) 8% of gross sales/receipts and other non-operating income in excess of 250k in lieu of graduated rates and percentage tax; or (ii) graduated rates in (A) above.

Passive income from interest, royalties, prizes and other winnings of individual citizen and resident alien Capital gains from sale of shares of stock not traded in the local stock exchange of individual citizen and resident alien

Alien individuals and qualified Filipinos employed by specific employers

Sec. 24 (B) (1) PCSO and lotto winnings are exempt from the 20% final tax. Interest income from a depository bank under the EFCDS is subject to a final tax of 7.5%.

Sec. 24 (C) Capital gains tax on sale of shares not traded in the stock exchange: first 100k at 5%, and excess at 10%

Sec. 25 (C), (D) and (E) A rate of 15% final withholding tax on the gross compensation income of alien individuals and qualified Filipinos employed by the following employers: RHQ, ROHQ, OBUs, and Petroleum service contractors and subcontractors.

(C) New: Mixed income earners: On their compensation income at graduated rates On their income from the conduct of trade or business or the practice of profession same as (B) above Now taxed: PCSO and lotto winnings exceeding 10k subject to the 20% final tax. Increased Tax: Interest income from a depository bank under the EFCDS, final tax now at 15%.

Increased Tax: now flat rate of 15%.

New: Sunset clause Preferential tax treatment shall not apply for employees of ROHQ, RHQ, OBU, and Petroleum service contractors and subcontractors which registered with the Securities and Exchange Commission beginning 1 January 2018. [ITEM VETOED] Grandfather clause:

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Adjustments in corporate income tax provisions Governmentowned or controlled corporations, agencies or instrumentalities Passive income on interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and royalties Capital gains from sale of shares of stock not traded in the local stock exchange of domestic corporations

On exemption of 13th month pay and other benefits exemption

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Present and future qualified employees of existing ROHQ, RHQ, OBU, and Petroleum service contractors and subcontractors as of 31 Dec 2017 shall enjoy preferential tax treatment.

Sec. 27 (C) GSIS, SSS, PhilHealth, the local water districts and the PCSO are exempt from corporate income tax.

Removed Tax exemption of PCSO

Sec. 27 (D) (1) Interest income from a depository bank under the EFCDS subject to final tax of 7.5%.

Increased Tax: Interest income from a depository bank under the EFCDS, final tax now at 15%.

Sec. 27 (D) (2) Capital gains tax on sale of shares not traded in the stock exchange: first 100k at 5%, and excess at 10%

Increased Tax: now flat rate of 15%.

Adjustments on provisions for exclusions and deductions Sec. 32 (B) (7) (e) 13th month pay and other benefits amounting to 82k is excluded from the computation of gross income. The President shall adjust the amount of said exemption to its present value using the Consumer Price Index (CPI)

Fringe benefit tax

Sec. 33 (A) Fringe benefits given to non-rank and file employees are subject to 32% final tax rate. The grossed-up monetary value is determined by dividing the actual monetary value by 68%.

Optional standard deduction ( OSD )

Sec. 34 (L) In lieu of the itemized allowable deductions, an individual subject to tax, other than a non-resident alien, may elect an OSD of 40% of gross sales or gross receipts.

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Increased exemption: Amount of exempt 13th month pay and other benefits is increased to 90k. Removed CPI adjustments on said amount. Increased tax: Effective 1 Jan 2018, final tax rate now 35%; grossed-up monetary value determined using 65%. New: OSD may be availed of by a general professional partnership only once, either the partnership or the partners.

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Deduction of premium payments on health and/or hospitalization insurance

Sec. 34 (M) Allowed deduction of 24k per year or 200 per month worth of premium payments on health and/or hospitalization insurance of an individual provided that the family has a gross income not exceeding 250k for the taxable year.

Repealed

On personal and additional exemptions

Secs. 35 and 79 (D) Exemptions on the following: 50k worth of basic personal exemption; 25k worth of additional exemption per qualified dependent not exceeding four; Personal exemption allowable to non-resident alien individual

Repealed

Sec. 62 Exemption of 20k allowed from the income of the estate or trust.

Repealed

Sec. 79 (F) Husband deemed head of the family and proper claimant of the additional exemption. Taxes to be withheld from the wages of the wife must be in accordance with the table for zero exemption of the withholding tax table.

Repealed

Exemption allowed to estate and trust Income tax collected at source husband and wife

Filing of tax returns

An individual whose taxable income (not from business or profession) does not exceed 250k shall not be required to file an ITR. Those engaged in business or profession required to file ITR regardless of gross income.

Individual

Sec. 51 (A) (2) (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents are no req ired o file an income a re rn ( ITR ).

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New, Form of an ITR: The ITR shall consist of a maximum of four pages in paper or electronic form containing only the following information: (i) Personal profile and information; (ii) Total gross sales, receipts or income from compensation of services rendered, conduct of trade or business or the exercise of a profession, except income subject to final tax as provided under the Tax Code; (iii) Allowable deductions under the Tax Code; (iv) Taxable income as defined in the Tax

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Substituted Filing

[instituted via Revenue Regulation]

Corporate

Sec. 52 (A) The return shall be filed by the president, vicepresident or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

Payment and assessment of income tax for individuals and corporations

Sec. 56 (A) (2) When a tax due is in excess of 2k, the taxpayer other than a corporation may elect to pay the tax due in two equal instalments; the first instalment paid at the time the return is filed and the second instalment on or before 15 July following the close of the calendar year.

Withholding of creditable tax at source

Sec. 57 (B) Secretary of Finance may require withholding of tax on items of income payable to natural or juridical persons, residing in the Philippines by payor-corporations/persons at the rate of 1% to 32% thereof, which shall be credited against the income tax liability of the taxpayer. Sec. 58 Return for final withholding tax filed and paid made within 25 days from the close of each calendar quarter.

On return and payment of taxes withheld at source

Return for creditable withholding taxes filed and paid not later than the last day of the month following the close of the quarter during which the withholding taxes was made. The Commissioner, with the approval of the Secretary of Finance, may require the withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. Page 251 of 290

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Code; and (v) Income tax due and payable. Entirely new provision: Sec. 51-A An individual receiving purely compensation income from one employer wherein the tax of which has been correctly withheld shall not be required to file an annual ITR. The certificate of withholding, filed by the employer and stamped recei ed by the BIR, shall be tantamount to the substituted filing of income tax return of the employees. New provision prescribing the form of an ITR same as with individuals (supra) The foregoing provisions shall not affect the implementation of TIMTA. Changed date: Second instalment to be paid on or before 15 Oct following the close of the calendar year. Reduced withholding rate: Beginning 1 Jan 2019, rate of withholding shall not be less than 1% but not more than 15% of the income payment. Changed date, simplified: The return for both final and 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 the withholding was made.

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Declaration of income tax for individuals

Sec. 74 (A) Every individual subject to income tax and is receiving self-employment income shall make and file a declaration of his estimated income for the current taxable year on or before 15 April of the same taxable year.

Return and payment of estimated income tax

Sec. 74 (B) The amount of estimated income shall be paid in 4 instalments with the fourth instalment to be paid on or before 15 April of the following calendar year.

Tax Particulars

NIRC Estate Tax Table Over But not Over

Sec. 84. Rate of Estate Tax

Sec. 86(A) Deductions for Citizens or Residents

Sec. 86(B) Deductions for Nonresident not a citizen

0 200,000 500,000 2,000,000 5,000,000 10,000,000

200,000 500,000 2,000,000 5,000,000 10,000,000 And Over

The tax shall be Exempt 0 15,000 135,000 465,000 1,215,000

Removed: The provision allowing the Commissioner of Internal Revenue to adjust the withholding of tax at more frequent intervals is removed. Changed date: Filing of declaration of estimated income shall be on or before 15 May of the same taxable year. Changed date: Payment of the fourth instalment shall be paid on or before 15 May of the following calendar year.

TRAIN Law (RA 10963) Plus

Of the Excess Over

5% 8% 11% 15% 20%

200,000 500,000 2,000,000 5,000,000 10,000,000

Citizens or residents are allowed the following deductions, among others: Expenses, losses, indebtedness, and taxes (among others, funeral expenses not to exceed PHP200,000 and judicial expenses) Family home not to exceed PHP1m Standard deduction of PHP1m Medical expenses not to exceed PHP500,000.

A nonresident alien is allowed the following deductions, among others: Expenses, losses, indebtedness, and taxes (among others, funeral expenses not to exceed PHP200,000 and judicial expenses) Property previously taxed Transfers for public use

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Estate tax rate is fixed at 6%

Removed the deductions of funeral expenses, judicial expenses, and medical expenses. Increased allowance for deduction of family home to PHP10m. Increased the standard deduction to PHP5m Removed allowance for deduction of expenses, losses, indebtedness, and taxes. Provides for a standard deduction of PHP500,000. Provides that a proportion of the

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claims against the estate, claims against insolvent persons, and unpaid mortgages may be claimed as a deduction from the estate. Sec. 86(D) Deductions for Nonresident not a citizen Sec. 89 Filing a Notice of Death Sec. 90(A)(1) When required to file an estate tax return Sec. 90(A)(3) When CPA Certificate required Sec. 90(B) Deadline of Estate Tax Return

An Individual who is a nonresident not citizen of the Philippines shall not be allowed to claim any deduction unless the value of the nonre iden gro e a e i a ed o ide he Philippine i included in the return filed.

Repealed

Written notice of death required for gross estates exceeding PHP20,000

Repealed

All transfers subject to estate tax or those, though exempt from tax, have gross values exceeding PHP200,000, or regardless of the gross value of the estate where the said estate consists of registered or registrable property shall file an estate tax return.

Estate tax returns showing a gross value exceeding PHP2M must be certified by a CPA. The estate tax return must be filed within six months from the deceden dea h.

deposit

Sec. 84. Rate of D Ta

The estate tax return must be filed within one year from he deceden dea h. An estate with insufficient cash is allowed to pay the estate tax due by installment within two years from the statutory date for its payment without civil penalty and interest.

Sec. 91 Additional Provision allowing Payment by Installment Sec. 97 Banks can now allow withdrawal from

All transfers subject to estate tax or regardless of the gross value of the estate where the said estate consists of registered or registrable property shall file an estate tax return. Estate tax returns showing a gross value exceeding PHP5m must be certified by a CPA

Sec. 97 A bank shall not allow i hdra al from a deceden bank account without the Commissioner certifying that taxes imposed thereon have already been paid. The administrator of the estate or any one of the heirs may, when authorized by the Commissioner, withdraw an amount not exceeding PHP20, 000 even without the certification from the Commissioner that the estate taxes have been paid. Donor a ra e are a follo : Not stranger based on total net gift Over But not The tax Over shall be 0

100,000

Plus

Of the Excess Over

Exempt Page 253 of 290

Banks, which has knowledge of the death of the person, shall allow withdrawals from a deceden depo i acco n subject to a 6% final withholding tax. Donor a ra e fixed at 6% based on total gifts in excess of PHP250,000 (exempt gift) made during the calendar year whether the donee is a stranger or not.

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100,000 200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000 Stranger

200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

0 2,000 14,000 44,000 204,000 404,000 1,004,000

2% 4% 6% 8% 10% 12% 15%

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100,000 200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

30% based on net gifts

Sec. 100. Additional Provision on transfer for less than adequate and full consideration

The amount by which the fair market value exceeded the value of the consideration in a transfer of property shall be deemed a gift.

Sec. 101 Exemption of Dowries Repealed

Sec. 101 (A) PHP10,000 amount of dowries or gifts made on acco n of marriage are e emp from donor a .

Sec. 106 (A) (2) Limiting the zero-rated sale of goods transactions

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: a. Export sales which include the following: 1. sale and actual shipment of goods from the Philippines to a foreign country; 2. sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local exportoriented enterprise; 3. sale of raw materials or packaging materials to exportoriented enterprise whose export sales exceed seventy percent (70%) of total annual production; 4. sale of gold to the Bangko Sentral ng Pilipinas (BSP); 5. those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and 6. sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. b. Foreign currency denominated sales; and c.

Sales to persons or entities exempted under special laws or international agreements

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A sale, exchange, or other transfer made in the ordinary course of business (i.e., bona fide transaction, a arm leng h, and free from donative intent) shall be considered as made for an adequate and full consideration.

Repealed [ITEM VETOED] Expressly added as e por ale he ale and delivery of goods to registered enterprises within a separate customs territory as provided under special laws and within Tourism Enterprise Zones declared by TIEZA. Items 2, 3, and 5 shall be subject to 12% VAT upon the successful establishment and implementation of an enhanced VAT refund system. For Item 4, Sale of gold to BSP is reclassified from export sales to exempt transactions. Item 6 will qualify as export sales provided that the goods, supplies, equipment and fuel shall be used

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Sec 108(A) Additional Provision

Sec. 108 (A) Provision defines sale or exchange of services.

Sec 108(B) Limiting the zero-rated sale of services transactions

Sec. 108 (B) Zero-rated sales of services include: 1. Services rendered to persons engaged in international shipping or international air transport operations; 2. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; 3. Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed 70% of total annual production; and 4. 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 BSP

Sec 109(1)

VAT exemptions include, among others, the following transactions: Page 255 of 290

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for international shipping and air transport operations. Foreign currency denominated sales are removed from zerorated sale of goods. Inclusion of sale of electricity by generation companies, transmission by any entity, and distribution companies, including electric cooperatives in the definition of sale or exchange of services. Item 1 will qualify as zero-rated sale of services if these services are exclusively for international shipping and air transport operations. For Item 2, Zerorating for transport of passenger and cargo from the Philippines to foreign country shall apply for domestic air or sea vessels only. Items 3 and 4 shall be subjected to 12% VAT upon successful establishment and implementation of an enhanced VAT refund system. [ITEM VETOED] Expressly added as zero-rated transactions the sale of services to registered enterprises within a separate customs territory as provided under special laws and within Tourism Enterprise Zones as declared by TIEZA. Item 1 was expanded to include those

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Expansion of VAT Exempt Transactions

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1.

2. 3. 4. 5.

Importation of professional instruments, etc. belonging to persons coming to settle in the Philippines, for their personal use, accompanying such persons or arriving within 90 days before or after their arrival; Sale of real property utilized for low- cost housing, sale of residential lot valued at PHP1,919,500 and sale of house and lot and other residential dwellings valued at PHP3,199,200; Lease of residential unit with monthly rental of PHP12,800 Importation of fuel, goods, and supplies by persons engaged in international shipping of air transport operations; and Other sale of lease of goods or properties or the performance of services, the amount of which does not exceed PHP1.919,500.

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belonging to overseas Filipinos, and their families and descendants who are now residents or citizens of other countries. For item 2, beginning 1 January 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing and sale of house and lot and other residential dwellings with threshold reduced to PHP2m. For item 3, the lease threshold would be increased to PHP15,000 and it will no longer be adjusted to its present value. For item 4, exemption of the importation of fuel, goods and supplies shall only apply if such are used for international shipping or air transport operations. For item 5, the VAT threshold is increased to PHP3m. Added the exemption of sale or lease of goods and services to senior citizens and persons with disabilities. Added the exemption for transfers of property pursuant to Section 40 (C)(2) of the Tax Code.

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Sec. 110 (A) (2)(b) No more amortization of input VAT on purchases exceeding 1m

Sec. 112(c) Period within which the VAT claim should be decided by the BIR

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The input tax on goods purchased or imported for use in trade or business for which deduction for depreciation is allowed shall be spread evenly over the month of acquisition and the 59 succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds PHP1M.

The Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from the date of submission of complete documents. 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 30 days from the receipt of the decision denying claim or after the expiration of the 120 day period, appeal the decision or the unacted claim with the Court of Tax Appeals (CTA).

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Added the exemption for association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations. Sale of gold to BSP is now classified under VAT exempt transactions. Beginning 1 January 2019, sale of drugs and medicines prescribed for diabetes, high cholesterol and hypertension would be included as VAT exempt transactions. The amortization of the input VAT shall only be allowed until 31 December 2021 after which taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized. The Commissioner shall grant a refund for creditable input taxes within 90 days from the date of submission of the official receipts or invoices and other documents in support of the application filed. Should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial. In case of full or partial denial of claim for tax refund, the taxpayer may within 30 days from receipt of the decision denying the claim appeal the decision with the CTA.

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Sec. 114(a) Filing of Quarterly VAT Returns

Every person liable to pay the VAT shall file a quarterly return of his gross amount of his gross sales/receipts within 25 days following the close of each taxable quarter. Moreover, VATregistered persons shall pay VAT on a monthly basis.

Sec. 114(c)

The Government or any of its political subdivisions, instrumentalities or agencies shall, before making payment of purchase of goods and services, deduct and withhold a final VAT at the rate of 5% of the gross payment thereof.

Sec. 129 Excise tax now covers both goods and services

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Penalty for failure on the part of any official, agent, or employee of the BIR to act on the application within the 90-day period shall be imposed. Effective 1 January 2023, the filing and payment of VAT shall be done within 25 days following the close of each taxable quarter. Effective 1 January 2021, the VAT withholding system shall shift from final to a creditable system.

Payment for lease or use of properties or property rights to nonresident owners shall be subject to 12% withholding tax at the time of payment.

Payments for purchase of goods and services arising from Official Development Assistance funded projects shall not be subject to the final withholding VAT.

Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported.

Excise taxes also apply to services performed in the Philippines

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TARIFF AND CUSTOMS CODE Taxation Law

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TARIFF AND CUSTOMS CODE

V. TARIFF AND CUSTOMS CODE OF THE PHILIPPINES91 [as amended by R.A. No. 10863 or the Customs Modernization and Tariff Act (CMTA) which took effect on June 16, 2016] Note: The CMTA has both saving and repealing clauses. Laws, rules and regulations previously issued pertaining to the importation of goods that are consistent with the CMTA will remain valid unless the same be repealed or amended. While those which are inconsistent are expressly repealed, amended or modified accordingly. [Sec. 1802 and 1803, CMTA]

A. Tariff and Duties 1. Definition Tariff can mean: The list or schedule of articles with their corresponding duties imposed on the same; or The duties imposed on the articles which are payable to the government. Taxes or list of articles liable to duties a list or schedule of articles on which a duty is imposed upon the importation into the country, with the rates at which they are severally taxed. And derivatively, the system of imposing duties or taxes on the importation of foreign merchandise. Customs duties taxes on the importation or exportation of commodities, the tariff or tax assessed upon the merchandise imported from or exported to a foreign country. [Garcia v. Exec. Sec., G.R. No. 101273 (1992)] Note: Customs and tariffs are used interchangeably. They both refer to the taxes imposed on imported or exported wares, articles, or merchandise. Export tariff duty levied, assessed and collected on the gross FOB value at the time of shipment based on the prevailing exchange rate on traditional export products, such as certain wood products, mineral

91

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products, plant and vegetable products [Sec. 514, TCC] Note: Export duties imposed upon all export products under Sec. 514, TCCP had been abolished, except the export duty upon logs [Sec. 1, EO 26 issued on 1 July 1986]. Import tariff Except as otherwise provided for in this Act or in other laws, all goods, when imported into the Philippines, shall be subject to duty upon importation, including goods previously exported from the Philippines. [Sec. 104, CMTA]

2. Purpose for Imposition a. Generation of governmental revenues b. Regulation of economic activity such as protecting local industries -- where such local industries actually exist and are producing comparable goods

3. Kinds or Classification of

Duties

a. Ordinary/Regular Duties Ordinary or regular duties refer to those that, as a matter of course, are imposed on dutiable articles as a revenue-generating measure AD VALOREM; METHODS OF VALUATION The tax rates are based on the value of the imported article. Methods for determining dutiable value 1. Transaction value an ad valorem rate of duty equivalent to the price actually paid or payable for the goods when sold for export to the Philippines, as adjusted; [Sec. 701, CMTA] 2. Transaction value of identical goods 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; a refer to goods which are the same in all respects, including physical characteristics, quality and reputation, discounting minor differences in appearances; [Sec. 702, CMTA]

Not Included in the Bar Examination Coverage for 2019.

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3.

4.

5.

6.

TARIFF AND CUSTOMS CODE

Transaction value of similar goods 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; a refer to goods which, although not alike in all respects, have like characteristics and similar component materials which enable them to perform the same functions and to be commercially interchangeable; factors to be considered in determining whether goods are similar may include quality of the goods, its reputation and the existence of a trademark [Sec. 703, CMTA] Deductive value an amount 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 importation of the goods being valued, to persons not related to the persons from whom they buy such goods, subject to certain deductions [Sec. 704, CMTA] Computed value the aggregate value of the cost or value of materials and fabrication or other processing employed in producing the imported goods; amount for profit and general expenses; freight, insurance fees and other transportation expenses for the importation of the goods, among others; and [Sec. 705, CMTA] Fallback value an amount determined by using other reasonable means and on the basis of data available in the Philippines. [Sec. 706, CMTA]

Note:

General rule: Imported goods shall be valued using the transaction value. [Sec. 700, CMTA] Exception: Where the dutiable value cannot be determined under the transaction value system, the succeeding methods are sequentially applied. However, the order of methods 4 and 5 may be reversed at the request of the importer, subject to the approval of the Commissioner. [Sec. 700, CMTA; CAO 4-2004] Ground to refuse the request: if the Commissioner deems that the BOC will experience real difficulties in determining the dutiable value using Method 5 Dutiable Value (DV) must not include: 1. Charges for construction, erection, assembly maintenance or technical assistance undertaken after importation; 2. Cost of transport after importation;

3. 4.

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Duties and taxes of the Philippines; and Other permissible deduction under the WTO Valuation Agreement [CAO 4-2004]

ALL of the following conditions must be satisfied so that the dutiable value shall be the Transaction Value (TV): 1. No restrictions as to the disposition or use of goods by the buyer except restrictions which: a. are imposed by law or by Philippine authorities b. limit the geographical area where goods may be resold c. do not substantially affect the value of the goods 2. The sale or price is not subject to some condition or consideration for which value cannot be determined 3. Buyer and seller are not related or if they are, that the transaction value is acceptable for customs purposes [Sec. 701, CMTA] Persons are deemed related if: 1. They are officers or direc or of one ano her business; 2. They are legally recognized partners in business; 3. There exists an employer-employee relationship between them; 4. Any person directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares of both seller and buyer; 5. One of them directly or indirectly controls the other; 6. Both of them are directly or indirectly controlled by a 3rd person; 7. Together they directly or indirectly control a 3rd person; or 8. They are members of the same family, including those related by affinity or consanguinity up to the 4th civil degree. [Sec. 701, CMTA] If related, use of TV is acceptable if the importer demonstrates that such value closely approximates one of the following: 1. TV in sales to unrelated buyers of identical or similar goods 2. Deductive value of identical or similar goods determined according to method #4 3. Computed value of identical or similar goods determined according to method #5 [Sec. 701, CMTA]

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2. Transaction value of identical goods The DV shall be the transaction value of identical goods sold for export to the Phil and exported at or about the same time as the goods being valued. Identical goods must be same commercial level and substantially same quantity as the goods being valued. Identical goods 1. Same in all respects (physical characteristics, quality and reputation) 2. Produced in the same country as the goods being valued 3. Produced by producer of the goods being valued Excludes: imported goods for which engineering, development, artwork, design work, plans and sketches are undertaken in the country of importation and provided by the buyer to the producer free of charge or at a reduced rate [CAO 4-2004] When no identical goods produced by the same person: Identical goods produced by different producer in the same country If NO identical goods at same commercial level and same quantity, 1. TV of identical goods at a different commercial level and different quantity may be utilized 2. TV shall be adjusted upward or downward to account for the difference [CAO 4-2004] Similar Goods 1. like characteristics and like component materials 2. capable of performing same functions 3. commercially interchangeable 4. produced in same country 5. produced by same producer Excludes: imported goods for which engineering, development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the producer free of charge or at a reduced rate When no similar goods produced by the same person: similar goods produced by different producer in the same country If NO similar goods at same commercial level and same quantity, 1. TV of similar goods at a different commercial level and different quantity may be utilized

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TV shall be adjusted upward or downward to account for the difference [CAO 4-2004]

Deductive value DV is determined on the basis of sales in the Phil of goods being valued of identical or similar imported goods less certain expenses resulting from importation and sale of goods. Deductive Value is determined by making a deduction from the established price per unit for the aggregate of the ff. elements: 1. Commissions or 2. additions made in connection with profit and general expenses and 3. transport, insurance and associated costs 4. customs duties and other national taxes Less: Less: Less:

PRICE COMMISSIONS/ADDITIONS COSTS DUTIES and TAXES DEDUCTIVE VALUE

The sales must meet the following conditions: 1. sold in the Philippines in the same condition as imported 2. sale has taken place at or about the same time of importation of goods being valued If no sale took place at or about the time of importation, use sales at the earliest date after importation (of the imported goods or similar or identical goods) but before expiration of 90 days If no sale meets the above conditions, 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 unrelated persons in the Philippines [Sec. 704, CMTA] A ab a 45 days prior to and 45 days following the importation [CAO 4-2004] DV is calculated by: Determining aggregate of relevant costs, charges and expenses or value of 1. materials and 2. production or processing costs Additional Costs* Cost of containers, packing, assists, engineering, artwork, plans and sketches undertaken in the

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Philippines and charged to producer profits and general expenses cost of transport, insurance and charges to the port or place of importation

Presidential Decree No. 1464", otherwise known as the "Tariff and Customs Code of the Philippines, as Amended", are hereby adopted.

*Note: these additional costs are added only if not included in the determination of the aggregate of relevant costs, charges and expenses or value of materials and production.

Marking duties CMTA, Sec. 710. Marking of Imported Goods and Containers. (A) Marking of Goods, Except as hereinafter provided, all goods of foreign origin imported into the Philippines or their containers, as provided in subsection (B) hereof shall be conspicuously marked in any official language of the Philippines as legibly, indelibly and permanently as the nature of the goods or container will permit and in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin of the goods. Pursuant thereto, the Commissioner shall, with the approval of the Secretary of Finance:

Fallback value If DV cannot be determined using any of the above methods, use other reasonable means consistent with principles and general provisions of the General Agreements on Tariffs and Trade [GATT] SPECIFIC Rates are based on units of weight number or measurement [Sec. 202, TCC] Kinds of weight: 1. Gross Weight weight of same, together with the weight of all containers, packages, holders and packings, of any kind, in which said articles are contained, held or packed at the time of importation 2. Legal Weight weight at the time of their sale to the public in usual retail quantities 3. Net Weight only the actual weight at the time of importation excluding the weight of the immediate and all other containers

b. Special Duties These are additional import duties imposed on specific kinds of imported articles. [See Table of Special Duties below] Dumping duties CMTA, Sec. 711. Dumping Duty. The provisions of Republic Act No. 8752, otherwise known as the "Anti-Dumping Act of 1999", are hereby adopted. Countervailing duties CMTA, Sec. 713. Countervailing Duty. The provisions of Republic Act No. 8751, otherwise known as "An Act Strengthening the Mechanisms for the Imposition of Countervailing Duties on Imported Subsidized Products, Commodities or Articles of Commerce in Order to Protect Domestic Industries from Unfair Trade Competition, Amending for the Purpose Section 302, Part 2, Title II, Book I of

(1) Determine the character of words and phrases or abbreviation thereof which shall be acceptable as indicating the country of origin and prescribe any reasonable method of marking, whether by printing, stenciling, stamping, branding, labeling or by any other reasonable method, and in a conspicuous place on the goods or container where the marking' shall appear; (2) Require the addition of other words or symbols which may be appropriate to prevent deception or mistake as to the origin of the goods or as to the origin of any other goods with which such imported goods is usually combined subsequent to importation but before delivery to an ultimate purchaser; and (3) Authorize the exception of any goods from the requirements of marking if: (i) Such goods are incapable of being marked; (ii) Such goods cannot be marked prior to shipment to the Philippines without injury; (iii) Such goods cannot be marked prior to shipment to the Philippines, except at an expense economically prohibitive of their importation; (iv) The marking of a container of such goods will reasonably indicate the origin of such goods; (v) Such goods are crude substances; (vi) Such goods are imported for use by the importer and not intended for sale in their imported or any other form; (vii) Such goods are to be processed in the Philippines by the importer or for the importer's account other than for the purpose of concealing

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the origin of such goods and in such manner that any mark contemplated by this section would necessarily be obliterated, destroyed, or permanently concealed; (viii) An ultimate purchaser, by reason of the character of such goods or by reason of the circumstances of their importation, must necessarily know the country of origin of such goods even though they are not marked to indicate their origin; (ix) Such goods were produced more than twenty (20) years prior to their importation into the Philippines; or (x) Such goods cannot be marked after importation except at an expense which is economically prohibitive, and the failure to mark the goods before importation was not due to any purpose of the importer, producer, seller or shipper to avoid compliance with this section. (B) Marking of Containers. Whenever goods are exempt under paragraph (3) of subsection (A) of this section from the requirements of marking, the immediate container, if any, of such goods, or such other container or containers of such goods, shall be marked in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin of such goods in any official language of the Philippines, subject to all provisions of this section, including the same exceptions as are applicable to goods under paragraph (3) of subsection (A). (C) Fine for Failure to Mark. If, at the time of importation any good or its container, as provided in subsection (B) hereof, is not marked in accordance with the requirements of this section, there shall be levied, collected, and paid upon such good a marking duty of five percent (5%) of dutiable value, which shall be deemed to have accrued at the time of importation, (D) Release Withheld Until Marked. No imported goods held in customs custody for inspection, examination, or assessment shall be released until such goods or their containers shall have been marked in accordance with the requirements of this section and until the amount of duty estimated to be payable under subsection (C) of this section shall have been deposited. (E) The failure or refusal of the owner or importer to mark the goods as herein required within a period of thirty (30) days after due notice

TAXATION LAW

shall constitute as an act of abandonment of said goods and their disposition shall be governed by the provisions of this Act relative to abandonment of imported goods.

Retaliatory/discriminatory duties CMTA, Sec. 714. Discrimination by Foreign Countries. Without prejudice to the Philippine commitment in any ratified international agreements or treaty, the following recourse shall be applicable in case of discrimination by foreign countries: (a) When the President finds that the public interest will be served thereby, the President shall, by proclamation, specify and declare new or additional duties in an amount not exceeding one hundred percent (100%) ad valorem upon goods wholly or in part the growth or product of, or imported in a vessel of any foreign country whenever the President shall find as a fact that such country: (1) Imposes, directly or indirectly, upon the disposition or transportation in transit or through reexportation from such country of any goods wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction, regulation or limitation which is not equally enforced upon the like goods of every foreign country; or (2) Discriminates in fact against the commerce of the Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition, in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. (b) If at any time the President shall find it to be a fact that any foreign country has not only discriminated against the commerce of the Philippines, as aforesaid, but has, after the issuance of a proclamation as authorized in subsection (a) of this section, maintained or increased its said discrimination against the commerce of the Philippines, the President is hereby authorized, if deemed consistent with the interests of the Philippines and of public interest, to issue a further proclamation directing that such

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product of said country or such goods imported in their vessels be excluded from importation into the Philippines. (c) Any proclamation issued by the President under this section shall, if the President deems it consistent with the interest of the Philippines, extend to the whole of any foreign country or may be confined to any subdivision or subdivisions thereof: Provided, That the President may, whenever the public interest requires, suspend, revoke, supplement or amend any such proclamation. (d) All goods imported contrary to the provisions of this section shall be forfeited to the government of the Philippines and shall be liable to be seized, prosecuted and condemned in like manner and under the same regulations, restrictions, and provisions as may from time to time be established for the recovery, collection, distribution, and remission or forfeiture to the government by the tariff and customs laws. Whenever the provision of this section shall be applicable to importations into the Philippines of goods wholly or in part the growth or product of any foreign country, it shall be applicable thereto, whether such goods are imported directly or indirectly. (e) It shall be the duty of the Commission to ascertain and at all times be informed whether any of the discriminations against the commerce of the Philippines enumerated in subsections (a) and (b) of this section are practiced by any country; and if and when such discriminatory acts are disclosed, it shall be the duty of the Commission to bring the matter to the attention of the President, and to recommend measures to address such discriminatory acts. (f) The Secretary of Finance shall make such rules and regulations as are necessary for the execution of a proclamation that the President may issue in accordance with the provisions of this section. Safeguard measure CMTA, Sec. 712. Safeguard Duty. The provisions of Republic Act No. 8800, otherwise known as the "Safeguard Measures Act", are hereby adopted.

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4. Flexible Tariff Clause Constitutional Basis

Sec. 28[2], Art. VI, 1987 Constitution. The Congress may, by law, authorize the President to fix with specified limits, and subject to such limitations and restrictions, as it may impose, tariff rates, import and export quotas, tonnage and wharfage duties, and other duties or imposts within the framework of the national development program of the Government.

Definition The Flexible Clause refers to the power of the President upon recommendation of the National Economic and Development Authority (NEDA) to: a. Increase, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher than 100% ad valorem; b. Establish import quota or to ban importation of any commodity as may be necessary; and c. Impose additional duty on all imports not exceeding 10% ad valorem, whenever necessary. [Sec. 102(u), CMTA] Specific Rule CMTA, Sec. 1608. Flexible Clause. (a) In the interest of the general welfare and national security, and, subject to the limitations prescribed under this Act, the President, upon the recommendation of the NEDA, is hereby empowered to: (1) Increase, reduce, or remove existing rates of import duty including any necessary change in classification. The existing rates may be increased or decreased to any level, in one or several stages, but in no case shall the increased rate of import duty be higher than a maximum of one hundred percent (100%) ad valorem; (2) Establish import quotas or ban imports of any commodity, as may be necessary; and (3) Impose an additional duty on all imports not exceeding ten percent (10%) ad valorem whenever necessary: Provided, That upon periodic investigations by the Commission and recommendation of the NEDA, the President may cause a gradual reduction of rates of import duty granted in Section 1611 of this Act, including those subsequently granted pursuant to this section.

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(b) Before any recommendation is submitted to the President by the NEDA pursuant to the provisions of this section, except in the imposition of an additional duty not exceeding ten percent (10%) ad valorem, the Commission shall conduct an investigation and shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, to produce evidence and to be heard. The Commission shall also hear the views and recommendations of any government office, agency, or instrumentality. The Commission shall submit its findings and recommendations to the NEDA within thirty (30) days after the termination of the public hearings. (c) The power of the President to increase or decrease rates of import duty within the limits fixed in subsection (a) hereof shall include the authority to modify the form of duty. In modifying the form of duty, the corresponding ad valorem or specific equivalents of the duly with respect to imports from the principal competing foreign country for the most recent representative period shall be used as basis. (d) Any order issued by the President pursuant to the provisions of this section shall take effect thirty (30) days after promulgation, except in the imposition of additional duty not exceeding ten percent (10%) ad valorem which shall take effect at the discretion of the President. (e) The power delegated to the President as provided for in this section shall be exercised only when Congress is not in session. (f) The power herein delegated may be withdrawn or terminated by Congress through a joint resolution. The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this section.

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B. Requirements of Importation 1. Beginning and Ending of

Importation

Importation begins when the carrying vessel or aircraft enters the Philippine territory with the intention to unload therein. [Sec. 1202, TCC; Sec. 103, CMTA] Importation is deemed terminated a. The duties, taxes and other charges due upon the goods have been paid or secured to be paid at the port of entry unless the goods are free from duties, taxes and other charges and legal permit for withdrawal has been granted; or b. In case the goods are deemed free of duties, taxes and other charges, the goods have legally left the jurisdiction of the Bureau. [Sec. 1202, TCC; Sec. 103, CMTA] Note: The payment of the duties, taxes, fees and other charges must be in full. [Papa v. Mago, G.R. No. L27360 (1968)] D Impor ed good hall be deemed en ered in he Philippines for consumption when the goods declaration is electronically lodged, together with any required supporting documents, with the pertinent customs office. [Sec. 115, CMTA] Under Sec. 206, TCC, imported articles shall be deemed "entered" in the Philippines for consumption when the specified entry form is properly filed and accepted, together with any related documents required by the TCC and/or regulations to be filed with such form at the time of entry, at the port or station by the customs official designated to receive such entry papers and any duties, taxes, fees and/or other lawful charges required to be paid at the time of making such entry have been paid or secured to be paid with the customs official designated to receive such monies, provided that the article has previously arrived within the limits of the port of entry.

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2. Obligations of Importer a. Cargo Manifest

[Sec. 1005, TCC; the same under CMTA, Sec. 1204] Every vessel from a foreign port must have on board a complete manifest of all her cargo. All cargoes intended to be landed at a port in the Philippines must be described in separate manifests for each port of call. The manifest shall include: 1. Port of departure 2. Port of delivery 3. Marks, numbers, quantity and description of the packages 4. Names of the consignees Requirement to provide advance copy A true and complete copy of the cargo manifest shall be electronically sent in advance by the shipping company, NVOCC (Non-Vessel Operating Common Carrier), freight forwarder, cargo consolidator, or their agents within the cut-off period as may be determined by the Bureau before the arrival of the carrying vessel at the port of entry. [Sec. 1204, CMTA] General rule: It cannot be changed or altered after entry of vessel. Exception: Amendment, under oath, by the master, consignee or agent, which shall be attached to the original manifest CANNOT amend the manifest after the invoice and/or entry covering the importation have been received and recorded in the office of the appraiser EXCEPT: (a) Obvious clerical error or any other discrepancy is committed in the preparation; (b) Without fraudulent intent; (c) Discovery would not have been made until after examination of the importation is completed. The cargo manifest and each copy thereof shall be accompanied by a translation in English if originally written in another language. [Sec. 1205, CMTA; Sec. 1006, TCC pre io l ae in o the official language of the Philippines ]

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Manifests for the Commission on Audit and District Collector 1. the Bureau of Customs shall provide electronic copies to the COA Chairperson; 2. the master shall present to the District Collector the original properly endorsed by the boarding officer [Sec. 1206, CMTA] [Under Sec. 1007, TCC, it is the master who delivers and mails the cargo manifest to the Auditor General and Collector]

b. Import Entry N

ca ed G d Dec a a

de

e CMTA

Goods Declaration a statement made in the manner prescribed by the Bureau and other appropriate agencies, by which the persons concerned indicate the procedure to be observed in the application for the entry or admission of imported goods and the particulars of which the customs administration shall require [Sec. 102(y), CMTA] Declarant may be a consignee or a person who has the right to dispose of the goods. The declarant shall lodge a goods declaration with the Bureau and may be: 1. The importer, being the holder of the bill of lading; or 2. The exporter, being the owner of the goods to be shipped out; or 3. A customs broker acting under the authority of the importer or from a holder of the bill; or 4. A person duly empowered to act as agent or attorney-in-fact for each holder. In case the consignee or the person who has the right to dispose of the goods is a juridical person, it may authorize a responsible officer of the company to sign the goods declaration as declarant on its behalf. [Sec. 106 and 407, CMTA] [Sec. 1301, TCC #2 pertains o an other holder of the bill of lading in due co r e ] Importations Subject to Goods Declaration Unless otherwise provided for in this Act, all imported goods shall be subject to the lodgement of a goods declaration. A goods declaration may be for consumption, for customs bonded warehousing, for

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admission, for conditional importation, or for customs transit. [Sec. 401, CMTA] Kinds of Goods Declaration 1. For Consumption 2. For Customs Bonded Warehousing 3. For admission 4. For conditional importation 5. For customs transit

2.

Sec. 1302, TCC All imported articles, except importation admitted free of duty, shall be subject to a formal or informal entry. Kinds of Import Entry [Sec. 1302, TCC] 1. Formal Entry A formal entry may be: 2. For immediate consumption, or 3. Under irrevocable domestic letter of credit, bank guarantee or bond for: 4. Placing the article in customs bonded warehouse; 5. constructive warehousing and immediate transportation to other ports of the Philippines upon proper examination and appraisal; or 6. Constructive warehousing and immediate exportation. 7. Informal Entry Statements in Goods Declaration 1. The invoice and goods declaration contain an accurate and faithful account of the prices paid or payable for the goods, and other adjustments to the price actually paid or payable, and that nothing has been omitted therefrom or concealed whereby the government of the Republic of the Philippines might be defrauded of any part of the duties and taxes lawfully due on the goods; 2. To the best of the declarant's information and belief, all the invoices and bills of lading or airway bills relating to the goods are the only ones in existence relating to the importation in question, and that these documents are in the same state as when they were received by the declarant, and the declaration thereon are in all respects genuine and true. [Sec. 412, CMTA] [U de Sec. 1304, TCC, e f g c ded: T a e entry delivered to the Collector contains a full account of the value or price articles, including b ec f e e . ] Content of Goods Declaration 1. shall contain the names of the consignee, importing vessel or aircraft, port of departure, port of destination and date of arrival, the number and marks of packages, or the quantity,

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if in bulk, the nature and correct commodity description of the goods contained therein, its value as set forth in a proper invoice, and such other information as may be required by rules and regulations. [Sec. 411, CMTA] signed by the declarant [Sec. 107, CMTA]

Form As far as practicable, the format of the goods declaration shall conform with international standards. The Bureau shall require the electronic lodgement of the goods declaration. [Sec. 407, CMTA] [Sec. 1306, TCC requires a number of copies in such form as prescribed by regulations and excludes consignee and port of destination from the content of the import entry] Articles to be cleared on informal entry 1. Goods of a commercial nature with Free on Board (FOB) or Free Carrier At (FCA) value of less than P50,000.00, subject to adjustment every three years; and 2. Personal and household effects or goods, not in commercial quantity, imported in a passenger's baggage or mail. The Commissioner may adjust the value of goods of commercial nature that shall be cleared through an informal entry process. [Sec. 402, CMTA; Sec. 1302, TCC value of #1 is P2,000 or less] Articles to be cleared on formal entry All goods declaration for consumption shall be cleared through a formal entry process. [Sec. 402, CMTA] Note: All importations entered through a formal entry process shall be covered by a letter of credit or any verifiable commercial document evidencing payment or in cases where there is no sale for export, by any commercial document indicating the commercial value of the goods. [Sec. 402, CMTA; RA 9135 (2001)]

c. Declaration of Correct Weight or Value Unless otherwise provided for in this Act, all imported goods shall be subject to the lodgement of a goods declaration. PROVISIONAL GOODS DECLARATION (PGD) UNDER CMTA, SEC. 403: Where the

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declarant does not have all the information or supporting documents required to complete the goods declaration, the lodging of a provisional goods declaration may be allowed: Provided, That it substantially contains the necessary information required by the Bureau and the declarant undertakes to complete the information or submit the supporting documents within 45 days from the filing of the PGD, extendible for another 45 days for valid reasons.

d. Liability for Payment of Duties

If the Bureau accepts a PGD, the duty treatment of the goods shall not be different from that of goods with complete declaration.

How to discharge: Discharged only by payment in full of all duties, taxes, fees and other charges legally accruing

Goods under a PGD may be released upon posting of any required security equivalent to the amount ascertained to be the applicable duties and taxes. [See also Sec. 1400, CMTA on misdeclaration]

Exception: Relieved by laws or regulations

INFORMATION TO BE FURNISHED [SEC. 1313, TCC]

When made: Upon approval by the Collector of the returns of the appraiser and reports of the weights, gauge or quantity [Sec. 1601, TCC]

Classification When article is not specifically classified in the Code, the interested party, importer or foreign exporter may submit a sample with full description of component materials in a written request. Value Upon written application, Collector shall furnish importer within 30 days the latest information as to the value of the articles to be imported. Importer must present all pertinent papers and documents, act in good faith and unable to obtain information due to unusual conditions Information given is not an appraisal nor is it binding pon he Collec or righ of apprai al. 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. 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. Similarly, 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.

General rule: the liability for duties, taxes, fees and other charges attached to importation constitutes a personal debt due from the importer in favor of the government; it constitutes a lien upon the imported goods which may be enforced while such goods are nder c om c od . [CMTA, Sec. 405; same under Sec. 1204, TCC]

e. Liquidation of Duties

How: 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. [Sec. 1601, TCC] Additional Process: 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, taxes and other charges found upon liquidation, and notice shall promptly be sent to the interested parties. [Sec. 1601, TCC] TENTATIVE AND FINAL LIQUIDATION Tentative Liquidation [Sec. 1602, TCC] When liquidation shall be deemed to be tentative: If to determine the exact amount due under the law in whole or in part some future action is required [only as to item/s affected] Effect: shall to that extent be subject to future and final readjustment and settlement; entry in such case shall be stamped "Tentative liquidation" Final Liquidation [Sec. 1603, TCC as amended by RA 9135]

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When liquidation is final and conclusive upon all the parties: when articles have been entered and passed free of duty or final adjustment of duties made, after the expiration of 3 years from the date of the final payment of duties. Exceptions: 1. Fraud 2. Protest 3. Compliance audit pursuant to the provisions of the Code

4.

Notes:

1.

2.

3.

READJUSTMENT OF APPRAISAL, CLASSIFICATION OR RETURN [Sec. 1407, TCC] Prescriptive Period for Appraisal, Classification or Return General rule: Appraisal, classification or return as finally passed upon and approved or modified by the Collector shall not be altered or modified in any manner. Exceptions: 1. Within one year after payment of the duties, upon statement of error in conformity with seventeen hundred and seven hereof, approved by the Collector 2. Within fifteen days after such payment upon request for reappraisal and/or reclassification addressed to the Commissioner by the Collector, if the appraisal and/or classification is deemed to be low 3. Upon request for reappraisal and/or reclassification, in the form of a timely protest addressed to the Collector by the interested party

if the latter should be dissatisfied with the appraisal or return Upon demand by the Commissioner of Customs after the completion of compliance audit pursuant to the provisions of this Code." [R.A. 9135 (2001)]

f. Keeping of Records

Note: Exceptions do not apply in case of tentative liquidation Fractions in the Liquidation 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. [Sec. 1604, TCC]

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All importers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner and for a period of 3 years from the date of final payment of duties and taxes or customs clearance, as the case may be, all records pertaining to the ordinary course of business and to any activity or information contained in the records required by this title in connection with any such activity. All parties engaged in customs clearance and processing are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner and for a period of 3 years from the date of filing of the goods declaration, copies of the abovementioned records covering the transactions handled. Locators or persons authorized to bring imported goods into free zones, such as the special economic zones and free ports, are required to keep subject-records of all its activities, including in whole or in part, records on imported goods withdrawn from said zones into the customs territory for a period of three (3) years from the date of filing of the goods declaration. [Sec. 1003, CMTA]

Audit examination Any authorized officer of the Bureau shall be given by the importer and customs broker full and free access to the premises where the records are kept, to conduct audit examination, inspection, verification, and investigation of those records relevant to such investigation or inquiry. [Sec. 1002, CMTA] [Sec. 3514, TCC also required all importers and brokers, to keep records for 3 years for inspection by customs officers authorized by BOC]

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C. Accrual and Payment of Tax and Duties

the stamp, brand or mark does not Indicate the actual fineness of quality of the metals or alloys; 5.

1. General Rule: All Imported

Articles are Subject to Duty

a. Free Importation and Exportation

b. Regulated Importation and Exportation These goods shall be imported or exported only after securing the necessary goods declaration or export declaration, clearances, licenses, and any other requirements, prior to importation or exportation. In case of importation, submission of requirements after arrival of the goods but prior to release from customs custody shall be allowed but only in cases provided for by governing laws or regulations. [Sec. 116, CMTA]

c. Prohibited importations 1.

2.

3.

4.

6. 7.

Unless otherwise provided by law or regulation, all goods may be freely imported into and exported from the Philippines without need for import and export permits, clearances or licenses. [Sec. 116, CMTA]

Written or printed goods in any form containing any matter advocating or inciting treason, rebellion, insurrection, sedition against the government of the Philippines, or forcible resistance to any law of the Philippines, or written or printed goods containing any threat to take the life of, or inflict bodily harm upon any person in the Philippines; Goods, instruments, drugs and substances designed, intended or adapted for producing unlawful abortion, or any printed matter which advertises, describes or gives direct or indirect information where, how or by whom unlawful abortion is committed; Written or printed goods, negatives or cinematographic films, photographs, engravings, lithographs, objects, paintings, drawings or other representation of an obscene or immoral character; Any goods manufactured in whole or in part of gold, silver or other precious metals or alloys and

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Any adulterated or misbranded food or goods for human consumption or any adulterated or misbranded drug in violation of relevant laws and regulations; Infringing goods as defined under the Intellectual Property Code and related laws; and All other goods or parts thereof which importation and exportation are explicitly prohibited by law or rules and regulations issued by the competent authority. [Sec. 118, CMTA]

d. Restricted Importation and Exportation Except when authorized by law or regulation, the importation and exportation of the following restricted goods are prohibited: 1. Dynamite, gunpowder, ammunitions and other explosives, firearms and weapons of war, or parts thereof; 2. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling or the distribution of money, cigars, cigarettes or other goods when such distribution is dependent on chance, including jackpot and pinball machines or similar contrivances, or parts thereof; 3. Lottery and sweepstakes tickets, except advertisements thereof and lists of drawings therein; 4. Marijuana, opium, poppies, coca leaves, heroin or other narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, or any compound, manufactured salt, derivative, or preparation thereof, except when imported by the government of the Philippines or any person duly authorized by the Dangerous Drugs Board, for medicinal purposes; 5. Opium pipes or parts thereof, of whatever material; and 6. Any other goods whose importation and exportation are restricted.

e. De Minimis Importations (Small Value Importations) No duties and taxes shall be collected on goods with an FOB or FCA value of 10,000.00 or below.

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The Secretary of Finance shall adjust the de minimis value every 3 years. The value shall be adjusted to its present value using the CPI, as published by the PSA. [Sec. 423, CMTA] CAO 2-2016 De Minimis importations shall be lodged and processed under a simplified system and with the use of information and communications echnolog ( ICT ) enabled em o allo advance clearance, and ensure proper customs monitoring and control; De Minimis importations shall, as far as practicable, be subject to a nonintrusive examination (e.g. x-ray or any other equivalent device) on a random basis based. The customs examiner may physically inspect the imported goods. Exclusions from Immediate Release as De Minimis importations: 1. Importations declared a i ho commercial al e or of no commercial al e or i h pecific amo n b q alified b he phra e for c om p rpo e or analogo phra e . The party concerned must declare the specific value of the goods, supported by available invoice, receipt or equivalent document. 2. Tobacco and liquor products carried by passengers in excess of the allowable limits but within the De Minimis value. 3. Goods subject to requirements or conditions imposed by the concerned regulatory agency, unless for personal use and within the limits allowed by regulations. 4. Prohibited and restricted importations. 5. Importations to be entered conditionally-free, for warehousing, for transit, and / or admission to a free zone [CAO 2-2016]

if the goods had been entered without the benefit of this section, shall be subject to forfeiture and the importation shall constitute a fraudulent practice against customs laws: Provided, However, That a sale pursuant to a judicial order or in liquidation of the estate of a deceased person shall not be subject to the preceding proviso, without prejudice to the payment of duties, taxes and other charges; Provided, Further, That the President may, upon the recommendation of the Secretary of Finance, suspend, disallow or completely withdraw, in whole or in part, any conditionally free importation under this section: 1.

Aquatic products such as fishes, crustaceans, mollusks, marine animals, seaweeds, fish oil, roe, caught or gathered by fishing vessels of Philippine registry; Provided, That they are imported in such vessels or in crafts attached thereto; Provided, However, That they have not been landed in any foreign territory or, if so landed, that they have been landed solely for transshipment without having been advanced in condition;

2.

Equipment for use in the salvage of vessels or aircrafts, not available locally, upon identification and the giving of a security in an amount equal to 100% of the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of corresponding duties, taxes and other charges within six (6) months from the date of acceptance of the goods declaration; Provided, That the Bureau may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding six (6) months from the expiration of the original period;

3.

Cost of repairs, excluding the value of the goods used, made in foreign countries upon vessels or aircraft documented, registered or licensed in the Philippines, upon proof satisfactory to the Bureau: (1) that adequate facilities for such repairs are not afforded in the Philippines; or (2) that such vessels or aircrafts, while in the regular course of their voyage or flight, were compelled by stress of weather or other casualty to put into a foreign port to make such repairs in order to secure the safety, seaworthiness, or airworthiness of the vessels or aircrafts to enable them to reach their port of destination;

4.

Goods brought into the Philippines for repair, processing or reconditioning to be reexported

f. Conditionally-Free and DutyExempt Importations [Sec. 800, CMTA] The following goods shall be exempt from the payment of import duties upon compliance with the formalities prescribed in the regulations which shall be promulgated by the Commissioner with the approval of the Secretary of Finance: Provided, That goods sold, bartered, hired or used for purposes other than what they were intended for and without prior payment of the duty, tax or other charges which would have been due and payable at the time of entry

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upon completion of the repair, processing or reconditioning: Provided, That the Bureau shall require security equal to 100% of the duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six (6) months from the date of acceptance of the goods declaration; 5.

Medals, badges, cups, and other small goods bestowed as trophies or prizes, or those received or accepted as honorary distinction;

6.

Returning residents Personal and household effects belonging to returning residents including household appliances, jewelry, precious stones, and other goods of luxury which were formally declared and listed before departure and identified under oath before the District Collector when exported from the Philippines by such returning residents upon their departure therefrom or during their stay abroad; personal and household effects including wearing apparel, goods of personal adornment, toilet goods, instruments related to one's profession and analogous personal or household effects, excluding luxury items, vehicles, watercrafts, aircrafts and animals purchased in foreign countries by residents of the Philippines which were necessary, appropriate, and normally used for their comfort and convenience during their stay abroad, accompanying them on their return, or arriving within a reasonable time which, barring unforeseen and fortuitous events, in no case shall exceed 60 days after the owner's return.

within 10 years prior to returning resident's arrival; 250,000.00 for those who have stayed in a foreign country for a period of at least five (5) but not more than 10 years and have not availed of this privilege within five (5) years prior to returning resident's arrival; or 150,000.00 for those who have stayed in a foreign country for a period of less than five (5) years and have not availed of this privilege within six (6) months prior to returning resident's arrival. Any amount in excess of the above-stated threshold shall be subject to the corresponding duties and taxes under this Act. Every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust the amount herein stated to its present value using the CPI as published by the PSA. In addition to the privileges granted under the immediately preceding paragraph, returning Overseas Filipino Workers (OFWs) shall have the privilege to bring in, tax and duty-free, home appliances and other durables, limited to one of every kind once in a given calendar year accompanying them on their return, or arriving within a reasonable time which, barring unforeseen and fortuitous events, in no case shall 60 days after every returning OFW's return upon presentation of their original passport at the port of entry: Provided, That any amount in excess of FCA value of 150,000.00 for personal and household effects or of the number of duty-free appliances as provided for under this section, shall be subject to the corresponding taxes and duties; Provided, Further, That every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust the amount herein stated to its present value using the CPI as published by the PSA;

For purposes of this section, the phrase re rning re iden hall refer o na ional ho have stayed in a foreign country for a period of at least six (6) months. Conditions for exemption from tax and duties Returning residents shall have tax and duty exemption on personal and household effects: Provided, That: a. It shall not be in commercial quantities; b. It is not intended for barter, sale or for hire; and c. Limited to the FCA or FOB value of: 350,000.00 for those who have stayed in a foreign country for at least 10 years and have not availed of this privilege

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7.

Balikbayan box

Residents of the Philippines, OFWs or other Filipinos while residing abroad or upon their return to the Philippines shall be allowed to bring in or send to their families or relatives in the Philippines balikbayan boxes which shall be exempt from applicable duties and taxes imposed under the NIRC of 1997, as amended: Provided, That balikbayan boxes shall contain personal and

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household effects only and shall neither be in commercial quantities nor intended for barter, sale or for hire and that the FCA value of which shall not exceed 150,000.00; Provided, Further, That every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust the amount herein stated to its present value using the CPI as published by the PSA; Provided, Finally, That residents of the Philippines, OFWs or other Filipinos can only avail of this privilege up to three (3) times in a calendar year. Any amount in excess of the allowable non-dutiable value shall be subject to the applicable duties and taxes; For purposes of this Act, OFWs refer to holders of valid passports duly issued by the Department of Foreign Affairs (DFA) and certified by the Department of Labor and Employment (DOLE) or the Philippine Overseas Employment Administration (POEA) for overseas employment purposes. They cover all Filipinos, working in a foreign country under employment contracts, regardless of their professions, skills or employment status in a foreign country; and Calendar Year refers to the period from January 1 to December 31. 8.

Wearing apparel, goods of personal adornment, toilet goods, portable tools and instruments, theatrical costumes and similar effects accompanying travelers, or tourists, or arriving within a reasonable time before or after their arrival in the Philippines, which are necessary and appropriate for the wear and use of such persons according to the nature of the journey, their comfort and convenience; Provided, That this exemption shall not apply to goods intended for other persons or for barter, sale or hire: Provided, However, That the Bureau may require either a written commitment or a security in an amount equal to 100% of the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within three (3) months from the date of acceptance of the goods declaration: Provided, Further, That the Bureau may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding three (3) months from the expiration of the original period.

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Personal and household effects and vehicles belonging to foreign consultants and experts hired by, or rendering service to, the government, and their staff or personnel and families accompanying them or arriving within a reasonable time before or after their arrival in the Philippines, in quantities and of the kind necessary and suitable to the profession, rank or position of the person importing said items, for their own use and not for barter, sale or hire: Provided, That the Bureau may require either a written commitment or a security in an amount equal to 100% of the ascertained duties, taxes and other charges thereon, upon the goods classified under this subsection; conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within three (3) months after the expiration of their term or contract; Provided, However, That the Bureau may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding three (3) months from the expiration of the original period; 9.

Professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal and household effects belonging to persons coming to settle in the Philippines or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing said items, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time: Provided, That the Bureau may, upon the production of satisfactory evidence that such persons are actually coming to settle in the Philippines and that the goods are brought from their former place of abode, exempt such goods from the payment of duties and taxes; Provided, Further, That vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall within this classification and shall therefore be subject to duties, taxes and other charges;

10. Goods used exclusively for public entertainment, and for display in public expositions, or for exhibition or competition for prizes, and devices for projecting pictures and parts and appurtenances thereof, upon identification,

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examination, and appraisal and the giving of a security in an amount equal to 100% of the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and other charges within three (3) months from the date of acceptance of the goods declaration: Provided, That the Bureau may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding three (3) months from the expiration of the original period; and technical and scientific films when imported by technical, cultural and scientific institutions, and not to be exhibited for profit: Provided, Further, That if any of the films is exhibited for profit, the proceeds therefrom, shall be subject to confiscation, in addition to the penalty provided under this Act; 11. Goods brought by foreign film producers directly and exclusively used for making or recording motion picture films on location in the Philippines, upon their identification, examination and appraisal and the giving of a security in an amount equal to 100% of the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and other charges within three (3) months from the date of acceptance of the goods declaration, unless extended by the District Collector for another three (3) months; photographic and cinematographic films, underdeveloped, exposed outside the Philippines by resident Filipino citizens or by producing companies of Philippine registry where the principal actors and artists employed for the production are Filipinos, upon affidavit by the importer and identification that such exposed films are the same films previously exported from the Philippines. As used in this paragraph, he erm ac or and ar i include the persons operating the photographic camera or other photographic and sound recording apparatus by which the film is made; 12. Importations for the official use of foreign embassies, legations and other agencies of foreign governments: Provided, That those foreign countries accord like privileges to corresponding agencies of the Philippines. Goods imported for the personal or family use of members and attaches of foreign embassies, legations, consular officers and other representatives of foreign governments;

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Provided, However, That such privilege shall be accorded under special agreements between the Philippines and the countries which they represent: Provided, Further, That the privilege may be granted only upon specific instructions of the Secretary of Finance pursuant to an official request of the DFA on behalf of members or attaches of foreign embassies, legations, consular officers and other representatives of foreign governments; 13. Imported goods donated to or, for the account of the Philippine government or any duly registered relief organization, not operated for profit, for free distribution among the needy, upon certification by the DSWD or the Department of Education (DepED), or the Department of Health (DOH), as the case may be; 14. Containers, holders and other similar receptacles of any material including kraft paper bags for locally manufactured cement for export, including corrugated boxes for bananas, mangoes, pineapples and other fresh fruits for export, except other containers made of paper, paperboard and textile fabrics, which are of such character as to be readily identifiable and/or reusable for shipment or transportation of goods shall be delivered to the importer thereof upon identification, examination and appraisal and the giving of a security in an amount equal to 100% of the ascertained duties, taxes and other charges thereon, within six (6) months from the date of acceptance of the goods declaration; 15. Supplies which are necessary for the reasonable requirements of the vessel or aircraft in its voyage or flight outside the Philippines, including goods transferred from a bonded warehouse in any Customs District to any vessel or aircraft engaged in foreign trade, for use or consumption of the passengers or its crew on board such vessel or aircraft as sea or air stores; or goods purchased abroad for sale on board a vessel or aircraft as saloon stores or air store supplies; Provided, That any surplus or excess of such vessel or aircraft supplies arriving from foreign ports or airports shall be dutiable; 16. Goods and salvage from vessels recovered after a period of two (2) years from the date of filing the marine protest or the time when the vessel was wrecked or abandoned, or parts of a foreign

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vessel or its equipment, wrecked or abandoned in Philippine waters or elsewhere: Provided, That goods and salvage recovered within the said period of two (2) years shall be dutiable; 17. Coffins or urns containing human remains, bones or ashes, used personal and household effects (not merchandise) of the deceased person, except vehicles, the FCA value of which does not exceed 150,000.00, upon identification as such: Provided, That every three (3) years after the effectivity of this Act, the value herein stated shall be adjusted to its present value using the CPI as published by the PSA; 18. Samples of the kind, in such quantity and of such dimension or construction as to render them unsaleable or of no commercial value; models not adapted for practical use; and samples of medicines, properly marked ample-sale p ni hable b la , for he p rpo e of introducing new goods in the Philippine market and imported only once in a quantity sufficient for such purpose by a person duly registered and identified to be engaged in that trade: Provided, That importations under this subsection shall be previously authorized by the Secretary of Finance: Provided, However, That importation of sample medicines shall have been previously authorized by the Secretary of Health, and that such samples are new medicines not available in the Philippines: Provided, Further, That samples not previously authorized or properly marked in accordance with this section shall be levied the corresponding tariff duty. Commercial samples, except those that are not readily and easily identifiable as in the case of precious and semi-precious stones, cut or uncut, and jewelry set with precious or semi-precious stones, the value of any single importation of which does not exceed FCA value of 50,000.00 upon the giving of a security in an amount equal to the ascertained duties, taxes and other charges thereon, conditioned for the exportation of said samples within three (3) months from the date of the acceptance of the goods declaration or in default thereof, the payment of the corresponding duties, taxes and other charges: Provided, That if the FCA value of any single consignment of such commercial samples exceeds 50,000.00, the importer thereof may select any portion of the same not exceeding the FCA value of 50,000,00 for entry under the

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provision of this subsection, and the excess of the consignment may be entered in bond, or for consumption, as the importer may elect: Provided, Further, That every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust the amount herein stated to its present value using the CPI as published by the PSA. 19. Animals, except race horses, and plants for scientific, experimental propagation or breeding, andfor other botanical, zoological and national defense purposes: Provided, That no live trees, shoots, plants, moss and bulbs, tubers and seeds for propagation purposes may be imported under this section, except by order of the government or other duly authorized institutions; Provided, However, That the free entry of animals for breeding purposes shall be restricted to animals of recognized breed, duly registered in the record or registry established for that breed, and certified as such by the Bureau of Animal Industry (BAI): Provided, Further, That the certification of such record, and pedigree of such animal duly authenticated by the proper custodian of such record or registry, shall be submitted to the District Collector, together with the affidavit of the owner or importer that such animal is the animal described in said certificate of record and pedigree: Provided, Finally, That the animals and plants are certified by the NEDA as necessary for economic development; 20. Economic, technical, vocational, scientific, philosophical, historical and cultural books or publications, and religious books like Bibles, missals, prayer books, the Koran, Ahadith and other religious books of similar nature and extracts therefrom, hymnal and hymns for religious uses; Provided, That those which may have already been imported but are yet to be released by the Bureau at the effectivity of this Act may still enjoy the privilege herein provided upon certification by the DepED that such imported books and/or publications are for economic, technical, vocational, scientific, philosophical, historical or cultural purposes or that the same are educational, scientific or cultural materials covered by the International Agreement on Importation of Educational Scientific and Cultural Materials (XAESCM) signed by the President of the Philippines on August 2, 1952, or other agreements binding upon the Philippines. Educational, scientific and

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cultural materials covered by international agreements or commitments binding upon the Philippine government so certified by the DepED; 21. Philippine goods previously exported from the Philippines and returned without having been advanced in value, or improved in condition by any process of manufacturing or other means, and upon which no drawback or bounty has been allowed, including instruments and implements, tools of trade, machinery and equipment, used abroad by Filipino citizens in the pursuit of their business, occupation or profession; and foreign goods previously imported when returned after having been exported and loaned for use temporarily abroad solely for exhibition, testing and experimentation, for scientific or educational purposes; and foreign containers previously imported which have been used in packing exported Philippine goods and returned empty if imported by or for the account of the person or institution who exported them from the Philippines and not for sale, barter or hire subject to identification: Provided, That Philippine goods falling under this subsection upon which drawback or bounty have been allowed shall, upon reimportation thereof, be subject to a duty under this subsection equal to the amount of such drawback or bounty; 22. Aircraft, equipment and machinery, spare parts, commissary and catering supplies, aviation gas, fuel and oil, whether crude or refined except when directly or indirectly used for domestic operations, and such other goods or supplies imported by and for the use of scheduled airlines operating under congressional franchise: Provided, That such goods or supplies are not locally available in reasonable quantity, quality and price and are necessary or incidental to the proper operation of the scheduled airline importing the same; 23. Machineries, equipment, tools for production, plans to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals, and transportation and communications facilities imported by and for the use of new mines and old mines which resume operations, when certified to as such by the Secretary of the Department of Environment and Natural Resources (DENR), upon the recommendation of the Director of Mines and

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Geosciences Bureau, for a period ending five (5) years from the first date of actual commercial production of saleable mineral products: Provided, That such goods are not locally available in reasonable quantity, quality and price and are necessary or incidental in the proper operation of the mine; and aircrafts imported by agro-industrial companies to be used by them in their agriculture and industrial operations or activities, spare parts and accessories thereof, when certified to as such by the Secretary of the Department of Agriculture (DA) or the Secretary of the Department of Trade and Industry (DTI), as the case may be; 24. Spare parts of vessels or aircraft of foreign registry engaged in foreign trade when brought into the Philippines exclusively as replacements or for the emergency repair thereof, upon proof satisfactory to the District Collector that such spare parts shaft he utilized to secure the safety, seaworthiness or airworthiness of the vessel or aircraft, to enable it to continue its voyage or flight; 25. Goods exported from the Philippines for repair, processing or reconditioning without having been substantially advanced in value, and subsequently reimported in its original form and in the same state: Provided, That in case the reimported goods advanced in value, whether or not in their original state, the value added shall be subject to the applicable duty rate of the tariff heading of the reimported goods; and 26. Trailer chassis when imported by shipping companies for their exclusive use in handling containerized cargo, upon posting a security in an amount equal to 100% of the ascertained duties, taxes and other charges due thereon, to cover aperiod of one (1) year from the date of acceptance of the entry, which period, for meritorious reasons, may be extended by the Commissioner from year to year, subject to the following conditions: a. That they shall be properly identified and registered with the Land Transportation Office (LTO); b. That they shall be subject to customs supervision fee to be fixed by the District Collector and subject to the approval of the Commissioner; c. That they shall be deposited in the customs territory when not in use; and

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d. That upon the expiration of the period prescribed above, duties and taxes shall be paid unless otherwise reexported.

2. Goods Declaration Goods Declaration A statement made in the manner prescribed by the Bureau and other appropriate agencies, by which the persons concerned indicate the procedure to be observed in the application for the entry or admission of imported goods and the particulars of which the customs administration shall require. [Sec. 102(y), CMTA] Importations subject to Goods Declaration Unless otherwise provided for, all imported goods shall be subject to the lodgement of a goods declaration. A goods declaration may be for consumption, for customs bonded warehousing, for admission, for conditional importation, or for customs transit. [Sec. 401, CMTA]

a. Formal Entry distinguished from Informal Entry All goods declaration for consumption shall be cleared through a formal entry process except for the following goods which shall be cleared through an informal entry process: 1. Goods of a commercial nature with Free on Board (FOB) or Free Carrier At (FCA) value of less than fifty thousand pesos ( 50,000.00). Every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust this amount as provided herein to its present value, using the Consumer Price Index (CPI) as published by the PSA; and 2. Personal and household effects or goods, not in commercial q an i , impor ed in a pa enger baggage or mail. The Commissioner may adjust the value of goods of commercial nature that shall be cleared through an informal entry process without prejudice to the periodic adjustment period in subparagraph (a) of this section. All importations entered through, a formal entry process shall be covered by a letter of credit or any verifiable commercial document evidencing payment or in cases where there is no sale for export, by any commercial document indicating the commercial value of the goods. [Sec. 402, CMTA]

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b. Filing of Goods Declaration As far as practicable, the format of the goods declaration shall conform with international standards. The data required in the goods declaration shall be limited to such particulars that are deemed necessary for the assessment and collection of duties and taxes, the compilation of statistics and compliance with this Act. The Bureau shall require the electronic lodgement of the goods declaration. The Bureau shall only require supporting documents necessary for customs control to ensure that all requirements of the law have been complied with. Translation of supporting documents shall not be required except when necessary. Goods declaration must be lodged within 15 days from the date of discharge of the last package from the vessel or aircraft. The period to file the goods declaration may, upon request, be extended on valid grounds for another 15 days: Provided, That the request is made before the expiration of the original period within which to file the goods declaration: Provided, However, That the period of the lodgement of the goods declaration may be adjusted by the Commissioner. [Sec. 407, CMTA]

c. Assessment and Payment of Duties and Taxes, Interest and Surcharge Tentative Assessment of Provisional Goods Declaration Assessment of a provisional goods declaration shall be deemed tentative and such assessment shall be completed upon final readjustment and submission by the declarant of the additional information or documentation required to complete the declaration within the period provided in Section 403 of this Act. [Sec. 426, CMTA] Readjustment of Appraisal, Classification or Return Such appraisal, classification or return, as finally passed upon and approved or modified by the District Collector, shall not be altered or modified in any manner, except: 1. Within one (1) year after payment of the duties, upon statement of error in conformity with Section 912 of this Act, as approved by the District Collector;

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2.

3.

4.

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Within 15 days after such payment, upon request for reappraisal or reclassification addressed to the Commissioner by the District Collector, if the appraisal or classification is deemed to be low; Upon request for reappraisal and/or reclassification, in the form of a timely protest addressed to the District Collector by the interested party if the latter should be dissatisfied with the appraisal or return; or Upon demand by the Commissioner after the completion of compliance audit in accordance with the provisions of this Act. [Sec. 427, CMTA]

Assessment of Duty on Less Than Entered Value Duty shall not be assessed in any case upon an amount less than the entered value, unless by direction of the Commissioner in cases when the importer certifies at the time of entry that the entered value is higher than the dutiable value and that the goods are so entered in order to meet increases made by the appraiser in similar cases then pending reappraisement; and the lower assessment shall be allowed only when the importer's contention is sustained by a final decision, and shall appear that such action of the importer was taken in good faith after due diligence and inquiry. [Sec. 428, CMTA] Final Assessment Assessment shall be deemed final 15 days after receipt of the notice of assessment by the importer or consignee. [Sec. 429, CMTA] Period of Limitation In the absence of fraud and when the goods have been finally assessed and released, the assessment shall be conclusive upon all parties three (3) years from the date of final payment of duties and taxes, or upon completion of the post clearance audit. [Sec. 430, CMTA] Release of Goods after Payment of Duties and Taxes Goods declared shall be released when duties and taxes and other lawful charges have been paid or secured and all the pertinent laws, rules and regulations have been complied with. [Sec. 431, CMTA] Fine or Surcharge on Goods Goods subject to any fine or surcharge shall be released only after the payment of the fine or surcharge. [Sec. 436, CMTA]

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d. Provisional Goods Declaration Where the declarant does not have all the information or supporting documents required to complete the goods declaration, the lodging of a provisional goods declaration may be allowed: Provided, That it substantially contains the necessary information required by the Bureau and the declarant undertakes to complete the information or submit the supporting documents within 45 days from the filing of the provisional goods declaration, which period may be extended by the Bureau for another 45 days for valid reasons. If the Bureau accepts a provisional goods declaration, the duty treatment of the goods shall not be different from that of goods with complete declaration. Goods under a provisional goods declaration may be released upon posting of any required security equivalent to the amount ascertained to be the applicable duties and taxes. [Sec. 404, CMTA]

e. Relief Consignment Goods such as food, medicine, equipment and materials for shelter, donated or leased to government institutions and accredited private entities for free distribution to or use of victims of calamities shall be treated and entered as relief consignment. Upon declaration of a state of calamity, clearance of relief consignment shall be a matter of priority and subject to a simplified customs procedure. The Bureau shall provide for: 1. Lodging of a simplified goods declaration or of a provisional or incomplete goods declaration subject to completion of the declaration within a specified period; 2. Lodging, registering and checking of the goods declaration and supporting documents prior to the arrival of the goods, and their release upon arrival; 3. Clearance beyond the designated hours of business or away from customs offices and waiver of any corresponding charges; and 4. Examination and/or sampling of goods only in exceptional circumstances. The DOF and the DSWD shall jointly issue the rules and regulations for the implementation of this provision. [Sec. 120, CMTA]

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Duty and Tax Treatment Relief consignment imported during a state of calamity and intended for a specific calamity area for the use of the calamity victims therein, shall be exempt from duties and taxes. [Sec. 121, CMTA]

Prima facie evidence of fraud A discrepancy in duty and tax to be paid between what is legally determined and what is declared amounting to more than 30% shall constitute a prima facie evidence of fraud.

f. Misdeclaration, Misclassification and Undervaluation in Goods Declaration

IMPOSITION OF SURCHARGE When the misdeclaration, misclassification or undervaluation is intentional or fraudulent, such as when a false or altered document is submitted or when false statements or information are knowingly made, a surcharge shall be imposed equivalent to 500% of the duty and tax due and that the goods shall be subject to seizure regardless of the amount of the discrepancy without prejudice to the application of fines or penalties provided under Section 1401 of this Act against the importer and other person or persons who willfully participated in the fraudulent act.

[Sec. 1400, CMTA] DEFINITION AND DISTINCTION Misdeclaration as to quantity, quality, description, weight, or measurement of the goods, or misclassification through insufficient or wrong description of the goods or use of wrong tariff heading resulting to a discrepancy in duty and tax to be paid between what is legally determined upon assessment and what is declared, shall be subject to a surcharge equivalent to 250% of the duty and tax due. No surcharge shall be imposed when the discrepancy in duty is less than 10%, or when the declared tariff heading is rejected in a formal customs dispute settlement process involving difficult or highly technical question of tariff classification, or when the tariff classification declaration relied on an official government ruling. There is undervaluation when: 1. the declared value fails to disclose in frill the price actually paid or payable or any dutiable adjustment to the price actually paid or payable; or 2. when an incorrect valuation method is used or the valuation rules are not properly observed, resulting in a discrepancy in duty and tax to be paid between what is legally determined as the correct value against the declared value. When the undervaluation is established without the need to go through the formal dispute settlement process provided for in this Act, a surcharge shall be imposed equivalent to 250% of the duty and tax due. No surcharge shall be imposed when the discrepancy in duty is less than 10%, or the declared value is rejected as a result of an official ruling or decision under the customs dispute settlement process involving difficult or highly technical question relating to the application of customs valuation rules.

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D. Unlawful Importation or Exportation Smuggling refers to the fraudulent act of importing any goods into the Philippines, or the act of assisting in receiving, concealing, buying, selling, disposing or transporting such goods, with full knowledge that the same has been fraudulently imported, or the fraudulent exportation of goods. Goods referred to under this definition shall be known as smuggled goods. [Sec. 101(nn), CMTA]

1. Technical Smuggling and

Outright Smuggling

Technical Smuggling The act of importing goods into the country by means of fraudulent, falsified or erroneous declaration of the goods to its nature, land, quality, quantity or weight, for the purpose of reducing or avoiding payment of prescribed taxes, duties and other charges [Sec. 101(pp), CMTA]

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l. Disappearance of manifested goods m. Discrepancy between actual and declared weight of manifested goods n. Discrepancy with the master's or pilot's-incommand deport o. Failure to report fraud p. False statement of vessel's or aircraft's destination q. Affixing seals r. Breaking of seal placed by customs officers s. Breaking of lock or fastening placed by customs officers t. Removal, breakage, and alteration of marks u. Unauthorized withdrawal of imported goods from bonded warehouse v. Removing or repacking goods in warehouse w. Removing goods from customs custody x. Failure to pay duties, taxes and other charges y. Breach of security z. Failure to keep importation records and full access to customs officers aa. Concealment or destruction of evidence of fraud

Outright Smuggling The act of importing goods into the country without complete customs prescribed importation documents, or without being cleared by customs or other regulatory government agencies, for the purpose of evading payment of prescribed taxes, duties and other government charges. [Sec. 101(ff), CMTA]

2. Other Fraudulent Practices [Secs. 1402-1428, CMTA] a. Failure or refusal of party to give evidence or submit documents for assessment b. Other fraudulent practices against customs revenue c. Failure to declare baggage d. Vessel, seacraft, or aircraft departing before undergoing customs formalities e. Obstruction to boarding officer f. Unlawful boarding or leaving of vessel or aircraft g. Unloading of cargo before arrival at port of entry h. Unloading of cargo at improper time or place after arrival i. Failure to exhibit or deposit documents j. Bringing of unmanifested arms, explosives or war equipment k. Failure to supply advance and requisite manifests Page 281 of 290

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vessel, aircraft, cargo, goods, animal or any other movable property when the same is subject to forfeiture or when they are subject of a fine imposed under the CMTA. [Sec. 216, CMTA; Sec 4.12.1 of CAO 01-2017]

E.Remedies 1. Government a. Administrative/Extrajudicial SEARCH, SEIZURE, FORFEITURE, ARREST Persons exercising police authority The following persons are authorized to effect search, seizure, and arrest: 1. Officials of the Bureau, District Collectors, Deputy District Collectors, police officers, agents, inspectors and guards of the Bureau; 2. Upon authorization of the Commissioner, officers and members of the Armed Forces of the Philippines (AFP) and national law enforcement agencies; and 3. Officials of the BIR on all cases falling within the regular performance of their duties, when payment of internal revenue taxes is involved. [Sec. 214, CMTA] Place where authority may be exercised Within customs premises, and within the limits of the authority granted by the Commissioner, Port and airport authorities in all ports of entry shall provide authorized customs officers with unhampered access to all premises within their administrative jurisdiction. [Sec. 215, CMTA] CAO 01-2017 (Clearance Procedures for all Travelers and Crew and their Baggage) Sec 4.11: District Collector shall coordinate with the Port or Airport authorities as to the premises that should be under customs control and jurisdiction and only the District Collector shall be authorized to grant access to said premises. Customs premises The Bureau shall, for customs purposes, have exclusive control, direction and management of customs offices, facilities, warehouses, ports, airports, wharves, infrastructure and other premises in the Customs Districts, in all cases without prejudice to the general police powers of the local government units (LGUs), the Philippine Coast Guard and of law enforcement agencies in the exercise of their respective functions. [Sec. 303, CMTA] Exercise of power of seizure Any person exercising police authority, as defined in the CMTA, has the power and duty to seize any

Other Authorized Searches 1. Authority to enter properties [Sec. 219, CMTA] 2. Authority to search dwelling house [Sec. 220, CMTA] 3. Authority to search vessels or aircrafts and persons or goods conveyed therein [Sec. 221, CMTA] 4. Authority to search vehicles, other carriers, persons and animals [Sec. 222, CMTA] 5. Authority to search persons arriving from foreign countries [Sec. 223, CMTA] CAO 1-2017, Sec 4.5: Baggage of arriving Travelers and Crew shall be subject to non-intrusive inspection. When necessary, scanned baggage may be subject to physical inspection. Property subject to seizure and forfeiture [Sec. 1113, CMTA] 1. Any vehicle, vessel or aircraft, including cargo, which shall be used unlawfully in the importation or exportation of goods or in conveying or transporting smuggled goods in commercial quantities into or from any Philippine port or place. The mere carrying or holding on board of smuggled goods in commercial quantities shall subject such vehicle, vessel, aircraft, or any other craft to forfeiture: Provided, That the vehicle, vessel, aircraft or any other craft is not used as a common carrier which has been chartered or leased for purposes of conveying or transporting persons or cargo; 2. Any vessel engaging in the coastwise trade which shaft have on board goods of foreign growth, produce, or manufacture in excess of the amount necessary for sea stores, without such goods having been properly entered or legally imported; 3. Any vessel or aircraft into which shall be transferred cargo unloaded contrary to law prior to the arrival of the importing vessel or aircraft at the port of destination; 4. Any part of the cargo, stores, or supplies of a vessel or aircraft arriving from a foreign port hich i nloaded before arri al a he e el or aircraf por of de ina ion and i ho authority from the customs officer; but such cargo, ship, or aircraft stores and supplies shall not be forfeited if such unloading was due to

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5.

6.

7. 8.

9.

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accident, stress of weather, or other necessity and is subsequently approved by the District Collector; Goods which are fraudulently concealed in or removed contrary to law from any public or private warehouse, container yard, or container freight station under customs supervision; Goods, the importation or exportation of which are effected or attempted contrary to law, or any goods of prohibited importation or exportation, and all other goods which, in the opinion of the District Collector, have been used, are or were entered to be used as instruments in the importation or the exportation of the former; Unmanifested goods found on any vessel or aircraft if manifest therefor is required; Sea stores or aircraft stores adjudged by the District Collector to be excessive, when the duties and taxes assessed by the District Collector thereon are not paid or secured forthwith upon assessment of the same; Any package of imported goods which is found upon examination to contain goods not specified in the invoice or goods declaration including all other packages purportedly containing imported goods similar to those declared in the invoice or goods declaration to be the contents of the misdeclared package;

Misdeclared Shipment Shipments declared as consolidated Balikbayan Boxes but are found to be otherwise shall be considered as misdeclared and subjected to seizure and forfeiture proceedings. [Sec. 8, CMO 33-2016 (Guidelines on the Implementation of CAO 05-2016 on Consolidated Shipment of Duty and Tax-Free Balikba an Bo e )] 10. Boxes, cases, trunks, envelopes, and other containers of whatever character used as receptacle or as device to conceal goods which are subject to forfeiture under this Act or which are so designed as to conceal the character of such goods; 11. Any conveyance actually used for the transport of goods subject to forfeiture under this Act, with its equipage or trappings, and any vehicle similarly used, together with its equipment and appurtenances. The mere conveyance of smuggled goods by such transport vehicle shall be sufficient cause for the outright seizure and confiscation of such transport vehicle but the forfeiture shall not be effected if it is established that the owner of the means of conveyance used as aforesaid, is engaged as common carrier and

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not chartered or leased, or that the agent in charge thereof at the time, has no knowledge of the unlawful act; and 12. Goods sought to be imported or exported: a. Without going through a customs office, whether the act was consummated, frustrated, or attempted; b. Found in the baggage of a person arriving from abroad and undeclared by such person; c. Through a false declaration or affidavit executed by the owner, importer, exporter, or consignee concerning the importation of such goods; d. On the strength of a false invoice or other document executed by the owner, importer, exporter, or consignee concerning the importation or exportation of such goods; or e. Through any other practice or device contrary to law by means of which such goods entered through a customs office to the prejudice of the government. Conditions Affecting Forfeiture of Goods The forfeiture shall be effected only when and while the goods are in the custody or within the jurisdiction of customs officers, or in the possession or custody of or subject to the control of the importer, exporter, original owner, consignee, agent of another person effecting the importation, entry or exportation in question, or in the possession or custody of or subject to the control of persons who shall receive, conceal, buy, sell, or transport the same, or aid in any of such acts, with knowledge that the goods were imported, or were the subject of an attempt at importation or exportation contrary to law. [Sec. 1115, CMTA] Seizure or Release of Goods The District Collector shall issue an order of release or a warrant of seizure within five (5) days, or two (2) days in case of perishable goods, upon the recommendation of the alerting officer or any other customs officer. The District Collector shall immediately make a report of such seizure or release to the Commissioner. [Sec. 1116, CMTA] Warrant of Seizure or Order of Release The District Collector shall have the authority to issue a warrant of seizure of the goods upon determination

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of the existence of probable cause and in case of nonexistence thereof, the issuance of order of release. In case the District Collector issued an order of release, the District Collector shall immediately transmit all the records to the Commissioner who shall automatically review within forty-eight (48) hours, or within twenty-four (24) hours in case of perishable goods. When no decision is made by the Commissioner within the prescribed period, the imported goods shall be deemed released. The lifting of the alert order shall he issued by the District Collector only upon the affirmation of the decision of the District Collector by the Commissioner, or after the lapse of the period of review by the Commissioner, whichever is earlier. [Sec. 1117, CMTA] Release of Balikbayan Boxes Balikbayan boxes or portions thereof which are compliant with the existing rules and regulations are entitled to immediate release. When consolidated Balikbayan Boxes or portions thereof are subject to alert or any enforcement intervention, the boxes or portions thereof which are compliant shall be segregated and processed separately. [Sec. 4.7, CAO 05-2016] Sale of Perishable Goods During Forfeiture Proceedings Upon motion of the importer of the perishable goods, the goods may be sold at a public auction during the pendency of the forfeiture proceedings. The proceeds of the auction shall be held in escrow until the final resolution of the proceedings. [Sec. 1118, CMTA] Service of Warrant of Seizure The District Collector shall cause the service of warrant of seizure to the owner or importer of the goods or the authorized representative thereof. The owner or importer shall be given, an opportunity to be heard during the forfeiture proceedings. For the purpose of serving the warrant, the importer, consignee, or person holding the bill of lading or air a bill hall be deemed he o ner of he good . For he ame p rpo e, a hori ed repre en a i e shall include any agent of the owner and if the owner or the agent is unknown, any person having possession of the goods at the time of the seizure.

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Service of warrant to an unknown owner shall be effected by posting the warrant for fifteen (15) days in a public place at the concerned district, and by electronic or printed publication. [Sec. 1119, CMTA] Proceedings in Case of Property Belonging to Unknown Parties If, within fifteen (15) days after service of warrant, no owner or agent can he found or appears before the District Collector, the seized goods shall be forfeited ipso facto in favor of the government to be disposed of in accordance with the CMTA. [Sec. 1121, CMTA] Burden of Proof in Forfeiture Proceedings In all proceedings for the forfeiture of any vehicle, vessel, aircraft, or goods under this Act, the burden of proof shall be borne by the claimant. [Sec. 1123, CMTA] Settlement of Pending Seizure Case by Payment of Fine or Redemption of Forfeited Goods Subject to the approval of the Commissioner, the District Collector may allow the settlement by payment of fine or the redemption of forfeited goods, during the course of the forfeiture proceeding. However, the Commissioner may accept the settlement by redemption of any forfeiture case on appeal. No settlement by payment of fine shall be allowed when there is fraud or when the discrepancy in duties and taxes to be paid between what is determined and what is declared amounts to more than thirty percent (30%). In case of settlement by payment of fine, the owner, importer, exporter, or consignee or agent shall offer to pay a fine equivalent to thirty percent (30%) of the landed cost of the seized goods. In case of settlement by redemption, the owner, importer, exporter, or consignee or agent shall offer to pay the redeemed value equivalent to one hundred percent (100%) of the landed cost. Upon payment of the fine or payment of the redeemed value, the goods shall be released and all liabilities which may attach to the goods shall be discharged without prejudice to the filing of administrative or criminal case. When settlement not allowed 1. Fraud 2. Importation is prohibited by law 3. Release of the goods is contrary to law 4. [Sec. 1124, CMTA]

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Decision in Forfeiture Cases In forfeiture cases, the District Collector shall issue an order for hearing within fifteen (15) days, or five (5) days in case of perishable goods, from issuance of the warrant. The District Collector shall render a decision within thirty (30) days upon termination of the hearing, or within ten (10) days in case of perishable goods. The decision shall include a declaration of forfeiture, the imposition of a fine or such other action as may be proper. [Sec. 1125, CMTA] Automatic Review in Forfeiture Cases The Commissioner shall automatically review any decision by the District Collector adverse to the government. [Sec. 1127, CMTA] AUTHORITY OF THE COMMISSIONER TO MAKE COMPROMISE Subject to the approval of the Secretary of Finance, the Commissioner may compromise any administrative case arising under this Act involving the imposition of fines and surcharges, including those arising from the conduct of a post clearance audit, unless otherwise specified by law. Cases involving forfeiture proceedings shall however not be subject to any compromise. [Sec. 1131, CMTA]

b. Judicial Requisites for filing of criminal/civil case 1. Brought in the name of the government of the Phil; 2. Prosecuted and handled by the Bureau with the assistance of the Department of Justice (DOJ); and 3. With approval from the Commissioner. [Sec. 1135, CMTA] Rules on appeal including jurisdiction Unless otherwise provided, the party aggrieved by the ruling or decisions of the Commissioner may appeal to the CTA, in the manner and within the period prescribed by law and regulations. Decisions of the Secretary of Finance when required by this Act, may likewise be appealed to the CTA. Unless an appeal is made to the CTA in the manner and within the period prescribed by law and regulations, the ruling or decision of the Commissioner or the Secretary of Finance shall be final and executory. [Sec. 1136, CMTA]

TAXATION LAW

2. Taxpayer a. Protest When, a ruling or decision of the District Collector or customs officer involving goods with valuation, rules of origin, and other customs issues is made, except the fixing of fines in seizure cases, the party adversely affected may appeal by way of protest against such ruling or decision by presenting to the Commissioner a written protest setting forth the objection to the ruling or decision in question and the reasons therefore. [Sec. 1106, CMTA] When made At the time when payment of the amount claimed to be due the government is made, or within fifteen (15) days thereafter. [Sec. 1106, CMTA] Form 1. Must be in writing 2. Specify the particular decision or ruling of the District Collector for which protest is being made 3. Indicate the particular grounds relied upon for relief [Sec. 1108, CMTA] Scope Limited to the particular goods subject of a goods declaration, but any number of issues may be raised in a protest with reference to the goods declaration constituting the subject matter of the protest. [Sec. 1108, CMTA] Samples to be Furnished by Protesting Parties If the nature of the goods permit, importers filing protests involving questions offset must, upon demand, present to the Commissioner samples of the goods which are the subject matter of the protest. The samples of the goods shall be verified by the customs officer who made the classification against which the protests are filed. [Sec. 1109, CMTA] Effect of Failure to Protest The action of the District Collector shall be final and conclusive. [Sec. 1107, CMTA] Decision in Protest When a protest is filed in proper form, the Commissioner shall render a decision within thirty (30) days from receipt of the protest. In case the protest is sustained, in whole or in part, the appropriate order shall be made, and the entry reassessed, if necessary. [Sec. 1110, CMTA]

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Automatic Review The Commissioner shall automatically review any decision by the District Collector adverse to the government. [Sec. 1127, CMTA]

b. Abandonment When article deemed abandoned Imported goods are deemed abandoned under any of the following circumstances: 1. When the owner, importer, or consignee of the imported goods expressly signifies in writing to the District Collector the intention to abandon the same; or 2. When the owner, importer, consignee, or interested party after due notice, falls to file the goods declaration within the prescribed period in Section 407 of this Act; Provided, That the term goods declaration shall include provisional or incomplete goods declaration deemed valid by the Bureau as provided in Section 403 of this Act. For this purpose, it is the duty of the District Collector to post a list of all packages discharged and their consignees, whether electronically or physically in the District Office, or send a notice to the consignee within five (5) days from the date of discharge; or 3. Having filed such goods declaration, the owner, importer, consignee or interested party after due notice, fails to pay the assessed duties, taxes and other charges thereon, or, if the regulated goods failed to comply with Section 117 of this Act, within fifteen (15) days from the date of final assessment: Provided, That if such regulated goods are subject of an alert order and the assessed duties, taxes and other charges thereof are not paid within fifteen (15) days from notification by the Bureau of the resolution of the alert order, the same shall also be deemed abandoned; or 4. Having paid the assessed duties, taxes and other charges, the owner, importer or consignee or interested party after due notice, fails to claim the goods within thirty (30) days from payment. For this purpose, the arrastre or warehouse operator shall report the unclaimed goods to the District Collector for disposition pursuant to the provisions of this Act; or 5. When the owner or importer fails to claim goods in customs bonded warehouses within the prescribed period. [Sec. 1129, CMTA] Treatment and Disposition of Abandoned Goods

TAXATION LAW

Expressly abandoned goods, when the owner, importer, or consignee of the imported goods expressly signifies in writing to the District Collector the intention to abandon the same, shall ipso facto be deemed the property of the government. If the Bureau has not disposed of the abandoned goods, the owner or importer of goods impliedly abandoned may, at any time within thirty (30) days after the lapse of the prescribed period to file the declaration, reclaim the goods provided that all legal requirements have been complied with and the corresponding duties, taxes and other charges, without prejudice to charges and fees due to the port or terminal operator, as well as expenses incurred have been paid before the release of the goods from customs custody. When the Bureau sells goods which have been impliedly abandoned, although no offense has been discovered, the proceeds of the sale, after deduction of any duty and tax and all other charges and expenses incurred as provided in Section 1143, shall be turned over to those persons entitled to receive them or, when this is not possible, held at their disposal for a specified period. After the lapse of the specified period, the balance shall be transferred to the forfeiture fund as provided in Section 1151. [Sec. 1130, CMTA] If the abandoned articles are transferred to a customs bonded warehouse, the operator shall be liable for the payment of duties and taxes in the case of loss of the stored abandoned imported articles [R.V. Marzan v. CA, GR No. 128064 (2004)]

c. Abatement and Refund The reduction or diminution, in whole or in part, of duties and taxes where payment has not been made. [Sec. 102, CMTA] When available When goods have not yet been released for consumption or have been placed under another customs procedure, provided that no other offense or violation has been committed, the declarant shall neither be required to pay the duties and taxes nor be entitled to refund thereof in any of the following cases: 1. When, at the request of the declarant, the goods are abandoned, or as determined by the Bureau, the goods are destroyed or rendered commercially valueless while under customs

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2.

3.

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control. Any cost herein incurred shall be borne by the declarant; When goods are destroyed or irrecoverably lost by accident or force majeure, the remaining waste or scrap after destruction, if taken into consumption, shall be subject to the duties and taxes that would be applicable on such waste or scrap if imported in same state; and When there are shortages due to the nature of the goods. [Sec. 904, CMTA]

Other cases of abatement or refund 1. Abatement for damage incurred during Voyage [Sec. 905, CMTA] 2. Missing packages [Sec. 906, CMTA] 3. Deficiency in contents of packages [Sec. 907, CMTA] 4. Goods lost or destroyed after arrival [Sec. 908, CMTA] 5. Defective goods [Sec. 909, CMTA] 6. Dead or injured animals [Sec. 910, CMTA] Refund in case of excess payments due to 1. manifest clerical error made in invoice or entry 2. error in return of weight, measure and gauge (certified, under penalties of falsification or perjury, by examining official) 3. error in the distribution of charges on invoices [which does not involve any question of law and certified, under penalties of falsification or perjury, by examining official] [Sec. 912, CMTA] Conditions for refund of excess payments 1. errors discovered before payment or discovered within 1 year after the final liquidation 2. written request and notice from importer or statement of error certified by the Collector How claimed 1. Claim made in writing 2. Collector shall verify with the records in his office 3. Certify claim to Commissioner with his recommendation and necessary papers 4. Commissioner shall then cause the claim to be paid if found correct If the result of the refund would result to a corresponding refund of the internal revenue taxes on the same importation, Collector shall certify to Commissioner who shall cause the said excess to be paid, refunded or credited in favor of the importer. [Sec. 913, CMTA]

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TAXATION LAW

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TARIFF AND CUSTOMS CODE

TAXATION LAW

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and Customs Code START

Collector seizes goods and reports it to the Commissioner and to COA. Owner is notified of seizure

Collector determines probable cause (illegal importation)

C decision favorable to taxpayer/ a ?

Importer may secure release of goods by filing of cash bond (Sec. 2301)

Amount involved less than 5M?

Yes

Yes

Automatic review* by Customs Commisioner (Sec. 2313)

Does commissioner decide w/in 30 days?

No Taxpayer appeals to Customs Commissioner 15 days from receipt of notice

Collector conducts hearing

Is C decision favorable to taxpayer/ a ?

Yes

No Inaction construed as affirmation C

Does Commissioner decide w/n 30 days?

Yes Is

No, amount is at least 5M

C decision favorable to taxpayer/ adverse to ?

No

Yes

Automatic Review* by the Secretary of Finance (SOF) (Sec. 2313, CMO 3-2002)

Yes

I SOF decision favorable to taxpayer/adverse ?

No No

Does SOF decide within 30 days?

Yes

No Yes

END

Inaction construed as affirmation of C decision

Decision becomes final & unappealable

Appeal to the Court of Tax Appeals within 30 days from notice of decision

MR within 15 days from receipt of decision

Appeal to CTA en banc 15 days from receipt of decision denying MR

Inaction construed as affirmation of ( in case of inaction by commissioner)

Appeal to the Supreme Court

No Appeal to CTA

END

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591

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Anti-Dumping [Sec. 301, TCCP; RA 8752; Sec. 711, CMTA] Countervailing [Sec. 302, TCCP; RA 8751; Sec. 713, CMTA] Marking [Sec. 303, TCCP; Sec. 710, CMTA]

Discriminatory [Sec. 304, TCCP; Sec. 714, CMTA]

Safeguard [RA 8800; Sec. 712, CMTA]

TARIFF AND CUSTOMS CODE

TAXATION LAW

TABLE OF SPECIAL DUTIES: When Imposed Where a product or commodity is imported in the Philippines at an export price less than the normal value in the ordinary course of trade for the like product or article destines for consumption in the exporting country or materially regarding establishment of a domestic industry producing the like product [Sec. 3, RA 8752] Whenever any product, commodity or article of commerce is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product, commodity or article, and the importation of such subsidized product, has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry [Sec. 1, RA 8751] If, at the time of importation, any good or its container is not marked in any official language of the Philippines as legibly, indelibly and permanently as the nature of the goods or container will permit, and in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin of the goods Whenever the President finds that the public interest will be served thereby, additional customs duty shall be imposed upon articles wholly or in part the growth or product of, or imported in a vessel of, any foreign country whenever he shall find as a fact that such country 1. Imposes, directly or indirectly, upon any Phil product unreasonable charge, exaction, regulation or limitation which is not equally enforced upon the like articles of other foreign countries; or 2. Discriminates in fact against the commerce of the Philippines, as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. [Sec 5] General Safeguard Measure: Whenever there is a positive final determination of the Commission that a product is being imported into the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat thereof to the domestic industry; however, in the case of nonagricultural products, the Secretary of Agriculture shall first establish that the application of such safeguard measures will be in the public interest [Sec 21] Special Safeguard Measure for Agricultural Products: Imposed upon agricultural products, consistent with Phil international treaty obligations, if its: 1. Cumulative import volume in a given year exceeds its trigger volume subject to the conditions under Sec. 23, RA 8800, or but not currently; and 2. Actual CIF import price is less than its trigger price subject to conditions under Sec. 24, RA 8800

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AntiDumping [Sec. 301, TCC as amended by RA 8752]

TARIFF AND CUSTOMS CODE

TAXATION LAW

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Countervailing [Sec. 302 as amended by RA 8751]

Secretary of Trade and Industry non-agricultural products Secretary of Agriculture agricultural products Tariff Commission - decides whether or not to impose antidumping/countervailing duty

Marking [Sec. 710, CMTA]

Commissioner of Customs

Discriminatory [Sec. 714, CMTA]

President [through a proclamation]

Safeguard [RA 8800] For nonagricultural products: Secretary of Trade and Industry For agricultural products: Secretary of Agriculture

Secretary of Agriculture

For 1]:

Anti-Dumping Duty = Normal Value - Export Price

Equivalent to the subsidy

5% of dutiable value, deemed to have accrued at the time of importation

Not exceeding 100% ad valorem upon the articles

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tariff increase, either ad valorem or specific, or both, to be paid through a cash bond set at a level sufficient to redress or prevent injury to the domestic industry [Sec. 8, RA 8800]

appropriately set to a level not exceeding onethird of the applicable outquota customs duty on the agricultural product under consideration in the year when it is imposed For 2], compute as follows: 0 - if price difference is at most 10% of the trigger price 30% of the amount by which the price difference exceeds 10% of the trigger price 50% - if it exceeds 40% but less than 60% 70% - if it exceeds 60 but at most 75% 90% - if it exceeds 75%