4 2020 Up Boc Taxation Law Reviewer.pdf

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TAXATION

U.P. LAW BOC

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

GENERAL PRINCIPLES OF TAXATION......... 2

A.

CONCEPT AND PURPOSE OF TAXATION .... 2

I. 1. 2. 3. 4. 5.

AS TO OBJECT ..................................................24 AS TO BURDEN OR INCIDENCE .............................24 AS TO TAX RATES .............................................24 AS TO PURPOSE ...............................................25 AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX) ..... .................................................................25 6. AS TO GRADUATION ..........................................25

1. DEFINITION AND CONCEPT ................................... 2 2. PURPOSE ......................................................... 2 3. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS ....................................................... 4 B. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN .. 7 C.

J.

PROSPECTIVITY OF TAX LAWS ............................25 IMPRESCRIPTIBILITY OF TAXES ............................26 SITUS OF TAXATION ..........................................27 DOUBLE TAXATION ...........................................29 a. Strict sense (Direct Duplicate Taxation) ..29 b. Broad sense (Indirect Duplicate Taxation) 29 5. ESCAPE FROM TAXATION ...................................30 a. Shifting of Tax Burden............................30 b. Tax Avoidance (Tax Minimization) ..........32 c. Tax Evasion (Tax Dodging) ....................32 d. Transformation.......................................33 6. EXEMPTION FROM TAXATION ..............................33 7. DOCTRINE OF EQUITABLE RECOUPMENT ..............35 8. PROHIBITION ON COMPENSATION AND SET-OFF ....35 9. COMPROMISE ..................................................35 10. TAX AMNESTY ..............................................36

D. JURISDICTION OVER SUBJECT AND OBJECTS............................................................... 9 PRINCIPLES OF A SOUND TAX SYSTEM ... 10 1. FISCAL ADEQUACY ........................................... 10 2. ADMINISTRATIVE FEASIBILITY.............................. 10 3. THEORETICAL JUSTICE OR EQUALITY ................... 10 F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION............................... 10 1. INHERENT LIMITATIONS ..................................... 10 a. Public Purpose ...................................... 10 b. Inherently Legislative ............................. 11 c. Territorial............................................... 12 d. International Comity............................... 13 e. Exemption of Government Entities, Agencies, and Instrumentalities ................ 13 2. CONSTITUTIONAL LIMITATIONS ........................... 14 a. Provisions directly affecting Taxation...... 15 b. Provisions Indirectly Affecting Taxation .. 21 G.

STAGES OR ASPECTS OF TAXATION........ 22 1. LEGISLATIVE ACT: LEVY OR IMPOSITION ............... 22 2. EXECUTIVE ACT: ASSESSMENT AND COLLECTION ...... ................................................................. 23 3. TAXPAYER’S ACT: PAYMENT .............................. 23 4. TAXPAYER’S AND EXECUTIVE ACT: REFUND ......... 23

H.

REQUISITES OF A VALID TAX .................... 23

GENERAL CONCEPTS IN TAXATION .......... 25 1. 2. 3. 4.

THEORY AND BASIS OF TAXATION ............. 9 1. LIFEBLOOD THEORY ............................................ 9 2. NECESSITY THEORY ........................................... 9 3. BENEFITS-PROTECTION THEORY (SYMBIOTIC RELATIONSHIP) .................................................. 9

E.

KINDS OF TAXES ......................................... 24

K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES, AND REGULATIONS ........... 36 1. 2. 3. 4.

TAX LAWS .......................................................36 TAX EXEMPTION AND EXCLUSION ........................37 TAX RULES AND REGULATIONS ...........................37 PENAL PROVISIONS OF TAX LAWS .......................39

II. NATIONAL INTERNAL REVENUE CODE (NIRC) OF 1997, AS AMENDED............................ 39 A.

TAXING AUTHORITY.................................... 39 1. JURISDICTION, POWER AND FUNCTIONS OF THE COMMISSIONER OF INTERNAL REVENUE ...............39 a. Powers and Duties of the Bureau of Internal Revenue (Sec. 2, NIRC) ...........................39 b. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.................39 c. Non-retroactivity of rulings (Sec. 246, NIRC) 39

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2. RULE-MAKING AUTHORITY OF THE SECRETARY OF FINANCE ......................................................... 40 a. Authority of the Secretary of Finance to Promulgate Rules and Regulations (Sec. 244, NIRC) .............................................. 40 b. Specific Provisions to be Contained in Rules and Regulations (Sec. 245, NIRC)............ 40 B.

a. Domestic Corporations and Resident Foreign Corporations................................97 b. Non-resident Foreign Corporations (NRFC) [Sec. 28(B)]............................................ 108 c. Corporations Exempt from Income Tax . 108 7. FILING OF RETURNS AND PAYMENT ................... 111 a. Individual Return .................................. 111 b. Corporate Returns ............................... 113 c. Return on Capital Gains Realized from Sale of Shares of Stock and Real Estate......... 114 8. WITHHOLDING OF TAXES ................................. 114 a. Concept ............................................... 114 b. Final Withholding Tax........................... 114 c. Creditable Withholding Tax................... 114 d. Fringe Benefits Tax .............................. 115

INCOME TAX ............................................... 41 1. DEFINITION, NATURE AND GENERAL PRINCIPLES ... 41 a. Income Tax Systems ............................. 42 b. Features of the Philippine Income Tax Law ............................................................. 43 c. Criteria in Imposing Philippine Income Tax . ............................................................. 43 d. Types of Philippine Income Tax ............. 43 e. Kinds of Taxpayers................................ 44 f. Estates and Trusts ................................ 46 2. CONCEPT OF INCOME ....................................... 47 a. When Income is Taxable ....................... 48 b. Tests in Determining Whether Income is Earned for Tax Purposes ......................... 49 c. Methods of Accounting .......................... 50 d. Situs of Income ..................................... 51 3. GROSS INCOME ............................................... 51 a. Definition ............................................... 51 b. Distinguish: gross income, net income, and taxable income ........................................ 52 c. Sources of Income Subject to Tax.......... 52 d. Exclusions............................................. 63 4. DEDUCTIONS FROM GROSS INCOME .................... 68 a. General Rules ....................................... 68 b. Concept of Return of Capital .................. 68 c. Distinguish: Itemized Deductions and Optional Standard Deductions.................. 69 d. Items Not Deductible ............................. 81 5. INCOME TAX ON INDIVIDUALS ............................. 82 a. Resident Citizens, Non-Resident Citizens and Resident Aliens [Sec. 24(A)(1)] .......... 82 b. Non-Resident Aliens Engaged in Trade or Business ................................................. 88 c. Non-Resident Aliens Not Engaged in Trade or Business [Sec. 25 (B)] ......................... 88 d. Aliens Employed by Regional Headquarters, Regional Operating Headquarters, Offshore Banking Units, and Petroleum Service Contractors.............................................. 89 e. Individual Taxpayers exempt from income tax........................................................... 89 6. INCOME TAX ON CORPORATIONS ........................ 97

TAXATION 2 ....................................................... 116 A.

ESTATE TAX .............................................. 117 1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION ... 117 2. CLASSIFICATION OF DECEDENT ......................... 118 3. COMPOSITION OF GROSS ESTATE ..................... 119

B.

DONOR’S TAX............................................ 132 1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION ... 132 2. REQUISITES OF VALID DONATION ...................... 132 3. TRANSFERS WHICH MAY BE CONSIDERED AS DONATION ..................................................... 133 a. Sale, Exchange, or Transfer of Property for Less Than Adequate and Full Consideration ........................................................... 133 b. Condonation or Remission of Debt ....... 134 c. Renunciation of inheritance .................. 134 4. CLASSIFICATION OF DONOR ............................. 134 5. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION AND EXEMPTIONS) ...................... 135 6. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY ...................................................... 137 7. FILING OF RETURN AND PAYMENT ..................... 137

C.

VALUE-ADDED TAX (VAT) ......................... 148 1. NATURE & CHARACTERISTICS OF VAT ............... 148 a. Tax on value added.............................. 148 b. Sales Tax ............................................ 148 c. Tax on Consumption ............................ 148 d. Indirect tax: Impact and Incidence of Tax ... ........................................................... 148 e. Tax Credit Method ............................... 148 f. Destination Principle and Cross-Border Doctrine ................................................. 148 2. PERSONS LIABLE TO VALUE-ADDED TAX ............ 150

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3. COMPOSITION OF VALUE-ADDED TAX ................ 150 a. On sale of goods or properties ............. 150 b. On importation of goods....................... 155 c. On sale of services and use or lease of properties .............................................. 155 4. ZERO-RATED AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES, AND SERVICES......... 159 5. VALUE-ADDED TAX-EXEMPT TRANSACTIONS ....... 162 6. INPUT AND OUTPUT TAX .................................. 170 7. REFUND OR TAX CREDIT OF EXCESS INPUT TAX; PROCEDURE ................................................. 174 8. COMPLIANCE REQUIREMENTS .......................... 179 a. Registration......................................... 179 b. Invoicing Requirements ....................... 179 c. Filing of Returns and Payment ............. 180 d. Withholding of Final Value-added Tax on Sales to Government ............................. 181 e. Administrative and Penal Sanctions ..... 181 D.

PERCENTAGE TAXES: CONCEPT AND NATURE..................................................... 187

E.

EXCISE TAX: CONCEPT AND NATURE .... 191

2. NATURE AND SOURCE OF TAXING POWER .......... 217 a. Grant of Local Taxing Power under the Local Government Code (LGC)........................ 217 b. Authority to Prescribe Penalties for Tax Violations ............................................... 217 c. Authority to Grant Local Tax Exemptions ... ........................................................... 217 d. Withdrawal of Exemptions .................... 217 e. Authority to Adjust Local Tax Rates ...... 218 f. Residual Taxing Power of Local Governments ......................................... 218 3. SCOPE OF TAXING POWER ............................... 218 4. SPECIFIC TAXING POWER OF LGUS .................. 219 a. Taxing Powers of Provinces ................. 219 b. Taxing Powers of Municipalities............ 222 c. Taxing Powers of Cities........................ 226 d. Taxing Powers of Barangays ................ 226 5. COMMON REVENUE-RAISING POWERS ............... 227 6. COMMUNITY TAX ............................................ 227 7. COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS........................................................... 229 8. REQUIREMENTS FOR A VALID TAX ORDINANCE .... 231 9. COLLECTION OF TAXES.................................... 232 10. TAXPAYER’S REMEDIES ............................... 232 a. Protest of Assessment ......................... 233 b. Claim for Refund or Tax Credit of Erroneously or Illegally Collected Tax, Fee or Charge................................................... 233 c. Question the Legality of the Ordinance . 233 11. ASSESSMENT AND COLLECTION OF LOCAL TAXES . ............................................................... 234

F. DOCUMENTARY STAMP TAX: CONCEPT AND NATURE......................................................... 192 1. TAX REMEDIES UNDER THE NIRC .................... 193 2. TAXPAYER’S REMEDIES................................... 198 a. Protesting the assessment ................... 199 b. Recovery of Tax Erroneously or Illegally Collected ............................................... 201 c. Power of Commissioner of Internal Revenue to Compromise ...................................... 205 d. Non-retroactivity of Rulings .................. 206 3. GOVERNMENT REMEDIES FOR COLLECTION OF DELINQUENT TAXES ....................................... 206 a. Requisites ........................................... 207 b. Prescriptive Periods; Suspension of Running of Statute of Limitations.......................... 207 c. Administrative Remedies ..................... 207 d. No Injunction Rule; Exceptions ............ 214 4. CIVIL PENALTIES ............................................ 214 a. Delinquency Interest and Deficiency Interest ........................................................... 214 b. Surcharge ........................................... 215 c. Compromise Penalty ........................... 215 d. Fraud Penalty...................................... 215 III. LOCAL TAXATION ........................................ 216 A.

LOCAL GOVERNMENT TAXATION ........... 216 1. FUNDAMENTAL PRINCIPLES (U-PUCE-PIP) ....... 216

B.

REAL PROPERTY TAXATION .................... 236 1. FUNDAMENTAL PRINCIPLES .............................. 236 2. NATURE OF REAL PROPERTY TAX (RPT) ........... 236 3. IMPOSITION.................................................... 236 a. Power to Levy ...................................... 236 b. Exemptions from RPT .......................... 238 4. APPRAISAL AND ASSESSMENT OF REAL PROPERTY ... ............................................................... 238 a. Classes of Real Property...................... 239 b. Assessment of Real Property Based on Actual Use ............................................. 240 5. COLLECTION OF REAL PROPERTY TAX ............... 241 6. TAXPAYER’S REMEDIES ................................... 244 a. Contesting the Valuation of Real Property.. ........................................................... 244 b. Contesting a Deficiency Tax Assessment... ........................................................... 244 c. Compromising an RPT assessment ...... 246

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IV. JUDICIAL REMEDIES ................................... 250 A. JURISDICTION OF THE COURT OF TAX APPEALS ....................................................... 250 1. CIVIL CASES ................................................. 250 a. Exclusive Original Jurisdiction of the Court in Divisions................................................ 250 b. Exclusive Appellate Jurisdiction in Civil Cases.................................................... 250 2. CRIMINAL CASES ........................................... 251 a. Exclusive Original Jurisdiction of the Court in Divisions................................................ 251 b. Exclusive Appellate Jurisdiction in Criminal Cases.................................................... 251 3. CIVIL CASES ................................................. 253 a. Who May Appeal, Mode of Appeal, Effect of Appeal................................................... 253 b. Suspension of Collection of Taxes ....... 253 c. Injunction not available to restrain collection 253 4. CRIMINAL CASES ........................................... 255 a. Institution and Prosecution of Criminal Actions .................................................. 255 b. Institution of Civil Action in Criminal Action . ........................................................... 255 c. Period to Appeal.................................. 255 5. APPEAL TO THE CTA EN BANC ........................ 256 6. PETITION FOR REVIEW ON CERTIORARI TO SUPREME COURT ......................................................... 256

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TAXATION 1 TAXATION LAW

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I.

TAXATION 1

GENERAL PRINCIPLES OF TAXATION

A. CONCEPT AND PURPOSE OF TAXATION 1. Definition and Concept a. 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].

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[PAL v. Edu, G.R. No. L-41383 (1988)] b. 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 and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. Thus, taxation can: 1. Promote general welfare of the people as an implement of police power

b. As a Power i. It refers to the inherent power of the state to demand enforced contributions for public purpose. ii. 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)]

2. Purpose a. Revenue-raising The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. [Napocor v. Province of Albay G.R. No. 87479, 4 June 1990.] 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. Page 2 of 256

The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540 (2005)] 2. Strengthen anemic enterprises or provide incentives to greater production through grant of tax exemptions or the creation of conditions conducive to their growth. 3. Protect local industries against foreign competition by imposing additional taxes on imported goods, or encourage foreign trade by providing tax incentives on imported goods. 4. Be a bargaining tool by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country. 5. Halt inflation in periods of prosperity to curb spending power; ward off depression in periods of slump to expand business. 6. Reduce inequalities in wealth and incomes, as for instance, the estate, donor's and income taxes, their payers

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being the recipients of unearned wealth or mostly in the higher income brackets. Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden. [MAMALATEO] 7. Encourage economic growth through the grant of incentives or exemptions, which encourage investment and thereby stimulate economic activity 8. 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]. 9. To push for the government’s health measure, just like what happened in the landmark legislation on sin taxes in 2012 [see R.A. No. 10351]. Nature 1. Inherent in sovereignty – The power to tax is an attribute of sovereignty. It is a power emanating from necessity because it imposes a necessary burden to preserve the State's sovereignty xxx [Phil. Guaranty Co., Inc. v. Commissioner, G.R. No. L22074 (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;

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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 checks on its abuse rest on 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 although they may or may not be provided in the Constitution. Elements of Taxation 1. Enforced proportional contribution from persons and properties - 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. Imposed by the State by virtue of its sovereignty; and 3. It is levied for the support of government [Republic v. COCOFED, G.R. Nos. 147062-64 (2001)] Characteristics of Taxing Power 1. It is comprehensive. Covers persons, businesses, activities, professions, rights, and privileges. 2. It is unlimited. A tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely

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TAXATION 1 TAXATION LAW

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TAXATION

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I.

TAXATION 1

GENERAL PRINCIPLES OF TAXATION

A. CONCEPT AND PURPOSE OF TAXATION 1. Definition and Concept a. 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].

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[PAL v. Edu, G.R. No. L-41383 (1988)] b. 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 and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. Thus, taxation can: 1. Promote general welfare of the people as an implement of police power

b. As a Power i. It refers to the inherent power of the state to demand enforced contributions for public purpose. ii. 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)]

2. Purpose a. Revenue-raising The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. [Napocor v. Province of Albay G.R. No. 87479, 4 June 1990.] 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. Page 2 of 256

The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540 (2005)] 2. Strengthen anemic enterprises or provide incentives to greater production through grant of tax exemptions or the creation of conditions conducive to their growth. 3. Protect local industries against foreign competition by imposing additional taxes on imported goods, or encourage foreign trade by providing tax incentives on imported goods. 4. Be a bargaining tool by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country. 5. Halt inflation in periods of prosperity to curb spending power; ward off depression in periods of slump to expand business. 6. Reduce inequalities in wealth and incomes, as for instance, the estate, donor's and income taxes, their payers

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being the recipients of unearned wealth or mostly in the higher income brackets. Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden. [MAMALATEO] 7. Encourage economic growth through the grant of incentives or exemptions, which encourage investment and thereby stimulate economic activity 8. 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]. 9. To push for the government’s health measure, just like what happened in the landmark legislation on sin taxes in 2012 [see R.A. No. 10351]. Nature 1. Inherent in sovereignty – The power to tax is an attribute of sovereignty. It is a power emanating from necessity because it imposes a necessary burden to preserve the State's sovereignty xxx [Phil. Guaranty Co., Inc. v. Commissioner, G.R. No. L22074 (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;

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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 checks on its abuse rest on 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 although they may or may not be provided in the Constitution. Elements of Taxation 1. Enforced proportional contribution from persons and properties - 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. Imposed by the State by virtue of its sovereignty; and 3. It is levied for the support of government [Republic v. COCOFED, G.R. Nos. 147062-64 (2001)] Characteristics of Taxing Power 1. It is comprehensive. Covers persons, businesses, activities, professions, rights, and privileges. 2. It is unlimited. A tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely

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venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. [Tio v. Videogram Regulatory Board, G.R. No. 75697 (1987)] 3. It is plenary or complete. Under NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. Taxes, being the lifeblood of the government, should be collected without unnecessary hindrance, every precaution must be taken not to unduly suppress it. [Republic v. Caguioa G.R. No. 168584 (2007)] 4. It is supreme. It is supreme insofar as the selection of the subject of taxation is concerned, but it does not mean that it is superior to the other inherent powers of the State. Characteristics of Tax 1. Enforced contribution 2. Proportionate in character – Laid by some rule of apportionment which is usually based on ability to pay. “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.” [Sec. 28 (1), Art. VI, 1987 Constitution]; 3. 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)]; and 4. 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); 5. Personal to the taxpayer; 6. Levied on persons, property, rights, acts, privileges, or transactions; 7. Levied by the State which has jurisdiction or control over the subject to be taxed; 8. Levied by the law-making body of the

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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 accrue exclusively to the local governments.” [Sec. 5, Art. X, 1987 Constitution];

3. Tax as Distinguished from Other Forms of Exactions Tariff Taxes

Tariff

All embracing term to A kind of tax imposed include various kinds on articles which are of enforced traded internationally contributions upon persons for the attainment of public purposes Tariff may be used in one of three (3) senses: 1. A book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same; or 2. The duties payable on goods imported or exported; or 3. The system or principle of imposing duties on the importation (or exportation of goods)

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Toll Taxes

Toll

Paid for the support Paid for the use of of the government another’s property. Demand sovereignty

of Demand proprietorship

Generally, no limit on the amount collected as long as it is not excessive, unreasonable or confiscatory

of

Amount paid depends upon the cost of construction or maintenance of the 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] License fee Taxes

License and Regulatory Fee

Imposed under the Levied under the taxing power of the police power of the state for purposes of state. revenue. Forced contributions for the purpose of maintaining government functions.

Exacted primarily to regulate certain businesses or occupations.

Generally unlimited Should not as to amount unreasonably exceed the expenses of issuing the license and of supervision.

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

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called a tax. [Phil. Airlines, Inc. v. 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 purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. [Progressive Development Corp. v. 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. Special assessment Taxes

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It has general Exceptional both as application both as to to time and locality time and place 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. 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] Debt Taxes

Debt

Based on laws

Generally based on contract, express or implied.

Special Assessment

Levied not only on Levied only on land land

Generally cannot be Assignable assigned

Imposed regardless Imposed because of of public an increase in value improvements of land benefited by public improvement

Generally money

Contribution of a Contribution of a taxpayer for the person for the support of the construction of a government public improvement

paid

in May be paid in kind

Cannot be a subject Can be a subject of of set off or set off or compensation compensation (see Art. 1279, Civil Code) Imprisonment is a sanction for nonpayment of tax, except poll tax

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A person cannot be imprisoned for nonpayment of debt (except when it arises from a crime)

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Governed by the Governed by the special prescriptive ordinary periods of periods provided for prescription in the NIRC Does not draw Draws interest when interest except only it is so stipulated or when delinquent where there is default Imposed only public authority

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 xxx would not be of any moment when Congress itself exercises the power. [NTC v. CA, G.R. No. 127937 (1999)

by Can be imposed by private individual

A tax is not a debt in the ordinary sense of the word. Penalty Taxes

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Penalty

Violation of tax laws Any sanction may give rise to imposed as a imposition of penalty punishment for violation of law or acts deemed injurious Primarily intended to Designed to regulate raise revenue conduct May be imposed only May be imposed by by the government the government or private individuals or entities Cannot be a subject Can be a subject of of set off or set off or compensation compensation (see Art. 1279, Civil Code)

B. 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 Page 7 of 256

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Authority exercises Power)

(who the

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Taxation

Eminent Domain

May be exercised only by: the government; or its political subdivisions.

May be exercised by: the government; its political subdivisions; or may be granted to public service companies or public utilities.

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Police Power May be exercised only by: the government; or its political subdivisions.

Purpose

The property (generally in the form of money) is taken for the support of the government.

To facilitate the taking of private property for public use.

The use of the property is “regulated” for the purpose of promoting the general welfare; it is not compensable.

Persons Affected

Operates upon: a community; or class of individuals.

Operates on: an individual as the owner of a particular property.

Operates upon: a community; or a class individuals.

Effect

The money contributed becomes part of the public funds.

There is a transfer of the right to property.

There is no transfer of title. At most, there is restraint on the injurious use of property.

Benefits Received

Protection and benefits he receives. The enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purpose.

Amount Imposition

Relationship Constitution

of

to

of

Indirect benefits Market value of the property He receives the market value of the property taken from him.

The person affected receives indirect benefits as may arise from the maintenance of a healthy economic standard of society.

Generally, there is no limit on the amount of tax that may be imposed.

No amount imposed but rather the owner is paid the market value of property taken.

Amount imposed should just be commensurate to cover the cost of regulation, issuance of a license or surveillance

Subject to constitutional limitations, including the prohibition against impairment of the obligation of contracts.

Inferior to the impairment prohibition; government cannot expropriate private property, which under a contract had previously bound itself to purchase from the other contracting party.

Relatively free from constitutional limitations and is superior to the impairment of contract provision.

[MAMALATEO, Reviewer on Taxation 2nd Edition (2008), pp. 11-12]

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C. THEORY AND BASIS OF TAXATION 1. Lifeblood theory The underlying basis of taxation is governmental necessity, for without taxation, a government can neither exist nor endure. 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)].

2. Necessity theory The power of taxation proceeds upon the theory that the existence of the 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

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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. 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. JURISDICTION OVER SUBJECT AND OBJECTS 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. 1. Tax laws cannot operate beyond a State’s territorial limits 2. The gov’t cannot tax a particular object of taxation which is not within its territorial jurisdiction 3. Property outside the State’s jurisdiction does not receive any protection of the State 4. If a law is passed by Congress, it must see to it that the object or subject of taxation is within the territorial jurisdiction of the taxing authority

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E. PRINCIPLES OF A SOUND TAX SYSTEM 1. 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.

A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. These principles are only designed to make our tax system sound. However, if a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. [Dimaampao, Tax Principles and Remedies (2015)]

F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

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, • enforced with the least inconvenience to the taxpayer; and • not unduly burdensome upon or discouraging to business activity.

3. Theoretical justice or equality The tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called ability to pay principle. Taxation should be uniform as well as equitable [Section 28(1), Art. VI, 1987 Constitution] The State must evolve a progressive system of taxation. Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. 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]

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1. Inherent Limitations 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

a. Public Purpose The proceeds of the tax must be used: i. for the support of the State; or ii. for some recognized objects of government or directly to promote the welfare of the community. 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)] 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.

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No. L-75697 (1987)] Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647 (2005)] It is the purpose which determines the public character of the tax law, not the number of persons benefited. [Dimaampao, Tax Principles and Remedies (2015)] 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 ultimately benefited by their promotion. [Pascual v. Sec. of Public Works, supra]

b. Inherently Legislative General Rule: Delegata potestas non potest delegari. (No delegated powers can be further delegated.) 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

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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.” [People v. Vera, G.R. No. L-45685 (1937)] 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] For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself, that is, it must set forth the policy to be executed by the delegate and, (2) it must fix a standard — limits of which are sufficiently determinate or determinable — to which the delegate must conform. [Osmena v. Orbos, G.R. No. 99886 (1993)] 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

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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 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)].

c. 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.

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. [Sec 5, Art. X 1987 Constitution] b. Delegation to the President 1. Tariff powers by Congress under the Flexible Tariff Clause 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. [Sec. 28(2), Art. VI, 1987 Constitution] 2. Emergency Powers [Sec. 23(2), Art. VI, 1987 Constitution. 3. To enter into Executive agreements; and 4. To ratify treaties which grant tax exemption subject to Senate concurrence.

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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; ! The manner, means, and agencies of collection; and ! The prescribing of the necessary rules with respect thereto.

c. 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. 8788].

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Reasons: a. Tax laws do not operate beyond a country’s territorial limits. 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 the relationship justifying the levy. Thus, the citizen’s 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 a citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of his government.

d. 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. All states, including the smallest and least influential, are also entitled to their dignity and the protection of their honor and reputation. [Dimaampao, Tax Principles and Remedies (2015)]

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b. In international law, a foreign government may not be sued without its consent. Therefore, it is useless to impose a tax which could not be collected. c. 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.

e. Exemption of Government Entities, Agencies, and Instrumentalities If the taxing authority is the National Government: General Rule: Agencies and instrumentalities of the government are exempt from tax. Their exemption rests on the State's sovereign immunity from taxation. The State cannot be taxed without its consent and such consent, being in derogation of its sovereignty, is to be strictly construed. [Gomez v. Palomar, GR No. L-23645, 29 October 1968] 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. 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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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: Government-owned or controlled corporations (GOCCs) perform proprietary functions hence, they are subject to taxation. [Dimaampao, Tax Principles and Remedies (2015)] Exception to the Exception: The following GOCCs are considered tax exempt: 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) [NIRC as amended, Sec 27(c)] There is no constitutional prohibition against the government taxing itself. [Coll. v. Bisaya Land Transportation, 105 Phil. 338 (1959)].

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2. Constitutional Limitations The following are the constitutional limitations of taxation: 1. Provisions directly affecting taxation: 1. Prohibition against imprisonment for non-payment 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. President’s veto power on appropriation, 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. 2. Provisions indirectly affecting taxation: 1. Due process 2. Equal protection; 3. Religious freedom; 4. Non-impairment of obligations of contracts; 5. Freedom of speech and expression; 6. Presidential power to grant reprieves, communications, and pardons, and remit fines and forfeitures after conviction by final judgement; and 7. No taking of private property for public use without just compensation

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a. Provisions Taxation

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directly

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.

affecting

1. Prohibition against imprisonment for non-payment of poll tax No person shall be imprisoned for debt or non-payment of a poll tax. [Sec. 20, Art. III, 1987 Constitution] Capitation or poll taxes are taxes of a fixed amount upon all persons, or upon all the persons of a certain class, resident within a specified territory, without regard to their property or the occupations in which they may be engaged. Taxes of a specified amount upon each person performing a certain act or engaging in a certain business or profession are not, however, poll taxes. [51 Am. Jur. 66-67]

b. Equity i. Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable. “Equitable” means fair, just, reasonable and proportionate to the taxpayer’s ability to pay. Taxation may be uniform but inequitable where the amount of the tax imposed is excessive or unreasonable. ii. 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 tax. Where the “tax differentiation is not based on material or substantial differences,” the guarantee of equal protection of the laws and the uniformity rule will likewise be infringed.

2. Uniformity and equality of taxation The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation. [Sec. 28(1), Art. VI, 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)] i. 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. ii. Equality in burden – Uniformity implies equality in

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Taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation.

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Equality and Uniformity distinguished: Equality in taxation is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it. Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but simply a geographical uniformity [Churchill v Concepcion, GR No. 11572, 22 September 1916] 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. L22814 (1968)] The progressive system of taxation would place stress on direct rather than indirect taxes, on non-essentiality rather than essentiality to the taxpayer of the object of taxation, or on the taxpayer’s ability to pay. Example is that individual income tax system that imposes rates progressing upwards as the tax base (taxpayer’s taxable income) increases. A progressive 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.

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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] 4. Prohibition against taxation of religious, charitable entities, and educational entities Sec. 28(3), Art. VI, 1987 Constitution: a. Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit 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]

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Test of Use of the property, and not Exemption the ownership [Abra Valley College v. Aquino, G.R. No. L-39086 (1988)] Nature Use

of Actual, direct and exclusive use for religious, charitable or educational purposes. [Lladoc v. CIR, supra]

Scope of Real property taxes on Exemption 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 nurses’ home, property to provide housing facilities for interns, resident doctors and other members of the hospital staff, and recreational facilities for student nurses, interns and residents, such as athletic fields. [Abra Valley College v. Aquino, supra] 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 insttution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, 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

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others). “Exclusive" – possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; "Exclusively" - “in a manner to exclude; as enjoying a privilege exclusively.” 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 purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.

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5. Prohibition against taxation of nonstock, non-profit educational institutions Sec. 4, Art. XIV, 1987 Constitution All revenues and assets of non-stock, nonprofit 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, nonprofit educational institutions. The exemption covers income, property, and donor’s taxes, 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.)

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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. Sec. 28, par. 3, Art. VI

Sec. 4, par. 3, Art. XIV

Charitable Non-stock, non-profit institutions, churches educational and parsonages or institutions. 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

The exemption does not cover revenues derived from, or assets used in, unrelated activities or enterprise. Revenues derived from assets used in the operation of cafeterias, canteens, and bookstores are also exempt if they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises [RMC No. 76-2003] Page 18 of 256

Income, property, and donor’s taxes and custom duties.

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6. Majority vote of Congress for grant of tax exemption Sec. 28, Art. VI, 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 c. Tax refunds

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. President’s veto power appropriation, revenue, tariff bills

on

Sec. 27(2), Art. VI, 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 Sec. 2, Art. VIII, 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.

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 Page 19 of 256

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Sec. 5(2(b)), Art. VIII, 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 (b) all cases involving the legality of any tax, impost, assessment or toll or any penalty imposed in relation thereto.

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11. Flexible tariff clause Delegation of tariff powers to the President under the flexible tariff clause [Sec. 28(2), Art. VI, 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

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)] Sec. 30, Art. VI, 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)]. 10. Grant of power to the local government units to create its own sources of revenue

Sec. 28(3), Art. VI, 1987 Constitution. Charitable institutions, churches and personages 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 shall be exempt from taxation. 13. No appropriation or use of public money for religious purposes Sec. 29, Art. VI, 1987 Constitution 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.

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. [Sec. 5, Art. X, 1987 Constitution]

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b. Provisions Taxation

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Indirectly

Affecting

1. Due process Sec. 1, Art. III, 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 within taxing authority’s territorial jurisdiction (c) Assessment or collection is not arbitrary or oppressive 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. L59431(1984)] Due process is usually violated where: ! The tax imposed is for private, as distinguished from, public purposes ! A tax is imposed on property outside the State, i.e., extra-territorial taxation; or ! Arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer.

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Due process does not require that the property subject to the tax or the amount to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. [Pepsi-Cola Bottling Co. of the Philippines, Inc. v. Municipality of Tanauan, G.R. No. L31156 (1976)] Instances of violations of the due process clause: • If the tax amounts to confiscation of property; • If the subject of confiscation is outside the jurisdiction of the taxing authority; • If the tax is imposed for a purpose other than a public purpose; • If the law which is applied retroactively imposes just and oppressive taxes. • If the law violates the inherent limitations on taxation. 2. Equal protection Sec. 1, Art. III, 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. 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 properties to be taxed and it is sufficient “if all of the same class are subject to the same rate and the tax is administered impartially upon them.” [1 Cooley 608]. The equal protection clause is subject to reasonable classification [See requisites for valid classification, supra].

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3. Religious freedom

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4. Non-impairment contracts

Sec. 5, Art. III, 1987 Constitution. No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. (Non-establishment clause) The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. (Free exercise clause) No religious test shall be required for the exercise of civil and political rights. The free exercise clause is the basis of tax exemptions. The imposition of license fees on the distribution and sale of bibles and other religious literature by a non-stock, 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)]

of

obligations

of

Sec. 10, Art. III, 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]

G. STAGES OR ASPECTS OF TAXATION The exercise of taxation involves the following stages:

1. Legislative imposition

Act:

Levy

or

This process involves the passage of tax laws or ordinances through the legislature. The tax laws to be passed shall determine: i. Those to be taxed (person, property or rights); ii. How much is to be collected (the rate and the base of tax); and iii. 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. Scope of legislative power to tax: a) Discretion as to purpose for which taxes shall be levied. The sole arbiter of the purposes for which taxes shall be levied is the legislature, provided the purposes are public. The courts may review the levy of the tax to determine whether the

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purpose is a public one but once that is determined, the courts can make no other inquiry as to the purpose of tax, as it affects the power to impose it. [Cooley Taxation, 4th Ed., 171.] b) Discretion as to subjects of taxation. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. [Lutz v. Araneta G.R. No. L-7859 (1955)] c) Discretion as to amount or rate of tax. In the absence of constitutional prohibitions, the legislature has the right to finally determine the amount or rate of tax. Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy. The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare, x x x But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining the amount of the tax. (Cruz, Constitutional Law, 2000 Ed., p. 87)

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such as the Bureau of Internal Revenue or Bureau of Customs.

3. Taxpayer’s Act: Payment 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. Taxpayer’s and Act: Refund

Executive

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]

H. REQUISITES OF A VALID TAX 1. It must be 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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tax falls on the same person. (e.g., income tax, estate tax, donor’s tax, community tax)

I. 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). 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 – it is said that an excise tax is a charge imposed upon: i. the performance of an act, ii. the enjoyment of a privilege, or iii. the engagement in an occupation, profession, or business. The obligation to pay excise 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 term “excise tax” is synonymous with “privilege tax” and the two are often used interchangeably (e.g., income tax, value added tax, estate tax, donor’s tax).

2. As to burden or incidence 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. The liability for the payment of the tax (incidence) and the burden (impact) of the

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 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).

3. As to tax rates a. 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 determined. The phrase “ad valorem” means literally, “according to value.” (e.g., real estate tax, excise tax on automobiles, non-essential goods such as jewelry and perfumes, customs duties. c. Mixed – a tax that has both the characteristics of specific tax and ad valorem tax

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

5. As to scope (or authority imposing the tax) a. National – taxes imposed by the national government, through Congress and administered by the Bureau of Internal Revenue (BIR) or the Bureau of Customs (BOC) (e.g., national internal revenue taxes, customs duties, and national taxes imposed by laws). b. Municipal or Local – taxes imposed by local governments, through their respective Sanggunians, and administered by the local executive through the local treasurer (e.g., business taxes that may be imposed under the Local Government Code, professional tax).

6. As to graduation a. Progressive – The rate of tax increases as the tax base or bracket increases, e.g., income tax, estate tax, donor’s tax. 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

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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, a regressive taxation system exists when there are more indirect taxes imposed than direct taxes. Since the lowincome sector of the population as a whole buys 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. Regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights. [Tolentino v. Secretary of Finance, GR No. 115455, 25 August 1994]

J. GENERAL CONCEPTS IN 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

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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)] Statutes are prospective and not retroactive in their operation, laws being the formulation of rules for the future, not the past. [Curata v. Philippine Ports Authority, G.R. Nos. 15421112 (2009)]

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favor of the other taxpayers.

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. Standard Chartered Bank, G.R. No. 192173 (2015)]

a. Prescriptions found in statutes

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. Thus, 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)]

(1) National Internal Revenue Code – statute of limitations in the assessment and collection of taxes therein imposed. Summary of prescription on assessment and collection: 3 YEARS

Prescription of assessment AND collection from: (a) the prescribed last day of filing of returns (even if the return was filed earlier than the deadline); OR (b) the day when the return was actually filed if filed later than the last day of filing [Sec. 203, NIRC], whichever comes later.

10 YEARS

Prescription of assessment in cases of: (a) false or fraudulent return with intent to evade tax; OR (b) failure or omission to file a return [Sec. 222, NIRC]

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. Taxpayer’s deliberate misstatement or omission of facts b. BIR’s gathered facts is materially different 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 Page 26 of 256

Counted from the discovery of the fraud, falsity, or omission.

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5 YEARS

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Prescription of collection of tax if: (1) assessed within the 3-year and 10-year prescriptive periods; (2) assessed within the extended period agreed upon by the Commissioner and taxpayer (waiver of the prescriptive period); and (3) 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; 3. Fraud; and 4. Compliance audit. (2) Customs Modernization and Tariffs Act (CMTA) Under Sec. 430, it provides that “[i]n 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 or duties, or upon completion of the post-clearance audit.” (3) Local Government Code The LGC prescribes the following prescriptive periods for the assessment and collection of local taxes, fees, or charges [Sec. 194, LGC]: a. Taxes, fees, and charges shall be assessed five (5) years from the date they become due; b. Taxes, fees, and charges must be collected five (5) years from the date of assessment by administrative or judicial action; c. The prescriptive period for assessment and collection shall be three (3) years if the tax accrued before the effectivity

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of the Local Government Code [Sec. 194 and 270, LGC]. d. 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 the discovery of the fraud or intent to evade payment. 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. 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: a. Nature of the tax; b. Subject matter of the tax (person, property, act or activity) c. Possible protection and benefit that may accrue both to the government and the taxpayer; d. Citizenship of the taxpayer; e. Residence of the taxpayer; f. Source of income.

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Situs of Income Tax Taxpayer Citizenship

Source of Income

Residency

Within PH.

Outsi de PH.

Filipino

Resident

Taxable

Taxab le

Filipino

NonResident

Taxable

NonTaxab le

Alien

Resident

Taxable

NonTaxab le

Alien

NonResident

Taxable

NonTaxab le

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

Situs of Property Tax Kind of Property

Situs

Real property Where it is located (lex rei sitae) Tangible Personal property

Where property is physically located although the owner resides in another jurisdiction; or place of sale or transaction

General Rule: Domicile of the owner. Mobilia sequuntur personam (movables follow the person) Exceptions: When property has acquired a business situs in another jurisdiction; or When the law provides for the situs of the subject of tax (e.g., Sec 104, NIRC) ! Franchise, patents, copyrights, trademarks – situs is the place of the country where such intangibles are exercised ! Receivables – Domicile or residence of the debtor ! Bank deposits – Location of the depository bank

Situs of Excise Tax Kind of Excise Tax Income Tax

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Situs Source of the income, nationality or residence of taxpayer (Sec. 23, NIRC) ! Occupation – where the occupation is engaged in ! Transaction – where the transaction took place

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Donor’s Tax

Location of property; nationality or residence of donor

Estate Tax

Location of property; nationality or residence of deceased

Situs of Business Tax Kind of Business Tax VAT

Sale of Property

Situs Where transaction is made (i.e. where the good/service is sold/perform and consumed)

Real Where the real property is located

Sale of Personal Where the personal Property property was sold

4. Double Taxation Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the same person twice by the same jurisdiction for the same thing.” [Swedish Match Phils., Inc. v. Treasurer, G.R. No. 181277 (2013)]

a. Strict sense Taxation)

(Direct

Duplicate

The same property must be taxed twice when it should be taxed once. The requisites are: 1. Both taxes must be imposed on the same property or subject matter; 2. For the same purpose; 3. By the same State, Government, or taxing authority; 4. Within the same territory, jurisdiction or taxing district; 5. During the same taxing period; and

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6. Of the same kind or character of tax. [Swedish Match Phils., Inc. v. Treasurer, supra]

b. Broad sense (Indirect Duplicate Taxation) There is double taxation in the broad sense or 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. L31156 (1976)]. 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 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].

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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 resorts to several methods. 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. [CIR v. SC Johnson & Sons, Inc., G.R. No. 127105 (1999)] Modes of eliminating double taxation a. Allowing reciprocal exemption either by law or by treaty; b. Allowance of tax credit for foreign taxes paid; c. Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax; or d. Reduction of Philippine tax rate.

5. Escape from Taxation a. Shifting of Tax Burden Shifting The act of transferring the burden of a tax from 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

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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 and the higher the incidence on supply. 2. Nature of markets – In an oligopolistic market (i.e. few 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. 3. 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. 4. Geographical location – If taxes are imposed on certain regions, it is hard to shift them to consumers because

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5.

6.

7.

8.

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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 the rate is too high, shifting can occur backwards or forwards; if the rate is 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 the tax e.g. if the buyer can shift to substitute goods, the seller will bear the tax burden. The tax point

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Impact Distinguished from Incidence Impact Initial burden of tax

At the point imposition

Incidence of taxation is the point on whom the tax burden finally rests. [INGLES] It takes place when shifting has been effected from the statutory taxpayer to another.

Ultimate burden of the tax of At the point settlement

of

Falls upon the Rests on the person person from whom who pays it the tax is collected eventually May be shifted

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 where the tax is originally imposed or the one on whom the tax is formally assessed. [Ingles, Tax Made Less Taxing (2018)] 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

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.

Application: 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.

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Relationship between Impact, Shifting, and Incidence of a Tax Impact

Shifting

Initial phenomenon

Intermediate process

Imposition of Transfer the tax the tax

Incidence Result

of 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 is 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) Tax Evasion - is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as “tax dodging.” It is 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 a. The end to be achieved. Example: the payment of less than that known by the

TAXATION LAW

taxpayer to be legally due, or in paying no tax when such is due; b. An accompanying state of mind described as being “evil,” “in bad faith,” “willful,” or “deliberate and not accidental”; and c. A course of action (or failure of action) which is unlawful. [CIR v. Estate of Toda, G.R. No. 147188 (2004)] 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: ! 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)] ! 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)]. Mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. The burden of proof is on the prosecution to prove beyond reasonable doubt that the accused willfully failed to supply correct and accurate information. [People v. Judy Ann Santos, CTA Crim. Case No. 0-012 (2013)] The Willful Blindness doctrine states that a taxpayer can no longer raise the defense that the errors on their tax returns are not their responsibility or that it is the fault of the accountants they hired. Intent to defraud need not be shown for a conviction of tax evasion. The only thing that needs to be proven is that the taxpayer was aware of his obligation to file the tax return but he nevertheless voluntarily, knowingly, and intentionally failed to file the required returns. [INGLES citing People v. Kintanar, C.T.A. E.B. No. 006 (2010)]

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Tax Avoidance v. Tax Evasion Tax Avoidance

Tax Evasion

Also called as

Tax Minimization

Tax Dodging

Means

Legal

Illegal

Outcome of tax Outcome planning tax fraud Punisha ble?

No

Purpose

Merely minimize payment taxes savings)

of

Yes Entirely escape of payment (tax taxes

of

d. Transformation 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 of exemption from taxation The grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected. It is strictly construed against the taxpayer.

TAXATION LAW

It is a waiver of the government's right to collect the amounts that would have been collectible under our tax laws. Thus, when the law speaks of a tax exemption, it should be understood as freedom from the imposition and payment of a particular tax. [Secretary of Finance v. Lazatin, G.R. No. 210588 (2016)] 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 “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly mentioned in the law, it must at least be within its purview by clear legislative intent. [Jaka Investments Corp. v. CIR, G.R. No. 147629 (2010)] He who claims an exemption must be able to point to some positive provision of law creating the right; it cannot be allowed to exist upon a mere vague implication or inference. The right of taxation will not be held to have been surrendered unless the intention to surrender is manifested by words too plain to be mistaken, for the state cannot strip itself of the most essential power of taxation by doubtful words; it cannot, by ambiguous language, be deprived of this highest attribute of sovereignty. [Manila Electric Corporation v. Vera, G.R. No. L-29987 (1975)] If there is nothing in a law that points that the word “exemption” refers to taxes, the implication would be that the term would be an exemption of something else, such as regulatory or reporting requirements. [Ingles citing PLDT v. City of Davao, G.R. No. L-29987 (1975)] Grounds for Tax Exemption a. It may be based on a 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.

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But equity is NOT a ground for tax exemption. 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.

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.

There is no tax exemption solely on the ground of equity. [Davao Gulf Lumber Corp. v. CIR, G.R. No. 117359 (1998)]

Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation is the exception.

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 [Sec. 11, Art. XII, 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 a 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 -

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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)] 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

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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. L-46787 (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 almost be said “to be odious to the law.” [Manila Electric Company v. Vera, supra] 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 nonimpairment clause of the Constitution.

7. Doctrine of Recoupment

Equitable

The doctrine of equitable recoupment allows a taxpayer whose claim for refund has been barred by prescription to offset such claims against a current assessment. The doctrine also allows the government to offset taxes that have not been collected from the taxpayer against a current claim for refund, although the government is time-barred from collecting the previous taxes. The doctrine finds NO application in this jurisdiction.

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8. Prohibition on Compensation and Set-Off General rule: Taxes cannot be subject to compensation [South African Airways v. CIR, G.R. No. 180356 (2010)] Reasons: a. This would adversely affect the government revenue system [Philex Mining v. CA, G.R. No. 125704 (1998)]. b. The government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction. [South African Airways v. CIR, 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. L-18994 (1963)]

9. Compromise 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 the taxpayer’s liability. Requisites of a tax compromise: a. The taxpayer must have a tax liability. b. There must be an offer (by the taxpayer or

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Commissioner) of an amount to be paid by the taxpayer. c. There must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the offer in settlement of the original claim.

10.

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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, administrati ve liability arising from nonpayment of taxes

Immunity from civil liability (relief from paying taxes)

Coverage

Past tax Future tax liability liability

Actual Revenue Loss

Yes

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. 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.

None

K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES, AND REGULATIONS 1. Tax Laws 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. L-30264 (1929)]. No person or property is subject to taxation unless within the terms or plain import of a taxing statute. [see 72 Am. Jur. 2d 44] Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. [Coll. v. La Tondena, G.R. No. L10431 (1962)]. Thus, a tax payable by “individuals” does not apply to “corporations.”

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Tax statutes offering rewards are liberally construed in favor of informers. [Penid v. Virata, G.R. No. L-44004 (1983)]. 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]. E.g. Word “individual” was changed by the law to “person”. This clearly 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.

2. Tax Exemption and 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

TAXATION LAW

mere vague implication or inference. c. RCPI v Provincial Assessor of South Cotabato [G.R. No. 144486 (2005)]: Exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority—it is the taxpayer’s duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted. d. CIR v. CA [supra]: Refunds are in the nature of exemption and must be construed strictly against the grantee/taxpayer. e. Quezon City v. ABS-CBN Broadcasting Corporation [G.R. No. 166408 (2008)]: Since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms 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; 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)].

3. Tax Rules and Regulations General Rule: The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC. [Sec. 244, NIRC]

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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 are entitled to great respect. They have in their favor a presumption of legality [Gonzales v. Land Bank, G.R. No. 76759 (1990)] It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the enabling statute if such rule or regulation is to be valid. In case of conflict between a statute and an administrative order, the former must prevail. [Fort Bonifacio Development Corp v. CIR, GR 175707 (2014)] 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 or 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

TAXATION LAW

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 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 [Sec. 7, NIRC]. 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, they “form part of the law of the 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).

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[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 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)].

II.

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

A. TAXING AUTHORITY 1. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue a. Powers and Duties of the Bureau of Internal Revenue [Sec. 2, NIRC] 1. To assess and collect all national internal revenue taxes, fees, and charges; 2. To enforce all forfeitures, penalties and fines connected therewith; 3. To execute judgment in all cases decided in its favor by the CTA and the ordinary courts; and 4. To give effect to 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 interprets 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 No. 007-02, 7 May 2002] Taxpayers acting in good faith should not be made to suffer for adhering to general interpretative rules of the Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. [CIR v. San Roque, G.R. No. 187485 (2013)] 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 or other laws administered by the BIR is vested in the CIR, subject to the exclusive appellate jurisdiction of the CTA. [Sec. 4, NIRC]

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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 revocation, modification, or reversal is 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. 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, supra].

2. 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.

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b. Specific Provisions to Contained in Rules Regulations [Sec. 245, NIRC]

be and

1. 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; 2. 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; 3. 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 BIR or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax: Provided, however, that notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the 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 (An Act Authorizing the CIR to Prescribe the Place for Payment of Internal Revenue Taxes by Large Taxpayers)

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or the completion of its comprehensive computerization program, whichever comes earlierFor 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 Sec. 248 shall be imposed on any violation of the rules and regulations issued by the Secretary of Finance, upon recommendation of the CIR, prescribing the place of filing of returns and payments of taxes by large taxpayers.

B. INCOME TAX 1. Definition, Nature General Principles

income, emoluments, 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] 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 (1) is a 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 only on income derived from sources within the Philippines.

and

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 person’s

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Taxpayer

Within

Without

Resident Citizen

√

√

Non-resident and OCW

√

X

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Citizen

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Resident Alien

√

X

Non-resident Alien

√

X

Domestic Corporation

√

√

Foreign Corporation

√

X

Global System

Emphasizes the Emphasizes revenue burden allocation and administrative aspects. aspects.

Global

Under a global tax system, it does 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. A global tax system is one where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. [Tan v. Del Rosario, Jr., G.R. No. 109289 (1994)] ii.

Schedular System

A personal tax based A tax on incomeon the income of the producing activities. taxpayer.

a. Income Tax Systems i.

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Schedular

Under a schedular tax system, different types of income 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. [MAMALATEO] A schedular approach in taxation is one where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. [Tan v. Del Rosario, Jr., supra]

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.

Because of its multiple rates, the tax burden of a person does not correspond to his income but rather falls fortuitously on the type of his income. It is fixed and final.

It serves as a means for redistributing income and wealth. Big income earners are subject to higher taxes than small income earners.

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.

Administration is not quite as easy as schedular because one has to consider all income from whatever source.

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

iii.

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, 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,

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they remain subject to different sets of tax rates and covered by different returns. [Mamalateo] Note: The Philippines, under the NIRC, follows a semi-schedular and semi-global tax system.

b. Features of the Philippine Income Tax Law i.

ii.

iii.

iv.

Direct Tax – The tax burden is borne by the income recipient upon whom the tax is imposed. 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. 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. 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 [MAMALATEO].

c. Criteria in Imposing Philippine Income Tax i.

Citizenship

A citizen of the Philippines is subject to Philippine income tax: a. On his worldwide income, if he resides in the Philippines; or b. Only on his income from sources within the

Philippines, if he qualifies as a non-resident citizen. [MAMALATEO] ii.

Residence

A resident alien is liable to pay Philippine income tax only on his income from sources within the Philippines but is exempt from tax on his income from sources outside the Philippines. [MAMALATEO] iii.

Source

An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident 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. [MAMALATEO]

d. Types of Philippine Income Tax There are several types of income tax under the NIRC, namely: [MAMALATEO] i. Graduated income tax and fixed tax on gross sales or receipts for individuals; ii. Normal corporate income tax on corporations; iii. Minimum corporate income tax on corporations; iv. Special income tax on certain corporations; v. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as capital assets; vi. Capital gains tax on sale or exchange of real property located in the Philippines classified as a capital asset; vii. Final withholding tax on certain passive investment income paid to residents;

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viii. ix. x. xi.

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Final withholding tax on income payments made to non-residents; Fringe benefits tax on fringe benefits of supervisory or managerial employees; Branch profit remittance tax; and Tax on improperly accumulated earnings of corporations

e. Kinds of Taxpayers

Special Classes of Individu als

Domestic Corporations

Corporations

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 Philippi nes

Resident citizens Non-resident citizens Residents

Individuals Aliens

Nonresident s

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

Minimum Wage Earner

Estates Trusts

Resident Corporation s Foreign Corporations

Nonresident Corporation s

and

General Partnership Partnerships General Professional Partnership

i.

Individual Taxpayers

CITIZENS a. Resident Citizens (RC) b. Non-resident Citizens (NRC) [Sec. 22 (E), NIRC] 1. PH citizen who establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein. 2. PH citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. 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. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the PH for not less than 183 days during such taxable year. [BIR R.R. 1-79, Sec. 2] 4. PH citizen previously considered as a non-resident citizen and who arrives

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during the taxable year to reside permanently in the PH - Treated as NRC with respect to his income derived from sources abroad until his arrival in the PH

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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. ii.

Note: The term ‘residence’ is to be understood not in its common acceptation as referring to ‘dwelling’ or ‘habitation,’ but rather to ‘domicile’ or legal residence, that is, ‘the place where a party actually or constructively has his permanent home, where he, no matter where he may be found at any given time, eventually intends to return and remain (animus manendi). [Japzon v. COMELEC, G.R. No. 180088 (2009)] 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. 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 itsnot 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. [Sec. 25(A)(1), NIRC]

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. [MAMALATEO] Excludes general professional partnerships (GPP); joint ventures or consortiums 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] Law of Incorporation Test To determine the residence of a corporation, the Philippines adopted the Law of Incorporation test under which a corporation is considered domestic if it is organized or created in accordance with or under the laws of the Philippines and foreign if it is organized or created in accordance with or under the laws of a foreign country. [MAMALATEO] Domestic corporations A corporation created and organized in the Philippines or under its laws. [Sec. 22 (C), NIRC] 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]

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DOING BUSINESS – 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. [CIR v. BOAC, G.R. No. L-65773 (1987)] 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]

f. 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) Employee’s trust [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,

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subject to certain special rules [Sec 61, NIRC] 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, Joint Ventures, Coownership 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

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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. A joint venture or consortium is treated as a corporation, except those formed for the purpose of: 1. Undertaking construction projects, or 2. engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. Co-ownership There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. [Art. 484, NCC] Co-ownerships are not subject to tax as a corporation 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]

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which starts after the first month of the tax year or ends before the last month of the tax year (less than 12 months). Instances whereby short accounting period arises: i. When a corporation is newly organized. ii. When a corporation is dissolved. [Sec. 52(c), NIRC] iii. When a corporation changes its accounting period. [Sec 46, NIRC] iv. When the taxpayer dies. General rule: Taxable income shall be computed based on the taxpayer’s annual accounting period, which may be fiscal year or calendar year Exception: Taxable income shall be computed based on the basis of calendar year only: a. If the taxpayer's annual accounting period is other than a fiscal year; b. If the taxpayer has no annual accounting period; c. If the taxpayer does not keep books of accounts; or d. If the taxpayer is an individual [Sec. 43, NIRC].

f. 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 – An accounting period of 12 months ending on the last day of December. b. Fiscal Year – An accounting period of 12 months ending on the last day of any month other than December [Sec. 22(Q), NIRC]. c. Short Period – An accounting period

2. Concept of Income a. Definition Income means all wealth which flows to the taxpayer other than a mere return of capital. 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] 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)] Income may be received in the form of cash, property, service, or a combination of the three.

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Income v. Capital " The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income." [Madrigal v. Rafferty, G.R. No. 12287 (1918)] Income

Capital

Denotes a flow of Fund or property wealth during a existing at one definite period of distinct point in time. time. Service of wealth

Wealth itself

Subject to tax

Return of capital is not subject to tax

Fruit

Tree

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assets. [VALENCIA AND ROXAS]

b. When Income is Taxable i.

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 ii.

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] Mere increase in the value of property without actual realization, either through sale or other disposition, is not taxable. [De Leon]

Classification of Income 1. Compensation Income Means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless explicitly excluded by the Tax Code of special law. [MAMALATEO] 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

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. 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).

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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] iii.

Recognition of Income

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

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ii.

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)] iii.

Examples: i. Interest or rent income earned but not yet received ii. Rent expense accrued but not yet paid iii. Wages due to workers but remaining unpaid

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

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]. Income is recognized when both of the following conditions are met: (a) the earning is complete or virtually complete; and (b) an exchange has taken place. [INGLES]

Claim of Right Doctrine

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). Anything that benefits a person materially or economically in whatever way is taxable. However, note that a mere increase in the value of property without actual realization is not taxable. [INGLES] iv.

Severance Test

Under the 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. Hence, the increase in value of an asset is not income as it has not yet been exchanged or transferred for something else. Once the asset

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is exchanged, then a severance of the gain from its original value takes place, resulting into taxable income. [Ingles]

d. Methods 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] 2. N.B. “received” here includes actual and constructive receipt. 3. 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] 4. 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] SPECIAL METHODS: 1. Installment Basis [Sec. 49, NIRC] 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.

Income to be reported for = the year

Instalment × Received

Gross Profit Contract 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 ● Installment method method if initial ● Person who payments do regularly not exceed sells/disposes of 25% of the personal gross selling property on price instalment plan ● Deferred ● Held as ordinary payment asset method if initial ● Regardless of payments amount of exceed 25% of percentage of the gross initial payments selling price ● 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 Sale by Individuals ● Installment method provided; initial payments do not exceed 25% of selling price

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● Held as capital asset

Initial payments mean the payments received in cash or property (other than evidence of indebtedness of the purchaser) by the seller during the taxable year of the disposition of the real property. [Sec 49(B), NIRC] 2. 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.

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e. Situs of Income Income Interest Dividends

Services Rentals Royalties Sale of Real Property Sale of ● Personal Property

3. Percentage of completion [Sec. 48, NIRC] Income from long-term contracts is reported for tax purposes on the basis of percentage of completion. “Long-term contracts” means building, installation 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.

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

3. Gross Income a. Definition Gross Income [Sec. 32(A)] Gross Income means all income derived from whatever source, including (but not limited to) the following items: • Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; • Gross income derived from the conduct of

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•

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trade or business or the exercise of a profession; Gains derived from dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partner's distributive share from the net income of the general professional partnership.

The list here is NOT exclusive. 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 computation of gross income which determines taxable income. [CIR v. PAL, GR 160628 (2006)]

b. Distinguish: gross income, net income, and 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] Net income – Means gross income less statutory deductions and exemptions. [Sec. 31, NIRC ] 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, NIRC ]. It is synonymous to the term “net income.” [VALENCIA and ROXAS]

c. Sources of Income Subject to Tax The following sources of income subject to tax are the following. 1. Compensation income;

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2. 3. 4. 5. 6. 7.

Fringe benefits; Professional income; Income from business; Income from dealings in property; Passive investment income; Annuities, proceeds from life insurance or other types of insurance; 8. Prizes and awards; 9. Pensions, retirement benefits, or separation pay. 10. Income from any source i.

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] It includes, but is not limited to, salaries and wages, honoraria and emoluments, allowances (e.g., transportation, representation, entertainment), commissions, fees (including directors’ fees, if the 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.) The term wages does NOT include remuneration paid: a. For agricultural labor paid entirely in products of the farm where the labor is performed b. For domestic service in a private home c. For casual labor not in the course of the employer's trade or business d. For services by a citizen or resident of the Philippines for a foreign government or an int’l organization. [Sec. 78(A), NIRC]

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The term “remuneration for domestic services” 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. The term “casual labor” includes labor which is occasional, incidental or regular. “Not in the course of the employer’s trade or business” includes labor that does not promote or advance the trade or business of the employer. General Rule: 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]; Exception: If he receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P90,000 [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. FORMS OF COMPENSATION AND HOW THEY ARE ASSESSED Cash – If compensation is paid in cash, the full amount received is the measure of the income subject to tax. 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

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the absence of evidence to the contrary, such price will be presumed to be the FMV of the remuneration received. 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 the employee’s work or position, the value of that privilege need not be included as compensation [Henderson v. Collector, G.R. No. L-12954 (1961)] ii.

Fringe Benefits

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: • Housing • Expense Account • Vehicle of any kind • Household personnel, such as maid, driver and others • Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. • Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations • Expenses for foreign travel • Holiday and vacation expenses • Educational assistance to the employee or his dependents; and • Life or health insurance and other nonlife insurance premiums or similar amounts on excess of what the law allows. [Sec. 33(B)]

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Tax Rate and Tax Base

employer.

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.

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. Taxable and non-taxable fringe benefits

FBT is calculated using the GMV multiply by the 35%. [Sec. 33 (A), NIRC] GMV represents i. 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 ii. 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 ‘fringe benefits’ to rank-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

Fringe Benefits NOT subject to Tax 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 Fringe Benefit that is not taxable under Sec. 32 (B) – Exclusions from Gross Income Fringe benefits not subject to Fringe Benefit Tax: a. Fringe Benefits which are authorized and exempted from income tax under the Code or under special laws; b. Contributions of the employer for the benefit of the employee for retirement, insurance and hospitalization benefit plans; c. Benefits given to the rank-and-file employees, whether granted under a collective bargaining agreement or not; and d. Fringe benefits granted for the convenience of the employer; e. De minimis benefits If the Fringe Benefit is exempted from the FBT, the same may, however, still form of the employee’s gross 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

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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. 1-2015 ]: 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. 52011] 3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month; [RR No. 11-2018] 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. 112018] 6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive checkup, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum; [RR No. 5-2011] 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

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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] 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

Assignment of MV= [5% (FMV or residential property ZV, whichever is owned by employer for higher) x 50%] use of employees Purchase of residential MV= 5% x property in installment acquisition cost basis for the use of the exclusive of employee interest x 50%

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Purchase of residential MV= FMV or ZV, property and ownership whichever is is transferred in the higher 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: a. Housing privilege of the Armed Forces of the Philippines (AFP) officials – i.e. those of the Philippine Army, Philippine Navy, or Philippine Air Force b. 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 c. Temporary housing for an employee who stays in housing unit for three months or less Motor Vehicle Motor Vehicle

Fringe Benefit Tax Base (Monetary Value)

Purchased in the name MV = acquisition of the employee cost Cash given to employee MV = to purchase in his own received name employee

cash by

TAXATION LAW

Employer owns and maintains a fleet of MV = (AC/5) x motor vehicles for use 50% of the business and of employees Employer leases and maintains a fleet for the MV = 50% of use of the business and rental payment of employees Pure Compensation Earner (Minimum Wage Earner, Rank Executive) Minimum Wage Earner

Rank and File

&

File,

Managerial or Supervisory

Basic Compensation Exempt

Taxable Compensation

Taxable Compensation

Holiday Pay, OT, Nightshift Pay, Hazard Pay Exempt

Taxable Compensation

Taxable Compensation

13th Month Pay up to P90,000 Exempt

Exempt

Exempt

Other Benefit in Excess of P90,000 N/A (with Taxable caveat) Compensation

Taxable Compensation

Fringe Benefit

Purchase on MV = acquisition installment, in the name cost exclusive of of employee interest Employee shoulders MV = amount part of the purchase shouldered by price, ownership in the employer name of employee

N/A

Taxable Compensation Tax shouldered by employee

Subject to Fringe Benefit Tax Tax shouldered by employer

De Minimis Benefit Exempt

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Exempt

Exempt

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iii.

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Professional Income

Ordinary Asset

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 endeavor 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. iv.

Ordinary Gain (part Capital Gain of Gross Income) Loss from sale, exchange, or other disposition Ordinary Loss (part of Allowable Capital Loss Deductions from Gross Income) Excess of Gains over Losses Part of Gross Income Net Capital Gain Excess of Losses over Gains

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. 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

+

Capital Asset

Gain from sale, exchange or other disposition

Income from Business

Any income derived from doing business.

v.

TAXATION LAW

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

Part of Allowable Deductions from Net Capital Loss Gross Income (a) Capital v. Ordinary Asset Ordinary Assets 1. 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. 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

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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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TAXATION LAW

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.

3. Property used in the trade or business of a character which is subject to the allowance for depreciation, or 4. Real property used in the trade or business of the taxpayer, including property held for rent.

Thus, whether or not the seller makes a profit from the sale of real property, he has to pay 6% capital gains tax. Actual Gain: The tax base in the sale of real property classified as an ordinary asset is the actual gain. Computation of the amount of gain or loss

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]

Amount realized from sale or other disposition of property Less: Basis or Adjusted Basis ______________________________ NET GAIN (LOSS) (c) Special rules pertaining to income or loss from dealings in property classified as capital asset

(b) Types of Gains ORDINARY INCOME VIS-À-VIS CAPITAL GAIN. a. 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 b. 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: a. real property with a capital gains tax (final tax), or b. shares of stock of a domestic corporation with a capital gains tax (final tax).

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. Note: If the taxpayer is a corporation, 100% of the gain is recognized regardless of the holding period. Net Capital Gain Vis-À-Vis Net Capital Loss

ACTUAL GAIN VIS-À-VIS PRESUMED GAIN

Net Capital Gain: Excess of the gains over the losses on sales or exchange of capital assets during the taxable year.

Presumed Gain: In the sale of real property

Net Capital Loss: Excess of the losses over

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the gains on sales or exchanges of capital assets during the taxable year. [Sec. 39 (A), NIRC] Income Tax Treatment of Capital Loss

c.

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]. (d) 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 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 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. 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. vi.

Passive Investment Income

Under Sec 24(B) of the Tax Code, a final tax is imposed upon gross passive income of citizen and resident aliens. An income is considered passive if the taxpayer merely waits for it to be realized.

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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 sources of income are NOT added to other income in the determination of ordinary income tax liability. Passive income is only subject to final tax if the source is within the Philippines.

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 b. 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 stockholders’ proportionate share in the outstanding share of the corporation. Property dividends Property dividends are subject to tax at the preferential rate under the NIRC.

(a) Interest Income An earning derived from depositing or lending of money, goods or credits [Valencia and Roxas] (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 dividends: 1. Cash dividends 2. Stock dividends 3. Property dividends; and 4. Liquidating dividends.

TAXATION LAW

of

Cash dividends Dividends are subject to final tax under the NIRC. However, dividends received by a domestic corporation from another domestic corporation, and a non-resident foreign corporation from a domestic corporation is exempt from income tax.

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 shareholder’s investment. The difference between the 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. (c) Royalty Income 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

Stock dividends Stock dividend is generally exempt from income tax, EXCEPT: a. If a corporation cancels or redeems stock issued as a dividend xxx the amount so

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

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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] 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:

NRFC Vessel

NRANETB

4.5%

25%

Aircraft, 7.5% machineries and other Equipment

25%

Other assets

25%

30%

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 Annuities, insurance Insurance

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. L8480 (1957)] 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. viii.

Prizes and Awards

A prize is a reward for a contest or a competition. Such payment constitutes gain derived from labor.

Leasehold improvements by lessee

vii.

TAXATION LAW

Proceeds from Life or Other Types of

It refers to periodic installment 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

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 3. The recipient is not required to render substantial future services as a condition to receiving the prize or award. 4. 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. ix.

Pensions, Retirement Benefit, or Separation Pay

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. [VALENCIA]

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x.

TAXATION 1

Income from Any Source

TAXATION LAW

Illustration:

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 (a) Condonation of Indebtedness The cancellation of indebtedness may have any of three possible consequences: 1. 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. 2. 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 latter’s report of income. 3. 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. (b) Recovery of Accounts Previously Written-off Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. 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]

Case A

Case B

Case C

Year 1 Gross Income

500,000

Less: Allowable Deduction s (before (200,00 write-off of 0) Uncollectib le Accounts/ Debts) Taxable Income (Net Loss) 300,000 before write-off Deduction for Accounts (2,000) Receivable written off Taxable Income (Net Loss) 298,000 after writeoff

400,000

500,000

(480,000 )

(495,000 )

(60,000)

5,000

(2,000)

(6,000)

(62,000)

(1,000)

Year 2 Recovery of Amounts Written Off

2,000

Taxable Income on 2,000 the Recovery

2,000

6,000

-

5,000

In Case A, the entire amount recovered Page 62 of 256

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(P2,000) is included in the computation of gross income in Year 2 because the taxpayer benefited by the same extent. Prior to the writeoff, 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 any income tax anyway. The “taxable income” before the write-off was actually a net loss.

TAXATION LAW

Note: The enumeration of tax refunds that are not taxable (income) is derived from an enumeration of tax payments that are not deductible from gross income. 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.

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. (c) Receipt of tax refunds or credit 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. Exceptions: However, the following tax refunds are not to be included in the computation of gross income: 1. Philippine income tax, except the fringe benefit tax 2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred. 3. Estate and donor’s taxes 4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessments) 5. Value Added Tax 6. Fines and penalties due to late payment of tax 7. Final taxes 8. Capital Gains Tax Page 63 of 256

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d. Exclusions 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 tax-free 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 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 insurance paid to the insured’s beneficiaries 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 already subject to transfer taxes (estate tax or donor’s tax).

TAXATION LAW

Items of Exclusions because they are expressly exempt from income tax a. Under the Constitution b. Under a tax treaty c. Under special laws i. Rationale The term “exclusions” refers to items that are not 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] ii.

Taxpayers Who May Avail Exclusion

Return of capital

Taxpayer All taxpayers since there is no income.

All taxpayers unless Already subject to provided that income internal revenue tax is to be included. Express exclusion

iii.

As expressly provided.

Exclusions Distinguished Deductions and Tax Credit

from

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 taxpayer’s taxable income, due to the following 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

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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. iv.

Exclusions Under the Constitution

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

(b) Return of premium paid 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.

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. v.

Exclusions Under the Tax Code [Sec. 32(b), NIRC] (a) Proceeds policies

of

life

insurance

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.

TAXATION LAW

(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.

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(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] (e) Amount received through accident or health insurance (Compensation for damages) As a rule, amounts received through accident or health insurance or under workmen’s compensation 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 damages recoveries are: Non-taxable – compensation for damages on account of

and

taxable

Taxable – compensation for damages on account of

Actual damages for Personal (physical) loss of anticipated injuries or sickness profits Any other damages recovered on account of personal injuries or sickness

Moral and exemplary damages awarded as a result of break of contract

Exemplary and moral damages for out-of- Interest court settlement, taxable including attorney’s above fees

for nondamages

TAXATION LAW

Alienation of Any damages as affection, or breach compensation for of promise to marry unrealized income Any amount received as a return of capital or reimbursement of expenses (f) Income exempt under tax treaty Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (g) Retirement benefits, pensions, gratuities, etc. These are: • Retirement benefits under RA 7641, RA 4917, and Section 60(B) of the NIRC • Terminal pay • Retirement Benefits from foreign government agencies • Veterans benefits • Benefits under the Social Security Act • GSIS benefits 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

RPBP

Retiring employee must be in the service of same employer CONTINUOUSLY for at least five (5) years

Retiring official or employee must have been in the service of the same employer for at least ten (10) years.

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Retiring employee must be at least sixty (60) years old but not more than 65 years of age at the time of retirement

TAXATION 1

Retiring official or employee must be at least fifty (50) years old at the time of retirement

Retiring employee shall not have Availed of only once, previously availed of and only when there the privilege under a is no RPBP 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.

TAXATION LAW

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 employee. The phrase “for any cause beyond the control of the said official or employee” means that the separation of the employee must be involuntary and not initiated by him. The separation must not be of his own making. Notes: a. Sickness must be life-threatening or one which renders the employee incapable of working b. Retrenchment of the employee due to unfavorable business conditions or financial reverses is considered as involuntary. c. BIR Ruling 143-98: The “terminal leave pay” (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. [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

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TAXATION LAW

of 1954 [RA 8282], as amended, e.g., Maternity Benefits

[Commissioner v. Anoldus Carpentry Shop, G.R. No. 71122 (1988)]

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]

Types of Deductions There are four (4) types of deductions from gross income: 1. 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; 2. 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 3. optional standard deduction available to corporations under Section 34(L) of the Tax Code (introduced by RA No. 9504) 4. the special deductions in Sections 37 and 38 of the NIRC, and in special laws like the BOI law (E.O. 226).

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

4. Deductions Income

from

a. General Rules 1. Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession 2. Deductions must be supported by adequate receipts or invoices (except standard deduction)

Gross b. Concept of Return of Capital

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)] 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.

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

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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 sales. Rather they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged. Sale of services: Their entire gross receipts are treated as part of gross income.

c. Distinguish: Itemized Deductions and Optional Standard Deductions Itemized Deductions • Expenses • Interest • Taxes • Losses • Bad debts • Depreciation • Depletion of oil and gas wells and mines • Charitable and other contributions • Research and development • Pension trusts 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] Expenses Business expenses deductible from gross income include the ordinary and necessary

TAXATION LAW

expenditures directly connected with or pertaining to the taxpayer’s 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. Requisites for deductibility a. Ordinary AND necessary ORDINARY - normal and usual in relation to the taxpayer's business and surrounding circumstances; need not be recurring 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 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 nonresident 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]

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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, operation and/or conduct of the trade, business or profession of the taxpayer.

3.

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personal services actually rendered such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered

Traveling expenses This include transportation expenses and meals and lodging [Secs. 65 and 66, Rev. Reg. No. 2] Expenses must be reasonable and necessary.

Kinds of business expenses These are: a. Salaries, wages and other forms of compensation for personal services actually rendered, including the grossedup 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. 12-2013]. Bonuses are deductible when: 1. made in good faith 2. given as additional compensation for

Must be incurred or paid “while away from home;” tax home is the principal place of business, when referring to “away from home” Incurred or paid in the conduct of trade or business. Note: However, necessary transportation expenses of the taxpayer in its “tax home” are deductible. Thus, a taxpayer operating its business in Manila is allowed transportation expenses from its office to its customers’ place of business and back. But the 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 a. Required as a condition for continued use or possession of property. b. For purposes of trade business or profession. 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. d. On the accrual basis, rent is deductible as

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expense when liability is incurred during the period of use. On cash basis, rent is deductible when it is incurred and paid. [VALENCIA and ROXAS]

accuracy, which implies something less than an exact or completely accurate amount. [Commissioner v. Isabela Cultural Corporation, G.R. No. 172231 (2007)]

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. [Visayan Transportation Co. v. CTA, CTA Case No. 1119, (1964)]

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 transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals. [MAMALATEO]

Extraordinary repairs are not deductible – they are capital expenditures 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 for professionals Deductible in the year the professional services are rendered, not in the year they are billed, provided that the “all events” is present. “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. The “all-events test” does not demand that the 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

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: 1. Reasonable in amount. 2. Paid or incurred during the taxable period. 3. 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. 4. Not 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) 5. Not incurred for purposes contrary to law, morals, public policy or public order. 6. Must be substantiated with sufficient evidence such as receipts and/or adequate records. Exclusions from EAR expenses: 1. Expenses which are treated as compensation or fringe benefits for services rendered under an employeremployee relationship 2. Expenses for charitable or fund raising

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3.

4.

5.

6.

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events Expenses for bona fide business meeting of stockholders, partners or directors Expenses for attending or sponsoring an employee to a business league or professional organization meeting Expenses for events organized for promotion marketing and advertising, including concerts, conferences, seminars, workshops, conventions and other similar events; and 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] Training expenses 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 10297, 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 Expenses Allowable to Private Educational Institutions In addition to the expenses allowable as deductions under the NIRC, a private

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proprietary educational institution may at its OPTION, elect either: a. To deduct expenditures otherwise considered as capital outlays or depreciable assets incurred during the taxable year for the expansion of school facilities, OR b. 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. Advertising Expenses The media advertising expenses which were found to be inordinately large and thus, not ordinary, and which were incurred in order to protect the taxpayer’s brand franchise which is analogous to the maintenance of goodwill or title to one’s property, are not ordinary and necessary 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)] Interest Requisites for deductibility 1. There is a valid and existing indebtedness. 2. The indebtedness is that of the taxpayer 3. The indebtedness is connected with the taxpayer‘s trade, profession, or business. 4. The interest must be legally due. 5. The interest must be stipulated in writing. 6. The taxpayer is LIABLE to pay interest on the indebtedness. 7. The indebtedness must have been paid or accrued during the taxable year. 8. The interest payment arrangement must not be between related taxpayers 9. The interest must not be incurred to finance petroleum operations. 10. 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,

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Non-deductible interest expense 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. 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. Interest payments made between related taxpayers. 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 a. 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 b. Except in the case of distributions in liquidation, between two corporations where: i. 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 ii. More than 50% of the outstanding stock of each is owned, directly or indirectly, by or for the same individual; or b. Between parties to a trust – Grantor and Fiduciary; or c. Fiduciary of a trust and fiduciary of another trust if the same person is a grantor with

TAXATION LAW

respect to each trust; or d. Fiduciary and Beneficiary INTEREST SUBJECT TO SPECIAL RULES 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. But the deduction shall be allowed in the year the indebtedness is paid. 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. 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. A deduction in full in the year when incurred; b. 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)] 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

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tax; effective January 1, 2009. [RA 9337]

[CIR v. Palanca, G.R. No. L-16626 (1966)]

Taxes Taxes Proper: Refers to national and local taxes

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.

Requisites for deductibility a. Paid or incurred within the taxable year; b. Paid or incurred in connection with the taxpayer‘s trade, profession or business; c. Imposed directly on the taxpayer; d. Not specifically excluded by law from being deducted from the taxpayer‘s gross 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.

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

Tax Deduction

Taxes are deductible Taxes are deductible from gross income in from the Phil. computing the Income tax itself taxable income Effect: Reduces Effect: Reduces taxable income upon Philippine income which the tax liability tax liability is calculated

Non-deductible taxes 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) However, 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 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.

Sources: Only foreign income taxes Sources: Deductible may be claimed as taxes (e.g. business credits against tax, excise tax) Philippine income tax. 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 non-resident

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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 Taxable Income Per Foreign Country

Worldwide Taxable Income

Phil. x Income Tax

Limit on = amount of tax credit

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

Phil. Income Tax

=

Limit on amount of tax credit

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Worldwide Taxable Income

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: 1. Actual FTC 2. For taxes paid to one foreign country 3. For taxes paid to 2 or more foreign countries 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

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loss, the loss incurred from the sale of nondepreciable vehicle is not allowed as a deduction. [RR No. 2-2013]

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 b. 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) c. Resulting from securities becoming worthless and which are capital assets (considered loss from sale or exchange) on last day of the taxable year d. Losses from short sales of property; e. Losses due to failure to exercise privileges or options to buy or sell property. 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.

TAXATION LAW

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 Exception: If by a dealer in securities in the course of ordinary business, it is deductible. 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. 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

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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 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. Domestic and resident foreign corporations subject to the normal income tax or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) or under special laws (e.g., PEZA-registered 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. Bad debts Debts resulting from the worthlessness or

TAXATION LAW

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; 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

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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)] Rev. Reg. No. 5-1999 “Actually ascertained to be worthless” – 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 b. collection through court action may be more costly to the taxpayer. “Actually charged off from the taxpayer’s book of accounts” – 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 as part of the taxpayer‘s gross income in the year 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 taxpayer‘s books of accounts. c. Does not exceed the acquisition cost of the property.

TAXATION LAW

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, unless the taxpayer’s 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] Methods of allowance

computing

Straight-line

depreciation

(costsalvage value) ÷ estimated life Cost x Rate Depreciation*

Declining balance

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of

*rate = (1÷ estimated life) x multiplier applicable ex. Double declining balance multiplier is 200%

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Note: depreciation allowance should not cause the asset to be valued below its salvage value Sum-of-the-yeardigit (SYD)

(remaining life ÷ SYD) x (costsalvage value)

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 the taxpayer‘s taxable income before charitable contributions

TAXATION LAW

9. in accordance with a National Priority Plan determined by NEDA (otherwise, subject to statutory limit) 10. 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 11. Donations to Accredited Non-government Organizations subject to conditions set forth in RR No. 13-98 – NGO means a non-stock non-profit domestic corporation or organization: a. Organized and operated exclusively for: i. scientific, ii. research, iii. educational, iv. character-building and youth and sports development, v. health, vi. social welfare, vii. cultural or viii. charitable purposes, or ix. a combination thereof,

Amount that May Be Deducted

No part of the net income of which inures to the benefit of any private individual

Kinds of Contributions: a. Contributions deductible in full; b. Contributions subject to the statutory limit.

Administrative expense, on an annual basis, must not exceed 30% of total expenses for the taxable year

Contributions Deductible in Full: 1. Donations to the Government of the Philippines, or to any of its agencies, or political subdivisions, including fully owned government corporations 2. Exclusively to finance, provide for, or to be used in undertaking priority activities in 3. Education 4. Health 5. Youth and sports development 6. Human settlements 7. Science and culture, and 8. Economic development

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. 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

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c. d. e. f. g. h. i. j. k.

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associations organized exclusively for Religious Charitable Scientific youth and sports development cultural educational purposes or rehabilitation of veterans Social welfare institutions 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 the taxpayer's/donor’s income derived 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. 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.

TAXATION LAW

Requisites for deductibility of payments to pension trusts a. 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 subject to the employer’s control or disposition; and e. The payment has not theretofore been allowed before as a deduction. Optional Standard Deduction 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. Taxpayer’s income is not entirely 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. Corporations, except non-resident foreign corporations The option to elect Optional Standard Deduction granted is now granted to corporations by virtue of RA 9504. The OSD is 40% of its gross income. Corporations availing of OSD are still required

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to submit their financial statements when they file their annual ITR and to keep such records pertaining to its gross income. [RR 2-2010]. Partnerships For purposes of taxation, the Code considers general co-partnerships as corporations. Hence, rules on OSD for corporations are applicable to general co-partnerships.

d. Items Not Deductible General rule: In determining deductions, one of the general rules is that deductions must be paid or incurred in connection with the taxpayer’s trade, 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. Exceptions: In computing taxable net income, no deduction shall be allowed with respect to: a. Personal, living or family expenses b. 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 c. 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 d. 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 e. Interest expense and bad debts between related parties [Sec. 36(B), NIRC)] f. Losses from sales or exchanges of property between related taxpayers. g. Non-deductible interest – should the taxpayer elect to deduct interest payments against its gross income, he cannot at the

TAXATION LAW

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)] h. Non–deductible taxes i. Non-deductible losses j. Losses on Wash Sales (except if by dealer in securities in ordinary course of exempt corporations) These are: k. Proprietary Educational Institutions and hospitals l. Government owned and controlled corporations m. Others Relevant points regarding related taxpayers a. Payment of interest is not deductible. b. Bad debts are not deductible. c. Losses from sales or exchanges of property are not deductible. Related Parties [Sec. 34(B), NIRC] a. Between members of a family (which shall include only his brothers and sisters, spouse, ancestors and lineal descendants) b. 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 c. 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 d. Between the grantor and the fiduciary of a trust e. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust f. Between the fiduciary of a trust and a beneficiary of such trust [Section 36(B), NIRC]

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5. Income Tax on Individuals Summary Table for Taxation of Individuals (all individual taxpayers, including nonresident aliens) Classification

Taxable Income

Tax Rates

Resident Citizen

Income from sources within and outside the Philippines

0%-35%

Non-Resident Citizen

Income from sources within the Philippines

0%-35%

Resident Alien

Income from sources within the Philippines

0%-35%

Income from sources within the Philippines

0%-35%

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

TAXATION LAW

Worker (OCW) is taxable only on income from sources within the Philippines (i.e. sideline income in the Philippines). b. OCW – Filipino citizens who are physically present in a foreign country as a consequence of their employment. Their salaries and wages are paid by an employer abroad and is not borne by an entity or person in the Philippines. [Sec. 2, RR 1-11] c. An OCW’s income arising from sources outside the Philippines is exempt from income tax. 3. Resident Aliens A resident alien is taxable only on income from sources within the Philippines. ii. Taxation on Compensation Income Income arising from an employer-employee relationship. (a) Inclusions

Income from sources within the Philippines

25%

a. Resident Citizens, Non-Resident Citizens and Resident Aliens [Sec. 24(A)(1)]

1. Monetary compensation – If compensation is paid in cash, the full amount received is the measure of the income subject to tax. 2. Regular salary/wage Salary – earnings received periodically for a regular work other than manual labor, such as monthly salary of an employee.

i. Coverage 1. Resident Citizens A Filipino resident citizen is taxable on income from all sources (both within and outside Philippines). 2. Non-resident Citizens A non-resident citizen is taxable only on income derived from sources within the Philippines. Other considerations: a. A Filipino citizen working and deriving abroad as an Overseas Contract Page 82 of 256

Wages – all remuneration for services performed by an employee for his employer, including the cash value of all non-cash remuneration. [Sec. 78(A), NIRC] Separation pay/retirement benefit not 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. [Sec. 2(b), RR No. 6-82]

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General rule: Retirement pay is taxable Exceptions: i. SSS or GSIS retirement pays [Sec. 32(B)(6), NIRC] ii. Retirement benefit under R.A. 7641 provided the following requirements are met: iii. Retirement program is approved by the Commissioner; iv. Retirement benefit is pursuant to a reasonable private benefit plan. v. Retiree employed for 10 years by the employer; vi. Retiree should have been 50 years old or above at the time of retirement; and vii. Retirement benefit availed only once [Sec. 32 (B)(6)(a), NIRC].

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4. Directors’ bonuses

fees,

allowances

and

General Rule: taxable as compensation income when the recipient director has an employee-employer relationship with the corporation which pays the same Exception: not taxable as compensation income when recipient director’s duties is confined to attendance and participation only in the meetings of the Board of Directors, but taxable as income arising from exercise of profession [R.M.C 34-08]. 5. Non-monetary compensation – measure of income subject to tax is the equivalent value in money. (b) Exclusions

Separation pay General Rule: Separation pay taxable if voluntarily availed of. Exception: if due to causes such as death, sickness, disability, reorganization or bankruptcy of the company or for any other cause beyond the control of the said employee. 3. Bonuses, 13th month pay, and other benefits not exempt

1. Fringe benefit subject to tax (See Gross Income, supra for the discussion of Taxable and Non-taxable fringe benefits)

Tips and Gratuities – those paid directly to the employee (usually by employer’s customer) which are not accounted for by the employee to the employer. (taxable income but not subject to withholding tax) [Sec. 2.78.1, RR No. 2-98] 13th month pay – taxable only for the part which exceeds P90,000 [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. Page 83 of 256

If the recipient of the fringe benefits is a rank and file employee, and the said fringe benefit is not tax-exempt, then the value of such fringe benefit shall be considered as part of taxable compensation income. [DOMONDON] Where the recipient of the fringe benefit is not a rank and file employee, and the said benefit is not tax-exempt, then the value of such fringe benefit shall not be included in the taxable compensation income. It is instead levied upon the employer. [DOMONDON] Convenience of the employer 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 the employee’s work or position, the value of that privilege need not

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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 [RR No. 11-18]. These are exempt from both fringe benefit tax and compensation income tax [Sec. 33 (C)(4), NIRC]. (See Gross Income, supra for discussion of de minimis benefits)

the

3. 13th month pay and other benefits and payments specifically excluded from taxable compensation income Gross benefits received by employees up to P90,000 (amounts in excess are considered compensation income) Benefits include: a) Benefits received by government employees under RA 6686; b) Benefits received by employees pursuant to PD 851 (13th Month Pay Decree); c) Benefits received by employees not covered by PD 851 as amended by Memorandum Order No. 28; and, d) Other benefits such as productivity incentives and Christmas bonus.

employment and/or practice of profession, whose gross sales/receipts and other nonoperating income does not exceed the VAT threshold as provided under Sec. 109 (BB) of the Tax Code, as amended, shall have the option to avail of: a. The graduated rates under Sec. 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 Sec. 24 (A) and the percentage tax under Sec. 116 of the NIRC. 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); AND b. The income from business or practice of profession shall be subject to the following: c. If the gross sales/receipts and other nonoperating income do not exceed the VAT threshold, the individual has the option to be taxed at: d. The aforementioned graduated taxable income rates; OR e. The aforementioned optional 8% gross income tax. f. If the gross sales/receipts and other nonoperating income exceeds the VAT threshold, the individual shall be subject to the graduated income tax rates.

iii. Taxation of Business Income/Income From Exercise of Profession All income obtained from doing business or exercising of profession shall be included in the computation of gross income. Individuals earning purely business or professional income Individuals earning income purely from self-

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iv. Taxation of Partners in a General Professional Partnership 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.

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Each partner shall report as gross income his distributive share in the net income of the GPP, actually or constructively received.

4 years to less than 5 5% years 3 years to less than 4 12% years

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] 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. v. Taxation of Passive Income Passive Income Subject to Final Tax “Final tax” means tax withheld from source, and the amount received by the income earner is net of the tax already. The income having been tax-paid already, it need not be included in the gross income in the yearly submission of ITR. Interest income • 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-residents 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:

TAXATION LAW

less than 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. 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. Royalties (See summary table, infra) Dividends from domestic corporation a. cash and/or property dividends actually or constructively received by an individual from b. a domestic corporation c. a joint stock company d. insurance or mutual fund companies e. regional operating headquarters of multinational companies f. 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 g. share of an individual member or coventurer in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation Rate: a. 10% for residents (RC, RA) and nonresident citizens (NRC); b. 20% for non-resident aliens engaged in trade or business (NRAETB)

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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. 73 (B), NIRC]

TAXATION LAW

NIRC]. 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%

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. On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented. Prizes and other winnings Prizes and other winnings - 20%, except a. Prizes amounting to P10,000 or less, which shall be subjected to the graduated rates under Subsection A of Section 24; and b. Philippine Charity sweepstakes / lotto winnings which does not exceed P10,000 exempt ; c. Prizes excluded from gross income. 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). Taxation of Capital Gains Income from sale of shares of stock of a Philippine corporation Shares traded and listed in the stock exchange – CGT-exempt, but subject to business tax The transaction is exempt from income tax regardless of the nature of business of the seller or transferor. However, it is subject to a business tax of six-tenths of one percent (0.6%) of the gross selling price [Sec. 127 (A),

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 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: GSP, or FMV in accordance with Sec. 6 (E). Exception: a. In case of sales made to the government, any of its political subdivisions or agencies, or to GOCCs, it can be taxed either: b. Under Sec. 24 (D)(1) – 6% CGT, or c. Under Sec. 24 (A), at the option of the taxpayer. d. In case of the sale of or disposition of their principal residence by natural persons

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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. Tax treatment of sale of principal residence: 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

XXX

Add: Additional cost to acquire new principal residence*

XXX

Adjusted cost basis of the new principal residence

XXX

*Additional cost to acquire new principal residence: Cost to acquire new principal residence

XXX

TAXATION LAW

Less: Gross selling price of old principal residence

(XXX)

Additional cost to acquire new principal residence

XXX

(c) Income from the sale, exchange, or other disposition of other capital assets Other properties shall be subject to income tax a. At the graduated income tax rates, if the seller is an individual b. Long-term capital gains: only 50% is recognized. c. Short-term capital asset transactions: 100% subject to tax [Sec. 39(B), NIRC]. Determination of whether short- or longterm: 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). Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Section 39(A)(1), NIRC, namely: a. 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 b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance

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for depreciation provided for under Sec. 34(F) of the Code; or d. Real property used in trade or business of the taxpayer

b. Non-Resident Aliens Engaged in Trade or Business General Rule: Subject to income tax in the same manner as an individual citizen and a resident alien individual on taxable income from all sources within the Philippines. The following shall be subject to an income tax of 20% on the total amount thereof:
 a. Cash and/or property dividends from: b. A domestic corporation; c. A joint stock company; d. An insurance or mutual fund company; e. A regional operating headquarters of multinational company; f. 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; g. The share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; h. Interests 
 i. Royalties (in any form); and 
 j. 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) Except: The following Royalties shall be subject to a final tax of ten percent (10%) on the total amount thereof: a. On books as well as other literary works; and b. On musical compositions c. Cinematographic films and similar works shall be subject to twenty-five percent

TAXATION LAW

(25%) of the gross income 
 d. 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: a. Four (4) years to less than five (5) years 5%; b. Three (3) years to less than four (4) years - 12%; and 
 c. 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. Sale, barter or exchange of Shares of stock in domestic corporation not traded – 15% of net capital gains Sale, barter or exchange of real properties – 6% of gross selling price or current FMV whichever is higher

c. Non-Resident Aliens Not Engaged in Trade or Business [Sec. 25 (B), NIRC] There shall be levied, collected, and paid for each taxable year upon the entire income received from all sources within the PH by

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every NRANETB within 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.

d. Aliens Employed by Regional Headquarters, Regional Operating Headquarters, Offshore Banking Units, and Petroleum Service Contractors The preferential tax treatment of 15% shall no longer be applicable to employees of regional headquarters (RHQs), regional operating headquarters (ROHQs), offshore banking units (OBUs) or petroleum service contractors and subcontractors. They are now subject to regular income tax rates [Sec. 25 (F)]. [Note item A of veto message of the President on TRAIN Law]

e. Individual Taxpayers exempt from income tax are: a. Senior Citizens (with qualifications) 
 b. Minimum wage earners c. 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

TAXATION LAW

required shall subject him to the payment of appropriate withholding taxes due on the transaction. [RMC No. 8-14] i. Minimum Wage Earners Rule: they shall be exempt from payment of income tax on their taxable income.
 Limit: However, if he receives “other benefits” 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. The 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 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. Compensation income including overtime pay, holiday pay and hazard pay, earned by minimum wage earners who have no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504]. ii. Exemptions Granted International Agreements

Under

See RMC No, 31-2013, April 12, 2013 – taxation of compensation income of Philippine

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nationals and alien individuals employed by foreign governments/embassies/diplomatic missions and international organizations situated in the Philippines. 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)

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SUMMARY TABLES OF RATES

Citizens, Residents

NRAETB

NRANETB

Interest from any currency bank deposit

20%

20%

25%

Yield or any other monetary benefit from deposit substitute

20%

20%

25%

Yield or any other monetary benefit from trust funds and similar arrangements

20%

20%

25%

Royalties, in general

20%

20%

25%

Royalties on books as well as other literary works and musical compositions

10%

10%

25%

Prizes exceeding P10,000

20%

20%

25%

Other winnings (except Philippine Charity Sweepstakes and Lotto winnings not exceeding P10,000)

20%

20%

25%

Interest incomes received from a depositary bank under expanded foreign currency deposit system

15% Note: NRC – exempt (RR 111)

Exempt

Exempt

Exempt

Exempt

25%

4 years to less than 5 years

5%

5%

25%

3 years to less than 4 years

12%

12%

25%

Less than 3 years

20%

20%

25%

Cash and/or Property Dividends

Citizens, Residents

NRAETB

NRANETB

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)

10%

20%

25%

Share of an individual in the distributable net income after tax of a PARTNERSHIP (other than a general professional partnership) (beginning Jan. 1, 2000)

10%

20%

25%

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)

10%

20%

25%

Interest, Royalties, Prizes and Other Winnings

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

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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

TAXATION LAW

Citizens, Residents 15%

Sec. 24 (D). Capital Gains Tax from Sale of Real Property Classified as Capital Asset

NRAETB

15%

Citizens, Residents

NRANETB

15%

NRAETB

NRANETB

Tax base: Gross selling price or current fair market value, whichever is higher Tax Rate

6%

6%

Resident Category of income

Citizen All sources

6%

Non-Resident Alien

Citizen

NRAETB

NRANETB

Within the Philippines

Within the Philippines

Within the Philippines

Within the Philippines

Based on Taxable (i.e. Net) Income

Compensation/ Profession

Business/

Prizes of P10,000 or less

Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24) (See table below) For those earning purely business or professional income or mixed income not exceeding the threshold gross sales/receipts for the year of P3,000,000, the taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of graduated income tax rates and percentage tax – for the business/professional income portion – upon the option of the taxpayer

Interest from any currency bank deposit, etc. Royalties, in general

Gross Income Within the Philippines (GIW) – 20% Final Withholding Tax GIW – 25%

Winnings/ Prizes (except prizes P10,000 and below) Royalties from books, literary works, musical compositions

GIW – 10% Final Withholding Tax

Interest from long-term deposit or investment certificates, which have a maturity of 5 years or more

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

Cash/ Property Dividends from a domestic corporation, etc., OR share in the distributed net income after tax of a partnership (except a general professional partnership), etc.

GIW – 10% Final Withholding Tax

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GIW – 20%

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Interest (Expanding Foreign Currency Deposit System)

GIW – 15% Final Withholding Tax

Prizes

Subject to schedular rates if not exceeding P10,000

Winnings on Philippine Sweepstakes/ Lotto

Exempt if P10,000 and below

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 located Abroad

Exempt

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

Property

Sale of Shares of Foreign Corp.

Schedular/Graduated Income Tax Rates (i.e. 0% to 35%) (Sec. 24) 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

Passive Income from Abroad

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

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

Additional Rate (b)

0 to 250,000

-

-

Over 250,000 but not more than 400,000

-

20% of excess over 250,000

Over 400,000 but not more than 800,000

30,000

25% of excess over 400,000

Over 800,000 but not over 2,000,000

130,000

30% of excess over 800,000

Over 2,000,000 but not over 8,000,000

490,000

32% of excess over 2,000,000

2,410,000

35% of excess over 8,000,000

Over 8,000,000

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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

P135,000.00

Add: Overtime, night shift differential, hazard, and holiday pay

140,000.00 –––––––––––

Total Income

P275,000.00

Less: Mandatory contributions

P5,000.00

Non-taxable benefits

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) Taxable Compensation Income Tax due: 1. On Compensation: On P800,000.00 On excess (P1,410,000 - P800,000) x 30% Tax due on Compensation Income 2. On Business Income: Gross Sales Add: Non-operating Income

P1,500,000.00 90,000.00 –––––––––––– P1,410,000.00

P130,000.00 183,000.00 –––––––––––– P313,000.00 –––––––––––– P2,400,000.00 100,000.00

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Taxable Business Income Multiplied by income tax rate Tax Due on Business Income Total Income Tax Due (Compensation and Business)

–––––––––––– P2,500,000.00 8% –––––––––––– P200,000.00 –––––––––––– P513,000.00

* 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 selfemployment/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 Taxable Compensation Income Add: Taxable Income from Business — Gross Sales Less: Cost of Sales Gross Income Less: Operating Expenses Net Income from Operation Add: Non-operating Income

P1,500,000.00 90,000.00 –––––––––––– P1,410,000.00 P2,400,000.00 1,000,000.00 ––––––––––– P1,400,000.00 600,000.00 ––––––––––– P800,000.00 100,000.00 –––––––––––

Total Taxable Income

900,000.00 –––––––––––– P2,310,000.00

Tax Due: On P2,000,000.00

P490,000.00

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On excess (P2,310,000 - 2,000,000) x 32%

99,200.00 –––––––––––– P589,200.00

Total Income Tax

* 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. 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

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

Total Sales/Receipts Less: Amount allowed as deduction under Sec. 24 (A) (2) (b)

* 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

Taxable Income

P1,100,000.00 600,000.00 –––––––––––– P500,000.00 200,000.00 –––––––––––– P300,000.00

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

P10,000.00

Gross Income Less: Operating Expenses

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TAXATION LAW

6. Income Tax on Corporations

i. Taxation in General

a. Domestic Corporations and Resident Foreign Corporations Domestic Corporations A corporation created and organized in the Philippines or under its laws (the law of incorporation test) [Sec. 22 (C), NIRC]. Taxable on all income derived from sources within and without the Philippines; and Resident Foreign Corporations A corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines. [See “Doing Business” definition under the FIA above] Taxable only on income derived from sources within the Philippines. 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. 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 non- resident foreign corporations. [Marubeni v. Commissioner, G.R. No. 76573 (1989)]

(a) Regular Corporate Income Tax (RCIT) Default income tax. Except as otherwise provided, income tax of 30% is imposed on taxable income. 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) Normal/Regular Corporate Income Tax Rate: 30% of Taxable Income Gross Income Less: Allowable Deductions Taxable Income

xxx xxx xxx

(b) Optional gross income tax (GIT) Section 27 (A) provides for an optional gross income tax of 15% based on gross income. (c) Minimum Corporate Income Tax (MCIT) a. Applies to domestic corporations and RFCs whenever such corporations b. have zero or negative taxable income, or whenever the c. MCIT is greater than the normal income tax due. d. 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 corporation registers with the BIR (not in which the corporation started commercial operations). e. Tax rate: 2% of Gross Income

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Gross Income Gross Sales Less: Sales Returns Sales Discounts Allowances Cost of Goods Sold Gross Income

TAXATION 1

xxx xxx xxx xxx xxx

xxx xxx

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 12-07] This means that the term “gross income” will also include all items of gross income enumerated under Section 32(A), except: (a) income exempt from income tax, and (b) income subjected to FWT. Cost of goods sold In general – includes all business expenses directly incurred to produce the merchandise to bring them to their present location and use. 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. 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. Gross Receipts Less: Sales Returns Sales Discounts Allowances Cost of Services Gross Income

xxx xxx xxx xxx xxx

TAXATION LAW

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. MCIT is in the nature of a tax credit, not an allowable deduction. It addresses the previously rampant practice of some corporations not declaring their actual income or bloating their expenses. There is no MCIT on the first three taxable years as incentive to do business. 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. 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 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.

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Illustration: E Co., a domestic trading corporation, in its fourth year of operations had a gross income 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? MCIT (P300,000 x 2%) Normal Income Tax (P100,000 x 30%) Income Tax to be paid for the year (whichever is higher)

P6,000 P30,000 P30,000

Carry forward of excess minimum tax 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 only [Sec. 27(E)(2), NIRC]. In the year to which it was carried forward, the normal tax should be higher than the MCIT. 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. Yr 4 80K 20K

MCIT NT

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: 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

50,000

40,000

40,000

70,000

n/a

n/a

(40,000) (a)

n/a

(20,000) (a)

Tax Due

80,000

50,000

0

40,000

(20,000) (b) 30,000

MCIT NT

(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).

TAXATION LAW

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 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. (d) Taxation of Passive Income

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.

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: b. interest on any currency bank deposit, c. yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, and d. Royalties e. same for Domestic Corporations and Resident Foreign Corporations f. Collected as Final Withholding Tax [Sec. 57, NIRC]

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Interest Income derived by a domestic corporation from depository bank under the expanded foreign currency deposit system [Section 27 (D)(1), NIRC] 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. Dividends received from a domestic corporation by another domestic corporation or resident foreign corporation - Exempt b. Dividends received from a domestic corporation by a non-resident foreign corporation (NRFC): 30% of the amount of cash and/or property dividend; provided that it may be reduced to 15% of the amount of cash and/or property dividend, if the country in which the NRFC is domiciled shall allow a credit against the tax due from the NRFC deemed to have been paid in the Philippines equivalent to 15%, which represents the difference between the regular income tax of 30% and the 15% tax sparing rate.

TAXATION LAW

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: 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 b. 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%; c. If it is a Resident Foreign Corporation., it is subject to the regular corporate income tax rate of 30% d. 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. e. Applicable to domestic corporations only. f. Tax treatment is similar to that of individuals.

Stock dividends are exempt if there is no change in proportionate interest.

(e) Improperly Earnings Tax

Accumulated

Taxation of Capital Gains [Sec. 29, NIRC, as implemented by RR 2-2001] Capital gain from sale of shares of stock not traded in the stock exchange
 Final tax on net capital gains realized by a domestic corporation 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 [Sec. 27 (D)(2), NIRC]. Final tax on net capital gains realized by Resident Foreign Corporations and Nonresident Foreign Corporations during the

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

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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.

TAXATION LAW

Less: Amount that may be retained (100% of Paid-Up Capital) IAE Multiply by: IAET Rate

Effect of imposition of IAET 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.

IAET

xx xx xx xx 10 % xx xx

Profits which have been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends.

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 IAET.

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).

Immediacy Test: The term "reasonable needs of the business" means (1) the immediate needs of the business, including (2) reasonably anticipated needs.

Sample computation (RMC No. 35-2011) xx Taxable Income for the Year xx Add: xx (a) Income subjected to Final Tax xx xx (b) NOLCO xx xx (c) Income exempt from tax xx (d) Income excluded from gross xx xx income xx xx xx xx Less: xx Income Tax paid xx xx xx Dividends declared/paid xx xx xx Total xx Add: Retained Earnings from xx prior years xx Accumulated Earnings as of end xx of current year xx

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. Accumulation for Reasonable needs under RR 2-2001 Accumulation of earnings up to 100% of paidup capital; Definite corporate expansion projects requiring considerable capital expenditure (approved by Board of Directors or equivalent body); Building, Plant or Equipment Acquisition (approved by Board of Directors or equivalent body) a. compliance with any Loan Covenant or pre-existing obligation (established under a legitimate business agreement); b. required by Law or applicable regulations to be retained; c. in case of subsidiaries of foreign corporations in the Philippines, undistributed earnings reserved for Investments within the Philippines

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Coverage: a. IAET applies to: domestic corporations classified as closely- held corporations. b. IAET does not apply to: c. Banks and other non-bank financial intermediaries; d. Insurance companies; e. Publicly-held corporations; f. Taxable partnerships; g. General professional partnerships; h. Non- taxable joint ventures; and i. 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: a. at least 50% in value of the outstanding capital stock; or b. at least 50% of the total combined voting power of all classes of stock entitled to vote c. 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); not the same as close corporation under the Revised Corporation Code] 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. 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.

TAXATION LAW

Determination of Purpose to Avoid Income Tax 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; 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 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. A speculative and indefinite purpose will not suffice. Definiteness of plan/s coupled with action/s taken towards its consummation are essential. Branch Profit Remittance Tax (BPRT) Coverage 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).

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The following are not treated as branch profits unless effectively connected with the conduct of trade or business in the Philippines: a. Interests, dividends, rents, royalties (including remuneration for technical services), b. salaries, wages, c. premiums, annuities, emoluments, or d. 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 Income Tax Corporations

on

Special

Domestic

ii. 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 DepEd, CHED or TESDA [Sec. 27 (B), NIRC].

TAXATION LAW

iii. Government-owned or Controlled Corporations, Agencies, Instrumentalities [Sec. 27(C), NIRC] GOCCs General rule: GOCCs are taxable as any other corporation engaged in similar business, industry or activity Exceptions: a. Government Service Insurance System (GSIS) b. Social Security System (SSS) c. Philippine Health Insurance Corporation (PHIC) d. Local water districts (LWDs) [Sec. 27 (C), NIRC] 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 (1996)] iv. Foreign Currency Deposit Units [Sec. 27(D)(3), NIRC] Income derived by a depository bank under the expanded foreign currency deposit system from: 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

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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 depository banks under the EFCDS – exempt from income tax Same for Domestic and Resident Foreign Corporations. Similar treatment to OBUs.

TAXATION LAW

Air Canada vs. CIR (CTA Case No. 6572): A foreign airline company selling tickets in the Philippines through their local agents shall be considered as a resident foreign corporation engaged in trade or business in the country. The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. 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.

v. Resident Foreign Corporations Subject to Preferential Tax Rates

(b) Foreign Currency Deposit Units and Offshore Banking Units

(a) International Carriers Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB) International Air Carriers, GPB means: a. gross revenue derived from b. carriage of persons, excess baggage, cargo and mail c. originating from the Philippines in a continuous and uninterrupted flight, d. irrespective of the place of sale or issue and the place of payment of the ticket or passage document e. 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 f. 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 15-02]

FOREIGN CURRENCY DEPOSIT UNITS [Sec. 28(A)(7)] Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties [Sec. 28(B)(7)(a), NIRC] Derived from sources within the Philippines Final income tax at tax rate of 20% of interest income Interest income derived by RFC from a depository bank under the expanded foreign currency deposit system - 7.5% of interest income Income derived by a depository bank under the expanded foreign currency deposit system [Sec. 28(B)(7)(b), NIRC] Note: The provision discussing income derived by a resident foreign corporation under the expanded foreign currency deposit system cites the same rule as that derived by a domestic corporation [Sec. 27(D)(3), NIRC].

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See discussion above. Offshore Banking Units [Sec. 28(A)(4), NIRC] Income derived by OBUs authorized by the BSP from: a. 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 b. 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 c. foreign currency loans granted to residents (other than offshore banking units in the Philippines)– interest income subject to a final tax of 10% d. income of nonresidents, individuals or corporations, from transactions with OBUs – exempt from income tax e. similar treatment to FCDUs

TAXATION LAW

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] b. tax of 10% of their taxable income.

(c) Regional or Area Headquarters and Regional Operating Headquarters [Sec. 28(A)(6), NIRC] Regional or area headquarters a. 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 AsiaPacific Region and other foreign markets [Sec. 22 (DD)] b. not subject to income tax Regional operating headquarters a. branch established in the Philippines by multinational companies which are engaged in any of the following services: (i) general administration and planning; (ii) Page 106 of 256

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TAXATION LAW

Summary of Tax Bases and Rates of Special Corporations Type of Corporation Tax Base Domestic Corporation Proprietary Educational Institutions and Hospitals Taxable income from all sources (Non-profit) Depository Banks (Foreign Currency Deposit Units) Exempt (except that net income With respect to income derived under the from such transactions is subject expanded foreign currency deposit system from to the regular income tax payable certain foreign currency transactions by banks) 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 Amount of interest income Resident Foreign Corporation International Carriers Gross Philippines Billings Offshore Banking Units Exempt (except that net income With respect to income derived by offshore from such transactions is subject banking units from certain foreign currency to the regular income tax payable transactions by banks) With respect to interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks Amount of interest income Resident Depository Banks (Foreign Currency Deposit Units) Exempt (except that net income With respect to income derived under the from such transactions is subject expanded foreign currency deposit system from to the regular income tax payable certain foreign currency transactions by banks) 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 Amount of interest income Regional Operation Headquarters of Multinational Taxable income from within the Companies Philippines Non-Resident Foreign Corporation Non-resident cinematographic film owners, Gross income from the lessors or distributors Philippines Non-resident owner or lessor of vessels charted Gross rentals, lease and charter by Philippines nationals fees from the Philippines Non-resident owner or lessor of aircraft, Gross rentals, lease and charter machineries or other equipment fees from the Philippines

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Tax Rate 10%

10% 2.5%

10%

10% 10%

25% 4.5% 7.5%

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b. Non-resident Foreign Corporations (NRFC) [Sec. 28(B), NIRC] i. Taxation of NRFC in general A corporation organized under the laws of a foreign country, which is not engaged in trade or business in the Philippines. [See “Doing Business” 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 The tax is 30% of gross income received during each taxable year from all sources within the Philippines 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) ii. NRFCs subject to preferential tax rates Non-resident cinematographic film owner, lessor or distributor – 25% of gross income from all sources within the Philippines 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 Non-resident owner or lessor of aircraft, machineries and other equipment – 7.5% of

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gross rentals, charters or other fees TAX ON CERTAIN INCOME RECEIVED BY NRFC Tax on Interest on foreign loans: contracted on or after August 1, 1986 – 20% [Sec. 28 (B)(5)(a), NIRC] Tax on Inter-corporate dividends Inter-corporate 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 least 15% for taxes “deemed paid” in the Philippines 15% foreign tax credit represents the difference between the regular income tax of 30% on corporations and the 15% tax on dividends (“tax sparing credit”) 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. Tax on Capital gain from sale of shares of stock not traded in the stock exchange
 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: First P100k – 5% Amount in excess of P100k – 10%

c. Corporations Exempt from Income Tax Tax exempt corporations [Sec. 30, NIRC] a. Labor, agricultural or horticultural organization – non-profit b. mutual savings bank or cooperative bank – non-stock, non-profit, operated for mutual purposes c. Beneficiary society, order, or association –

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d.

e.

f.

g.

h. i. j.

k.

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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 Cemetery company – owned and operated exclusively for the benefit of its members 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 Business league, chamber of commerce, or board of trade – Non-profit; no part of net income inures to the benefit of an individual Civic league or organization – Non-profit; operating exclusively for the promotion of social welfare Non-stock and non-profit educational institutions Government educational institutions Organizations of a purely local character whose income consists solely of assessment, duties and fees collected from their members to meet expenses; includes: farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company and mutual or cooperative telephone company Farmers’, fruit growers’, 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.

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passive income, etc. applies to these otherwise exempt organizations. Tax on Other Entities: General Partnerships, General Professional Partnerships, Coownerships, Joint Ventures, and Consortia 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 partner’s share in the partnership’s 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 2-01 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 partner’s contribution to the general partnership fund is a capital investment and is not taxable income of the partnership. 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] A GPP as such shall not be subject to the income tax. It is not a taxable entity for income tax purposes.

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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)].

net of cost and expenses. [RR No. 08-2018]

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 2-98].

When Co-ownership is not subject to tax When the co-ownership’s activities are limited merely 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]

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

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 subject to tax The following circumstances would render a co-ownership 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)]

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Joint Ventures and Consortiums To constitute a” joint venture,” certain factors 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 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 inter-corporate 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.

7. Filing of Payment

Returns

and

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.

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Examples of tax returns are: a. BIR Form Nos. 1700 and 1701 – Annual Income Tax Returns for Individual b. BIR Form No. 1702 – Annual Income Tax Return for Corporations and Partnerships c. BIR Form No. 1800 – Donor’s Tax Return d. 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] 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 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].

a. Individual Return i. Who are required to file; Exceptions [Sec. 51(A), NIRC] General Rule: The following are required to file income tax return: a. Resident citizen b. Non-resident citizen, on income from sources within the Philippines

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c. Resident alien, on income from sources within the Philippines d. 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: a. 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. b. 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. c. Individuals whose sole income has been subjected to final withholding tax (pursuant to Sec. 57 (A)). d. Minimum wage earner (as defined in Sec. 22 (HH)) e. Individuals who are exempt from income tax pursuant to the provisions of the Tax Code and other laws.

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been paid on such property, or (b) when the transfer of such property is exempt from the donor’s tax [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]. ii. Substituted Filing Applicable to individual taxpayers: a. receiving purely compensation income, regardless of amount b. from only one employer in the Philippines for the calendar year, and c. the income tax of which has been withheld correctly by the employer The certificate of withholding filed by their respective employers, duly stamped ‘received’ by the BIR, shall be tantamount to the substituted filing of income tax returns by the employee [Sec. 51-A, NIRC]. iii. When and Where to File

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 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) when the donor’s tax has

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] 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 b. Sale of real property – file a return within 30 days from each sale

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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), NIRC]. 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, 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 RR No. 2-93] Where to File 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].

b. Corporate Returns i. Quarterly Income Tax All corporations subject to income tax shall render quarterly income tax returns and a final or adjustment return, except foreign

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corporations not engaged in trade or business in the Philippines. 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. ii. When and Where to File 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]. The filing of the tax returns by a corporation using the calendar year: Period Due Date for Filing Return Period Due Date for Filing Return Q1 Return May 31 of the same year Q2 Return August 31 of the same year Q3 Return November 30 of the same year Annual Return April 15 of the following year Where to File 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 corporation’s 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].

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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), NIRC] Return of Corporations 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]

c. Return on Capital Gains Realized from Sale of Shares of Stock and Real Estate 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]

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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 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. 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]

b. Final Withholding Tax The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. 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.

c. 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.

8. Withholding of Taxes a. Concept Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income.

The income recipient is still required to file an income tax return, to report the income and/or

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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. i. Expanded Withholding Tax Withholding Tax at Source [Sec 57, NIRC] 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 payorcorporation and/or person. N.B. Sec. 57 contains an extensive list of taxes. These 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 more than fifteen percent (15%) of the income payment. [Sec. 57 (B), NIRC]

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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. ii. Withholding Tax on Compensation 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.

d. Fringe Benefits Tax Note: See earlier discussion on Fringe Benefits under Gross Income.

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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.

TRANSFER TAXES A. ESTATE TAX 1. Basic Principles, and Definition

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Concept,

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] Estate tax is levied upon the transfer of the net estate [Sec. 84, NIRC]. 1. Estate tax accrues at the time of the decedent’s death, distinct from the obligation to pay the same as fixed by law. 2. The tax is measured by the value of the property AT THE TIME OF DEATH. Subsequent appreciation or depreciation is immaterial; 3. 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. 3, RR 12-2018]

Justification Theories for its Imposition: 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 3. Ability-to-pay theory – Receipt of inheritance is in the nature of unearned wealth which 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.

a. Time and Transfer of Properties

Nature, Purpose, and Object It is a transfer tax (i.e. an excise tax on the right of transmitting property), not a property tax. Unlike the old inheritance tax, estate tax is a tax on the right to transfer and not the right to inherit property.

The rights to the succession are transmitted from the moment of the death of the decedent. [Art. 777, Civil Code]. The decedent’s estate includes property to the extent of the interest therein of the decedent at the time of his death. [Sec. 85(A), NIRC]

Purpose: To tax the shift of economic benefits and enjoyment of property from the dead to the living.

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]

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Time of death governs: 1. The determination of the extent of the decedent’s interest for computing his gross estate. 2. The statute that governs estate taxation. 3. The accrual of the estate tax. Taxable Transfers 1. Transfers Mortis Causa. These are gratuitous transfers that take effect after death, either testate or intestate. These 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. [Maglasang v Heirs of Cabatingan, G.R. No. 131953 (2002)] 2. Transfers Inter Vivos. Gratuitous transfers that take effect during the lifetime of the donor. (See Donor’s Tax for requisites) General Rule: Donation Inter Vivos is subject to donor’s tax. Exceptions: Donation Inter Vivos is subject to estate tax when it is treated by law as substitutes for testamentary dispositions: 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.

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2. Classification of Decedent Estate Tax applies only to individuals. The decedent may be classified into: 1. Citizens and residents (RC/NRC/RA) or 2. Non-resident alien (NRA). Concept of residence For purposes of estate taxation, “residence” refers to 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 (movables follow the person) Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits promissory notes, and corporate stocks) follows the residence/domicile of the owner. [Collector v Fisher, G.R. No. L-11622 (1961)] Exception: When it is inconsistent with express provisions of law. Exception to the exception: Rule of Reciprocity with respect to an NRA. 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

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5. 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] Valuation of Gross Estate [Sec. 88, NIRC] General Rule: Gross Estate = FMV at the time of the decedent’s death [Sec. 5, RR 12-2018] Real Property 1. Appraised value, whichever is higher between: a. FMV, as determined by the Commissioner of Internal Revenue (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 FMV per latest tax declaration. [Sec. 5, RR 12-2018] Personal Property 1. FMV at the time of death. 2. Shares of stocks a. If listed = FMV is the mean between the highest and lowest quotation at a date nearest the date of death, if

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none is available on the date of death b. If unlisted = book value at the time of death (common shares) or par value (preferred shares) [Sec. 5, RR 12-2018] Note: In determining the book value, appraisal surplus and the value assigned to preferred shares, if any, shall not be considered. The valuation of unlisted shares shall be exempt from the provisions of RR 6-2013, which prescribes the use of the Adjusted Net Asset Method. [Sec. 5, RR 12-2018] Units of Participation in Any Association, Recreation or Amusement Club (golf, polo, etc.) FMV shall be the bid price nearest the date of death published in any newspaper or publication of general circulation. [Sec. 5, RR 12-2018] Right to Usufruct, Use or Habitation, and Annuity The probable life of the beneficiary in accordance with the latest basic standard mortality table shall be taken into account. [Sec. 5, RR 12-2018]

3. Composition of Gross Estate Items to be included in the Gross Estate [Sec. 85, NIRC] 1. Decedent’s interest [Sec. 85(A), NIRC] – This includes property owned by the decedent actually and physically present in his estate at the time of his death [MAMALATEO 2014 at 358]; 2. Properties not physically in the estate, such as: a. Transfers in contemplation of death [Sec. 85(B), NIRC]; b. Revocable transfers [Sec. 85(C), NIRC]; c. Property passing under general power of appointment [Sec. 85(D), NIRC];

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d. Proceeds of life insurance [Sec. 85(E), NIRC]; e. Prior interest [Sec. 85(F), NIRC] f. Transfers for insufficient consideration [Sec. 85(G), NIRC]; i. Decedent’s interest NIRC]

[Sec.

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purpose of avoiding the tax. The decedent’s motive is a question of fact. Thus, the imminence of death may afford convincing evidence of the impelling cause of transfer. [MAMALATEO, Reviewer on Taxation]

85(A),

iii. Revocable Transfers [Sec. 85(C), NIRC]

All property owned by the decedent to the extent of his interest therein at the time of his death. This includes any interest, having value or capable of being valued or transferred, in property owned or possessed by the decedent at the time of his death., This also includes those transferred by the decedent at the time of his death.

General Rule: A transfer is revocable where: 1. There is a transfer by trust or otherwise, Exception: In case of a bona fide sale for an adequate and full consideration in money or money’s worth 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.

Examples: a. dividend declared on or before death, but is received by the estate after death b. partnership profits which have accrued before his death, but received after death ii. Transfers in Contemplation of Death [Sec. 85(B), NIRC] It is a transfer in contemplation of death if the decedent either has retained for his life 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 person who shall possess or enjoy the property or the income therefrom Exception: In case of a bona fide sale for an adequate and full consideration in money or money's worth Note: The term “in contemplation of death” 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

Note: The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death even though: a) The exercise of the power is subject to a precedent giving of notice, or b) The alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised. c) 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

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the power exercised, on the date of his death.

v. Proceeds of Life Insurance [Sec. 85(E), NIRC]

iv. Property Passing under a Special Power of Appointment [Sec. 85(D), NIRC]

Inclusion of proceeds of life insurance to the gross estate depends on (i) the designated beneficiary; (ii) the revocability of the insurance; and (iii) the period and source of funds used in premiums.

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. a. General Power of Appointment (GPA): when it gives to the decedent the power to appoint any person he pleases including himself, thus having as full dominion over the property as though he owned it b. Special Power of Appointment (SPA): when the decedent can appoint only among a designated class of persons other than himself, his estate, the creditors of his estate [AmJur] General Rule: Property passing under a GPA is excluded from gross estate Exception: Included in the gross estate if the property arises under a GPA 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.

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 when the beneficiary is: 1. The estate of the deceased, his executor or administrator, irrespective of whether or not the insured retained the power of revocation; or 2. Any beneficiary designated in the policy, except when designation is irrevocable. When not taxable 1. Irrevocably designated; how done a. By expressly stating it in the policy (if not stated, the designation is PRESUMED to be REVOCABLE); b. By not changing the beneficiary during the lifetime of the insured, it is deemed irrevocable. [Sec. 11, RA 10607 (2013)] 2. Accident insurance proceeds as the Tax Code specifically mentions only life insurance policies 3. Proceeds of a group insurance policy taken out by a company for its employees. 4. 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. 5. Proceeds of insurance policies issued by the GSIS are exempt from all taxes; [PD 1146] 6. Benefits accruing under the SSS Law [RA 1161] 7. Proceeds of life insurance payable to heirs of deceased members of military personnel [RA 360]

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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: a. Beneficiary is estate of the insured – proceeds are presumed conjugal; hence, one-half share of the surviving spouse is not taxable b. Beneficiary is third person – proceeds are payable to beneficiary even if premiums were paid out of the conjugal interest [MAMALATEO] vi. Prior Interest [Sec. 85(F), NIRC] The subsections pertaining to (1) transfers in contemplation of death, (2) revocable transfers and (3) proceeds of life insurance shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers whether made, created, arising, existing, exercised or relinquished before or after the effectivity of the NIRC. vii. Transfers for Insufficient Consideration [Sec. 85(G), NIRC] This refers to any (1) transfer in contemplation of death, (2) revocable transfer or (3) property passing under GPA that is made, created, exercised or relinquished for a consideration in money or money’s worth, but is NOT a bona fide sale for an adequate and full consideration in money or money’s worth. The value to be included in the gross estate is the excess of the FMV of the property at the time of the decedent’s death over the consideration received. Note: The transfer is subject to estate tax if the 3 instances mentioned are present. Otherwise, it is subject to donor’s tax.

TAXATION LAW

Capital of the Surviving Spouse [Sec.85(H), NIRC] It is NOT part of the gross estate of the deceased spouse. The capital of the surviving spouse is considered an exclusion from the deceased’s gross estate.

b. Allowable Deductions Exclusions from Estate

and

Deductions and/or losses already deducted from gross income can no longer be deducted from gross estate. Deductions should not be compensated for by any insurance or extrajudicial settlement. Otherwise, they are not valid deductions. 1. Ordinary Deductions a. Losses, Indebtedness Taxes, Etc. (LIT) i.

and

Claims Against the Estate [Sec. 86 (A)(2)]

“Claims” generally mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Claims against the estate or indebtedness in respect of property may arise out of contract, tort, or operation of law. [Sec. 6(2), RR 12-2018] Requisites for Deductibility [Sec. 6 (2.1) and (2.2), RR 12-2018]. a. The liability represents a personal obligation of the deceased existing at the time of his death; b. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth; 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

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collect from the decedent must not have prescribed; and e. They must be reasonably certain in amount, and substantiated. Substantiation Requirements [Sec. 6 (2.2), RR 12-2018]. In case of simple loan (including advances): a. The debt instrument must be duly notarized at the time the indebtedness was incurred, except for loans granted by financial institutions where notarization is not part of the business practice/policy. b. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. c. 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 showing the unpaid balance of the decedent-debtor. 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. Documents evidencing the purchase of goods or service (e.g., sales invoice/delivery receipt or contract for services), and statement of account given by the creditor 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. A certified true copy of the updated latest subsidiary ledger/records of the debtordecedent, should likewise be submitted.

TAXATION LAW

Note: Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the 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. [Sec. 6(2.2.3), RR 12-2018] ii.

Claims against Insolvent Persons [Sec. 86 (A)(3), NIRC]

These are claims of the deceased against insolvent persons as defined under RA 10142 (The Financial Rehabilitation and Insolvency Act of 2010) and other existing laws, where the value of the decedent’s interest therein is included in the value of the gross estate. [Sec. 6(3), RR 12-2018] Requirements for deductibility: 1. The full amount owed by the insolvent must first be included in the decedent’s gross estate; and 2. The incapacity of the debtor to pay his obligation should be proven, although a judicial declaration of insolvency is not required. [Monserrat v. Collector of Internal Revenue, CTA Case No. 11 (1955)] Note: 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. iii.

Unpaid Mortgages, Losses, and Taxes [Sec. 86(A)(4), NIRC]

Unpaid Mortgages Requisites for Deductibility [Sec. 6(4.1), RR 122018]: a. The value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estates.

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b. The mortgages were contracted bona fide and for an adequate and full consideration in money or money’s worth. Note: 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, said unpaid obligation shall not be allowed as a deduction. In all instances, the mortgaged property, to the extent of the decedent’s interest therein, should always form part of the gross taxable estate. [Sec. 6(4), RR 12-2018] iv.

Unpaid Taxes [Sec. 6(4.2), RR 12-2018]

Requisites for Deductibility: a. Taxes which have accrued as of or before the death of the decedent, and b. Unpaid as of the time of his death, regardless of whether or not it was incurred in connection with trade or business. Casualty Losses Requisites for Deductibility: a. Incurred during the settlement of the estate b. Arising from fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement c. Not compensated for 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 (i.e., 1 YEAR from decedent’s death).. Therefore, all casualty losses after the prescribed period from the payment of tax are not deductible. Value to deduct: The difference of the FMV before and after incurring the loss. [AMPONGAN]

TAXATION LAW

Casualty loss can be allowed as deduction in one instance only, either for income tax or estate tax purposes. [Sec. 6(A)(5)), Rev. Reg 2-2003] Note: See Formula for computing Ordinary Deductions of NRA below (footnotes under table). b. Property Previously Taxed (Vanishing Deduction) [Sec. 86(A)(5)] This is an amount allowed to reduce the gross estate where the property was previously subjected to transfer taxes, either donor’s tax or estate tax. Requisites for deductibility: 1. Death – The present decedent died within 5 YEARS from the date of death of the prior decedent OR the date of gift. 2. Identity of the property – The property can be identified as the one received from prior decedent or donor. 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. 4. Previous taxation of property – The estate tax on the prior succession, or the donor’s tax on the gift must have been finally determined and paid by the prior decedent or by the donor. 5. No previous vanishing deduction on the property – No such deduction on the property was allowed in determining the value of the net estate of the prior decedent. This is intended to preclude the application of vanishing deduction on the same property more than once. Steps (L.I.A.R): 1. Lower value – Identify the property and its proper value (i.e., the value at the time previously taxed or the value of the

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property in the present estate, whichever is lower) 2. Initial Basis - Deduct any mortgage or lien paid by the present decedent to arrive at the initial basis. 3. Actual or Final Basis - From the initial basis, deduct the proportionate amount for (a) claims against the estate, (b) claims against insolvent persons, (c) unpaid mortgages, taxes and casualty losses, and (d) transfers for public use [pars. 2, 3, 4 and 6 of Sec. 86(A) of the NIRC] based on the ratio of the initial basis over the gross estate. Thus, deductions are only Losses Indebtedness and Taxes (LIT) and Transfer for Public Use (TPU).

TAXATION LAW

Note: Amount of Vanishing Deduction is deducted from the exclusive property of the decedent, NOT from the conjugal property. c. Transfers for Public Use [Sec. 86(A)(6)] Requisites for deductibility: 1. The disposition is in a last will and testament 2. To take effect after death 3. In favor of the Government of the Republic of the Philippines, or any political subdivision thereof 4. Exclusively for public purposes 5. The value of the property given is included in the gross estate.

Formula for proportionate deduction: 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐵𝑎𝑠𝑖𝑠 𝑥 (𝐿𝐼𝑇 𝐺𝑟𝑜𝑠𝑠 𝑒𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡 + 𝑇𝑃𝑈) 4. Rate - Multiply the actual basis by the applicable rate based on the length of time the property has been acquired: More than 1 year 2 years 3 years 4 years

Not more than 1 year 2 years 3 years 4 years 5 years

Rate 100% 80% 60% 40% 20%

FORMULA: Value Taken of Property (Lower) Less: Mortgage debt paid, if any = Initial Basis Less: Proportionate Deduction = Actual or Final Basis Multiplied by Applicable Rate = VANISHING DEDUCTION

2. Special Deductions a. Family Home [Sec. 86(A)(7), NIRC; Sec. 6(7), RR 12-2018] Family home – 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 considered as such for as long as any of its beneficiaries actually resides therein. 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 one still intends to return. It must be part of the ACP/CPG/exclusive property of the decedent. It may also be constituted by an unmarried head of a family on his or her own property.

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For purposes of availing this deduction, a person may constitute only one family home. [Sec. 6(7.1), RR 12-2018 citing Arts. 152, 153, 156 and 161, Family Code] Requisites for Deductibility [Sec. 6(7.2), RR 12-2018] 1. The decedent was married (or if single, was the head of the family). 2. Along with the decedent, any of the beneficiaries must be dwelling in the family home. 3. The family home as well as the land on which it stands must be owned by the decedent. 4. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the same is situated. 5. The total value of the family home must be included as part of the gross estate. 6. Allowable deduction must be in an amount equivalent to whichever is lowest of: a. the current FMV of the family home as declared or included in the gross estate, or b. the extent of the decedent’s interest (whether conjugal/community or exclusive property), or c. P10,000,000. [AMPONGAN, 2017 and TABAG, 2019] Beneficiaries of a Family Home [Sec. 6(7), RR 12-2018] 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.

TAXATION LAW

b. Standard Deduction 86(A)(1), NIRC]

[Sec.

An amount equivalent to P5,000,000 shall be deducted from the gross estate without need of substantiation. For NRAs, the Standard Deduction is P500,000 [Sec. 86 (B)(1)].Amounts Received by Heirs Under RA 49171 [Sec. 86(A)(8), NIRC] Any amount received by the heirs from the decedent’s 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. This includes retirement benefits given by private firms with a reasonable private benefit plan, if the employee is not less than 50 years old and has been with the same employer for at least 10 years. Such benefit may be availed of only once. 3. Net Share of Surviving Spouse in CPG/ACP [Sec. 86(C), NIRC; Sec. 6(9), RR 12-2018] (Compare with Capital of Surviving Spouse which is excluded from the gross estate). The amount deductible from the net estate of the decedent is the net share of the surviving spouse in the conjugal property. The net share is equivalent to ½ of the conjugal property after deducting the obligations chargeable to such property. The net share of the surviving spouse is neither an ordinary nor a special deduction.

1 An Act Providing that Retirement Benefits of Employees

of Private Firms shall not be subject to attachment, levy, execution or any tax whatsoever

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TAXATION LAW

c. 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] All properties, real or personal, tangible or Only properties situated in the Philippines, intangible, wherever situated [Sec. 4, RR 12- provided that the inclusion of intangible personal 2018] property is subject to the rule of reciprocity provided for under Section 104 of the NIRC [Sec. 4, RR 12-2018] Note: If there is reciprocity, intangible assets are excluded from gross estate Exclusions from Gross Estate [Sec 85(H) and Sec 87 of NIRC, and special laws] Exclusion a. Separate property of the surviving spouse [Sec. 85 (H), NIRC] Exemptions under the NIRC b. Merger of usufruct in the owner of the naked title [Sec. 87 (A), NIRC] c. Transmission of inheritance or legacy by fiduciary heir or legatee to the fideicommissary [Sec. 87 (B), NIRC] d. Transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor [Sec. 87 (C), NIRC] e. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: provided that not more than 30% of said transfer shall be used for administration purposes [Sec. 87 (D), NIRC] Exemptions under special laws f. GSIS proceeds/benefits [P.D. 1146] g. Accruals from SSS [R.A. 1161] h. Proceeds of life insurance where the beneficiary is irrevocably appointed i. Proceeds of life insurance under a group insurance taken by employer j. War damage payments and Benefits received from US Veterans Administration [R.A. 227] k. Transfer of property to the National Government or to any of its political subdivisions l. Benefits received by beneficiaries residing in the Philippines under laws administered by the US Veteran Administration [R.A. 360] m. Grants and donations to the Intramuros Administration [P.D 1616] n. Properties held in trust by the decedent o. Acquisition and/or transfer expressly declared as not taxable p. Personal equity and Retirement Account (PERA) assets of the decedent-contributor (Sec. 14, RA 9505) [TABAG, 2019 at 43-44]

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TAXATION LAW

Deductions from Gross Estate to arrive at the Net Estate [Sec. 86 (A) and (B), NIRC] Ordinary deductions2: Ordinary deductions: a. Proportionate deductions for LIT3 a. Losses, indebtedness, taxes (LIT) ● Claims against the estate ● Claims against the estate ● Claims against insolvent persons ● Claims against insolvent persons ● Unpaid mortgages ● Unpaid mortgages ● Taxes ● Taxes ● Casualty losses ● Casualty losses b. Vanishing deductions (property previously b. Vanishing deductions (property previously taxed) taxed) c. Transfers for public use c. Transfers for public use Special deductions d. Family home (max of P10Million) e. Standard deduction (fixed at P5Million) f. Amounts received under R.A. 4917

Special deduction d. Standard Deduction of P500,000 Net share of the surviving spouse

N.B: No deduction for Family home and Amounts received under R.A. 4917 [Sec. 7, RR 12-2018] * Funeral expenses, judicial expenses, and medical expenses are no longer allowed as deductions under the TRAIN LAW Net share of the surviving spouse [Sec. 6, RR 12-2018]

Gross Estate vis-à-vis Net Estate Gross Estate Value at the time of death of all the decedent’s property wherever situated HOWEVER, in the case of an 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]

Net Estate The value of the gross estate less allowable deductions; also called net taxable estate, after deducting the net share of surviving spouse, if any. Tax Rate: FLAT RATE OF 6% [Sec. 84, NIRC] Tax Base: Net Estate

Formula for Estate Tax Gross Estate (Sec. 85) Less: Deductions (Sec. 86(A), (B)) ------------------------------------------------------Net estate before share of surviving spouse, if married Less: ½ share of the surviving spouse in the conjugal property (Sec. 86(C)) ------------------------------------------------------= Net taxable estate Multiply by: tax rate of 6% (Sec. 84) ------------------------------------------------------= Estate Tax Due Less: Tax Credit, if any (Sec. 86(E) ------------------------------------------------------= Estate Tax Payable

2 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 the time of the decedent’s death of that part of his gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC] 3 Formula for Proportionate Deductions of NRA [Sec. 7, RR 12-2018]:

Allowable Deduction = Phil Gross Estate World Gross Estate

x LIT

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d. Tax Credit for Estate Taxes Paid in a Foreign Country Estate Tax Credit is a remedy against international double taxation to minimize the onerous effect of taxing the same property twice. 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. [Sec. 86(E), NIRC] 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. LIMITATIONS ON CREDIT 1. Specific Country Limitation; Limit A The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under the tax code bears to his entire net estate. [Sec. 86(E)(2)(a), NIRC] Tax Credit Limit A: 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) 𝑥 𝑃𝐻 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 2. Global Limitation; Limit B The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under the tax code bears to his entire net estate. [Sec. 86(E)(2)(b), NIRC]

TAXATION LAW

Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. 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: A resident decedent died leaving the following: Net estate, Philippines P8,000,000 Net estate, Indonesia P3,000,000 Estate tax paid, Indonesia P200,000 Net estate, UK P2,000,000 Estate tax paid, UK P100,000 Net estate, Australia (P1,000,000) Question: How much is the estate tax payable after estate tax credit? ANSWER: P480,000 Total taxable net estate P12,000,000 Multiplied by tax rate 6% Estate tax due 720,000 Less: estate tax credit (240,000)* Estate tax payable 480,000 SOLUTION: Limit A: Indonesia: Limit P180,000** Actual P200,000 Allowed P180,000 UK: Limit P120,000** Actual P100,000 Allowed P100,000 Total Allowed (Indonesia and UK): P280,000

Tax Credit Limit B: 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝑎𝑙𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠) Limit B: 𝑥 𝑃𝐻 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 Limit P240,000*** Actual P300,000 Page 129 of 256

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Allowed: P240,000 *Allowable Tax Credit (lower between Limit A or B): P240,000

**Apply the Limit A computation (per foreign country) ***Apply the Limit B computation (total of all foreign countries) NRA, of that part of his gross estate situated in the Philippines; b. Itemized deductions from gross estate allowed in Sec. 86; and c. The amount of tax due whether paid or still due and outstanding.

e. Filing of estate tax returns and payment of estate tax Filing of Notice of Death [Sec. 89, NIRC] – Repealed by the TRAIN Law [R.A. 10963]. Hence, no such requirement. FILING OF ESTATE TAX RETURN [Sec. 90, NIRC] When Required (Copies in duplicate) [Sec. 90 (A), NIRC] 1. In all cases of transfers subject to estate tax, or 2. 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 BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee. Contents [Sec. 90 (A), NIRC] The return shall be filed 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 NRA, 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 CPA 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

TAXATION LAW

Period for Filing [Sec. 90 (B), NIRC] General Rule: Must be filed within 1 year from the decedent's death. 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: The 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. 90(D), NIRC] 1. 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: a. An authorized agent bank (AAB), or b. Revenue District Officer (RDO), or c. Collection Officer, or d. Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death

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2. Non-resident decedent (NRA/NRC) a. 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, it shall be filed with and the TIN for the estate shall be secured from the RDO having jurisdiction over the executor or administrator’s legal residence. [Section 9(8), RR 12-2018] b. Without 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. [Section 9(8), RR 12-2018] PAYMENT OF ESTATE TAX [Sec. 91, NIRC] Time of Payment [Sec. 91(A), NIRC] “Pay as you file”: At the time the return is filed by the executor, administrator or the heirs. 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. 2. If there are two or more executors or administrators, all of them are severally liable for the payment of the tax. 3. The tax clearance issued by the CIR or the RDO having jurisdiction over the estate will serve as the authority to distribute the remaining properties. Subsidiarily, the heirs or beneficiaries, for the payment of that portion of the estate tax which his distributive share bears to the value of the total net estate. [Sec. 9(9), RR 12-2018]

TAXATION LAW

The heirs shall be liable in proportion to their share in the inheritance. [Marcos v. CA, G.R. No. 120880 (1997)] Extension of Payment [Sec. 91(B), NIRC] The CIR may allow an extension of payment, if payment on the due date 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. Two (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 is 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. 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 the 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. [Sec. 9(5), RR 12-2018] Payment by installment [Sec. 91(C), NIRC] In case the available cash of the estate is insufficient to pay the total estate tax due, payment by installment shall be made within 2 years from the statutory date of filing, without civil penalty and interest.

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Restitution of tax paid [Sec. 96, NIRC] If, after the payment of the estate tax, new obligations of the decedent appear, and the persons interested satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid. Withdrawal from bank account of decedent General rule: If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall allow withdrawal from the said deposit account, subject to a final withholding tax of 6%. [Sec. 97, NIRC] Exception: No withholding tax shall be imposed where the bank deposit accounts have been duly included in the gross estate of the decedent and the estate tax due thereon has been paid provided that an eCAR is presented prior to withdrawing. [Sec. 10, RR 12-2018] Tax deficiency after distribution of properties 1. The BIR may recover the deficiency from all the heirs and collect from each of them the amount proportionate to the inheritance received. 2. By virtue of a lien created under Sec. 219, it may go after one heir and subject the property he received from the estate to the payment of estate tax. Such heir may seek reimbursement from the other heirs.

B. DONOR’S TAX 1. Basic Principles, and Definition

Concept,

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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 a 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. 24(D)) classified as capital asset within the Philippines, for less than an adequate and full consideration in money or money’s worth. [Sec. 100, NIRC] Nature of donor’s tax 1. Donor’s tax is not a property tax, but a tax imposed on the transfer of property by way of gift inter vivos (i.e., an excise tax). [Sec 12, RR 12-2018 citing Lladoc v. CIR, G.R. No. L-19201 (1965)] 2. It is a direct tax imposed on the donor. 3. It applies to both natural and juridical persons. [AMPONGAN, 2014] 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. Time and Transfer of Properties Donor’s tax shall not apply unless and until there is 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 shall govern the imposition of the donor’s tax. [Sec. 12, RR 12-2018]

A donor’s tax is levied, assessed, collected 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 Page 132 of 256

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2. 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 donor Donative intent must be present in a direct gift. It is not, however, required in transfers of property for less than adequate and full consideration. [MAMALATEO; Sec. 100, NIRC] 2. Capacity of the donor 3. Delivery of the donated property 4. Acceptance of the donee 5. 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. 12, RR 12-2018] 1. For movables exceeding P5,000 – 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

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3. Transfers which May Considered as Donation

be

a. Sale, Exchange, or Transfer of Property for Less Than Adequate and Full Consideration General rule: Where property, other than real property referred to in Sec. 24(D), is transferred for less than an adequate and full consideration, then the amount by which the FMV of the property exceeded the value of the consideration shall be deemed a gift. Exception: A transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. [Sec. 100, NIRC] Requisites: The excess of FMV over the value of the consideration will be considered a donation and subject to donor’s tax when: 1. The transfer was for less than adequate and full consideration; 2. Such transfer was effective during his lifetime (inter vivos); and 3. It involves property other than real property classified as capital asset within the Philippines as defined in Sec. 24(D). [Sec. 100, 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 gross selling price or the FMV; not gain. [Sec. 100 in relation to Sec. 24(D), NIRC]

Note: Acceptance shall not take effect unless it is done during the lifetime of the donor and of the donee [Art. 746, Civil Code].

Note: The absence of donative intent does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that the amount by which the fair market value of the property exceeded Page 133 of 256

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the value of the consideration shall be deemed a gift. [Philam Life v. Secretary of Finance, G.R. No. 210997 (2014)]

b. Condonation or Remission of Debt 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. [Dizon v. CTA, G.R. No. 140944, (2008)]

c. Renunciation of inheritance Renunciation in favor of other heirs is subject to donor’s tax. [Sec 12, RR 12-2018] a. Renunciation by the surviving spouse of his/her share in the ACP/CPG after the dissolution of the marriage in favor of heirs of the deceased spouse or any other person/s b. 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

If donor is: 1. RC/NRC/RA/DC/RFC = liable for donor’s tax REGARDLESS of where the gift was made or where property is located 2. NRA/NRFC = liable for donor’s tax only if the property 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.

However, general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is NOT subject to donor’s tax. [Sec 12, RR 12-2018]

4. Classification of Donor Donor’s tax applies to individuals corporations. Classifications: 1. Residents (RC/RA/DC/RFC) 2. Non-Residents (NRC/NRA/NRFC)

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and

Such classification is important in determining the deductions from the gross gift of the donor, and in filing the return.

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5. Determination Exemptions)

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of

Gross

Gift

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(including

Composition

and

RC/NRC/RA/DC/RFC NRA/NRFC Composition and Determination of Gross Gift All properties, real or personal, tangible or ● Only properties situated in the intangible, wherever situated Philippines, provided that the inclusion of intangible personal property is subject to the rule of reciprocity Note: If there is reciprocity, intangible assets are excluded from gross gifts [Sec. 104, NIRC] Exemptions from GROSS gift to arrive at NET Gifts 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. Encumbrances on the property donated if assumed by the donee in the deed of donation. 2. Donations made to entities exempted under special laws

NOT SUBJECT TO DONOR’S TAX 1. Contributions to a candidate or political party for campaign purposes duly reported to COMELEC [Sec. 99 (B), NIRC] Donation to a Political Candidate Prior to R.A. 7166, a donation for a political candidate was subject to donor’s tax. [ACCRA v CIR, G.R. No. 120721 (2005)] Page 135 of 256

Under R.A. 7166, contributions duly reported to the BIR are not subject to donor’s tax, as long as it is utilized in his campaign. Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s campaign expenditures, shall be considered as subject to income tax and must be included in the candidate’s

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taxable income as stated in his/her ITR [Sec. 2, RR 7-2011] 2. Gift to Parish Priest or Church (applies only to real property tax) 3. Onerous donations or donations in exchange for goods/services (they are subject to income tax) SUBJECT TO DONOR’S TAX Gratuitous Donations to Homeowners’ Association Valuation of Gifts Made in Property TAXABLE BASE: Net gifts - the net economic benefit from the transfer that accrues to the donee AT THE TIME OF DONATION 1. If gift is personal property = FMV at the time of donation [Sec. 102, NIRC] 2. 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] 3. If there is an improvement = construction cost per building permit or the FMV based on the latest tax declaration. 4. 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. [RR 6-2013]

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subtracted from the gross value of the property donated to arrive at the value of the net gift, which is the tax base for donor’s tax. [DE LEON] 1. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. [Sec. 101 (A)(1), NIRC] 2. 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. [Sec. 101 (A)(2), NIRC] 3. Encumbrances on the property donated if assumed by the donee in the deed of donation. 4. 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 Inventor’s Commission j. Philippine American Cultural Foundation k. Task Force on Human Settlement on the donation of equipment, materials and services

Note: Where the consideration is fictitious, the entire value of the property shall be subject to donor’s tax. Exemptions of Gifts from Donor’s Tax It is more appropriate to consider these “exemptions” as “deductions” as they are Page 136 of 256

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6. Tax Credit for Donor’s Taxes Paid in a Foreign Country Donor’s tax credit The donor’s tax imposed upon a citizen or resident at the time of the donation shall be credited with the amount of any donor’s tax, of any character and description, imposed by the authority of a foreign country. [Sec. 101(C), NIRC] Who may claim the tax credit: Resident or Citizen: RC, NRC, RA, DC, RFC (not NRA or NRFC) Limitations on credit 1. Per Country Limit 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) 𝑥 𝑃𝐻 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 2. Worldwide Limit 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (𝐴𝑙𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠) 𝑥 𝑃𝐻 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 Note: The allowable tax credit is the lower of the tax limit and the actual tax paid.

7. Filing of Return and Payment Persons 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] 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 conjugal/community property, each spouse shall file separate return with respect to his/her respective share in the said property.

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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; and 5. Such further information as the CIR may require. [Sec. 103(A), NIRC] Period for Filing 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 (pay-as-you-file). [Sec. 103(B), NIRC] Who will file: Any person who made a gift (whether direct or indirect), is required to file under oath a donor’s tax return in duplicate [Sec. 103(A), NIRC] Where to File the Donor’s Tax Return and Pay the Tax Due 1. Residents Unless the CIR permits otherwise, the return shall be filed and the tax paid to: a. AAB b. Revenue District Officer c. Revenue Collection Officer d. duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer [Sec. 103(B), NIRC] 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 (i.e., Revenue District Office No. 39 – South QC) [Sec. 103(B), NIRC; Sec. 15(B), RR 122018]

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PAYMENT OF DONOR’S TAX Payment: “Pay as you file” The donor’s tax is paid upon filing of the return [Sec. 103(B), NIRC] Notice of donation to donee institutions duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC) Requisites to be exempt from donor’s tax and to claim full deduction: 1. Donor must give notice on every donation worth at least P50,000 2. Notice is given to the RDO which has jurisdiction over donor’s place of business 3. Notice must be given within 30 days after receipt of the qualified done institution’s Certificate of Donation 4. Certificate of Donation must be attached to the Notice 5. Notice must state that not more than 30% of the donation for the taxable year shall be used by the qualified donee institution for administration purposes [Sec. 15 (C), RR 12-2018 in relation to Sec. 101(A)(2) and (B)(2)] 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. Tax Rate: FLAT RATE OF 6% [Sec. 99, NIRC]

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General Formula Gross Gifts Less: Allowable deductions ----------------------------------------------------Net Gifts Less: Exempt gift of P250,000 ----------------------------------------------------Taxable Net Gift Multiply by: Tax rate of 6% ----------------------------------------------------= Donor’s Tax Due Less: Tax Credit, if any ----------------------------------------------------= Donor’s Tax Payable If there are several gifts during the year Gifts made on a certain date Less: Deductions from gross gifts ----------------------------------------------------Net gifts made on a certain date Add: Prior gifts during the year ----------------------------------------------------= Aggregate Net Gifts ----------------------------------------------------Less: Exempt gift of P250,000 ----------------------------------------------------Taxable Net Gift Multiply by: Tax rate of 6% ----------------------------------------------------= Donor’s Tax on Aggregate Gifts Less: Tax credits: Payments for Prior Net Gifts During the Year Foreign Donor’s Tax Credit ----------------------------------------------------= Donor’s Tax Payable, if any

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SUMMARY OF TRANSFER TAXES TRANSFER TAXES Estate Tax Donor’s Tax Time for filing a return and payment of tax FILED: FILED: within thirty (30) days after the gift GR: within one (1) year from the decedent's (donation) is made death. EXC: extension not exceeding 30 days (in PAID: upon filing of return meritorious cases) Note: PAID: upon filing of return and before the ● If the gift involves conjugal/community delivery of the distributive share in the property, each spouse shall file separate inheritance to any heir or beneficiary return with regard to his/her respective share in the property. Extension: (when payment on the due date ● A separate return is filed for each gift made would impose undue hardship) not to exceed: on different dates during the year reflecting ● 5 years, in case the estate is settled therein any previous net gifts made in the judicially; or same calendar year. ● 2 years if settled extra-judicially. N.B. when extension is granted, a bond may be required by CIR not exceeding double the amount of tax Where to file and to whom paid Resident Resident To the Authorized Agent Bank (AAB), or To the AAB, RDO, RCO or duly authorized Revenue District Officer (RDO), Revenue Treasurer of the city or municipality in which the Collection Officer (RCO) or duly authorized decedent was domiciled at the time of his death Treasurer of the city or municipality in the Revenue District Office having jurisdiction over Non-resident the place of domicile of the decedent at the time ● The Philippine Embassy or Consulate in of his death the country where he is domiciled at the time of the transfer, or Nonresident ● Directly with the Office of the Commissioner. ● With executor/administrator in the Philippines: to the RDO where such executor/administrator is registered or, if not registered, to the RDO having jurisdiction over his/her legal residence ● Without executor/administrator in the Philippines: to the Office of the Commissioner through RDO No. 39South QC Who should file ● The executor/administrator or any of the Any person, natural or juridical, resident or nonlegal heirs of the decedent, whether resident resident, who transfers or causes to transfer or non-resident of the Philippines, under any property by gift, whether in trust or otherwise, of the following situations: whether the gift is direct or indirect and whether Page 139 of 256

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●

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1. In all cases of transfers subject to estate tax, or 2. 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 condition precedent for the transfer of ownership thereof 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.

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the property is real or personal, tangible or intangible.

N.B: The executor/administrator 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. ESTATE TAX EXCLUSIVE Gross Estate4 Real Properties (excluding family home) Personal Properties

4 DO NOT INCLUDE: Exemptions

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COMMUNITY

TOTAL

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Add: Taxable Transfers & Others Revocable Transfers/Donation Mortis Causa Transfers in contemplation of death Property passing under GPA Transfers for insufficient consideration5 Decedent’s Interest Accrued6 Proceeds of Life Insurance7 Family Home Claims against an Insolvent Person8 Amount received by heirs Less: (Ordinary Deductions) LIT9: Claims against the Estate Claims against Insolvent Persons Unpaid Mortgages, Taxes and Casualty Losses Vanishing Deductions Transfers for Public Use Retirement Benefits Received by Heirs10

Value Taken of Property Less: Mortgage debt paid, if any

Initial Basis Less: Proportionate Deduction**

Final Basis Multiplied by Vanishing Deduction Rate

VANISHING DEDUCTION **Proportionate Deduction: =

Estate After Ordinary Deductions Less: (Special Deductions11) Standard Deduction12 Family Home13 Amounts received by heirs

5 Amount included in the GE = FMV at the time of death – consideration amount 6 Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death; partnership’s

profit earned on/before and received after, accrued interest and rents on/before and collected after death 7 Beneficiary must be the estate of the decedent, or the executor or administrator or any beneficiary designated as revocable. If

premiums are paid using conjugal funds, the proceeds shall form part of the conjugal property. 8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under LIT. 9 In case of an NRA, these are prorated. 10 This is not allowed as deduction for an NRA. 11 These are not allowable deductions when taxpayer is NRA (except SD of P500,000). 12 P5M for RC/NRC/RA, P500,000 for NRA 13 Maximum of P10M

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Net Estate Less: Share of Surviving Spouse (Community Property less Ordinary Deductions = Net Community Property Divided by 2) Net Taxable Estate Multiply by Tax

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If only 1 country is involved: (whichever is lower) Estate Tax Credit = OR actual estate tax paid to foreign country If two or more countries are involved: (whichever is lower)

Rate

of

6% Estate Tax Credit = OR OR actual estate tax paid to foreign country

Estate Tax Due Less: Tax Credit14, if any ESTATE TAX PAYABLE Illustration: [RR 12-2018] (1) Decedent is an unmarried head of the family, 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 P10 million only.

14 Applies only to RC/NRC/RA

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(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

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

P30,000,000 14,000,000 44,000,000

P30,000,000 14,000,000 5,000,000 P49,000,000

(2,000,000)

(2,000,000)

42,000,000 (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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Aggregate Net Gifts Less: Exempt Gift of P250,000 Taxable Net Gift Multiply by Tax Rate of 6%

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xxx xxx xxx xxx

Donor’s Tax Due xxx Less: Tax Credit Payments: Donor’s tax on previous net gifts during the year xxx Foreign Donor’s Tax Credit16 DONOR’S TAX PAYABLE

xxx

xxx

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

Donor’s Tax 2,000,000 (250,000) 1,750,000

P105,000

1,000,000 2,000,000 (250,000) 2,750,000

Tax Due Thereon

165,000

Less: Tax due/paid on January donation Tax due/payable on the March donation

105,000

3. August 15, 2018 August 15, 2018 donation Add: January 2018 donation March 2018 donation Less: Exempt Gift Total

60,000 500,000 500,000 2,000,000 1,000,000 (250,000) 3,250,000

Tax Due Thereon

195,000

Less: Tax due/paid on Jan./March donation Tax due/payable on the August donation

165,000

16 Applies only to RC/NRC/RA

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30,000

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d. Indirect tax: Impact and Incidence of Tax

C. VALUE-ADDED TAX (VAT) 1. Nature & Characteristics of VAT a. Tax on value added It is imposed only on the value added of a taxpayer. “Value added” is the difference between total sales of the taxpayer and his total purchases for the same period subject also to VAT. [MAMALATEO]

b. Sales Tax The taxpayer (seller) determines his tax liability by computing the tax on the gross selling price or gross receipts (output tax), and subtracting or crediting the VAT on the purchase (or importation) of goods or services (input tax) against the tax due on his own sale.

Impact

Incidence

Refers to the statutory taxpayer (i.e., the seller/importer), the one who collects tax and pays to the government

Refers to the buyer / final consumer, the one who ultimately bears the burden of taxation

e. Tax Credit Method Under the VAT method of taxation, which is invoice-based, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [CIR v. Seagate, G.R. No. 153866 (2005)]. The VAT payable is the excess of output tax over input tax:

VAT rate: 12% standard rate; 0% on certain sales or transactions

OUTPUT VAT – INPUT VAT = VAT PAYABLE or EXCESS INPUT TAX

VAT base: gross selling price or gross receipts

Note: If input VAT is higher than output VAT, the excess input tax is carried over to the succeeding taxable quarter/s as tax credit. However, any input tax attributable to zerorated sales may instead be refunded or credited against other internal revenue taxes. [Sec. 4.110-7, RR 16-2005]

c. Tax on Consumption VAT is a consumption tax imposed at every stage of the distribution process on (i) the sale, barter, exchange, or lease of goods or properties, (ii) rendition of services in the course of trade or business, and (iii) the importation of goods, whether or not such imported goods are for use in business. [Sec. 4.105-2, RR 16-2005]

f. Destination Principle and CrossBorder Doctrine 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)]

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Exception: Zero-rated services under Sec. 108(b)(1)[1] and (2)

CHARACTERISTICS OF A VAT-TAXABLE TRANSACTION

Requisites for the exception to apply: 1. The service is performed in the Philippines; 2. The service falls under any of the categories provided in Section 108(b) of the Tax Code; and

General Characteristics/Nature: 1. Percentage Tax – imposed by law 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 or rate is based on the gross selling price or gross value in money, or the gross receipts derived from the transaction 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. [Sec. 105, NIRC]

Note: The recipient of such services must be doing business outside the Philippines. [CIR v. Burmeister, G.R. No. 153205 (2007)] 3. It is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the BSP. [CIR v. American Express International, G.R. No. 152609 (2005)] In a zero-rated service, the place where the service is rendered determines the jurisdiction to impose the VAT. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used. [ibid.] CONSTITUTIONALITY OF VAT ABAKADA Guro Party List, et. al. v. Ermita, G.R. No. 168056 (2005): 1. The VAT law is uniform: it provides a standard rate of 10% (now 12%) on all goods or services and 0% rate on certain sales and transactions. 2. It is equitable: The law is equipped with a threshold margin where VAT does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1.5 million (now P3 million). 3. VAT, by its very nature, is regressive, BUT the Constitution does not prohibit the imposition of indirect taxes. What it simply provides is that Congress shall “evolve a progressive system of taxation”.

Note: In the case of importation, the importer is the one liable for VAT. [Sec. 4.105.2, RR 16-2005] 4.

Excise Tax - a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods 5. Broad-based Tax on Consumption – VAT is levied on every sale of goods, properties or services at all stages of manufacture, production, and distribution of goods and services. [MAMALATEO] 6. Regressive Tax – By its very nature, VAT is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. [ABAKADA Guro Party List v. Executive Secretary, G.R. 168056 (2005)] ELEMENTS OF A VAT-TAXABLE TRANSACTION IN GENERAL 1. There must be a sale, barter, exchange, or lease of goods or properties, performance of service in the Philippines, or importation of good

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2. The subject matter must be taxable goods or properties or services 3. The sale must be made by a taxable person in the course of trade or business or in the furtherance of one’s profession. Meaning of “in the course of trade or business” (Rule of Regularity) The regular conduct or pursuit of a commercial or 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. [Sec. 105, NIRC; Section 4.105-3, RR 16-2005] Exceptions: 1. Services rendered by non-resident foreign persons shall be considered as being rendered in the course of trade or business, even if the performance of services is not regular. [Section 4.105-3, RR 16-2005] 2. Importation are subject to VAT whether or not made in the course of trade or business [Sec. 4.105-1, RR 16-2005] 3. Any business where the gross sales or receipts do not exceed P100,000 during the 12-month period shall be considered principally for subsistence or livelihood and not in the course of trade or business. Thus, they are exempt from VAT and percentage tax. [RMC 7-2014 in relation to RR 7-2012]

2. Persons Liable Added Tax

to

Value-

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

TAXATION LAW

Exceptions: a. A non-VAT-registered person whose annual gross sales or receipts do not exceed P3M. b. Franchise grantees under Sec. 119 of this Code whose annual gross receipts do not exceed P10M and who are not VAT-registered. 2. Any person who imports goods, whether or not in the course of business 3. Any person who voluntarily registers its business under the VAT system, regardless of level of sales. The term “person” refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association [Sec. 4.105-1, RR 16-2005]. VAT and Percentage Tax General Rule: VAT and Percentage Tax cannot be charged together. The transaction is subject to either VAT or Other Percentage Tax, but not both. Exception: When a non-VAT registered person erroneously issues a VAT invoice [Sec. 4.1134, RR 16-2005]

3. Composition of Value-Added Tax a. On sale of goods or properties Transactions: ! Every sale, barter or exchange (actual sale and in the course of trade or business) ! Transactions “deemed sale” of taxable goods or properties [Sec. 4.106-1, RR 162005] Rate: 12% VAT [Sec. 106, NIRC] Who Pays: Seller/Transferor[Sec. 106(A), NIRC]

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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. [Sec. 106(A)(1), NIRC] Requisites for Taxability of Sale of Goods or Personal Properties a. There is an actual or deemed sale of goods or properties for a valuable consideration b. Undertaken in the course of trade or business c. For use or consumption in the Philippines (regardless of the payment arrangements) d. Not exempt from VAT under Sec. 109 of the NIRC, special law, or international agreement [MAMALATEO]

Summary of Rules on Involving Real Properties Casual (Capital Assets)

Transactions

sale Subject to 6% CGT

Regular sales Subject to 12% VAT (Ordinary Assets):

TAXATION LAW

Commercial Property (Sale/Lease) Residential Units (Lease)

If monthly rental ≤ P15,000 = VAT and OPT-exempt If monthly rental > P15,000 but aggregate annual rentals ≤ P3M = subject to OPT If monthly rental > P15,000 and aggregate annual rentals > P3M = subject to VAT

Sale of Residential Lot

If SP > P1.5M = subject to VAT If SP ≤ P1.5M = VATexempt

Sale of Residential House and Lot

If SP > P2.5M = subject to VAT If SP ≤ P2.5M = VATexempt

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] Requisites for Taxability of Sale or Exchange of Real Property a. The seller executes a deed of sale, barter or exchange, assignment or conveyance, or contract to sell of real property. b. The real property is located within the Philippines. c. The seller or transferor is engaged in real estate business either as a real estate dealer, developer, or lessor. d. The real property is held primarily for sale or for lease in the ordinary course of his trade or business, or at least an

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TAXATION LAW

Exception: Zero-rated services under Sec. 108(b)(1)[1] and (2)

CHARACTERISTICS OF A VAT-TAXABLE TRANSACTION

Requisites for the exception to apply: 1. The service is performed in the Philippines; 2. The service falls under any of the categories provided in Section 108(b) of the Tax Code; and

General Characteristics/Nature: 1. Percentage Tax – imposed by law 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 or rate is based on the gross selling price or gross value in money, or the gross receipts derived from the transaction 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. [Sec. 105, NIRC]

Note: The recipient of such services must be doing business outside the Philippines. [CIR v. Burmeister, G.R. No. 153205 (2007)] 3. It is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the BSP. [CIR v. American Express International, G.R. No. 152609 (2005)] In a zero-rated service, the place where the service is rendered determines the jurisdiction to impose the VAT. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used. [ibid.] CONSTITUTIONALITY OF VAT ABAKADA Guro Party List, et. al. v. Ermita, G.R. No. 168056 (2005): 1. The VAT law is uniform: it provides a standard rate of 10% (now 12%) on all goods or services and 0% rate on certain sales and transactions. 2. It is equitable: The law is equipped with a threshold margin where VAT does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1.5 million (now P3 million). 3. VAT, by its very nature, is regressive, BUT the Constitution does not prohibit the imposition of indirect taxes. What it simply provides is that Congress shall “evolve a progressive system of taxation”.

Note: In the case of importation, the importer is the one liable for VAT. [Sec. 4.105.2, RR 16-2005] 4.

Excise Tax - a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods 5. Broad-based Tax on Consumption – VAT is levied on every sale of goods, properties or services at all stages of manufacture, production, and distribution of goods and services. [MAMALATEO] 6. Regressive Tax – By its very nature, VAT is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. [ABAKADA Guro Party List v. Executive Secretary, G.R. 168056 (2005)] ELEMENTS OF A VAT-TAXABLE TRANSACTION IN GENERAL 1. There must be a sale, barter, exchange, or lease of goods or properties, performance of service in the Philippines, or importation of good

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2. The subject matter must be taxable goods or properties or services 3. The sale must be made by a taxable person in the course of trade or business or in the furtherance of one’s profession. Meaning of “in the course of trade or business” (Rule of Regularity) The regular conduct or pursuit of a commercial or 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. [Sec. 105, NIRC; Section 4.105-3, RR 16-2005] Exceptions: 1. Services rendered by non-resident foreign persons shall be considered as being rendered in the course of trade or business, even if the performance of services is not regular. [Section 4.105-3, RR 16-2005] 2. Importation are subject to VAT whether or not made in the course of trade or business [Sec. 4.105-1, RR 16-2005] 3. Any business where the gross sales or receipts do not exceed P100,000 during the 12-month period shall be considered principally for subsistence or livelihood and not in the course of trade or business. Thus, they are exempt from VAT and percentage tax. [RMC 7-2014 in relation to RR 7-2012]

2. Persons Liable Added Tax

to

Value-

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

TAXATION LAW

Exceptions: a. A non-VAT-registered person whose annual gross sales or receipts do not exceed P3M. b. Franchise grantees under Sec. 119 of this Code whose annual gross receipts do not exceed P10M and who are not VAT-registered. 2. Any person who imports goods, whether or not in the course of business 3. Any person who voluntarily registers its business under the VAT system, regardless of level of sales. The term “person” refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association [Sec. 4.105-1, RR 16-2005]. VAT and Percentage Tax General Rule: VAT and Percentage Tax cannot be charged together. The transaction is subject to either VAT or Other Percentage Tax, but not both. Exception: When a non-VAT registered person erroneously issues a VAT invoice [Sec. 4.1134, RR 16-2005]

3. Composition of Value-Added Tax a. On sale of goods or properties Transactions: ! Every sale, barter or exchange (actual sale and in the course of trade or business) ! Transactions “deemed sale” of taxable goods or properties [Sec. 4.106-1, RR 162005] Rate: 12% VAT [Sec. 106, NIRC] Who Pays: Seller/Transferor[Sec. 106(A), NIRC]

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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. [Sec. 106(A)(1), NIRC] Requisites for Taxability of Sale of Goods or Personal Properties a. There is an actual or deemed sale of goods or properties for a valuable consideration b. Undertaken in the course of trade or business c. For use or consumption in the Philippines (regardless of the payment arrangements) d. Not exempt from VAT under Sec. 109 of the NIRC, special law, or international agreement [MAMALATEO]

Summary of Rules on Involving Real Properties Casual (Capital Assets)

Transactions

sale Subject to 6% CGT

Regular sales Subject to 12% VAT (Ordinary Assets):

TAXATION LAW

Commercial Property (Sale/Lease) Residential Units (Lease)

If monthly rental ≤ P15,000 = VAT and OPT-exempt If monthly rental > P15,000 but aggregate annual rentals ≤ P3M = subject to OPT If monthly rental > P15,000 and aggregate annual rentals > P3M = subject to VAT

Sale of Residential Lot

If SP > P1.5M = subject to VAT If SP ≤ P1.5M = VATexempt

Sale of Residential House and Lot

If SP > P2.5M = subject to VAT If SP ≤ P2.5M = VATexempt

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] Requisites for Taxability of Sale or Exchange of Real Property a. The seller executes a deed of sale, barter or exchange, assignment or conveyance, or contract to sell of real property. b. The real property is located within the Philippines. c. The seller or transferor is engaged in real estate business either as a real estate dealer, developer, or lessor. d. The real property is held primarily for sale or for lease in the ordinary course of his trade or business, or at least an

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ordinary asset used in the trade or business of the VAT taxpayer as an incident to his VAT-taxable activity. e. The sale is not exempt from VAT under Sec. 109 of the NIRC, special law, or international agreement. [MAMALATEO] Modes of Sales of Real Estate; Effects a. Cash sale – the entire selling price is taxable in the month of sale

Sale of Real Property NOT subject to VAT a. Sale of real properties not primarily held for sale or lease in the course of trade or business b. Real property utilized for low cost or socialized housing c. Residential lot valued at P1.5M and below d. House and lot, and other residential dwellings valued at P2.5M and below [Sec. 109(1)(P)] Note: Beginning January 1, 2021, the VAT exemption for sale of house and lot, and other residential dwellings shall apply only to those with selling price of not more than P2,000,000.

b. Installment sales 1. Meaning of installment sale: a sale in which the initial payments in the year of sale do not exceed 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. [Sec. 4.106-3, RR 16-2005]

e. Transfer of property to a corporation in exchange for shares of stocks in a taxfree exchange under Sec. 40(C)(2) of the NIRC [Sec. 109(1)(X), NIRC] f. Transmission of property to a trustee if the property is to be merely held in trust for the trustor and/or beneficiary [Sec. 4.106-3, RR 16-2005]

Note: “Initial payments” means payment 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 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. c. Sale on a deferred-payment basis 1. Meaning: initial payments in the year of sale exceed 25% of the GSP 2. Effect: The transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. Subsequent payments are no longer subject to VAT. [Sec. 4.106-3, RR 16-2005]

TAXATION LAW

Exception: 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. [Sec. 4.106-3, RR 16-2005] i. Tax base: gross selling price Basis: Gross selling price or gross value in money of the goods or properties sold, bartered or exchanged. Meaning of Gross Selling Price (GSP): The total amount of money or its equivalent which the purchaser pays or is obligated to pay to the

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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 [Sec. 106(A), NIRC] • •

Excludes: VAT, sales discounts and, allowances and returns Includes: Excise tax paid, initial payments, interests and penalties (if installment), commission income (if exported), purchase price, charges for packing, delivery and insurance

GSP in case of sale or exchange of real property a. The consideration stated in the sales document or b. The fair market value (FMV) whichever is higher.

TAXATION LAW

These refer to the value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person. 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 1. Must be determined and granted at the time of sale 2. 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. The grant is not dependent upon the happening of a future event ii. Transactions deemed sale

Meaning of FMV – Whichever is higher of the following: 1. The FMV as determined by the CIR (zonal value) or 2. The FMV as shown in the schedule of values of the Provincial and City Assessors (real property tax declaration). [Sec. 4.1064, RR 16-2005] Note: If the VAT is not billed separately in the document of sale, the stated selling price or consideration shall be deemed inclusive of VAT. However, if the GSP is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT. Thus, the zonal value/market value, net of the output VAT, should still be higher than the consideration in the document of sale, exclusive of the VAT. [Sec. 4.106-4, RR 16-2005] Allowable Deductions from GSP a. Sales returns and allowances – those for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales

Rate: 12% VAT Basis: Market value of the goods deemed sold as of the time of the occurrence of the transactions However, in case of retirement or 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 FMV, 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. [Sec. 4.106-7, RR 16-2005] The following are transactions deemed sale: [Sec. 106(B), NIRC] a. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the

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course of business [Sec. 4.106-7(a)(1), RR 16-2005]

proprietorship incorporates, or the sole proprietor sells his entire business) (ii) dissolution of a partnership and creation of a new partnership which takes over the business

Example: when a VAT-registered person withdraws goods from his business for his personal use Note: Transmission of property to a trustee, if such property is one for sale, lease or use in the ordinary course of trade or business and the transfer constitutes a completed gift, is subject to VAT as a deemed sale transaction. [Sec. 4.106-3, RR 16-2005] b.

Distribution or transfer to: (i) shareholders or investors as share in the profits of the VAT-registered person; or

i.

Basis: the acquisition cost or the current market price of the goods or properties, whichever is LOWER VAT shall apply to goods disposed of or existing as of a certain date if, under certain circumstances, the status of a person as a VAT-registered person changes or is terminated. [Sec. 106(C), NIRC]

c. Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned Note: Consigned goods returned by the consignee within the 60-day period are not deemed sold. [Sec. 4.106-7(a)(3), RR 16-2005] Retirement from or cessation of business with respect to goods on hand This covers 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. [Sec. 4.1067(a)(3), RR 16-2005] Examples: (i) change of ownership business (e.g., when

Change or cessation of status as value-added taxregistered person

Rate: 12% VAT

(ii) creditors in payment of debt. [Sec. 4.106-7(a)(2), RR 16-2005]

d.

TAXATION LAW

of the a sole Page 154 of 256

(a) Subject to VAT The 12% VAT is applicable to goods or 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: 1. Reversion to exempt status 2. A desire to revert to exempt status after lapse of 3 consecutive years

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TAXATION 2

from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109(2) of the NIRC 3. Failure to exceed the threshold of P3,000,000 by one who commenced business with the expectation of gross sales or receipts exceeding said threshold [Sec. 4.106-8(a), RR 16-2005]

TAXATION LAW

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 nonexempt persons or entities who acquire taxfree imported goods from exempt persons, entities or agencies [Sec. 4.107-1 (b), RR 162005]

(b) Not Subject to VAT VAT shall not apply to goods or properties originally intended for sale or use in the course of business which existing as of the occurrence of the following: a. Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder (individual or corporate) or group of stockholders. 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 of the date of merger or consolidation, shall be absorbed by the surviving or new corporation.

b. On importation of goods Rate: 12% VAT Basis: Total value used by the Bureau of Customs (BOC) in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges (such as postage, commission)

Customs duty – amount of customs duty legally due and paid by the importer Other similar chargers: 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 (Technical Importation): a. If the importer is tax-exempt, the subsequent purchasers, transferees or recipients who are non-exempt persons shall be considered as importers who shall be liable for VAT due on such 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. [Sec. 107(B), NIRC]

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. Page 155 of 256

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c. On sale of services and use or lease of properties Rate: 12% VAT Basis: Gross receipts derived from the sale or exchange of services, including the use or lease of properties 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]

d. The service is not exempt under the NIRC, special law or international agreement [MAMALATEO] SALE OR EXCHANGE OF SERVICES Means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration [Sec 108 (A), NIRC] “Sale or exchange of services” includes services performed by the following: a. Construction and service contractors b. Stock, real estate, commercial, customs and immigration brokers c. Lessors of property, whether personal or real Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. [Sec. 4.108-3 (a), RR 162005]

Gross receipts shall exclude those amounts earmarked for payment to unrelated third party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor. [Sec. 11, RR 4-2007] “Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. Examples are: a. Deposit in banks which are made available to the seller of services without restrictions b. Notice by debtor 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. [Sec. 4.108-4, RR 16-2005] Requisites for Taxability a. There is a sale or exchange of service or lease or use of property enumerated in the law or other similar services; b. The service is performed or to be performed in the Philippines; c. For a valuable consideration actually or constructively received; and

TAXATION LAW

VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be paid by the licensees on behalf of the non-resident owner. Note: Lease of a residential unit with a monthly rental not exceeding P15,000 shall be exempt from VAT. [Sec. 109(1)(Q), NIRC] 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(except palay into rice, corn into corn grits, and sugarcane into raw sugar) g. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts

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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 – merchants of stock or securities who buy and sell securities to customers with a view to the gains and profits that may be derived therefrom

n. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees Exceptions: ! Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10,000,000 shall be subject to 3% franchise tax, subject to optional registration; while franchise grantees of gas and water utilities shall be subject to 2% franchise tax. [Sec. 119, NIRC; Sec. 4.108-3(h), RR 162005] ! 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 10% percentage tax and hence exempt from VAT. [Sec. 120, NIRC; Sec. 4.108-3, RR 16-2005]

“Gross receipts” means gross selling price less 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 Note: Common carriers which transport passengers by land are subject to the 3% percentage tax under Sec. 117 of the NIRC. [Sec. 4.108-3(d), RR 16-2005] l.

o. Non-life insurance companies (except crop insurances) including surety, fidelity, indemnity and bonding companies Note: Life and disability insurance, and health and accident insurance are subject to the 2% percentage tax under Sec. 123 of the NIRC.

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 companies, transmission by any entity including the National Grid Corporation of the Philippines (NGCP), and distribution companies, including electric cooperatives (as amended by TRAIN Law; Sec. 2, RR 13-2018) Note: Sale of power or fuel generated through renewable sources of energy shall be subject to 0% VAT (zero-rated). [Sec. 108(B)(7), NIRC]

TAXATION LAW

Non-life reinsurance premiums are NOT subject to VAT. However, insurance and reinsurance commissions, whether life or non-life, are subject to VAT. [Sec. 4.1083(i), RR 16-2005] p. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties

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Health Maintenance Organizations (HMOs) – entities which arrange for coverage or designated managed care

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services needed by plan holders/members for fixed prepaid membership fees and for a specified period of time [Sec. 4.108-3(k), RR 16-2005]

f.

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 g. The lease of motion picture films, films, tapes and discs h. The lease or the use of or the right to use radio, television, satellite transmission and cable television time

HMO’s gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT. [Sec. 4.108-3(i), RR 16-2005] The amounts earmarked and eventually paid by the HMO to the medical service providers do not form part of its gross receipts for VAT purposes. [Medicard Philippines, Inc. v. CIR, G.R. No. 222743 (2017)]

TAXATION LAW

Additional services subject to VAT: a. Services performed in the exercise of profession or calling by individuals subject to professional tax under the LGC, and professional services rendered by general professional partnerships (GPPs) [R.A. 7716, as amended by R.A. 8241]

“Sale or exchange of services” shall likewise include the following: a. The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right b. The lease of the use of, or the right to use of any industrial, commercial or scientific equipment c. The supply of scientific, technical, industrial or commercial knowledge or information d. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (b) or any such knowledge or information as is mentioned in subparagraph (c) e. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person Page 158 of 256

Requisites: 1. The performance of services should not be in pursuit of an employer-employee relationship between the service-provider and the service-recipient 2. His/her gross receipts exceed P3,000,000 Note: Services rendered by doctors, and lawyers were previously VAT-exempt under R.A. 9238, but such exemption has since been removed by R.A. 9337. b. Services performed by actors/actresses, talents, singers, emcees, radio/television broadcasters, choreographers, musical, radio, movie, television, stage directors, and professional athletes [R.A. 7716, as amended by R.A. 8241] c. Lease or use of sports facilities and equipment by amateur players [R.A. 7716, as amended by R.A. 8241]

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of the total annual production of the preceding taxable year [Sec. 4.106-5(a)(3), RR 16-2005]

4. Zero-rated and Effectively Zero-rated sales of goods or properties, and services Rate: 0% VAT 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.

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4. Those considered export sales under the Omnibus Investment Code of 1987, and other special laws (e.g. Bases Conversion & Development Act of 1992)

The following transactions are subject to VAT at 0% a. Export sales b. Sales of goods or property to persons or entities who are tax-exempt (Effectively Zero-Rated Sales) c. 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. The (i) 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 3. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production Export-oriented enterprise – any enterprise whose export sales exceed 70% Page 159 of 256

Considered Export Sales under the Omnibus Investment Code (EO 226): 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) as 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 [R.A. 7916, R.A. 7922, R.A. 7903 and other similar export zones]; c. Sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products; 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 [Sec. 4.106-5(a)(4), RR 16-2005]

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Notes: ! Export sales of registered export traders shall include commission income. ! The exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee. ! 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 (BOI) which shall be good for 1 year unless subsequently re-issued [Sec. 4.106-5(a)(4), RR 162005] 5. 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 exclusively for international shipping or air transport operations [as amended by Train Law; Sec. 2, RR 132018] a. Limited to goods, supplies, equipment and fuel to be used in the transport of goods and passengers from a port in the Philippines directly to a foreign port, or vice versa without docking or stopping at any other port in the Philippines unless it is for unloading passengers and/or cargoes originating abroad, or to load passengers and/or cargoes bound for abroad b. If any portion of such fuel, goods, supplies or equipment is used for purposes other than that mentioned, such portion shall be subject to 12% VAT [Sec. 4.106-5, RR 16-2005 as amended by RR 13-2018]

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Note: items (2), (3), and (4) above shall be subject to the 12% VAT and no longer be considered export sales subject to 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 90 days from the filing of the VAT refund application with the Bureau; and 2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019. The Department of Finance shall establish a VAT refund center in the BIR and in the BOC that will handle the processing and granting of cash refunds of creditable input tax. [Sec. 106(A), NIRC] Effectively Zero-Rated Sales [Sec. 106(A)(2)(b), NIRC] This refers to (i) the local sale of goods and properties (ii) by a VAT-registered person (iii) to a person or entity who was granted direct and indirect tax exemption under special laws or international agreement (e.g., PEZA, Asian Development Bank, International Rice Research Institute). [MAMALATEO; RR 42007] ECOZONES Ecozones shall be managed and operated by PEZA as a separate customs territory [Sec. 8, RA 7916 or the “Special Economic Zone Act of 1995”]. Tax Treatment of Sales to and by PEZAregistered Enterprises [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 the latter’s PEZA registration, shall be subject to 0% VAT. [Sec. 3, RMC 74-99]

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ii. subject to 0% VAT if PEZA registered seller is subject to taxes under NIRC (i.e. not subject to 5% special tax regime) pursuant to “cross border doctrine” [Sec. 4, RMC 74-99]

“Customs Territory” shall mean the national 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] 2. Sale of goods, property and services by a VAT-exempt supplier from the Customs Territory to a PEZA registered enterprise shall be 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. [Sec. 4, RMC 74-99] 3. Sales made 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) shall be treated as a technical importation made by the buyer. b. Sale of services by a PEZA registered enterprise to a buyer from the Customs Territory 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 (intraecozone) shall be EXEMPT from VAT. [Sec. 5, RMC 74-99] d. Sale of services by ecozone enterprise to another ecozone enterprise (intra-ecozone) shall be: i. exempt from VAT if PEZA registered seller is subject to 5% special tax regime

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Zero Rated Sale of Services [Sec. 108 (B), NIRC] The following services performed in the Philippines by a VAT-registered person shall be subject to 0% VAT: 1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; 2. Services other than those mentioned in the preceding paragraph, rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; Note: The 0% VAT on services performed in the Philippines is an exception to the destination principle, which states that goods and services are taxed only in the country where they are consumed. [CIR v. American Express International, G.R. No. 152609 (2005)]

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3. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate;

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4. 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]; 5. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of total annual production; 6. Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country [as amended by TRAIN Law]; and Note: Gross receipts of international air or shipping carriers doing business in the Philippines derived from transport of passengers and cargo from the Philippines to another country shall be subject to the 3% percentage tax. [Sec. 118, NIRC] 7. Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. Note: Items (1) and (5) above shall be subject to the 12% VAT and no longer be considered export sales subject to 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 90 days from the filing of the VAT refund application with the Bureau; and 2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019. [Sec. 108(B), NIRC]

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Difference between Zero-rated and VATexempt Zero-rated

VAT-exempt

It is a taxable Not subject to output transaction but does tax not result in an output tax. The input VAT attributable to zerorated sales may be allowed as tax credits or refund.

The seller is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.

Persons engaged in Registration is zero-rated optional for VATtransactions are exempt persons. required to register.

5. Value-added Transactions

Tax-exempt

VAT-exempt transactions refer to the 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. [Sec. 4.109-1(A), RR 16-2005] The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers. [Sec. 4.109-1(A), RR 162005] Note: 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 (3) years from the quarter the election was made [Sec. 4.109-2, RR 16-2005 as amended by RR 13-2018].

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Exempt Transactions The following transactions are exempt from VAT: [Sec. 109, NIRC] a. Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption, and breeding stock and genetic materials therefor; ! Products in their original state remain as such 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, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods. ! 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. [Sec. 4.109-1(B)(1)(a), RR 16-2005] b. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered as pets); c. Importation of personal and household effects belonging to (i) Philippine residents returning from abroad and (ii) non-resident citizens coming to resettle in the Philippines; provided, that such goods are also exempt from customs duties under the

TAXATION LAW

Tariff and Customs Code of the Philippines; d. Importation of professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal household effects: i. 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 (i.e., overseas Filipinos ii. in quantities and of the class suitable to the profession, rank or position of the persons importing said items iii. for their own use and not for barter or sale, iv. accompanying such persons, or arriving within a reasonable time [as amended by TRAIN Law] Note: The Bureau of Customs may, upon 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 payment of duties and taxes [as amended by TRAIN Law]; Exception: Vehicles, vessels, aircrafts, machineries, and other goods for use in manufacturing shall be subject to duties, taxes and other charges. e. Services subject to percentage tax; (see Percentage Tax, infra) f. Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar; ! Agricultural contract growers refer to those producing for others poultry, livestock or other agricultural and marine food products in their original state.

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[Sec. 4.109-1(B)(1)(f), RR 162005] 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 drugstore, the sale of drugs and medicine is subject to VAT. [Sec. 4.109-1(B)(1)(g), RR 16-2005] ! Note: R.A. 9337 removed the VATexemption previously granted to doctors and lawyers. h. Educational services (i) rendered by private educational institutions, duly accredited by DepEd, CHED, TESDA, and (ii) those rendered by government educational institutions; i. Services rendered by individuals pursuant to an employer-employee relationship; j. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; k. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under PD No. 529 (Petroleum Exploration Concessionaires under the Petroleum Act of 1949); l. 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 non-members are exempted from

m.

n.

o. p.

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VAT if the producer is the cooperative itself. If not (e.g., trader), then only those sales to its members shall be exempted from VAT. [RR 4-2007] Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA; Sales by non-agricultural, non-electric and non-credit 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; ! However, their importation of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. [Sec. 4.109-1(B)(1)(n), RR 162005] Export sales by persons who are not VATregistered; Sale of real properties as follows: i. Sale of real properties NOT primarily held for sale to customers or held for lease in the ordinary course of trade or business. ii.

Sale of real properties utilized for low-cost housing as defined by R.A. 7279 (Urban Development and Housing Act of 1992) and other related laws (e.g., R.A. 7835, R.A. 8763; ! Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board /

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iii.

iv.

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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 as set by the Housing and Urban Development Coordinating Council (HUDCC). [RR 132018] 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 P480,000 for a horizontal socialized housing with a minimum floor area of 24sq.m, and P700,000 (if within NCR and nearby areas) or P600,000 (in other areas) for socialized vertical/condominium projects with a minimum floor area of 22sq.m. [HUDCC Resolution Nos. 1 and 2, series of 2018] ! "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. [RR 13-2018] Sale of residential lot valued at P1.5M and below, or house & lot and other residential dwellings valued at P2.5M and below, as adjusted in 2011 using the 2010 Consumer Price Index values. ! If two or more adjacent residential lots are sold or disposed of in favor of one

TAXATION LAW

!

buyer (even if covered by separate titles or tax declarations or separate deeds of conveyance), 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 13-2018] Sale of parking lots shall not be considered a sale of residential lot. Hence, it shall be subject to VAT regardless of its selling price. [RR 13-2012]

Note: Beginning January 1, 2021, the VAT exemption shall only apply to (i) sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, (ii) sale of real property utilized for socialized housing as defined by RA No. 7279, (iii) sale of house and lot, and other residential dwellings with selling price of not more than P2,000,000 [Sec. 109(1)(P), NIRC, as amended by TRAIN Law] q. Lease of residential units with a monthly rental per unit not exceeding P15,000; ! If more than P15,000 but the aggregate rentals of the lessor during the year do not exceed P3M, the lease shall be exempt from VAT, but subject to 3% percentage tax. ! Where a lessor has several residential units for lease, his tax liability will be as follows: ○ Gross receipts from rentals not exceeding P15,000 shall be exempt from VAT and percentage tax regardless of the

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aggregate annual gross receipts. ○ Gross receipts from rentals exceeding P15,000 shall be subject to VAT IF the aggregate annual gross receipts from said units only exceed P3M. Otherwise, the gross receipts will be subject to the 3% tax imposed under Sec. 116 of the NIRC. ! Residential units' refers 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. ! ‘Unit' means 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] r. Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; s. Transport of passengers by international carriers; [added by TRAIN Law] ! Note: Transport of cargoes by international carriers doing business in the Philippines is likewise exempt from VAT, but subject to 3% percentage tax under Sec. 118 of the NIRC. t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof

u.

v.

w.

x.

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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 requirements on restriction on vessel importation and mandatory vessel retirement program of the Maritime Industry Authority (MARINA). [RR 13-2018] 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 passengers from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines, except to unload passengers and/or cargoes from abroad or load the same bound for abroad. ! If any portion of such fuel, goods or supplies is used for any other purpose, such portion of fuel, goods and supplies shall be subject to VAT. [RR 13-2018] Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries (such as money changers and pawnshops) subject to percentage tax; [RR 13-2018] Sale or lease of goods and services to senior citizens and persons with disability, as provided under RA 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]; Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended [added by TRAIN Law];

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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 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

TAXATION LAW

shall be considered separate taxpayers. However, the aggregation rule (e.g., combining income from business and profession) for each taxpayer shall apply. ! The VAT-exempt sales shall NOT be included in determining the threshold. [Sec. 4.109-1(B), RR 162005] cc. Self-employed individuals and professionals availing of the 8% tax on gross sales and/or receipts and other nonoperating income, under Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC [RR 13-2018].

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SUMMARY OF VAT-EXEMPTIONS [SEC. 109, NIRC] A

B

Of agricultural and marine products in their original state Sale or importation

C Importation D

Of fertilizers; seeds, seedlings and fingerlings; fish, 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 (i) residents of the Philippines returning from abroad and (ii) nonresident citizens coming to resettle in the Philippines 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 or overseas Filipinos for their own use and not for barter or sale.

E

Subject to percentage tax

F

By agricultural contract growers and milling for others of palay into rice, corn into grits and sugarcane into raw sugar

G

Medical, dental, hospital and veterinary services Exception: those rendered by professionals Services

H

Educational services rendered by private educational institutions duly accredited by DepEd, CHED, and TESDA, and those rendered by governmental educational institutions

I

Rendered pursuant to an employer-employee relationship

J

Rendered by a RAHQ established in the Philippines

K

Others Sales

L Importation

M

Services

N

Sales

Transactions exempt under international agreements or special laws, except those under PD 529 (Petroleum concessionaires) By agricultural cooperatives duly registered with the CDA By agricultural cooperatives of direct farm inputs, machineries and equipment Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA By non-agricultural, non-electric, and non-credit cooperatives duly registered with the CDA. Provided, the share capital contribution of each member does not exceed P15,000

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O

By persons who are not VAT-registered

Export sales

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P

Sales

Of real property not primarily held for sale to customers or held for lease in the ordinary course of business, or real property for low-cost and socialized housing, residential lot valued at P1.5M and below and house and lot and other residential dwellings valued at P2.5M and below

Q

Lease

Of a residential unit with a monthly rental not exceeding P15,000

R

Sale, importation, printing, or publication

S

Services

T

Sale, importation, or lease

U

Importation

V

Services

W

Sale or lease

X

Transfer

Y

Others

Z

Sale

Of gold to BSP

AA

Sale

Of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019

BB

Sale or lease or performance of services

Of 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 Of 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 goods and services to senior citizens and persons with disability Of property pursuant to Section 40(C)(2) of the NIRC (tax free exchanges) Association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations

Other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P3M

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6. Input and Output Tax a. Definitions Input tax – the VAT due from or paid by a VATregistered person on importation of goods or local purchase of goods, properties, or services, including lease or use of properties, in the course of his trade or business [Sec. 110(A)(3), NIRC] 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 NIRC [Sec. 110(A)(3), NIRC] b. Sources of Input Tax (a) Purchase or Importation of Goods (evidenced by VAT invoice/receipt) (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under the NIRC. (b) Purchase of real properties for which VAT has actually been paid (c) Purchase of services in which VAT has actually been paid (d) Transactions deemed sale (e) Transitional Input Tax [Sec 111(A), NIRC] Who may avail of transitional input tax: 1. A person who becomes VAT-liable for the first time upon exceeding P3M in any 12-month period, or 2. any person who voluntarily registers even if their turnover does Page 170 of 256

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not exceed P3M (except franchise grantees of radio and television broadcasting whose threshold is P10M) [Sec. 4.111-1(a), RR 162005] Transitional Input VAT credit: Whichever is higher of: 1. two percent (2%) of the value of the beginning inventory on hand, OR 2. actual VAT paid on such goods, materials and supplies. Note: A real estate dealer is entitled to claim transitional input VAT on its beginning inventory based on the value of the entire real property, including the improvements thereon, regardless of whether there was prior payment of VAT on the purchase of such real property. [Fort Bonifacio Development Corp. v. CIR, G.R. Nos. 158885 and 170680 (2009)] (f) Presumptive Input Tax [Sec. 111(B), NIRC] Who may avail: Persons or firms engaged in the: 1. processing of (i) sardines, (ii) mackerel and (iii) milk, and 2. manufacturing (i) refined sugar, (ii) cooking oil and (iii) packed noodle based instant meals Rate and basis: 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production [Sec. 111(B), NIRC] “Processing” means pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. [Sec. 111(B), NIRC]

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2. If the estimated useful life is less than 5 years – the input tax shall be spread over such a shorter period by dividing the input tax by the actual number of months comprising the estimated useful life [Sec. 4.110-3, RR 16-2005]

c. 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 customs custody; b. To the purchaser of domestic goods or properties upon consummation of sale; or c. To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee. [Sec. 4.110-2, RR 16-2005] d. Input Tax on Depreciable Goods Capital goods or properties 1. Goods or properties with estimated useful life greater than one (1) year; 2. Treated as depreciable assets under Sec. 34(F) of the NIRC; and 3. Used directly or indirectly in the production or sale of taxable goods or services. [Sec. 16, RR 4-2007] Claims for input tax on depreciable goods Where a VAT-registered person purchases or imports capital goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (excluding VAT) in a calendar month exceeds P1,000,000, regardless of the acquisition cost of each capital good: 1. If the estimated useful life is 5 years or more – the input tax shall be spread evenly over the month of acquisition and the 59 succeeding months (i.e., 60 months) and the claim for input tax credit will start in the month of acquisition

TAXATION LAW

Notes: ! 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. ! If the depreciable capital good is sold/transferred within 5 years or prior to the exhaustion of the amortizable input tax, the entire unamortized input tax can be claimed as input tax credit during the month/quarter when the sale or transfer was made. [Sec. 4.110-3, RR 16-2005] ! 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 Claiming of input tax on motor vehicles subject to the following conditions: a. Purchase of vehicle must be substantiated with official receipts or other adequate 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 [Sec. 3, RR 12-2012]

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TAXATION LAW

ILLUSTRATION: CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS [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 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

5,000,000 (exclusive of VAT)

Passed on VAT

600,000

Original Cost of Asset

3,000,000

Accumulated Depreciation

1,000,000

Unutilized Input Tax (Sold Asset)

100,000

Accounting: SELLER

BUYER

October 1, 2017 Cash [(P5M 600k)/5]

October 1, 2017 + P1,120,000

Installment Receivable [(P5M+600k)-1.12M]

4,480,000

Accumulated Depreciation

1,000,000

Asset

P5,000,000

Input Tax

600,000

Output Tax (12% x P5M)

600,000

Cash

1,120,000

Asset

3,000,000

Installment Payable

4,480,000

Gain on sale of set

3,000,000

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To record liability:

TAXATION 2

TAXATION LAW

VAT

Output Tax

600,000

Input Tax

100,000

VAT Payable

500,000

Periodic receipt of installment Cash

Periodic receipt of installment

1,120,000

Installment Receivable

Installment Payable 1,120,000

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 or the month of purchase. If the depreciable capital good is sold/transferred within a period of 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. (2) A manufacturer purchased capital goods on different occasions as follow : Month of Purchase

Amount

12% Input Tax

Useful Life

No. of Monthly Amortization

Last Month of Amortization

January 2018

P8,500,000

P1,020,000

6 Years

60

December 2022

February 2018

P8,500,000

P1,020,000

4 Years

48

January 2022

December 2018

P10,000,000

P1,020,000

5 Years

60

November 2022

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January 2018

P10,000,000

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P1,020,000

5 Years

TAXATION LAW

-

*Outright claim on January 2022

a. For purchase made in 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 in February 2018, the amortization shall be for a 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 in December 2021, the amortization shall be for the period of 5 years or up to November 2026. d. For purchase made in January 2022, no amortization shall be made and the input VAT shall be claimed on the month of purchase or January 2022

7. Refund or Tax Credit of Excess Input Tax; Procedure Output VAT – Input VAT = VAT Payable or Excess input VAT

Determination of output tax [Sec. 4.110-6, RR 16-2005] a. 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 × 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆 b. 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 × 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆 c. Where VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be comprised of the gross selling price or gross receipts plus the correct amount of VAT. Hence, the output tax is computed as follows:

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒗𝒐𝒊𝒄𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 ×

𝟏𝟐% 𝟏𝟏𝟐%

Determination of input tax creditable a. Add all input tax creditable to a VATregistered person during the taxable month or quarter and any excess input tax carried over from the preceding month or quarter. b. The sum shall be reduced by the amount of claim for VAT refund or credit (whether filed with the BIR, the Department of Finance, the BOI or the BOC) and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. [Sec. 4.110-5, RR 16-2005] Allocation of input tax on mixed transactions A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed tax credit as follows: a. All input taxes directly attributable to transactions subject to VAT may be recognized for input tax credit. Input taxes directly attributable to VAT taxable sales to the Government, including GOCCs, shall not be credited against output taxes arising from sales to non-government entities.

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TAXATION 2

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

TAXATION LAW

transactions subject to VAT may be recognized for input tax credit. [Sec. 4.110-4, RR 16-2005]

ILLUSTRATION: ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS [Sec. 4.110-4, RR 16-2005, as amended by RR 4-2007] ERA Corporation has the following sales during the month: Sale to private entities subject to 12%

100,000

Sale to private entities subject to 0%

100,000

Sale of exempt goods

100,000

Sale to government subjected to 5% final withholding VAT

100,000

Total sales for the month

400,000

The following input taxes were passed on by its VAT suppliers: Input tax on taxable goods (12%)

5,000

Input tax on zero-rated sales

3,000

Input tax on sale of exempt goods

2,000

Input tax on sale to government

4,000

Not attributable to any specific activity (monthly amortization for 60 months) 20,000

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TAXATION LAW

The creditable input tax for the month shall be computed as follows: Input tax on sale subject to 12% 5,000 Ratable portion of the input tax not directly attributable to any activity: abcbdef gbefg (hi%) ajkbe lbefg

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 100,000 × 20,000 = 5,000 400,000

Total input tax attributable to sales to private entities for the month: 10,000.00 The input tax attributable to zero-rated sales for the month shall be computed as follows: Input directly attributable to zero-rated sale P 3,000 Ratable portion of the input tax not directly attributable to any activity: vfwj wbkfx gbefg ajkbe lbefg

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 100,000 × 20,000 = 5,000 400,000

Total input tax attributable to zero-rated sales for the month: 8,000 The input tax attributable to VAT-exempt sales for the month shall be computed as follows: Input tax on VAT-exempt sales 2,000 Ratable portion of the input tax not directly attributable to any activity: yza fcf{|k gbefg ajkbe lbefg

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 100,000 × 20,000 = 5,000 400,000

Total input tax attributable to VAT-exempt sales: 7,000 The input tax attributable to sales to government for the month shall be computed as follows: Input tax on sale to gov’t. P 4,000 Ratable portion of the input tax not directly attributable to any activity: abcbdef gbefg kj k}f ~j•fw€{f€k ajkbe lbefg

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 100,000 × 20,000 = 5,000 400,000

Total input tax attributable to sales to government: 9,000 Page 176 of 256

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TAXATION 2

Determination of the 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 VATregistered person b. The input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. However, any input tax attributable to zero-rated sales may be refunded or credited. [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 VAT payable is 20. Substantiation of Input Tax Credits 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 BIR: a. Importation of goods – import entry or other equivalent document showing actual payment of VAT on the imported goods b. Domestic purchase of goods and properties – invoice showing the information required under Secs. 113 (Invoicing Requirements) and 237 (Issuance of Receipts or Invoices) of the NIRC c. 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. Purchase of services – official receipt showing the information required under Secs. 113 and 237 of the NIRC e. Transitional input tax – inventory of goods as shown in a detailed list to be submitted to the BIR

TAXATION LAW

f.

Input tax on "deemed sale" transactions – required invoice g. Input tax from payments made to non-residents (such as for services, rentals and royalties) – copy of the Monthly Remittance Return of VAT Withheld (BIR Form 1600) filed by the resident payor in behalf of the nonresident evidencing remittance of VAT due which was withheld by the payor h. Advance VAT on sugar – Payment Order showing payment of the advance VAT Who May Claim for Refund/Apply for Issuance of Tax Credit Certificate a. Zero-Rated NIRC]

Sales

[Sec.

112(A),

Requirements: A claim for refund or tax credit for unutilized input VAT may be allowed only if the following requisites concur, namely: 1. the taxpayer is VAT-registered; 2. the taxpayer is engaged in zero-rated or effectively zero-rated sales; 3. the input taxes are due or paid; 4. the input taxes are not transitional input taxes; 5. the input taxes have not been applied against output taxes during and in the succeeding quarters; 6. the input taxes claimed are attributable to zero-rated or effectively zero-rated sales; 7. for zero-rated sales under Section 106(A)(2)(a)(1) and (3) and 108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the rules and regulations of the BSP; 8. where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the

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TAXATION 2

input taxes shall be proportionately allocated on the basis of sales volume; and 9. the claim is filed within two (2) years after the close of the taxable quarter when such sales were made. [Luzon Hydro Corporation v. CIR, G.R. No. 188260 (2013); Sec. 4.112-1, RR 162005] b. Cancelled VAT Registration [Sec. 112(B), NIRC] 1. A VAT-registered 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 NIRC 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. 2. The taxpayer shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized. 3. The date of cancellation shall be the date of issuance of tax clearance by the BIR, after full settlement of all tax liabilities. 4. 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. [RR 132018]

TAXATION LAW

registration). [Sec. 112(A) and (B), NIRC] Note: It is only the administrative claim that must be filed within the two-year period, which must be reckoned from the close of the taxable quarter when the relevant sales were made. [CIR v. San Roque Power Corporation, G.R. 187485 (2013)] Note: In tax refunds of erroneous tax payments under Sec. 229 of the NIRC, the administrative and judicial claims may be made simultaneously, and the reckoning point of the 2-year period is from the date of payment. b. 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. Note: Prior to January 1, 2018, all claims for refund or tax credit will be governed by the 120-day processing period. c. 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. Judicial Claim [Sec 112 (C), par. 2, NIRC] a. In case of full or partial denial of the claim for tax refund, the taxpayer may appeal to the CTA within 30 days from the receipt of decision. b. The 30-day period to appeal is both mandatory and jurisdictional.

Period to File Claim/Apply for Issuance of Tax Credit Certificate Administrative Claim [Sec 112(C), par. 1, NIRC] a. The claim must be filed within 2 years after the close of the taxable quarter when the sales were made (or 2 years from the date of cancellation of Page 178 of 256

Exception: Premature filing is allowed only if filed between 10 December 2003 and 5 October 2010, when BIR Ruling No. DA489-03 was still in force. [CIR v. San Roque Power Corporation, G.R. 187485 (2013)]

U.P. LAW BOC

TAXATION 2

Effect of inaction by the CIR 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 punishable under Section 269 of the NIRC (Violations Committed by Government Enforcement Officers). [Sec. 112(C), NIRC]

b. A VAT official receipt (OR) for every lease of goods or properties, and for every sale, barter or exchange of services [Sec. 113(A), NIRC] Only VAT-registered persons are required to print their TIN followed by the word “VAT” in their invoice or ORs, which shall be considered as a “VAT Invoice” or “VAT OR”. All purchases covered by invoices/receipts other than VAT Invoice/VAT OR shall not give rise to any input tax. [Sec. 4.113-1(A), RR 16-2005]

Note: The provision on the appeal of the CIR’s failure to act on the application for refund or tax credit was removed by the TRAIN Law. Exclusive appellate jurisdiction of CTA The CTA has exclusive appellate jurisdiction to review by appeal the inaction by the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the NIRC or other laws administered by the BIR, where the NIRC provides a specific period of action, in which case the inaction shall be deemed a denial. [Sec. 7(a)(2), R.A. 1125 as amended by R.A. 9282] Manner of Refund 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 of the Commission on Audit (COA), provided that refunds shall be subject to post audit by COA. [Sec. 112(D), NIRC]

8. Compliance Requirements a. Registration Note: Refer to table below for flowchart of VAT registration

b. Invoicing Requirements In General A VAT-registered person shall issue: a. A VAT invoice for every sale, barter or exchange of goods or properties; and

TAXATION LAW

Information Contained in the VAT Invoice or VAT Official Receipt: 1. A statement that the seller is a VATregistered 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 0% VAT, 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 VAT-exempt, 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 VAT on each portion of the sale shall be shown on the invoice or receipt. The seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.

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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 P1,000 or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client. [Sec. 113(B), NIRC] In Deemed Sale Transactions a. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business – Memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use b. Distribution or transfer to shareholders, investors or creditors; and consignment of goods if actual sale is not made within 60 days – Invoice, at the time of the transaction, which should include all the information required in a VAT invoice; data in the invoice shall be duly recorded in the subsidiary sales journal c.

Retirement from or cessation of business with respect to all goods on hand – An inventory shall be prepared and submitted to the RDO with jurisdiction over the taxpayer’s 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. 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. [Sec. 4.113-2, RR 16-2005]

TAXATION LAW

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 TIN, followed by the word "VAT", the erroneous issuance shall result to the following: a. The issuer shall be liable to: 1. percentage taxes applicable to his transactions; 2. VAT due on transactions under Section 106 or 108 of the NIRC, without the benefit of any input tax credit; and 3. a 50% surcharge under Section 248(B) of the NIRC. b. The VAT shall be recognized as an input tax credit to the purchaser, if the other requisite information is shown on the invoice/receipt. [Sec. 113(D), NIRC] Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a VATregistered Person If a VAT-registered person issues a VAT invoice or VAT OR for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale”: a. the transaction shall become taxable; b. the issuer shall be liable to pay VAT thereon; and c. the purchaser shall be entitled to claim an input tax credit on his purchase. [Sec. 4.113-4(B), RR 16-05]

c. Filing of Returns and Payment Procedure 1. Every person liable to pay VAT shall file a quarterly return of the amount of his gross sales or receipts within 25 days after the close of each taxable quarter prescribed for each taxpayer. 2. 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.

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3. Beginning January 1, 2023, the filing of return and payment of VAT shall be done within 25 days following the close of each taxable quarter. [Sec. 114(A), NIRC as amended by TRAIN Law; Sec. 4.114-1(A), RR 16-2005] Note: VAT is 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/overpayment as of the end of a quarter. [Sec. 4.114-1(A), RR 16-2005]

d. Withholding of Final Value-added Tax on Sales to Government General Rule: VAT cannot be collected by way of withholding. Exceptions: 1. Gross payments by the government shall be subject to the 5% final withholding VAT; 2. Gross payments by resident VATtaxpayers to non-residents shall be subject to 12% withholding VAT. [Sec. 4.114-2, RR 16-2005] Note: The payor or person in control of the payment is considered as the withholding agent. Sales to Government The government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall, before making payment for purchases of goods and services which are subject to the VAT, deduct and withhold a 5% final VAT on the gross payments. [Sec. 114(C), NIRC] Note: Beginning January 1, 2021, the VAT withholding system under this Subsection shall shift from final to a creditable system. [Sec. 114(C), NIRC] The 5% final VAT shall represent the net VAT payable of the seller. The remaining 7%

TAXATION LAW

effectively accounts for the standard input VAT, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. [Sec. 4.114-2, RR 16-2005] Should actual input VAT attributable to sales to the government exceed 7% of the gross payments, the excess may form part of the sellers’ expense or cost. On the other hand, if actual input VAT is less than 7% of gross payment, the difference must be closed to expense or cost. [Sec. 4.114-2, RR 16-2005] Payments to non-residents The government, as well as private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold 12% VAT with respect to the following: 1. Lease or use of properties or property rights owned by non-residents; and 2. Other services rendered in the Philippines by non-residents. [Sec. 22, RR 4-2007] Note: Payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under RA No. 8182, or the ‘ODA Act of 1996’, as amended, shall NOT be subject to the final/creditable withholding tax system as imposed in this Subsection. [Sec. 2, RR 132018]

e. Administrative Sanctions

and

Penal

Surcharge, interest and other penalties – The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the NIRC shall also apply to violations of the VAT provisions of the NIRC. [Sec. 115, NIRC; Sec. 4.115-1, RR 16-2005] Suspension of business operations – In addition to other administrative and penal sanctions provided for in the NIRC and implementing regulations, the CIR or his duly

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TAXATION LAW

Illustration of the VAT System VAT System (All VAT) Raw Material (VAT)

Manufacturer (VAT)

SP (100+12) 100 112 SP (300 + 36) 300 336 Cost Cost (100 + 12) 100 50 Profit 112 50 Profit 200 Purchase 112 Input 12

OT

12% OT 12

Trader (VAT) SP (450 +54) 450 504 Cost (300+36) 300 336 Profit 150

Purchases 336 VAT 12% 36

12% OT 36

IT

0 VAT Payable

12

End-User

Purchases 12% VAT

54

504

Total VAT

54

VAT

12% 54

IT 12 Vat Payable

IT

36 24

VAT

Payable 18

VAT

to

BIR VAT

12

to 24

BIR VAT to BIR

18

VAT System (VAT Exempt 1st chain) Raw Material (VAT Exempt) SP (100+ 0) Cost Profit

100 50 50

Manufacturer

Trader

SP (300 + 36) 300 336 Cost (100) 100 Profit 200

SP (450 +54) 450 504 Cost (300+36) 300 336 Profit 150

Purchase 100 Input 0

Purchases 336 VAT 12% 36

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End-User

Purchases 12% VAT VAT

504 54

U.P. LAW BOC

OT IT 0 VAT Payable

TAXATION 2

0

OT

12% OT 36

12% 54

IT

0

TAXATION LAW

IT 36 Payable VAT Payable

0 Vat

18

36 VAT

to

BIR VAT

0

to

BIR VAT

36

to

BIR Total VAT

54

18

VAT System (VAT Exempt mid-chain) Raw Material

Manufacturer (VAT Exempt)

Trader

End-User

SP (100+12) 100 112 SP (300) SP (450 +54) 450 Cost 300 504 50 Cost (100 + 12) 100 Cost (300) 300 Profit 112 Profit 150 50 Profit 188 Purchase 112 No Input 0

OT

Purchases 300 VAT No VAT

12% OT IT Vat Payable 0 Payable

12 IT VAT

0

OT

0

to 12

54

BIR Total VAT

66

0

12%

0

IT VAT

0 Payable 54

BIR VAT

to 0

BIR VAT

to 54

VAT System (VAT zero-rate mid-chain) Raw Material

504

54

12 VAT

Purchases 12% VAT

Manufacturer (VAT Zero-rated)

Trader

SP (100+12) 100 112 SP (300+ 0) SP (450 +54) 450 Cost 50 300 504 Profit 50 Cost (100 + 12) 100 Cost (300) 300 112 Profit 150

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End-User

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Profit

188 Purchase 112 No Input 12

OT

12% OT 12

Purchases 300 VAT No VAT

12% OT 0

IT VAT 12 VAT to BIR

VAT

0

12%

IT 0 VAT

12 Vat Payable Payable (12) 12

504 54

54

IT

0

Purchases 12% VAT

Payable 54

to (12)

BIR VAT

to

BIR Total VAT

54

54

D. PERCENTAGE TAXES: CONCEPT AND NATURE

Nature It is a privilege tax. Like VAT, it is imposed on the privilege to sell commodities or services. [DE LEON]

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. [CIR v. Solidbank Corp., G.R. No. 148191 (2003)]

TAX BASE: Gross Receipts By its nature, a gross receipts tax applies to the entire receipts without any deduction, exemption or exclusion, unless the law clearly provides otherwise. [China Banking Corp. v. CA, G.R. No. 146749 (2003)]

Percentage tax is a business tax imposed on persons, entities, or transactions specified under Sections 116 to 127 of the NIRC.

TAX RATE Any person whose sales or receipts are exempt from the payment of VAT and who is not a VAT-registered person shall pay a tax equivalent to 3% of his gross quarterly sales or receipts. Note: Cooperatives shall be exempt from the 3% gross receipts tax. [Sec. 116, NIRC]

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Illustration of the VAT System VAT System (All VAT) Raw Material (VAT)

Manufacturer (VAT)

SP (100+12) 100 112 SP (300 + 36) 300 336 Cost Cost (100 + 12) 100 50 Profit 112 50 Profit 200 Purchase 112 Input 12

OT

12% OT 12

Trader (VAT) SP (450 +54) 450 504 Cost (300+36) 300 336 Profit 150

Purchases 336 VAT 12% 36

12% OT 36

IT

0 VAT Payable

12

End-User

Purchases 12% VAT

54

504

Total VAT

54

VAT

12% 54

IT 12 Vat Payable

IT

36 24

VAT

Payable 18

VAT

to

BIR VAT

12

to 24

BIR VAT to BIR

18

VAT System (VAT Exempt 1st chain) Raw Material (VAT Exempt) SP (100+ 0) Cost Profit

100 50 50

Manufacturer

Trader

SP (300 + 36) 300 336 Cost (100) 100 Profit 200

SP (450 +54) 450 504 Cost (300+36) 300 336 Profit 150

Purchase 100 Input 0

Purchases 336 VAT 12% 36

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End-User

Purchases 12% VAT VAT

504 54

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OT IT 0 VAT Payable

TAXATION 2

0

OT

12% OT 36

12% 54

IT

0

TAXATION LAW

IT 36 Payable VAT Payable

0 Vat

18

36 VAT

to

BIR VAT

0

to

BIR VAT

36

to

BIR Total VAT

54

18

VAT System (VAT Exempt mid-chain) Raw Material

Manufacturer (VAT Exempt)

Trader

End-User

SP (100+12) 100 112 SP (300) SP (450 +54) 450 Cost 300 504 50 Cost (100 + 12) 100 Cost (300) 300 Profit 112 Profit 150 50 Profit 188 Purchase 112 No Input 0

OT

Purchases 300 VAT No VAT

12% OT IT Vat Payable 0 Payable

12 IT VAT

0

OT

0

to 12

54

BIR Total VAT

66

0

12%

0

IT VAT

0 Payable 54

BIR VAT

to 0

BIR VAT

to 54

VAT System (VAT zero-rate mid-chain) Raw Material

504

54

12 VAT

Purchases 12% VAT

Manufacturer (VAT Zero-rated)

Trader

SP (100+12) 100 112 SP (300+ 0) SP (450 +54) 450 Cost 50 300 504 Profit 50 Cost (100 + 12) 100 Cost (300) 300 112 Profit 150

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Profit

188 Purchase 112 No Input 12

OT

12% OT 12

Purchases 300 VAT No VAT

12% OT 0

IT VAT 12 VAT to BIR

VAT

0

12%

IT 0 VAT

12 Vat Payable Payable (12) 12

504 54

54

IT

0

Purchases 12% VAT

Payable 54

to (12)

BIR VAT

to

BIR Total VAT

54

54

D. PERCENTAGE TAXES: CONCEPT AND NATURE

Nature It is a privilege tax. Like VAT, it is imposed on the privilege to sell commodities or services. [DE LEON]

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. [CIR v. Solidbank Corp., G.R. No. 148191 (2003)]

TAX BASE: Gross Receipts By its nature, a gross receipts tax applies to the entire receipts without any deduction, exemption or exclusion, unless the law clearly provides otherwise. [China Banking Corp. v. CA, G.R. No. 146749 (2003)]

Percentage tax is a business tax imposed on persons, entities, or transactions specified under Sections 116 to 127 of the NIRC.

TAX RATE Any person whose sales or receipts are exempt from the payment of VAT and who is not a VAT-registered person shall pay a tax equivalent to 3% of his gross quarterly sales or receipts. Note: Cooperatives shall be exempt from the 3% gross receipts tax. [Sec. 116, NIRC]

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PERSONS OR TRANSACTIONS SUBJECT TO PERCENTAGE TAX Persons/ Transactions Percentage tax Persons Exempt from 3% of gross quarterly sales or receipts VAT [Sec. 116, NIRC] Domestic Carriers; Keepers of Garages [Sec. 117, NIRC] International Carriers [Sec. 118, NIRC] Franchises [Sec. 119, NIRC] a. Radio and/or television broadcasting companies with annual gross receipts not exceeding P10M

3% of gross quarterly receipts

3% of quarterly gross receipts

a. 3% on gross receipts derived from the business covered by the law granting the franchise Note: The franchisees may opt to register as VAT taxpayer, which shall be irrevocable once exercised. b. 2% on gross receipts derived from the business covered by the law granting the franchise

b. Gas and water utilities Overseas Dispatch, 10% on the amount paid for such services Message or Conversation Originating Exemptions: in the Philippines [Sec. 1. Government 120, NIRC] 2. Diplomatic services 3. International organizations 4. News services Banks and Non-bank The following taxes are collected on gross receipts from sources within Financial Intermediaries the Philippines. [Sec. 121, NIRC] 1. Interest, commissions and discounts from lending activities as well as income from financial leasing, based on remaining maturities: a. 5 years or less – 5% b. More than 5 years – 1% 2. Dividends and equity shares and net income of subsidiaries – 0% 3. Royalties, rentals of property, profits from exchange and all other items of gross income under Sec. 32, NIRC – 7% 4. Net trading gains within the year on foreign currency, debt securities, derivatives, and other financial instruments – 7%

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Other Non-bank 5% on gross receipts derived from interest, commissions, discounts and Financial Intermediaries other items of gross income [Sec. 122, NIRC] Note: Interests, commissions and discounts from lending, as well as income from financial leasing shall be taxed based on the remaining maturities: 1. 5 years of less – 5% 2. More than 5 years – 1%

Pawnshops are considered other non-bank financial intermediaries. [First Planters Pawnshop v. CIR, G.R. No. 174134 (2008)] Life Insurance Premiums 2% of total premiums collected, whether paid in money, notes, credits [Sec. 123, NIRC] or substitute money Taxable premiums exclude: 1. Premiums refunded within 6 months 2. Reinsurance 3. Premiums collected on the life insurance of a nonresident insured 4. Premium collected on variable contracts in excess of the amount necessary to insure the lives of variable contract owners. Note: Purely cooperative companies or associations are exempted from this tax. Agents of Foreign A tax equal to twice the tax imposed in Sec. 123 of the NIRC Insurance Companies ! This shall not apply to reinsurance. [Sec. 124, NIRC] ! If property owner obtains insurance from foreign companies without using an agent, he shall notify the Insurance Commissioner and pay 5% on premiums paid. Proprietors, Lessee or Operator of Amusement Places [Sec. 125, NIRC]

1. Cockpits – 18% 2. Cabarets, night or day clubs – 18% 3. Boxing exhibitions – 10%; exempt if a World or Oriental Championship is at stake and a Filipino is a contender and the exhibition is promoted by a Filipino or by an entity 60%-owned by Filipinos 4. Professional basketball games – 15% in lieu of all other percentage taxes 5. Jai-alai and racetracks – 30% Gross receipts – all receipts of the proprietor, lessee or operator of the amusement place, including income from TV, radio and motion picture rights

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Winnings NIRC]

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TAXATION LAW

[Sec. 126,

1. Horse races – 10% on actual amount paid for every winning ticket after deducting the cost of ticket 2. Double forecast / quinella and trifecta bets – 4% 3. Owners of winning horses – 10% of the prizes

Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering (IPO)

1. Sale through the local stock exchange, other than sale by a dealer in securities – 6/10 of 1% of the gross selling price or gross value in money of the shares of stock 2. Sale through IPO of shares of stock in closely held corporations The tax is based on gross selling price or gross value in money of said shares in accordance with the proportion of shares disposed to the total outstanding shares after listing: a. Up to 25% - 4% b. Over 25% but not over 33 1/3% - 1% Closely held corporation – any corporation at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals

SUMMARY OF TAX ON CARRIERS BY LAND / AIR / SEA

Area

By Land

Object

Kind

Business Tax

Income Tax

Person

Domestic

3% Percentage Tax

Regular Tax

Cargo/Goods

Domestic

12% VAT

Regular Tax

Person / Cargo / Goods

By Air / Sea

Domestic Domestic

Domestic travel 12% VAT International travel – 0% VAT

Persons

International

VAT-exempt

Cargo / Goods

International (doing business in the Philippines)

3% Percentage Tax

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Regular Tax Regular tax 2.5% on Gross Philippine Billing if doing business in the Philippines 2.5% on Gross Philippine Billing if doing business in the Philippines

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E. EXCISE TAX: CONCEPT AND NATURE 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, NIRC] Kinds of Excise Taxes [Sec. 129, par. 2, NIRC] 1. Specific tax – tax due is computed based on: o weight o volume capacity o any other physical unit of measurement. 2. Ad valorem tax – tax due is computed based on: o selling price o other specified value of the good or service performed 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 Liquors Sec. 144 Tobacco Products Cigars and Sec. 145 Cigarettes Manufactured Oils Sec. 148 and Other Fuels Sec. 149 Automobiles Non-essential Sec. 150 Goods Non-essential Sec. 150-A Services* Sweetened Sec. 150-B Beverages* Sec. 151 Mineral Products *Added by TRAIN Law

TAXATION LAW

Nature Excise taxes, whether under the specific or the ad valorem tax system, is basically an indirect tax imposed on 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. 166482 (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. [Ibid.] Purpose 1. To curtail consumption of certain commodities, the excessive or indiscriminate use of which is considered harmful to the individual or community (e.g., 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 the benefit derived from a particular government service (e.g., excise taxes on gasoline, lubricating oils and denatured alcohol for motive power); and 4. To raise revenue [DE LEON]

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F. DOCUMENTARY STAMP TAX: CONCEPT AND NATURE Concept Documentary stamp tax (DST) is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right, or property incident thereto. [Sec. 173, NIRC] The NIRC enumerates the specific documents that are subject to DST: NIRC Documents Documents, Loan Agreements, Sec. 173 Instruments and Papers Original Issue of Shares of Sec. 174 Stocks Sales, Agreements to Sell, Memoranda of Sales, Deliveries Sec. 175 or Transfer of Due-bills, Certificates of Obligation, or Shares of Certificates of Stock Bonds, Debentures, Certificates Sec. 176 of Stock or Indebtedness Issued in Foreign Countries Certificates of Profits or Interest Sec. 177 in Property or Accumulations Bank Checks, Drafts, Certificates Sec. 178 of Deposit not Bearing Interest, and Other Instruments Sec. 179 All Debt Instruments Sec. 180 All Bills of Exchange or Drafts Acceptance of Bills of Exchange Sec. 181 and Others Foreign Bills of Exchange and Sec. 182 Letters of Credit Sec. 183 Life Insurance Policies Policies of Insurance Upon Sec. 184 Property Fidelity Bonds and Other Sec. 185 Insurance Policies Policies of Annuities and PreSec. 186 Need Plans Sec. 187 Indemnity Bonds

Sec. 188 Sec. 189 Sec. 190 Sec. 191 Sec. 192 Sec. 193 Sec. 194 Sec. 195 Sec. 196 Sec. 197 Sec. 198

TAXATION LAW

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, Conveyances and Donation of Real Property Charter Parties and Similar Instruments Assignments and Renewals of Certain Instruments

Nature A DST is actually an excise tax because it is imposed on the transaction rather than on the document. It 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, the Court considers not only the document but also 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 nonpayment of the DST. [VITUG and ACOSTA] Person liable It is paid by the person making, signing, issuing, accepting or transferring the documents. However, when one party to the

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taxable document enjoys the exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for the tax. [TABAG, p. 429 (2019)] Purpose The purpose of the law in imposing stamp taxes is to raise revenue and not to invalidate contracts or inflict penalties, and courts should give it a liberal construction. [33 C.J.S. 315316] Filing and Payment The tax return shall be filed and the tax due shall be paid at the same time within 10 days after the close of the month when the taxable document was signed, issued, accepted or transferred. [Sec. 200(B), NIRC] Effect of Failure to Pay DST a. Failure to stamp a taxable document shall not invalidate the same. However, it shall not be recorded or admitted or used as evidence in any court until the requisite stamp is affixed. b. No notary or other officer authorized to administer oaths shall add his jurat or acknowledgment to the document unless the proper documentary stamp is affixed thereto or cancelled. [Sec. 201, NIRC]

1. Tax Remedies Under the NIRC General Concepts Taxpayer Remedies 1. Administrative Remedies (BIR) a. Before payment i. Filing a protest with request for reconsideration or reinvestigation; and ii. Entering into a compromise b. After payment i. Filing a claim for refund; and

TAXATION LAW

ii. Filing a claim for tax credit 2. Judicial Remedies (CTA/RTC) a. Civil Action i. Appeal to the CTA ii. Action to contest forfeiture of chattel; and iii. Action for damages b. Criminal Action i. Filing a criminal complaint against erring BIR officials and employees Government Remedies 1. Administrative Remedies a. Enforcement of tax lien b. Distraint of personal property, and garnishment of bank deposits c. Levy of real property d. Forfeiture of property e. Compromise and abatement f. Penalties and fines g. Suspension of business operations 2. Judicial Remedies a. Ordinary civil action b. Criminal action

1. Assessment of Internal Revenue Taxes Definition To assess means to impose a tax; to fix or settle a sum to be paid by way of tax; to settle determine or fix the amount of tax to be paid (84 C.J.S 749-750) 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, G.R. No. L-21483 (1969)] Presumption of correctness An assessment is presumed correct and made in good faith in the performance of official duties and failure to present proof of error will prosper such assessment. [Atlas Consolidated Mining and Development Corp. v. CA, G.R. No. 104151 and 105563 (1995)].

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a. Procedural due process in tax assessments [Sec. 228, NIRC; RR 12-99, as amended by RR 18-13 and RR 7-18] i. Letter of Authority and Tax Audit Letter of Authority (LOA): An official document that empowers a Revenue Officer to examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order to determine the taxpayer’s correct internal revenue tax liabilities. General Rule: The issuance of an LOA is a mandatory statutory requirement. [Sec. 13, NIRC] Any tax assessment issued without an LOA is a violation of the taxpayers’ right to due process and is therefore “inescapably void.” [RMC 75-2018; Medicard Philippines, Inc. v. CIR, G.R. No. 222743 (2017)] Exception: The following cases need not be covered by a valid LOA: a. Cases involving civil or 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 the National Office. [RMO 3699] Letter of Authority vs. Letter Notice A Letter Notice (LN) is not found in the NIRC and is not an authority to conduct an audit. The LN is merely a notice to the taxpayer that a discrepancy is found based on the BIR’s third party information data matching programs. Thus, an LOA must still be secured before proceeding with the further examination and assessment of the taxpayer. [Medicard Philippines, Inc. v. CIR, G.R. No. 222743 (2017)]

TAXATION LAW

Tax audit It is the process of examining, going over or scrutinizing the books and records of the taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer. 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 v. Sony Philippines, Inc., G.R. No. 178697 (2010)] Note: A Revenue Officer is allowed only 120 days from the date of receipt of an LOA by the taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a progress report to his Head of Office, and surrender the LOA for revalidation. iii. Notice for Informal Conference (NIC) 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 30 days from receipt of the notice for informal conference. If 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 7 days from the conclusion of

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the Informal Conference for the issuance of a deficiency tax assessment. iv. Issuance of Preliminary Assessment Notice (PAN) General rule: A PAN shall be issued if it is determined 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. Exceptions to the issuance of a PAN The NIC and the PAN shall not be required in any of the following cases, in which case, a Formal Letter of Demand and Assessment Notice (FLD/FAN) shall be issued outright: 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. [RR 18-2013] Note: Prior to the issuance of a PAN, the taxpayer may be allowed to make voluntary payments of probable deficiency taxes and penalties. [RMC 11-2014]

TAXATION LAW

Reply to the PAN The taxpayer is given 15 days from the date of receipt of the PAN to respond. • If the taxpayer fails to respond, he is considered in default and a formal letter of demand and assessment notice (FLD/FAN) shall be issued to the taxpayer. • If he responds that he disagrees with the findings of deficiency taxes, an FLD/FAN shall be issued within 15 days from filing/submission of the taxpayer’s response, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. [RR 18-2013] v. Issuance of a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) An FLD/FAN is a declaration of deficiency taxes issued to a taxpayer who: a. fails to respond to a PAN within the prescribed period of time, or b. whose reply to the PAN was found to be without merit. Contents of the FLD/FAN 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 certain period. Period for Issuance of the FLD/FAN It must be issued within 15 days from the filing/submission of the taxpayer’s response to the PAN. a. If the FLD/FAN is issued beyond the 15-day period, it shall still be valid, provided that it is issued within the period of limitation to assess internal revenue taxes.

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Note: The revenue officers who caused the delay shall be subject to administrative sanction. [RMC 11-2014] b. If the FLD/FAN is issued before the lapse of the 15-day period, it shall be void. Note: Prematurely issuing an FLD/FAN before the lapse of the 15-day period is a wanton disregard of the mandatory due process requirement. [CIR v. Pacific Bayview Properties, Inc., CTA EB No. 1677 (2018), citing CIR v. Metro Star Superama, Inc., G.R. No. 185371 (2010)] vi. Disputed Assessment The taxpayer or his duly authorized representative may protest administratively against the FLD/FAN within 30 days from date of receipt thereof. The taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation. vii. Administrative Decision Disputed Assessment

on

a

viii. Appeal from an Administrative Decision on Disputed Assessment

b. Requisites assessment

for

a

valid

1. The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment notice shall be rendered null and void. [Sec. 228, NIRC] 2. 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)] 3. assessment must be served on and received by the taxpayer. [CIR v. Pascor, ibid]

TAXATION LAW

Modes of service of assessment notice 1. Personal Service – Notice is delivered personally to the taxpayer at his known address. If not practicable, notice shall be served by substituted service or by mail. 2. Substituted Service – The notice is left with a clerk or a person in charge at the taxpayer’s known address. 3. Service by mail [RR 18-2013] Service to the tax agent shall be deemed service to the taxpayer. [RR 18-2013] The notice shall first be served to the taxpayer’s registered address before the same may be served to the taxpayer’s known address, or in the alternative, may be served to the taxpayer’s registered address and known address simultaneously. [RMC 11-2014]

c. Tax Delinquency Distinguished from Deficiency

as Tax

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. [Takenaka Corporation Philippine Branch v. CIR, CTA EB No. 745 (2012)] Tax Delinquency v. Tax Deficiency Tax Delinquency Tax Deficiency ● The self- ● The amount by assessed tax per which the tax return was not imposed by law paid or only exceeds the partially paid; or amount shown in ● The deficiency the tax return; or tax assessed by ● If no amount is the BIR became shown in the final and return, or if there executory. is no return, then the amount by which the tax as determined by the CIR exceeds the

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Delinquency tax can be collected administratively by distraint or levy or by judicial action

The filing of a civil action for the collection of the delinquent tax in the ordinary court is a proper remedy.

Subject to administrative penalties, such as 25% surcharge, interest, and compromise penalty [MAMALATEO]

d. Prescriptive Assessment

TAXATION 2

amount previously assessed as a deficiency [Sec. 56(B), NIRC] Deficiency tax must be assessed and must go through the process of filing the protest by the taxpayer and denial of such protest by the BIR. The filing of a civil action at the ordinary court for collection during the pendency of protest may be the subject of a motion to dismiss. In addition, the taxpayer must file a petition for review with the CTA to toll the running of the prescriptive period. Subject to administrative penalties of interest and compromise penalty, but NOT to the 25% surcharge

Period

for

General Rule: Within 3 years after the last day prescribed by law for the filing of the return or from the date of actual filing, whichever comes later; provided, that a return filed before the last day prescribed by law for filing shall be considered as filed on such last day [Sec. 203, NIRC] Exception: Within 10 years after the discovery of the falsity, fraud or omission in case of: (FFF) 1. False return 2. Fraudulent return with intent to evade tax; or

TAXATION LAW

3. Failure to file a return. [Sec. 222, NIRC] False return

Fraudulent return Contains Made with wrong intent to information evade taxes due to due mistake, carelessness or ignorance Deviation Intentional or may or may deceitful not be entry with intentional intent Not subject to Subject to 50% 50% surcharge, surcharge except if done willfully

Failure to file a return Omission to file a return within the time prescribed by law

Omission may or may not be intentional Not subject to 50% surcharge, except if omission is willful Assessment may be made within 10 years after discovery of the falsity, fraud or omission

Waiver of the Statute of Limitations 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] Note: A waiver of the statute of limitations is a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. However, the waiver does not mean that the taxpayer relinquishes the right to invoke the defense of prescription unequivocally particularly where the language of the document is equivocal. [Philippine Journalists Inc. v. CIR, G.R. No. 162852 (2004)] Requisites for a valid waiver under RMO 142016: a. It must be in writing, but not necessarily in the form prescribed by RMO No. 20-90 or RDAO No. 05-01, for as long as the following are complied with:

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i.

b.

c. d.

e.

It is executed before the expiration of the prescriptive period. The date of execution shall be indicated. ii. It is signed by the taxpayer himself or his authorized representative. In a corporation, it must be signed by its responsible officials iii. The expiry date of the period agreed upon to assess/collect the tax after the regular 3-year period of prescription should be indicated. Except for waiver of collection of taxes which shall indicate the particular taxes assessed, the waiver need not specify the particular taxes to be assessed nor the amount thereof, and it may simply state “all internal revenue taxes”. It may or may not be notarized. CIR or designated officials or the concerned revenue district officer or group supervisor must indicate acceptance by signing the same before the expiration of the period to assess or collect taxes, or before the lapse of the period agreed upon in a prior agreement. The taxpayer has the duty to retain a copy of the accepted waiver.

Two (2) material dates required on the waiver: 1. The date of execution of the waiver by the taxpayer or its authorized representative; and 2. The expiry date of the period the taxpayer waives the statute of limitations Effect of noncompliance with the requisites General Rule: When a waiver does not comply with the requisites for its validity, it is invalid and ineffective to extend the prescriptive period to assess taxes. Exception: When both the BIR and the taxpayer are in pari delicto or “in equal fault”, it would be more equitable if the BIR’s lapses were allowed to pass and consequently uphold the validity of the waivers in order to support the principle that taxes are the lifeblood of the

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government. [CIR v. Next Mobile, Inc., G.R. No. 212825 (2015)] Suspension of running of statute of limitations a. When the CIR is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for 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, 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; and e. When the taxpayer is out of the Philippines. Determining if prescription has 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 (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. • Direct denial of receipt of a mailed demand letter shifts the burden to the Government to prove that such letter was indeed received by the taxpayer [Republic v. CA, G.R. No. L-38540 (1987)]. [INGLES]

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2. Taxpayer’s Remedies a. Protesting the assessment i. Period to File Protest After issuance of the FLD/FAN, the taxpayer may protest the assessment within 30 days from receipt thereof by filing a request for reconsideration or reinvestigation. ii. Kinds of Protest - request for reconsideration or reinvestigation Request for Request for Reconsideration Reinvestigation As to nature/definition It refers to a plea of It refers to a plea of re-evaluation of an re-evaluation of an assessment on the assessment on the basis of existing basis of newly records without need discovered evidence of additional that a taxpayer evidence. It may intends to present in involve both a the reinvestigation. It question of fact or of may also involve a law or both. question of fact or law or both. As to effect on the status of limitations It shall not suspend A request for the prescriptive reconsideration does period to collect not toll the running of the prescriptive Note: It will only toll period for the the prescriptive collection of an period to collect if the assessed tax. [CIR v. request for Philippine Global reinvestigation is Communication Inc., granted by the BIR. G.R. No. 167146 (2006)] As to evidence It is limited to the It entails the evidence already at reception and hand. evaluation of additional evidence. Supporting documents must be submitted within 60

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days from filing the protest. Counting of 180-day period for CIR to decide From the filing of the From submission of protest the complete supporting documents [TABAG, p. 397 (2019] Contents of the Protest The protest shall state the following in his protest; otherwise, the protest shall be considered void and without force and effect. a. Nature of protest, whether reconsideration or reinvestigation, specifying newly discovered or additional evidence he intends to present if it is a request for reinvestigation, b. Date of the assessment notice, and c. law, rules and regulations, or jurisprudence on which his protest is based. [RR 182013] Protest Against Some of Several Issues in FLD/FAN • 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. • If the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues, the same shall be considered undisputed and the related assessment shall likewise become final, executory and demandable. [RR 18-2013] iii. Submission Documents

of

Supporting

For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents in support of his protest within 60 days from filing of the protest; otherwise, the assessment shall become final.

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•

•

•

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“Relevant supporting documents” – documents necessary to support the legal and factual bases in disputing a tax assessment as determined by the taxpayer Assessment shall become final” – taxpayer is barred from disputing the correctness of the issued assessment by introduction of newly discovered or additional evidence, and the FDDA shall consequently be denied. The 60-day period to submit supporting documents shall NOT apply to requests for reconsideration. [RR 182013

iv. Effect of Failure to File Protest Failure of the taxpayer to file a protest against the FLD/FAN within 30 days will make the assessment final, executory and demandable. No request for reconsideration or reinvestigation shall be granted on tax assessments that have already become final, executory and demandable. v. Action of the Commissioner on the Protest Filed

to the FLD/FAN by the CIR’s duly authorized representative. Under RR 18-2013, there is no administrative appeal to the CIR for inaction by the CIR’s representative. The remedy is to await the decision or file a petition for review to the CTA within 30 days after the lapse of the 180-day waiting period. DECISION ON THE PROTEST FILED 1. Denial of the protest through the issuance of a Final Decision on Disputed Assessment (FDDA) The decision of the CIR or his duly authorized representatives shall state (a) the facts, the applicable law, rules and regulations or jurisprudence on which such decision is based, and (b) that the same is his final decision. Effect of a void FDDA A void FDDA does not ipso facto render the assessment void. A “decision” differs from an “assessment” and failure of the FDDA to state the facts and law on which it is based renders the decision void, but not the assessment. [CIR v. Liquigaz Philippines Corp., GR No. 215534, (2016)] 2.

Period to act upon or decide the protest filed 1. By the CIR’s duly authorized representative a. In a request for reinvestigation, within 180 days from submission of documents; or b. In a request for reconsideration, within 180 days from the date of filing of the protest 2. By the CIR a. In case of protest, within 180 days from the filing of the protest b. In case of an administrative appeal, within 180 days from the filing of the administrative appeal Note: An administrative appeal to the CIR may only be availed of upon the denial of the protest

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Indirect denial of the protest

The following actions are equivalent to a denial of the protest: a. Filing of collection suit against taxpayer [CIR v. Union Shipping, G.R. No. L-66160 (1990)] b. Issuing a warrant of distraint and levy [CIR v. Algue, G.R. No. L-28896 (1998)] c. A final demand letter from BIR Note: A final demand letter from the BIR, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayer’s request for reconsideration. Such letter amounts to an FDDA and is thus appealable to the CTA. [CIR v. Isabela Cultural Corporation, G.R. No. 135210 (2001)]

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d.

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Filing of criminal action against taxpayer

3. Inaction by the CIR or his duly authorized representative If the protest is not acted upon within the 180day period, the inaction by the CIR is considered as a denial of protest. REMEDIES OF THE TAXPAYER IN CASE OF DENIAL OR INACTION BY THE CIR 1.

In case of denial of protest

a. If the protest is denied, in whole or in part, by the CIR’s duly authorized representative, the taxpayer may either: i. Appeal to the CTA within 30 days from the date of receipt of the decision ii. Elevate his protest through a request for reconsideration to the CIR within 30 days from date of receipt of the said decision. Note: No request for reinvestigation shall be allowed in administrative appeal and only issues raised in the decision of the Commissioner’s duly authorized representative shall be entertained by the Commissioner. [RR 18-2013] b. If the protest or administrative appeal, as the case may be, is denied, in whole or in part, by the CIR, the taxpayer may appeal to the CTA within 30 days from receipt of the decision denying the protest. Otherwise, the assessment shall become final, executory and demandable. Note: A motion for reconsideration of the CIR’s denial of the protest or administrative appeal shall not toll the 30-day period to appeal to the CTA.

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2. In case of inaction by the CIR or his duly authorized representative within the 180-day period a. Appeal to the CTA within 30 days from the lapse of the 180-day period, OR b. Await the final decision of the CIR or his duly authorized representative on the disputed assessment and appeal such final decision to the CTA within 30 days after receipt of such decision. [RR 18-2013] Note: These options are mutually exclusive, and the resort to one bars the application of the other. [Rizal Commercial Banking Corporation v. CIR, G.R. No. 168498 (2007); RR 18-2013] Effect of failure to appeal to the CTA in due time 1. The decision or assessment becomes final, executory and demandable. 2. The taxpayer is barred, in an action for collection, from invoking any defense that will re-open the question of his liability on the merits; 3. The assessment is considered correct and may be enforced by summary remedies or by judicial action; 4. The taxpayer may raise only questions of jurisdiction, collusion between the parties, or fraud in the party offering the record with respect to the proceedings. 5. The assessment which has become final and executory cannot be superseded by a new assessment. [DE LEON]

b. Recovery of Tax Erroneously or Illegally Collected Tax Refund as Distinguished from Tax Credit • Tax refund takes place when there is actual reimbursement. • 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.

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i. Grounds, Requisites, and Period for Filing a Claim for Refund or Issuance of a Tax Credit Certificate (TCC) Grounds for filing a claim for tax refund or credit 1. Tax is erroneously or illegally assessed or collected a. Taxes are erroneously paid when a taxpayer pays under a mistake of fact, as when he is not aware of an existing exemption in his favor at the time that payment is made. b. Taxes are illegally collected when payments are made under duress. c. Penalty is collected without authority 2. Penalty is collected without authority 3. Sum collected is excessive or in any manner wrongfully collected [Sec. 229, NIRC] Requisites for tax refund or tax credit 1. There is a tax collected erroneously or illegally, or a penalty collected without authority, or a sum excessively or wrongfully collected. 2. There must be a written claim for refund filed by the taxpayer to the CIR [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] c. The
 claim must be a categorical claim for reimbursement [Bermejo v. CIR, G.R. No. L-3029 (1950)] d. The claim for refund must be filed within 2 years from the date of the payment of the

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tax regardless of any supervening cause [Sec. 229, NIRC] Note: Both the claim for refund with the BIR and the subsequent appeal to the CTA must be filed within the 2-year period. e. Taxpayer must show proof of the payment of tax [Sec. 229, NIRC] Note: The two-year period is not jurisdictional. Even if it had already lapsed, the same may be suspended for reasons of equity and other special circumstances. [CIR v. Philippine American Life Ins. Co., G.R. 105208 (1995)] It is subject to waiver in the absence of objection to a claim filed after 2 years. Two-year period when counted General Rule: From the date the tax was paid Exceptions: a. If the tax is withheld at source – from the date it falls due at the end of the taxable year [Gibbs v. CIR, G.R. No. L-17406 (1965)] b. If the income is paid on a quarterly basis – from the time of filing the final adjustment return [CIR v. CA, G.R. No. 117254 (1999)] c. When the tax is paid in installments – from the date of final payment or the last installment Legal basis of tax refunds Tax refunds are based on the principle of quasi-contract or solutio indebiti. The Government is not exempted from the application of the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. [CIR v. Acesite (Philippines) Hotel Corporation, G.R. No. 147295 (2007); Secs. 2142 and 2154, NCC] Necessity of proof in claim for refund A claim for refund 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

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to the same. [CIR v. Tokyo Shipping, G.R. No. L-68252 (1995)] ii. Proper Party to File Claim for Refund or Tax Credit General Rule: The “taxpayer” is the person entitled to claim a tax refund; hence, the proper party to file a claim for refund or credit. Exceptions: a. In case of indirect taxes, the proper party is the “statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.” [Silkair (Singapore) Pte. Ltd. v. CIR, G.R. No. 173594 (2008)] b. Withholding agent a. In case the taxpayer does not file a claim for refund, the withholding agent may file the claim. [CIR v. Smart Communications, Inc., G.R. Nos. 179045-46 (2010)] b. The withholding agent of a nonresident foreign corporation may file the claim. [CIR v. Procter & Gamble Phil. Mfg. Corp., G.R. No. L-66838 (1991)] Reason: The withholding agent, who is made personally liable for the withholding tax, is a “taxpayer” under the NIRC. 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. [CIR v. Procter & Gamble Phil. Mfg. Corp., G.R. No. L-66838 (1991)] Option of a corporate taxpayer in case of excess income tax payments If the sum of the quarterly tax payments made during the taxable year exceeds the total tax due on the entire taxable income of that year, the corporation shall either: a. carry-over the excess credit; or b. be credited or refunded with the excess amount paid

TAXATION LAW

Note: These two options under Section 76 are alternative in nature. The choice of one precludes the other. [Republic v. Team (Phils.) Energy Corporation, G.R. No. 188016 (2015)] Irrevocability rule Once the option to carry over and apply the excess income tax payments to succeeding quarters of the succeeding years is taken, that option is irrevocable for that taxable period. 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. [Sec. 76, NIRC] Payment under protest not required A suit or proceeding for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress. [Sec. 229, NIRC]. Remedy upon Denial or Inaction by the CIR Taxpayer’s remedies 1. If the CIR denies claim – appeal to the CTA within 30 days from receipt of the CIR’s decision and within 2 years from the date of payment 2. If the CIR does not act on the claim and the 2-year period is about to lapse – file a claim before the CTA prior to the lapse of the 2year period; otherwise, the claim shall be barred [R.A. 1125, as amended] Simultaneous filing allowed 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. [Gibbs v. CIR, G.R. No. L-17406 (1965)] Period for claiming refund once granted The refund check or warrant must be claimed or cashed within 5 years from the date such warrant or check was mailed or delivered; otherwise it shall be forfeited in favor of the

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government and the amount thereof shall revert to the general fund. [Sec. 230(A), NIRC] Period for using the TCC TCCs may be applied against all internal revenue taxes, excluding withholding tax. TCCs which remain unutilized after 5 years from the date of issue shall, unless revalidated, be considered as invalid, and shall revert to the general fund. [Sec. 230, NIRC] All TCCs issued by the BIR shall not be allowed to be transferred or assigned to any person. [RR 14-2011] iii. Distinction Between Refund of Unutilized Input VAT (Sec. 112, NIRC) and Refund of Erroneously or Illegally Collected Tax (Sec. 229, NIRC) Rules on refund of excess or unutilized input VAT 1. When to file an administrative claim with the CIR: a. General rule: Within 2 years from the close of the taxable quarter when the sales were made [Sec. 112(A), NIRC; CIR v. Mirant Pagbilao, G.R. No. 172129 (2008)] b. Exception: Within 2 years from the date of payment of the output VAT, if the administrative claim was filed from June 8, 2007 (promulgation of Atlas v. CIR) to September 12, 2008 (promulgation of Mirant) 2. When to file a judicial claim with the CTA: a. General rule: Section 112(D) applies; not Section 229 i. Within 30 days from the full or partial denial of the administrative claim by the CIR; or ii. Within 30 days from the expiration of the 90-day period provided to the CIR to decide on the claim. This is mandatory and jurisdictional.

TAXATION LAW

Exception: The judicial claim need not await the expiration of the 90-day period, if such was filed from December 10, 2003 (issuance of BIR Ruling No. DA-489-03) to October 6, 2010 (promulgation of Aichi). Sec. 229 Refers to a refund or credit of 1. tax erroneously or illegally assessed or collected, or 2. penalty collected without authority, or 3. any sum excessively or wrongfully collected The 2-year period shall be reckoned from the date of payment of the tax or penalty.

Sec. 112 Refers to a refund or tax credit of excess or unutilized input VAT attributable to zero-rated sales

The 2-year period shall be reckoned from the close of the taxable quarter when the sales were made. Both the Only the administrative claim administrative claim with the CIR and the is required to be filed appeal to the CTA within the 2-year must be made within period. the 2-year period. If the 2-year period is Sec. 112(C) of the about to lapse and NIRC provides a 90the CIR has not day waiting period acted on the claim, for the CIR to decide the taxpayer may on the application for already appeal to the tax refund or credit. CTA without waiting Compliance with the for the decision of 90-day waiting the CIR. period is mandatory and jurisdictional.

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Thus, the taxpayer may elevate his claim to the CTA (a) within 30 days from the full or partial

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denial of the claim, or (b) within 30 days after the lapse of the 90-day waiting period, in case of inaction by the CIR. [CIR v. San Roque Power Corporation, G.R. No. 187485 (2013); Visayas Geothermal Power Company v. CIR, G.R. No. 197525 (2014); Sec. 112, NIRC, as amended by TRAIN Law]

c. Power of Commissioner of Internal Revenue to Compromise Authority to compromise and abate taxes General rule: The CIR has the authority to compromise or abate any tax liability. [Sec. 7(C), NIRC] Exception: The power to compromise may be delegated to: 1. the Regional Evaluation Board (REB), in case of: a. assessments issued by regional offices involving basic taxes of P500,000 or less; and b. minor criminal violations discovered by regional and district officials [Sec. 7(C), NIRC] 2. the National Evaluation Board (NEB), when: a. the basic tax exceeds P1,000,000, or b. the settlement offered is less than the prescribed minimum rates [Sec. 204(A), NIRC] Grounds for a compromise The CIR may compromise the payment of any internal revenue tax in the following cases: a. Doubtful validity of the assessment – when there exists reasonable doubt as to the validity of the claim against the taxpayer (e.g., one arising from a jeopardy assessment, arbitrary assessment); or b. Financial incapacity – when the financial position of the taxpayer demonstrates a

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clear inability to pay the assessed tax. [Sec. 204(A), NIRC; Sec. 3, RR 30-2002] Limits of the CIR’s power to compromise Ground

Minimum compromise rate Financial 10% of the basic assessed incapacity tax Other cases 40% of the basic assessed tax [Sec. 204(A), NIRC] Payment of compromise upon filing of application 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] Requisites of a tax compromise • The taxpayer must have a tax liability; • There must be an offer by the taxpayer or the Commissioner of an amount to be paid by the taxpayer • There must be an acceptance by the Commissioner or taxpayer as the case may be, of the offer in settlement of the original claim. Note: A compromise is consensual in nature. Hence, it may not be imposed on the taxpayer without his consent. The BIR may only suggest settlement of the taxpayer’s liability through a compromise. Cases which may be compromised: a. Delinquent accounts b. Cases under administrative protest after issuance of the FAN to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service,

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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, except (i) those already filed in court or (ii) those involving criminal tax fraud [Sec. 2, RR 30-2002] Cases which cannot be compromised: a. Withholding tax cases, unless the applicant-taxpayer 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 or reconsideration have been issued resulting in reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. 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 g. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer [Sec. 2, RR 302002] ABATEMENT It refers to the cancellation of the entire amount of tax payable. Grounds for abatement 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. [Sec. 204(B), NIRC]

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Coverage of abatement General rule: The CIR’s authority to abate is applicable to surcharge and compromise penalties only. Exception: In meritorious instances, the CIR may abate the interest as well as basic tax assessed, provided that cases for abatement or cancellation of tax, penalties and/or interest by the CIR shall be coursed through certain officials. [Sec. 4, NIRC] Compromise Abatement As to nature/definition It is a contract It is the cancellation whereby the parties, of the entire amount by reciprocal of tax payable concessions, avoid a because the tax litigation or to put an appears to be end to one already unjustly or commenced. It excessively reduces the amount assessed or the of taxpayer’s liability. costs do not the collection of the amount due. As to authorized officer CIR and, in certain CIR cases, the NEB and REB As to grounds 1. Doubtful validity 1. Unjustly or of assessment excessively 2. Financial assessed tax incapacity 2. Administration and collection costs do not justify the collection of the amount due

d. Non-retroactivity of Rulings See Taxation 1 Reviewer, Prospectivity of Laws

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Part

J.

on

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3. Government Remedies for Collection of Delinquent Taxes a. Requisites 1. The government can initiate collection administratively or judicially once the assessment becomes final and executory. 2. Collection must be made within 5 years following the assessment of the tax. [Sec. 222(c), NIRC] The government has two ways to collect: 1. Summary or administrative remedies a. Distraint on personal property b. Levy on real property 2. Judicial remedies (civil or criminal) Note: The remedies of distraint and levy shall not be availed of where the amount of tax involved is not more than P100.

b. Prescriptive Periods; Suspension of Running of Statute of Limitations Prescriptive period General Rule: The taxes due must be collected within 5 years following the assessment of the tax. [Sec. 222(c), NIRC] Exception: a. In case of (i) false or fraudulent return with intent to evade tax or of (ii) failure to file a return, a proceeding in court for the collection of such tax without assessment may be made within 10 years from discovery of falsity, fraud or omission. [Sec. 222(a), NIRC] b. When a waiver of the statute of limitation is executed within the 5-year period, collection may be made within the period agreed upon. [Sec. 222(d), NIRC] Court proceeding for collection of tax General rule: No proceeding in court without assessment for the collection of taxes may be

TAXATION LAW

made after the 3-year period for making an assessment. [Sec. 203, NIRC] Exception: A proceeding in court for the collection of such tax may be filed without assessment in the case of (i) false or fraudulent return with intent to evade tax or of (ii) failure to file a return [Sec. 222(a), NIRC] Waiver of prescriptive period If tax was assessed within the period agreed upon by the CIR and the taxpayer, such tax 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] Suspension of running of statute of limitations [see discussion under Assessments]

c. Administrative Remedies i. Tax Lien A tax lien is a legal claim or charge on property, whether real or personal, established by law as a source of security for the payment of tax obligations. [HSBC v. Rafferty, G.R. No. L13188 (1918)] Nature and extent of tax lien 1. 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 interests, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer. 2. 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]

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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 CIR; in the latter, the residue after payment of taxes and expenses is returned to the owner of the property. [BPI v. Trinidad, G.R. No. L16014 (1921)] ii. Distraint and Levy

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Grounds for Constructive Distraint: When the taxpayer is: 1. delinquent; or 2. retiring from any business subject to tax; or 3. intending to leave the Philippines; or 4. intending to remove his property from the Philippines or to hide or conceal his property; or 5. 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]

DISTRAINT OF PERSONAL PROPERTY Distraint is a remedy in which the collection of tax is 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 Constructive Distraint Actual Distraint As to procedure The BIR does not take The personal property is physical possession of actually taken. the personal property. As to basis Delinquency of the The taxpayer is already taxpayer is not delinquent in the necessary. payment of his taxes. As to the disposition of the personal property The personal property is The personal property is merely held as security taken to be sold in order to answer for any future to satisfy the tax tax delinquencies. delinquencies. As to purpose The purpose is to protect The purpose is to the government satisfy the tax, expenses revenues and ensure of distraint and the cost that there are properties of the subsequent sale. that the government could proceed against after a determination of the amount of deficiency taxes. (TABAG, p. 405-406 (2019))

How constructive distraint is effected: 1. By requiring the taxpayer or any person having possession or control of such property to: a. sign a receipt covering the property distrained; b. obligate himself to preserve the same intact and unaltered; and c. not to dispose of the same in any manner whatever, without the express authority of the CIR. 2. 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 2 witnesses, leave a copy thereof in the premises where the property distrained is located. [Sec. 206, NIRC] Garnishment This refers to the taking of personal properties, usually cash or sums of money, owned by a delinquent taxpayer which is in the possession of a third party (e.g., bank accounts). Procedure for actual distraint 1. Commencement of distraint proceedings The warrant of distraint is issued by: a. CIR or his duly authorized representative – where the amount involved is more than P1M

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b. Revenue District Officer – where the amount involved is P1M or less [Sec. 207(A), NIRC] 2. Service of warrant of distraint Distraint of tangible properties The officer serving the warrant shall leave a list of the personal property distrained, including a statement of the sum demanded and note of the time and place of sale, either: a. with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, OR b. with someone of suitable age and discretion at the dwelling or place of business of such person [Sec. 208, NIRC] Distraint of intangible properties a. Stocks and other securities: by serving a copy of the warrants of distraint on the taxpayer, and upon the president, manager, treasurer or other responsible officer of the corporation, company or association which issued the stocks or securities b. 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 c. Bank accounts: by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank [Sec. 208, 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 within 10 days from receipt of the warrant. Note: The CIR or his duly authorized representative may, in his discretion, allow the lifting of the order of distraint. [Sec. 207(A), NIRC]

TAXATION LAW

4. Notice of sale of distrained properties a. A notice of the public sale shall be posted in not less than 2 public places in the municipality or city (one of which is the Office of the Mayor) where the distraint was made. b. The notice shall specify the time and place of the sale. c. The time of sale shall not be less than 20 days after notice to the owner and the publication or posting of such notice. [Sec. 209, NIRC] 5. 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 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. In case of stocks and other securities, the officer shall execute a bill of sale which he shall deliver to the buyer, and copy thereof to the corporation, company or association that issued the stocks or other securities. c. 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. The expenses shall be limited to actual expenses of seizure and preservation of the property pending the sale, excluding charges for the services of the local internal revenue officer or his deputy. [Sec. 209, NIRC] 6. 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]

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7. Purchase by the government at sale upon distraint If the highest bid 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 on 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] 8. Report of sale to CIR Within 2 days after the sale, the officer making the same shall make a report of his proceedings in writing to the CIR. [Sec. 211, NIRC] LEVY ON REAL PROPERTY Levy refers to the seizure of real properties and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer. When levy may be made It can be made before, simultaneously or after the distraint of personal property. [Sec. 207(B), NIRC] Note: If the warrant of levy is not issued before or simultaneously with the warrant of distraint, and 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 30 days after execution of the distraint, proceed with the levy on the taxpayer’s real property. [Sec. 207(B), NIRC] Procedure for levy on real property 1. Issuance of warrant of levy The CIR or his duly authorized representative shall prepare a duly authenticated certificate showing: a. the name of the taxpayer; b. the amount of tax and penalty due from him; and

TAXATION LAW

c. a description of the property levied upon. 2. Service of written notice Written notice of the levy shall be mailed to or served upon: a. the Register of Deeds of the city of the province where the property is located and b. upon (i) the delinquent taxpayer, or (ii) if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or (iii) if there be none, to the occupant of the property in question. [Sec. 207(B), NIRC] 3. Advertisement of the sale Within 20 days after levy, an advertisement of the sale of the property or a usable portion thereof necessary to satisfy the claim and cost of sale shall be made, and the advertisement shall cover a period of 30 days. It shall be effected by: a. posting a notice at the main entrance of the municipal building or city hall and in a public and conspicuous place in the barrio or district in which the real estate lies; and b. publication once a week for 3 weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain: a. the amount of taxes and penalties due; b. the time and place of sale; c. the name of the taxpayer against whom taxes are levied; and d. a short description of the property to be sold. 4. Sale of real property At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties and interest. Otherwise, the sale shall proceed. [Sec. 213, NIRC]

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In case the proceeds of the sale exceed the claim and cost of sale, the excess shall be turned over to the owner of the property. [Sec. 213, NIRC] 5. Redemption of property sold Within one (1) year from the date of sale, the taxpayer or anyone for him, may pay to the Revenue District Officer the following: a. public taxes b. penalties c. interest from the date of delinquency to the date of sale d. interest of 15% per annum on said purchase price from the date of sale to the date of redemption. [Sec. 214, NIRC; RMC 46-2018] Note: The 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 sale to the purchaser If the property is not redeemed within the period of redemption, a final deed of sale shall be issued in favor of the purchaser. 7. Forfeiture in Favor of the Government a. If there is no bidder for the real property OR b. If the highest bid is not sufficient to pay the taxes, penalties and costs] The Register of Deeds shall transfer the title of the property upon registration with his office of any declaration of forfeiture. The taxpayer may redeem said property by paying the full amount of taxes and penalties, with interest thereon and the costs of sale within 1 year from date of forfeiture. Otherwise, the forfeiture shall become absolute. [Sec. 215, NIRC]

TAXATION LAW

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] SUMMARY It is the seizure of personal property, tangible or Distraint intangible, by the government to effect collection of taxes including penalties. It is the taking of personal property, usually cash or sums Garnishm of money, owned by the ent delinquent taxpayer which is in the possession of a third party. It is the seizure of real property Levy of of the taxpayer by the real government in order to property enforcement payment of taxes. [TABAG, p. 406 (2019)] iii. Forfeiture of Real Property 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] Instances when forfeiture is appropriate 1. All chattels, machinery, and removable fixtures of any sort used in the unlicensed production of articles [Sec. 268(B), NIRC] 2. Dies and other equipment used for the printing or making of any internal revenue stamp, label or tag which is in imitation of or purports to be a lawful stamp, label or tag [Sec. 268(B), NIRC] 3. Goods subject to excise tax which are illegally stored or removed [Sec. 268(C)] 4. Liquor or tobacco shipped or removed under a false name or brand [Sec. 262, NIRC]

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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]

TAXATION LAW

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 with in the same way. [Sec. 226, NIRC] iv. Suspension of Business Operation

Resale of real estate taken for taxes In case of any real estate taken by the government in payment of taxes, penalties or costs or in compromise or adjustment of any claim, the CIR may: a. sell the same at a public auction after giving not less than 20 days notice; or b. dispose of the same at a private sale upon approval of the Secretary of Finance. [Sec. 216, NIRC] 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 non-payment 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 [Sec. 225, NIRC] Note: Forfeited property shall not be destroyed until at least 20 days after seizure. [Sec. 225, NIRC] Disposition of funds recovered in proceedings or obtained from forfeiture

legal

In addition to other administrative and penal sanctions, the CIR or his duly authorized representative may order the suspension or closure of a business establishment for any of the following violations: 1. Failure to issue receipts and invoices; 2. Failure to file VAT returns as required under Sec. 114 of the NIRC; 3. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter; [Sec. 115(a), NIRC] 4. Failure of any person to register as required under Sec. 236 of the NIRC, in which case, the closure shall be for a duration of not less than 5 days and shall be lifted only upon compliance [Sec. 115(b), NIRC] v. Judicial Remedies 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; b. shall be conducted by legal officers of the BIR; and c. shall be filed in court only with the approval of the CIR. [Sec. 220, NIRC] 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

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TAXATION 2

b. By filing an answer to the petition for review filed by the taxpayer with the CTA [MAMALATEO] Criminal Action Any person convicted of a crime under the NIRC shall: a. be liable for the payment of the tax, and b. be subject to the penalties imposed under the NIRC. [Sec. 253(a), NIRC] Prescriptive period for criminal action All violations of any provision of the NIRC shall prescribe after 5 years: a. from the day of the commission of the violation, or b. if not known at the time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment. [Sec. 281, NIRC] When prescription is interrupted a. when proceedings are instituted against the guilty persons and the period shall run again if the proceedings are dismissed for reasons not constituting jeopardy; or b. when the offender is absent from the Philippines. Assessment not necessary before filing a criminal charge for tax evasion 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 willful attempt to file taxes, such as failure to file a required tax return. [CIR v. Pascor, G.R. No. 128315 (1999)] Payment of tax not a defense Payment of the tax due after a criminal case has been filed shall not constitute a valid defense in any prosecution for violation of the provisions under the NIRC. [Sec. 253(a), NIRC]

TAXATION LAW

NIRC 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

Penalty shall be deported Not a citizen He of the immediately after serving the Philippines sentence. The maximum penalty prescribed for the offense shall be imposed and he shall be A public dismissed from public office, officer or and perpetually disqualified employee from holding any public office, to vote, and to participate in any election. His license shall be CPA automatically revoked or cancelled upon conviction. Corporation The penalty shall be imposed on the partner, president, s, general manager, branch association s, manager, treasurer, officer-inpartnership charge and employees s etc. responsible for the violation. [Sec. 253, NIRC] Minimum amount of fine: The fines imposed for any violation of the NIRC 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(e), NIRC] Common crimes punishable under the NIRC a. Attempt to evade or defeat tax [Sec. 254, NIRC] b. Willful failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund excess taxes withheld on compensation [Sec. 255, NIRC]

Liability of person who aids or abets Any person who willfully aids or abets in the commission of a crime penalized under the Page 213 of 256

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Willful blindness doctrine The neglect or omission of the taxpayer to ensure compliance with her obligation to file her ITRs and pay the tax due is tantamount to “deliberate ignorance” or “conscious avoidance”. [People v. Kintanar, CTA EB Crim. No. 006 (2010)]

d. No Injunction Rule; Exceptions General Rule 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 the NIRC. [Sec. 218, NIRC] Exception When in the opinion of the CTA, the collection of tax may jeopardize the interest of the government and/or the taxpayer, the CTA may suspend said collection and require the taxpayer to deposit the amount claimed or file a surety bond. [Sec. 11, R.A. 1125, as amended]

collected from the date prescribed for its payment until: (a) full payment thereof; or (b) upon issuance of a notice and demand by the CIR or his authorized representative, whichever comes first [Sec 249(B), NIRC; Sec. 3, RR 21-2018] 2. Delinquency interest – Interest at the rate of 12% per annum on the unpaid amount in case of failure to pay: 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; Sec. 4, RR 21-2018] Deficiency interest

4. Civil Penalties Base

a. Delinquency Interest Deficiency Interest

and

INTEREST In general, interest is assessed and collected on any unpaid amount of tax at the rate of 12% or double the legal interest rate for loans or forbearance of any money as set by the BSP from the date prescribed for payment until the amount is fully paid. [Sec. 249(A), NIRC; Sec. 2, RR 21-2018] Note: The rate of interest per BSP Circular No. 799 series of 2013 for loans or forbearance of any money in the absence of an express stipulation is 6%. Thus, the interest rate imposable shall be 12%. [Sec. 2, RR 21-2018] 1. Deficiency Interest – Interest at the rate of 12% per annum on any deficiency tax due, which interest shall be assessed and

TAXATION LAW

Reckoni ng date

Rate

Delinquency interest Basic tax + deficiency Basic tax interest + surcharge From the due From the date date appearing prescribed for in the notice and its payment demand of the until the full CIR until the payment amount is fully thereof paid 12% per annum

Note: Upon effectivity of the TRAIN Law on January 1, 2018, the deficiency and the delinquency interest SHALL NOT be imposed simultaneously. [Sec. 249(A), NIRC; Sec. 5, RR 21-2018] 3. Interest on extended payment – Interest at the rate of 12% per annum on the tax or deficiency tax or any part thereof unpaid

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TAXATION 2

from the date of notice and demand until it is paid in the following cases: a. When a person elects to pay the tax on installment, but fails to pay the tax or any installment, or any part of such amount or installment on 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 [Sec. 249(D), NIRC] Effectivity of the 12% interest rate The interest rate of 12% is effective starting January 1, 2018. Prior to such date, the applicable interest rate shall be 20%.

b. Surcharge This is a civil penalty imposed in addition to the tax required to be paid [Sec. 248, NIRC] Rates of Surcharge (25% or 50%) 1. 25% of the amount due in the following cases: a. Failure to file any return and pay the tax due on the prescribed date; 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] 2. 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 prescribed period; or b. A false or fraudulent return is willfully made [Sec. 248(B), NIRC]

TAXATION LAW

Prima facie evidence of a false or fraudulent return • Substantial underdeclaration of sales, receipts or income – failure to report sales, receipts or income in an amount exceeding 30% of that declared per return • Substantial overstatement of deductions – a claim of deductions in an amount exceeding 30% of actual deductions [Sec. 248(B), NIRC]

c. Compromise Penalty A compromise penalty is an amount of money paid by a taxpayer to compromise a tax violation that he has committed, instead of the BIR instituting a criminal action against the taxpayer. A compromise is consensual in character, hence, may not be imposed on the taxpayer without his consent.[Sec. 6, RR 1299] Note: All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud.

d. Fraud Penalty Fifty percent (50%) of the tax or of the deficiency tax xxx 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 under-declaration of sales, receipts or income or for overstatement of deductions, as mentioned herein. [Sec. 248 (B), NIRC]

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TAXATION LAW

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: Basic Tax Due

P

Add: 25% surcharge for late payment 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, 2017 (184 days based on P1M) Add: 20% Delinquency Interest from July 1, 2017 to December 31, 2017 (184 days; based on total amount as of June 30, 2017) Add: 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, 2018

241,643.84

491,643.84 P 1, 491,643.84

100,821.92

150,390.39

20,106.54

271,318.85 P

o

III. LOCAL TAXATION A. LOCAL GOVERNMENT TAXATION 1. Fundamental Principles (UPUCE-PIP) a. Taxation shall be Uniform in each local government unit (LGU); b. Taxes, fees, charges and other impositions shall: o be Equitable and based as far as practicable on the taxpayer's ability to pay;

1,000,000.00

P 250,000.00

1,762,962.90

be levied and collected only for Public purposes; o not be Unjust, excessive, oppressive, or confiscatory; o not be Contrary to law, public policy, national economic policy, or in restraint of trade; c. The collection of local taxes, fees, charges and other impositions shall not be left to any Private person; d. The revenue collected shall Inure solely to the benefit of, and be subject to the disposition by, the LGU levying the tax, fee, charge or other imposition, unless otherwise specifically provided herein; and,

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substantial, whichever is higher

TAXATION LAW

the date of decedent's death Note: Evidence of payment of tax must be presented to the Register of Deeds before registration, and to the provincial assessor before cancellation of an old tax declaration.

TAX ON BUSINESS OF PRINTING AND PUBLICATION Imposed on the business Tax Rate: Not exceeding of persons engaged in the 50% of 1% printing, and/or publication of books, cards, posters, Tax Base: Gross annual leaflets, handbills, receipts for the preceding certificates, receipts, calendar year pamphlets, and others of similar nature [Sec 136, In the case of a newly started business: LGC] ● Tax Rate: Not exceeding 1/20 of 1% ● Tax Base: Capital investment FRANCHISE TAX Imposed on businesses Tax Rate: Not exceeding enjoying a franchise [Sec 50% of 1 137, LGC] Tax Base: Gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction

Receipts from printing and/or publishing of books and other reading materials prescribed by the Department of Education as school texts or references

No exception Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise. [Sec. 137, LGC]

In the case of a newly started business: ● Tax Rate: Not more than 1/20 of 1% ● Tax Base: Capital investment

TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES Levied on ordinary stones, Tax Rate: Not more than gravel, earth and other 10% quarry resources, as defined in the NIRC, Tax Base: Fair market extracted from public value in the locality per lands or from the beds of

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Franchise tax is a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state. It is not levied on the corporation simply for existing as a corporation. Requisites to be covered by franchise tax: a. that one has a franchise in the sense of a secondary or special franchise; and b. that it is exercising its rights or privileges under this franchise within the territory of the concerned LGU [NPC v. Province of Isabela, G.R. No. 165827 (2006)] Who issues permit to extract: issued exclusively by the provincial governor pursuant to an ordinance by the Sangguniang Panlalawigan

U.P. LAW BOC

seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction [Sec 138, LGC]

PROFESSIONAL TAX Exercise or practice of profession requiring government examination [Sec 139, LGC] Note: A person who has paid the professional tax is entitled to practice his profession anywhere in the country without being subjected to similar taxes for the practice of such profession.

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 subject to amusement tax under the LGC: a. Resorts, swimming pools, bath houses, hot springs, and tourist spots [Pelizloy Realty Corp. v. Province of Benguet, G.R. No. 183137 (2013)] b. Professional basketball games [PBA v. CA, G.R. No. 119122 (2000)] c. Golf courses [Alta Vista Golf and Country Club v. City of Cebu, G.R. No. 180235 (2016)] d. Those subject to amusement tax under Sec. 125 of the NIRC

TAXATION 2

cubic meter of extracted resources

TAXATION LAW

the

Tax Rate: Not to exceed P300

Distribution of proceeds: a. Province - 30% b. Component city or municipality where resources were extracted - 30% c. Barangay where resources were extracted - 40% Professionals exclusively employed by the government

Tax Base: At such amount and reasonable classification determined by the Sangguniang Panlalawigan

Place of payment: To the province where the profession is practiced, or where the principal office is maintained Time of payment: Payable annually, on or before January 31 or before beginning the practice of profession Employers shall require payment of professional tax before employment and annually thereafter.

Tax Rate: Not more than 10% [RA 9640] Tax Base: Gross receipts from admission fees

Holding of operas, concerts, dramas, recitals, paintings, and art exhibitions, flower shows, musical programs, literary and oratorical presentations

Note: In case of theaters or cinemas, tax shall first be deducted and withheld by their proprietors, lessees and operators before the gross receipts are divided among them.

Exception to exemption (taxable): Pop, rock, or similar concerts

Distribution of proceeds: Shared equally by the province and the municipality where amusement places are located

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TAX ON DELIVERY TRUCK/VAN Imposed on vehicles used Tax Rate: Not exceeding by manufacturers, P500 producers, wholesalers, dealers or retailers in the Tax Base: Every truck, delivery or distribution of van, or vehicle distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products, as may be determined by the Sangguniang Panlalawigan, to sales outlets, or consumers in the province, whether directly or indirectly [Sec 141, LGC]

TAXATION LAW

Such manufacturers, producers, wholesalers, dealers and retailers shall be exempt from the tax on peddlers.

b. Taxing Powers of Municipalities Scope of taxing power: Municipalities may levy taxes, fees, and charges not otherwise levied by provinces. [Sec. 142, LGC] Tax on Various Types of Businesses [Sec. 143, LGC] Businesses Taxed Rate/Amount and Base Manufacturers, assemblers, Tax Rate: From P165 to P24,375 repackers, processors, brewers, per annum or at a rate not exceeding distillers, rectifiers, and 37.5 % of 1% compounders of liquors, distilled spirits, and wines or manufacturers Tax Base: Gross sales or receipts of any article of commerce of for the preceding calendar year whatever kind or nature [Sec. 143(a), LGC] Wholesalers, distributors, or dealers Tax Rate: From P18 to P10,000 or in any article of commerce of at a rate not exceeding 50% of 1% whatever kind or nature [Sec. 143(b), LGC] Tax Base: Gross sales or receipts for the preceding calendar year

Exporters and manufacturers, millers, producers, wholesalers, distributor, dealers or retailers of essential commodities enumerated below: [Sec. 143(c), LGC]

Not exceeding ½ of rates prescribed under Sec. 143 (a), (b) and (d) of the LGC (on manufacturers; wholesalers, distributors and dealers; and retailers, respectively)

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Other Information

“Wholesale” means a sale where the purchaser buys or imports the commodities for resale to persons other than the end user regardless of the quantity of the transaction. [Sec. 131(z), LGC] “Dealer” means one whose business is to buy and sell merchandise, goods, and chattels as a merchant. He stands immediately between the producer or manufacturer and the consumer. [Sec. 131(k), LGC] Essential Commodities: [RWCCLAPS] a. Rice and corn b. Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt, and other agricultural, marine, and

U.P. LAW BOC

Retailers [Sec. 143(d), LGC]

TAXATION 2

Tax Rate: a. 2% per annum on sales not exceeding P400,000 b. 1% per annum on sales in excess of the first P400,000 [Art. 232(d), LGC IRR] Tax Base: Gross sales or receipts for the preceding calendar year

Contractors and other independent contractors [Sec. 143(e), LGC]

Tax Rate: From P27.50 to P11,500 or at a rate not exceeding 50% of 1% Tax Base: Gross sales or receipts for the preceding calendar year

Banks and other financial institutions[Sec. 143(f), LGC]

Peddlers engaged in the sale of any merchandise or article of commerce [Sec. 143(g), LGC]

Tax Rate: Not exceeding 50% of 1% Tax Base: Gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium Tax Rate and Base: Not exceeding P50 per peddler annually

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TAXATION LAW

freshwater products, whether in their original state or not c. Cooking oil and cooking gas d. Cement e. Laundry soap, detergents, and medicine f. Agricultural implements, Equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs g. Poultry feeds and other animal feeds h. School supplies [Sec. 143(c), LGC] Note: Barangays have the exclusive power to tax gross sales or receipts amounting to: a. 50,000 or less in case of cities b. 30,000 or less in case of municipalities [Sec. 143(d), Sec. 152, LGC] “Retail” means a sale where the purchaser buys the commodity for his own consumption, irrespective of the quantity of the commodity sold. [Sec. 131(w), LGC] “Contractor” includes persons, natural or juridical, not subject to professional tax under Sec. 139 of the LGC, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. [Sec. 131(h), LGC] Note: All other income and receipts of banks and other financial institutions not otherwise enumerated herein shall be excluded from the taxing authority of the LGU concerned. [Art. 232(f), LGC IRR]

“Peddler” means any person who, either for himself or on commission, travels from place to place and sells his goods or offers to sell and deliver the same. [Sec. 131(t), LGC]

U.P. LAW BOC

TAXATION 2

substantial, whichever is higher

TAXATION LAW

the date of decedent's death Note: Evidence of payment of tax must be presented to the Register of Deeds before registration, and to the provincial assessor before cancellation of an old tax declaration.

TAX ON BUSINESS OF PRINTING AND PUBLICATION Imposed on the business Tax Rate: Not exceeding of persons engaged in the 50% of 1% printing, and/or publication of books, cards, posters, Tax Base: Gross annual leaflets, handbills, receipts for the preceding certificates, receipts, calendar year pamphlets, and others of similar nature [Sec 136, In the case of a newly started business: LGC] ● Tax Rate: Not exceeding 1/20 of 1% ● Tax Base: Capital investment FRANCHISE TAX Imposed on businesses Tax Rate: Not exceeding enjoying a franchise [Sec 50% of 1 137, LGC] Tax Base: Gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction

Receipts from printing and/or publishing of books and other reading materials prescribed by the Department of Education as school texts or references

No exception Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise. [Sec. 137, LGC]

In the case of a newly started business: ● Tax Rate: Not more than 1/20 of 1% ● Tax Base: Capital investment

TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES Levied on ordinary stones, Tax Rate: Not more than gravel, earth and other 10% quarry resources, as defined in the NIRC, Tax Base: Fair market extracted from public value in the locality per lands or from the beds of

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Franchise tax is a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state. It is not levied on the corporation simply for existing as a corporation. Requisites to be covered by franchise tax: a. that one has a franchise in the sense of a secondary or special franchise; and b. that it is exercising its rights or privileges under this franchise within the territory of the concerned LGU [NPC v. Province of Isabela, G.R. No. 165827 (2006)] Who issues permit to extract: issued exclusively by the provincial governor pursuant to an ordinance by the Sangguniang Panlalawigan

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seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction [Sec 138, LGC]

PROFESSIONAL TAX Exercise or practice of profession requiring government examination [Sec 139, LGC] Note: A person who has paid the professional tax is entitled to practice his profession anywhere in the country without being subjected to similar taxes for the practice of such profession.

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 subject to amusement tax under the LGC: a. Resorts, swimming pools, bath houses, hot springs, and tourist spots [Pelizloy Realty Corp. v. Province of Benguet, G.R. No. 183137 (2013)] b. Professional basketball games [PBA v. CA, G.R. No. 119122 (2000)] c. Golf courses [Alta Vista Golf and Country Club v. City of Cebu, G.R. No. 180235 (2016)] d. Those subject to amusement tax under Sec. 125 of the NIRC

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cubic meter of extracted resources

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the

Tax Rate: Not to exceed P300

Distribution of proceeds: a. Province - 30% b. Component city or municipality where resources were extracted - 30% c. Barangay where resources were extracted - 40% Professionals exclusively employed by the government

Tax Base: At such amount and reasonable classification determined by the Sangguniang Panlalawigan

Place of payment: To the province where the profession is practiced, or where the principal office is maintained Time of payment: Payable annually, on or before January 31 or before beginning the practice of profession Employers shall require payment of professional tax before employment and annually thereafter.

Tax Rate: Not more than 10% [RA 9640] Tax Base: Gross receipts from admission fees

Holding of operas, concerts, dramas, recitals, paintings, and art exhibitions, flower shows, musical programs, literary and oratorical presentations

Note: In case of theaters or cinemas, tax shall first be deducted and withheld by their proprietors, lessees and operators before the gross receipts are divided among them.

Exception to exemption (taxable): Pop, rock, or similar concerts

Distribution of proceeds: Shared equally by the province and the municipality where amusement places are located

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TAX ON DELIVERY TRUCK/VAN Imposed on vehicles used Tax Rate: Not exceeding by manufacturers, P500 producers, wholesalers, dealers or retailers in the Tax Base: Every truck, delivery or distribution of van, or vehicle distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products, as may be determined by the Sangguniang Panlalawigan, to sales outlets, or consumers in the province, whether directly or indirectly [Sec 141, LGC]

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Such manufacturers, producers, wholesalers, dealers and retailers shall be exempt from the tax on peddlers.

b. Taxing Powers of Municipalities Scope of taxing power: Municipalities may levy taxes, fees, and charges not otherwise levied by provinces. [Sec. 142, LGC] Tax on Various Types of Businesses [Sec. 143, LGC] Businesses Taxed Rate/Amount and Base Manufacturers, assemblers, Tax Rate: From P165 to P24,375 repackers, processors, brewers, per annum or at a rate not exceeding distillers, rectifiers, and 37.5 % of 1% compounders of liquors, distilled spirits, and wines or manufacturers Tax Base: Gross sales or receipts of any article of commerce of for the preceding calendar year whatever kind or nature [Sec. 143(a), LGC] Wholesalers, distributors, or dealers Tax Rate: From P18 to P10,000 or in any article of commerce of at a rate not exceeding 50% of 1% whatever kind or nature [Sec. 143(b), LGC] Tax Base: Gross sales or receipts for the preceding calendar year

Exporters and manufacturers, millers, producers, wholesalers, distributor, dealers or retailers of essential commodities enumerated below: [Sec. 143(c), LGC]

Not exceeding ½ of rates prescribed under Sec. 143 (a), (b) and (d) of the LGC (on manufacturers; wholesalers, distributors and dealers; and retailers, respectively)

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Other Information

“Wholesale” means a sale where the purchaser buys or imports the commodities for resale to persons other than the end user regardless of the quantity of the transaction. [Sec. 131(z), LGC] “Dealer” means one whose business is to buy and sell merchandise, goods, and chattels as a merchant. He stands immediately between the producer or manufacturer and the consumer. [Sec. 131(k), LGC] Essential Commodities: [RWCCLAPS] a. Rice and corn b. Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt, and other agricultural, marine, and

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Retailers [Sec. 143(d), LGC]

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Tax Rate: a. 2% per annum on sales not exceeding P400,000 b. 1% per annum on sales in excess of the first P400,000 [Art. 232(d), LGC IRR] Tax Base: Gross sales or receipts for the preceding calendar year

Contractors and other independent contractors [Sec. 143(e), LGC]

Tax Rate: From P27.50 to P11,500 or at a rate not exceeding 50% of 1% Tax Base: Gross sales or receipts for the preceding calendar year

Banks and other financial institutions[Sec. 143(f), LGC]

Peddlers engaged in the sale of any merchandise or article of commerce [Sec. 143(g), LGC]

Tax Rate: Not exceeding 50% of 1% Tax Base: Gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium Tax Rate and Base: Not exceeding P50 per peddler annually

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freshwater products, whether in their original state or not c. Cooking oil and cooking gas d. Cement e. Laundry soap, detergents, and medicine f. Agricultural implements, Equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs g. Poultry feeds and other animal feeds h. School supplies [Sec. 143(c), LGC] Note: Barangays have the exclusive power to tax gross sales or receipts amounting to: a. 50,000 or less in case of cities b. 30,000 or less in case of municipalities [Sec. 143(d), Sec. 152, LGC] “Retail” means a sale where the purchaser buys the commodity for his own consumption, irrespective of the quantity of the commodity sold. [Sec. 131(w), LGC] “Contractor” includes persons, natural or juridical, not subject to professional tax under Sec. 139 of the LGC, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. [Sec. 131(h), LGC] Note: All other income and receipts of banks and other financial institutions not otherwise enumerated herein shall be excluded from the taxing authority of the LGU concerned. [Art. 232(f), LGC IRR]

“Peddler” means any person who, either for himself or on commission, travels from place to place and sells his goods or offers to sell and deliver the same. [Sec. 131(t), LGC]

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Any other business which the Sanggunian concerned may deem proper to tax [Sec. 143(h), LGC]

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Tax Base: Gross sales or receipts

Note: This is a catch-all provision.

Tax Rate: The Sanggunian may prescribe a schedule of graduated rates but in no case to exceed the rates prescribed herein.

Exception: Any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline, and other petroleum products shall not be subject to any local tax imposed under Sec. 143 of the LGC. [Art. 232(h), LGC IRR]

Note: For any business subject to excise, value-added or percentage tax under the NIRC, the rate of tax shall not exceed 2% of gross sales or receipts of the preceding calendar year.

Tax base of local business tax Business tax must be based on gross sales or receipts, it being different from gross revenue. [Ericsson Telecommunications Inc. v. City of Pasig, G.R. No. 176667 (2007)] “Gross Sales or Receipts” include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and VAT. [Sec. 131(n), LGC] “Gross revenue” covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received. [Ericsson Telecommunications Inc. v. City of Pasig, G.R. No. 176667 (2007)] Ceiling on business tax within Metro Manila Municipalities within Metro Manila may levy taxes at rates which shall not exceed by 50% the maximum rates prescribed in Sec 143 of the LGC. [Sec. 144, LGC] Tax on retirement of business Upon termination of a business subject to tax under Sec. 143 and 144, it shall submit a sworn statement of its gross sales or receipts for the

current year. 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] Rules on payment of business tax 1. Taxes imposed under Sec. 143 of the LGC 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, the tax shall be computed: a. on the combined total gross sales or receipts, if they are subject to the same tax rate b. separately based on the gross sales or receipts of each business, if they are subject to different tax rates [Sec. 146, LGC] Note: 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

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condominium. [Yamane v. BA Lepanto Condominium Corp., G.R. No. 154993 (2005)] Situs of business tax a. Rule 1: In case of persons maintaining/operating a branch or sales outlet making the sale or transaction, the sale shall be recorded in said branch or sales outlet and the tax paid to the municipality/city where the branch or sales outlet is located. [Sec. 150(a), LGC] “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), LGC IRR] b. Rule 2: Where there is NO branch or sales outlet in the city/municipality where the sale is made, the sale shall be recorded in the principal office and the tax shall be paid to such city/municipality. [Sec. 150(a), LGC] “Principal Office” – the head or main office of the business appearing in the pertinent documents (e.g., articles of incorporation) submitted to the SEC, or the DTI, or other appropriate agencies, as the case may be [Art. 243(a)(1), LGC IRR] c. Rule 3: In the case of manufacturers, assemblers, 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 taxable by the city/municipality where the principal office is located; and

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2. 70% shall be taxable by the city/municipality where the factory, project office, plant, or plantation is located [Sec. 150(b), LGC] Illustration of Rules 1 to 3 A company has a principal office in Mandaluyong, and a sales office and a factory in Sta. Rosa: 1. Sales made in Mandaluyong will be recorded in 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 these places and not made by the Sta. Rosa sales office] will be recorded in Mandaluyong where the principal office is located. The allocation shall be as follows: a. 30% of all sales recorded in the principal office shall be taxable in Mandaluyong; b. 70% of all sales recorded in the principal office shall be taxable in Sta. Rosa where the factory is located. d. 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: 1. 60% to the city/municipality where the factory is located; and 2. 40% to the city/municipality where the plantation is located. [Sec. 150(c), LGC] e. Rule 5: In case of 2 or more factories, project offices, plants or plantations in different localities, the 70% shall be prorated among the localities where they are located in proportion to their respective volumes of production. [Sec. 150(d), LGC] Illustration: A company has a principal office in Valenzuela and 2 factories located in

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Malolos City, Bulacan and Mandaue City, Cebu, which produced 60% and 40%, respectively, of the total production for the year. It also has branches selling merchandise in Muntinlupa, Bacolod and Cebu City. 1. Sales made in Valenzuela will be recorded in Valenzuela; 2. Sales made in Muntinlupa, Bacolod and Cebu City shall be taxable in the said cities; 3. Sales in all other places which do not have a sales branch shall be distributed as follows: 30% to Valenzuela and 70% to be allocated between Malolos City, and Mandaue City based on the factories’ volume of production. Hence, 42% shall be taxed in Malolos City; while 28% shall be taxed in Mandaue City. 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. [Sec. 150(e), LGC] Excise Tax: The business tax is imposed on the performance of an act, enjoyment of a privilege, or engagement in an occupation. 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 or the domicile of the person. [Allied Thread Co., Inc. v. City Mayor of Manila, G.R. No. L40296 (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)]

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Municipal Fees and Charges For Regulation & Licensing General rule: The municipality may impose reasonable fees and charges on the conduct of business or practice of profession commensurate with the cost of regulation, inspection and licensing. [Sec. 147, LGC] Exception: Professional tax reserved to the province in Sec. 139 of the LGC [Sec. 147, LGC] Specific rules: 1. The municipality may impose reasonable fees for sealing and licensing of weights and measures. [Sec. 148, LGC] 2. The municipality has exclusive authority to grant fishery privileges in municipal waters and impose rentals, fees or charges therefor. [Sec. 149, LGC]

c. Taxing Powers of Cities Scope of taxing power: The city may levy taxes, fees, charges which the province or municipality may impose. 1. Those levied and collected by highly urbanized and independent component cities shall accrue to them and distributed according to the provisions of the LGC. 2. Rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50%. [Sec. 151, LGC] Exception: Rates of professional amusement taxes [Sec. 151, LGC]

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and

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d. Taxing Powers of Barangays The following shall accrue exclusively to the barangays: 1. Taxes on stores or retailers with fixed business establishments with gross sales or receipts for the preceding calendar year of P50,000 or less in case of cities, and P30,000 or less in case of municipalities. [Sec. 152(a), LGC] a. Tax Rate: not greater than 1% b. Tax Base: gross sales or receipts 2. Service fees or charges – Barangays may collect reasonable fees or charges for services rendered in connection with the regulation or the use of barangay-owned properties or facilities. [Sec. 152(b), LGC] 3. 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. [Sec. 152(c), LGC] 4.

Reasonable fees and charges: a. on commercial breeding of fighting cocks, cockfights and cockpits; b. on places of recreation which charge admission fees; and c. on billboards, signboards, neon signs, and outdoor advertisements. [Sec. 152(d), LGC]

5. Common Powers

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Revenue-Raising

1. Service fees and charges LGUs may impose and collect such reasonable fees and charges for services rendered. [Sec. 153, 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] 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 LGU concerned. b. The Sanggunian may discontinue the collection of the tolls when public safety and welfare so requires. c. No toll fees or charges shall be collected from: i. Officers and enlisted men of the AFP and members of the PNP on mission ii. Post office personnel delivering mail iii. Persons who are physically handicapped iv. Disabled citizens who are 65 years or older. [Sec. 155, LGC]

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6. Community Tax Who may levy [Sec. 156, LGC]

Cities or municipalities

1. Individuals who are: a. Inhabitants of the Philippines b. 18 years of age or over c. Either: ● Regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year, or Persons Liable ● Engaged in business or occupation, or [Sec. 157 & 158, ● Owns real property with an aggregate assessed value of P1,000 or LGC] more, or ● Is required by law to file an income tax return 2. Juridical Persons a. Every corporation no matter how created or organized b. Whether domestic or resident foreign c. 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 of income regardless of whether from business, exercise of profession or property, but which shall not exceed P5,000 b. Husband and wife shall pay a basic tax of P5.00 each PLUS an additional tax of P1.00 for every P1,000 of income based on the total property owned by them and/or the total gross receipts or earnings derived by them [Art. 246(b)(2), LGC IRR] 2. Juridical Persons Rates [Sec. 157 a. Annual community tax of P500 PLUS annual additional tax, which shall & 158, LGC] not exceed P10,000 according to the following schedule: ● P2.00 for every P5,000 worth of real property in the Philippines owned during the preceding year, based on the assessed value used for the payment of the real property tax; and ● P2.00 for every P5,000 of gross receipts or earnings 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. Persons Exempt 1. Diplomatic and consular representatives 2. Transient visitors who stay in the Philippines for not more than 3 months [Sec. 159, LGC] Where individual resides, or where the principal office of the juridical entity is located Place of Payment [Sec. Note: In case of branch, sales office or warehouse where sales are made and 160, LGC] recorded, corresponding community tax shall be paid to the LGU where such branch, sales office or warehouse is located. [Art. 246(e)(3), LGC IRR] Time of Payment Accrues on January 1 of each year to be paid not later than the last day of February of each year [Sec 161, LGC]

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Penalty 161, LGC

[Sec.

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1. If a person reaches 18 years of age or otherwise loses the benefit of exemption: a. on or before June 30 – he shall be liable on the day he reaches such age or upon the day the exemption ends; b. on or before March 31 – he shall have 20 days to pay without being delinquent. 2. If a person comes to reside in the Philippines, or reaches 18 years old, or ceases to belong to an exempt class on or after July 1, he shall not be subject to community tax for that year. 3. If a corporation is established and organized: a. on or before June 30 – it shall be liable to community tax for that year b. on or before March 31 – it shall have 20 days to pay without becoming delinquent c. on or after July 1 – it shall not be subject to community tax for that year If unpaid within the prescribed period, an interest of 24% per annum shall be added from the due date until payment.

Community Tax Certificate (CTC) It is issued to every person or corporation upon payment of the community tax. It may also be issued to any person or corporation not subject to the community tax upon payment of P1.00. [Sec. 162, LGC] Presentation of CTC 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; or 7. receives any salary or wage from any person or corporation [Sec. 163(a), LGC] Note: Presentation of CTC is not needed in the registration of a voter. [Sec. 163(a), LGC] Collection of community tax The city or municipal treasurer shall deputize the barangay treasurers to collect, provided the latter be bonded. [Sec. 164(b), LGC]

Distribution of proceeds of community tax 1. If the community tax is actually and directly collected by the city or municipal treasurer, the proceeds shall accrue entirely to the general fund of the city or municipality. 2. If the community tax is collected through the barangay treasurers, the proceeds shall be apportioned equally between the city/municipality and the barangay. [Sec. 164(c), LGC]

7. Common Limitations on the Taxing Powers of LGUs Unless otherwise provided, the following cannot be levied by the local governments: (IDEC-GAPEP-TRR-ECN): a. Income tax, except when levied on banks and other financial institutions under Sec. 143(f) of the LGC; b. Documentary stamp tax; c. Taxes on Estate, inheritance, gifts, legacies and other acquisitions mortis causa; Exception: Tax on transfer of real property) [Sec. 135, LGC; Art. 221(c), LGC IRR]

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d. Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues;

h. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; i.

Exception: wharfage on wharves constructed and maintained by the LGU concerned “Wharfage” means a fee assessed against the cargo of a vessel engaged in foreign or domestic trade based on quantity, weight, or measure received and/or discharged by vessel. [Sec. 131(y), LGC] e. Taxes, fees or charges on Goods carried into or out of, or passing through, the territorial jurisdictions of LGUs in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form; Note: 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. [Palma Development Corp. v. Municipality of Malangas, G.R. No. 152492 (2003)] f.

Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen;

"Marginal Farmer or Fisherman" refers to an individual engaged in subsistence farming or fishing which shall be limited to the sale, barter or exchange of agricultural or marine products produced by himself and his immediate family. [Sec. 131(p), LGC] g. 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;

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Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

Exceptions (Percentage taxes): 1. Tax on business of printing and publication imposed by provinces/cities [Sec. 136, LGC] 2. Amusement tax imposed by provinces/cities [Sec. 140, LGC] 3. Tax on business imposed by municipalities/cities on manufacturers, wholesalers, distributors, dealers, and contractors enumerated in Sec. 143 of the LGC in accordance with the schedules provided therein j.

Taxes on the gross receipts of: 1. Transportation contractors and 2. persons engaged in the transportation of passengers or freight by hire and 3. common carriers by air, land or water

Exception: Tax on the operation and franchising of tricycles [Art. 221(j), LGC IRR] k. Taxes on premiums paid by way of Reinsurance or retrocession; l.

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;

m. Taxes, fees, or other charges on Philippine products actually Exported; Exception: Tax on exporters of essential commodities [Sec. 143(c), LGC, Art. 221(m), LGC IRR] n. Taxes, fees, or charges on Countryside and Barangay Business Enterprises and

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cooperatives duly registered under RA 6810 (Magna Carta for Countryside and Barangay Business Enterprises) and RA 6938 (Cooperative Code of the Philippines), respectively; and o. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and LGUs. [Sec. 133, LGC]

8. Requirements for a Valid Tax Ordinance Local tax ordinance The power to impose a tax, fee, or charge or to generate revenue under the LGC shall be exercised by the Sanggunian concerned through an appropriate ordinance. [Sec. 132, LGC] Tests of a valid ordinance: 1. It must not contravene the Constitution or any statut 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)] Note: An ordinance is presumed valid unless declared otherwise by a court in an appropriate proceeding. [Rural Bank of Makati v. Municipality of Makati, G.R. No. 150763 (2004)] Procedure for approval of tax ordinances 1. Within 10 days from the filing of the proposed tax ordinance, the same shall be published for 3 consecutive days in a newspaper of local circulation or posted simultaneously in at least 4 conspicuous public places within the territorial jurisdiction of the LGU. [Art. 276(b)(1), LGC IRR]

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2. The Sanggunian shall send written notices, specifying the date and venue of public hearing, to the interested or affected parties operating or doing business within the concerned LGU. [Art. 276(b)(2), (3), LGC IRR] 3. The public hearing must be held not earlier than 10 days from sending the notices, or the last day of publication, or date of posting, whichever is later. [Art. 276(b)(3), LGC IRR] 4. An ordinance must be approved on third reading by a majority of the sanggunian members present, there being a quorum. [Art. 107(g), LGC IRR] 5. The enacted ordinance shall be presented to the local chief executive (LCE), who may: a. Approve the same by affixing his signature; or b. Veto and return the same with his objections to the Sanggunian within 15 days in case of a province, and 10 days in case of a city or municipality; otherwise, the ordinance shall be deemed approved. [Art. 108, LGC IRR] Note: The LCE, except the Punong Barangay, may veto any ordinance on the ground that it is ultra vires or prejudicial to public welfare. His reasons shall be stated in writing. The LCE may veto an ordinance only once. [Art. 109, LGC IRR] 6. The sanggunian may override the veto of the LCE by 2/3 vote of all its members, thereby making the ordinance effective. [Art. 109(c), LGC IRR] 7. Once approved, the ordinance shall be transmitted to the higher level sanggunian for review. If no action is taken by the latter within 30 days after submission, the same shall be deemed approved. [Arts. 110 and 111, LGC IRR] 8. Within 10 days after the approval of the ordinance, certified true copies of all tax ordinances or revenue measures shall be

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published in full for 3 consecutive days in a newspaper of local circulation. Where there are no newspapers of local circulation, it must be posted in at least 2 conspicuous and publicly accessible places. [Art. 276, LGC IRR] Effectivity of ordinance 1. Unless otherwise stated in the ordinance, the same shall take effect after 10 days from the date a copy is posted at the entrance of the provincial capitol or city, municipal, or barangay hall, as the case may be, and in at least 2 other conspicuous places in the LGU concerned. [Sec. 59, LGC] 2. In case the effectivity falls on any date other than the beginning of the quarter, the same shall be considered as falling at the beginning of the next quarter and the taxes, fees, or charges due shall begin to accrue therefrom. [Art. 276(a), LGC IRR]

9. Collection of Taxes Tax Period Manner of Payment

Accrual of Tax

Time of Payment

Penalties on Unpaid Taxes, Fees or Charges

Collection of Taxes

Based on a calendar year, unless otherwise provided [Sec. 165, LGC] May be paid annually or in quarterly installments [Sec. 165, LGC] General rule: Accrues on the 1st day of January of each year Exception: New taxes, fees or charges, or changes in the rates thereof shall accrue on the 1st day of the quarter next following the effectivity of the ordinance imposing such new levies or rates [Sec. 166, LGC] Within the first 20 days of January or of each subsequent quarter. [i.e., January 20, April 20, July 20, and October 20].

Inspection of Books

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It may be extended by the Sanggunian for justifiable reasons, without surcharges or penalties, for a period not exceeding 6 months. [Sec. 167, LGC] 1. Surcharge not exceeding 25% on taxes, fees or charges NOT paid on time; and 2. Interest not exceeding 2% per month of the unpaid taxes, fees or charges including surcharges, until the amount is fully paid 3. In no case shall the total interest exceed 36 months. [Sec. 168, LGC] All local taxes, fees and charges shall be collected by the local treasurers or their duly authorized deputies. The provincial, city or municipal treasurer may designate the barangay treasurer as deputy to collect local taxes. [Sec. 170, 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]

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10.

TAXATION 2

Taxpayer’s Remedies

a. Protest of Assessment 1. Protest: The taxpayer may file a written protest with the local treasurer within 60 days from receipt of the notice of assessment; otherwise it shall become final and executory. 2. Decision: The local treasurer shall decide the protest within 60 days from the time of its filing. a. If found to be wholly or partly meritorious, a notice cancelling wholly or partially the assessment will be issued. b. If denied or when the 60-day period already lapsed, the taxpayer shall have 30 days thereafter to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable. [Sec. 195, LGC] Court of competent jurisdiction 1. Depending on the amount involved, the taxpayer may appeal the decision of the local treasurer to the MTC, MeTC, MCTC or the RTC in the exercise of its original jurisdiction. 2. Local tax cases decided by the MTC, MeTC and MCTC may be appealed to the RTC in the exercise of its appellate jurisdiction. 3. Said cases decided by the RTC in its original or appellate jurisdiction may be elevated to the CTA. With the passage of R.A. 9282, the authority to exercise either original or appellate jurisdiction over local tax cases depended on the amount of the claim. In cases where the RTC exercises appellate jurisdiction, it necessarily follows that there must be a court capable of exercising original jurisdiction – otherwise there would be no appeal over which the RTC would exercise appellate jurisdiction. The RTC exercises appellate jurisdiction only from cases decided

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by the Metropolitan, Municipal, and Municipal Circuit Trial Courts in the proper cases, and not those decided by non-judicial entities such as the City Treasurer. [China Banking Corp. v. City Treasurer, G.R. No. 204117 (2015)]

b. Claim for Refund or Tax Credit of Erroneously or Illegally Collected Tax, Fee or Charge

Requisites: 1. A written claim for refund or credit must be filed with the local treasurer; and 2. The case or proceeding must be filed in court within 2 years from the payment of tax or from the date the taxpayer became entitled to refund or credit. [Sec. 196, LGC]

c. Question the Ordinance

Legality

of

the

Any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal to the Secretary of Justice. [Sec. 187, LGC] Procedure: 1. Appeal must be made to the Secretary of Justice within 30 days from effectivity of the ordinance. 2. The Secretary must render a decision within 60 days from receipt of the appeal. Note: The appeal shall not suspend the effectivity of the ordinance and the accrual and payment of the tax, fee or charge levied therein. 3. Within 30 days after receipt of the decision or the lapse of the 60-day period without any action from the Secretary of Justice, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. [Sec. 187, LGC]

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Note: The 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. There is no need for a written protest when disputing an ordinance. [Ingles]

Note: If the property distrained is not disposed of within 120 days from the date of distraint, the same shall be considered as sold to the LGU for the amount of the assessment made. [Sec. 175(e), LGC] f.

11. Assessment and Collection of Local Taxes a. Remedies of LGUs i. Local Government’s Lien Local taxes, fees, charges and other revenues constitute a lien, superior to all liens or encumbrances in favor of any person, enforceable by administrative or judicial action. [Sec. 173, LGC] The lien may only be extinguished upon full payment of the delinquent local taxes, fees, and charges including related surcharges and interest. [Sec. 173, LGC] ii. Civil Remedies, in General (a) Administrative action DISTRAINT OF PERSONAL PROPERTY Subject of 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 [Sec. 174(a), LGC] Procedure: 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. Sale of the goods or effects distrained at public auction.

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Disposition of proceeds [Sec. 175, LGC]

LEVY ON REAL PROPERTY Subject of Levy: real property and interest in or rights to real property

Procedure a. After expiration of the time for payment of delinquent tax, fee or charge, real property may be levied on before, simultaneously or after the distraint of personal property. b. Preparation of a duly authenticated certificate by the local treasurer effecting the levy and showing: o the name of the taxpayer, o the amount of the tax, fee or charge, and penalty due, and o the description of the property. c. Service of written notice of levy to the assessor, Register of Deeds, and the delinquent taxpayer (or his agent if he be absent from the Philippines, or if none, to the occupant of the property in question) d. Annotation of the levy on the tax declaration and the certificate of title e. Report on any levy to be submitted to the Sanggunian within 10 days after receipt of warrant [Sec. 176, LGC] f. Advertisement of the sale or auction shall be held within 30 days after the levy. g. Before the date of sale, the taxpayer may stay the proceedings by paying the taxes, fees, charges, penalties and interests. h. Sale of the subject property [Sec. 178, LGC] i. Redemption of property sold within 1 year from date of sale [Sec. 179, LGC] j. If not redeemed, the local treasurer shall execute a deed conveying the property to the purchaser [Sec. 180, LGC]

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k. Purchase of the real property by the local treasurer in case there is no bidder for said property or if the highest bid is insufficient to pay the taxes, fees, or charges, related surcharges, interests, penalties and costs; resale of said property may be made at a public auction [Sec. 181 and 182, LGC] Further distraint or levy The remedies of distraint or levy may be repeated if necessary until the full amount due, including all expenses, is collected [Sec. 184, LGC] Note: In case the levy is not issued before or simultaneously with the warrant of distraint, and the personal property of the taxpayer is not sufficient to satisfy his delinquency, the local treasurer shall within 30 days after execution of the distraint, proceed with the levy on the taxpayer's real property. [Sec. 176, LGC] Property exempt from distraint or levy (ToB-CUPLAF) 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, lawyers and judges g. One Fishing boat and net, not exceeding the total value of P10,000 by the lawful use of which a fisherman earns his livelihood

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h. Any material or Article forming part of a house or improvement of any real property [Sec. 185, LGC] Penalty on local treasurer for failure to issue and execute warrant of distraint or levy Automatic dismissal from service after due notice and hearing [Sec. 177, LGC] (b) Judicial Action The LGU may enforce the collection of delinquent taxes, fees, charges or other revenues by civil action in any court of competent jurisdiction within 5 years from the date they became due. [Secs. 183 and 194, LGC] Note: Either of these remedies (administrative or judicial action) or all may be pursued concurrently or simultaneously at the discretion of the LGU concerned. [Sec. 174, LGC]. Injunction against collection of local taxes The 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 of the Rules of Court where local taxes are involved. [Angeles City v. Angeles City Electric Corporation, G.R. No. 166134 (2010)] Prescriptive Period Prescriptive period for assessment 1. General Rule: Within 5 years from the date they become due 2. Exception: In case of fraud or intent to evade tax, within 10 years from discovery of fraud or intent to evade payment [Sec. 194(a),(b), LGC] Prescriptive period for collection Within 5 years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of said period. [Sec. 194(c), LGC]

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Grounds for suspension of prescriptive period 1. The treasurer is legally prevented from making the assessment or collection 2. The taxpayer requests for reinvestigation and executes a waiver in writing before the lapse of the period for assessment or collection 3. The taxpayer is out of the country or otherwise cannot be located [Sec. 194(d), LGC]

B. REAL PROPERTY TAXATION 1. Fundamental Principles a. Real property shall be appraised at its current and fair market value. b. Real property shall be classified for assessment purposes on the basis of its actual use. c. Real property shall be assessed based on a uniform classification within each LGU. d. The appraisal, assessment, levy and collection of real property tax shall not be left to any private person. e. The appraisal and assessment of real property shall be equitable. [Sec. 198, LGC]

2. Nature of Real Property Tax (RPT) a. It is a direct tax on the use of real property. Note: 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. [Sec. 217, LGC] b. It is an ad valorem tax where the tax base is a fixed proportion of the value of the property. [Sec. 199(c), LGC]

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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.

3. Imposition a. Power to Levy Extent of taxing power A province or city or a municipality within Metro Manila may: 1. levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted; and [Sec. 232, LGC] 2. fix a uniform rate of basic real property tax applicable to their respective localities. [Sec. 233, LGC] The following may levy real property tax: 1. Province 2. City 3. Municipality within Metro Manila [Sec. 232, LGC] Note: A special levy on lands benefited by public works may be imposed by municipalities outside Metro Manila. PROPERTIES SUBJECT TO RPT 1. Land 2. Building 3. Machinery 4. Other improvements not specifically exempted [Sec. 232, LGC] Note: The LGC contains no definition of the term “real property”. Therefore, reference should be made to the enumeration of immovable property under Art. 415 of the Civil Code. Machinery It embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached,

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permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, selfpowered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes [Sec. 199(o), LGC] Summary of rules on machinery 1. Machinery that is permanently attached to land and buildings is subject to RPT. 2. Machinery that is not permanently attached: a. Subject to the RPT if it is an essential and principal element of an industry, work or activity without which such industry, work or activity cannot function; and b. Not subject to RPT if it is not an essential and principal element of an industry, work or activity. [DOF Local Finance Circular No. 0012002] Improvement It is a valuable addition made to a property or an amelioration in its condition, amounting to more than a mere repair or replacement of parts involving capital expenditures and labor, which is intended to enhance its value, beauty or utility or to adapt it for new or further purposes [Sec. 199(m), LGC] TYPES OF REAL PROPERTY TAX 1. Basic RPT a. Province: not exceeding 1% of the assessed value of real property; and b. City or municipality within Metro Manila: not exceeding 2% of the assessed value of real property. [Sec. 233, LGC] 2.

TAXATION LAW

a. Special Education Fund (SEF) – annual tax of 1% on the assessed value of real property which shall be in addition to the basic RPT [Sec. 235, LGC] b. Special Levy on Idle Lands – annual tax on idle lands at the rate not exceeding 5% of the assessed value of the property in addition to the basic RPT [Sec. 236, LGC] Idle lands covered 1. Agricultural lands more than 1 hectare in area, suitable for cultivation, dairying, inland fishery, and other agricultural uses, 1/2 of which remain uncultivated or unimproved 2. Non-agricultural lands more than 1,000 square meters in area 1/2 of which remain unutilized or unimproved 3. Residential lots in subdivisions regardless of land area [Sec. 237, LGC] Lands not considered idle 1. Agricultural lands planted to permanent or perennial crops with at least 50 trees to a hectare 2. Lands actually used for grazing purposes [Sec. 237(a), LGC] Idle lands may be exempted by reason of: 1. Force majeure, 2. Civil disturbance, 3. Natural calamity, or 4. Any cause or circumstance which physically or legally prevents the owner from improving, utilizing or cultivating the same. [Sec. 238, LGC] c. Special Levy for Public Works – a special levy on lands specially benefited by public works projects or improvements funded by the LGU concerned, but which shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith [Sec. 240, LGC]

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Exception: The special levy shall not apply to: 1. lands exempt from basic RPT; and 2. the remainder of the land, portions of which were donated to the LGU for the construction of such projects or improvements. [Sec. 240, LGC] Note: Municipalities outside Metro Manila may impose a special levy on lands benefited by public works.

b. Exemptions from RPT 1. Real property owned by the Republic of the Philippines or any of its political subdivisions Exception: when beneficial use is granted for a consideration or to a taxable person. 2. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes 3. Machinery and equipment actually, directly and exclusively used by local water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power 4. Real property owned by duly registered cooperatives as provided for under RA 6938 [Cooperative Code of the Philippines] 5. Machinery and equipment used for pollution control and environmental protection [Sec. 234, LGC] A claim for exemption under Sec. 234(e) of the LGC should be supported by evidence that the property sought to be exempted is actually, directly and exclusively used for pollution control and environmental protection. [Provincial Assessor of Marinduque v. CA, G.R. No. 170532 (2009)]

TAXATION LAW

Withdrawal of exemption Except as provided herein, any exemption from payment of RPT previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all governmentowned or controlled corporations (GOCCs) are hereby withdrawn upon the effectivity of the LGC. [Sec. 234, LGC] Note: Section 234 of the LGC applies specifically to RPT exemptions, while Section 193 of the LGC applies to exemptions from all other local taxes. Proof of exemption Every person who shall claim tax exemption shall file with the local assessor within 30 days from the date of declaration of real property sufficient documentary evidence in support of such claim (e.g., corporate charters, title of ownership, affidavits, by-laws, contract, articles of incorporation). Otherwise, the property will be listed as taxable in the assessment roll. [Sec. 206, LGC] GOCCs not exempt from RPT The last paragraph of Sec. 234 of the LGC expressly withdrew the exemption of GOCCs from RPT upon the effectivity of the LGC. Exemption of Charitable Institutions To be entitled to the exemption, claimant must prove, that (a) it is a charitable institution; and (b) its real properties are actually, directly and exclusively used for charitable purposes. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. [Lung Center of the Philippines v. Quezon City, G.R. No. 144104 (2004)]

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4. Appraisal and Assessment of Real Property Appraisal is the act or process of determining the value of property as of a specified date for a specific purpose. [Sec. 199(e), LGC] Assessment is the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. [Sec. 199(f), LGC]

a. Classes of Real Property For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or special. [Sec. 215, LGC] 1. Residential land – land principally devoted to habitation [Sec. 199(u), LGC] 2. Agricultural land – 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 [Sec. 199(d), LGC] 3. Commercial land – land devoted principally for the object of profit and is not classified as agricultural, industrial, mineral, timber or residential land [Sec. 199(i), LGC] 4. Industrial land – land devoted principally to industrial activity as capital investment and is not classified as agricultural, commercial, timber, mineral or residential land [Sec. 199(n), LGC] 5. Mineral land – land in which minerals exist in sufficient quantity or grade to justify the necessary expenditures to extract and utilize such minerals [Sec. 199(p), LGC] 6. Timberland – land identified as forest or reserved area by the government, which may or may not be granted to a concessionaire, licensee, lessee or

TAXATION LAW

permitee [BLGF Manual on Real Property Appraisal and Assessment Operations] 7. Special a. all lands, buildings and other improvements actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and b. 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] Declaration of real property by owner or administrator All persons owning or administering real property, including improvements therein, shall prepare a sworn statement: 1. declaring the true value of the property which shall be the current and FMV of the property; and 2. containing a sufficient description of the property for assessment purposes. The declaration must be filed with the assessor once every 3 years during the period from January 1 to June 30. [Sec. 202, LGC] Declaration by person acquiring real property or making improvements A sworn statement declaring the true value of the property must be filed with the provincial, city or municipal assessor within 60 days after the acquisition of a real property or upon completion or occupancy of the improvement, whichever comes earlier. [Sec. 203, LGC] Declaration by the local assessor When the person required to file the sworn declaration under Sec. 202 of the LGC refuses or fails to make such declaration, the provincial, city or municipal assessor shall declare the property in the name of the defaulting owner, and shall assess the property for taxation. [Sec. 204, LGC]

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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 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] Appraisal of Real Property at Fair Market Value All real property shall be appraised at the current and FMV 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] Determination of FMV 1. The assessor of the province, city or municipality or his deputy may summon the owners or persons having legal interest therein and witnesses, and may administer oaths, and take deposition concerning the property, its ownership, amount, nature, and value. [Sec. 213, LGC] 2. The assessors shall prepare a schedule of FMV for the different classes of real property situated in their respective local government units for enactment by ordinance of the Sanggunian concerned. [Sec. 212, LGC] 3. The schedule of FMV shall be published in a newspaper of general circulation in the LGU concerned or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in 2 other conspicuous public places therein. [Sec. 212, LGC] 4. The assessor may recommend to the Sanggunian amendments to correct errors in valuation in the schedule of FMV. The Sanggunian shall, by ordinance, act upon

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the recommendation within 90 days from its receipt. [Sec. 214, LGC] FMV of Machinery Brand New The FMV is the acquisition cost. [Sec. 224(a), LGC]

All Other Cases

Depreciatio n Allowance

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(b), LGC] FMV is determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement or reproduction cost. [Sec. 224(a), LGC] Depreciation rate: not exceeding 5% of its original cost or its replacement or reproduction cost, for each year of use The remaining value shall be fixed at not less than 20% of such original, replacement or reproduction cost for so long as the machinery is useful and in operation. [Sec. 225, LGC]

b. Assessment of Real Based on Actual Use

Property

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] “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]

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Note: 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. [Estate of Lim v. City of Manila, G.R. No. 90639 (1990)] Assessment levels It is the percentage applied to the FMV to determine the taxable value of the property. [Sec. 199(g), LGC] Note: Assessment levels shall be fixed by ordinances of the Sanggunian at rates not exceeding those prescribed under Sec. 218 of the LGC. Assessed or Taxable Value It is the FMV of the real property multiplied by the assessment level. [Sec. 199(h), LGC] • Assessed Value = FMV × Assessment Level • RPT = Assessed Value × Tax Rate 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] Valuation of real property by assessor The local assessor shall make a classification, appraisal and assessment of the real property irrespective of any previous assessment or taxpayer’s valuation thereon in the following cases: 1. real property is declared and listed for taxation purposes for the first time; 2. there is an ongoing general revision of property classification and assessment; or 3. a request is made by the person in whose name the property is declared. [Sec. 220, LGC]

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increasing the value of said property or of any change in its actual use. [Sec. 220, LGC] Date of effectivity of assessment or reassessment General rule: All assessments or reassessments made after January 1 of any year shall take effect on January 1 of the succeeding year [Sec. 221, LGC] Exceptions: Reassessments due to the following causes shall be made within 90 days from the date of any cause and shall take effect at the beginning of the quarter subsequent to the reassessment: 1. partial or total destruction 2. major change in actual use; 3. any great and sudden inflation or deflation of real property values; 4. gross illegality of the assessment when made; or 5. any other abnormal cause. [Sec. 221, LGC] Assessment of property subject to back taxes Property declared for the first time shall be assessed for taxes for the period during which it would have been liable but in no case for more than 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 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]

Note: The assessment shall not be increased more often than once every 3 years except in case of new improvements substantially

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5. Collection of Real Property Tax Collecting authority The collection of RPT shall be the responsibility of the city or municipal treasurer concerned. He may deputize the barangay treasurer to collect all taxes on real property located in the barangay provided the latter is bonded. [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 December 31 of 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 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: 1. on or before January 31 of each year in the case of basic RPT and additional tax for SEF; or 2. on any other date in the case of any other tax. The notice shall also be published in a newspaper of general circulation in the locality once a week for 2 consecutive weeks. [Sec. 249, LGC]

a. Date of Accrual Real property tax for any year shall accrue on the 1st day of January. [Sec. 246, LGC]

b. Periods to Collect General Rule: Within 5 years from the date the taxes become due

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Exception: In case there is fraud or intent to evade payment of tax, within 10 years from discovery of fraud or intent to evade payment [Sec. 270, LGC] Grounds for suspension of prescriptive period 1. The local treasurer is legally prevented from collecting the tax; 2. The owner of the property or the person having legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period to collect; and 3. The owner of the property or the person having legal interest therein is out of the country or cannot be located. [Sec. 270, LGC] RULES ON PAYMENT Payment of RPT 1. Payment of RPT and the additional tax for SEF, without interest, may be made in 4 equal installments: • 1st: March 31 • 2nd: June 30 • 3rd: September 30 • 4th: December 31 2. Any special levies shall be governed by ordinance of the Sanggunian concerned. [Sec. 250, LGC] Note: Payments of RPT 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 RPT Interest at the rate of 2% per month on the unpaid amount or a fraction thereof until the delinquent tax shall have been fully paid, but the total interest shall not exceed 36 months [Sec. 255, LGC] Discount for advance or prompt payment 1. Advance payment – not exceeding 20% of annual tax due [Sec. 251, LGC]

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2. Prompt payment – not exceeding 10% of annual tax due [Art. 342, LGC IRR] e.

c. Remedies of LGUs Issuance of notice of delinquency When the real property tax becomes delinquent, the local treasurer shall post a notice of delinquency at the main hall and in a publicly accessible and conspicuous place in each barangay of the LGU concerned. [Sec. 254, LGC]

f.

g.

h. 1. Local Government’s Lien The RPT 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 and may only be extinguished upon payment of the tax and the related interests and expenses. [Sec. 257, LGC]

i. j.

k.

l. It constitutes a lien on the property from the date of accrual (i.e., January 1) [Sec. 246, LGC]. 2.

Administrative Action

1. Levy on real property a. After expiration of the time required to pay the tax when due, the local treasurer shall issue a warrant of levy on or before, or simultaneously with, the institution of the civil action for the collection of the delinquent tax. b. The warrant shall include a duly authenticated certificate showing: 1. the name of the owner or person having legal interest therein, 2. description of the property, and 3. amount of the tax due and interest thereon. c. Warrant must be mailed to or served upon the delinquent owner or person having legal interest in the property. d. Written notice of levy with the attached warrant must be mailed to or served upon

TAXATION LAW

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. The levying officer shall submit a report on the levy to the Sanggunian within 10 days after receipt of warrant by the owner. [Sec. 258, LGC] Advertisement of the sale or auction shall be made within 30 days after service of warrant. Before the date of sale, the proceedings may be stayed by paying the delinquent tax. Sale of the real property [Sec. 260, LGC] Redemption of property sold within 1 year from date of sale upon payment of the delinquent tax [Sec. 261, LGC] If not redeemed, the local treasurer shall execute a deed conveying the property to the purchaser. [Sec. 262, LGC] Purchase of property by local treasurer in case there is no bidder for the real property or if the highest bid is insufficient to pay the RPT and other costs; resale of such property may be made at a public auction [Sec. 263 and 264, LGC]

Further levy until full payment Levy may be repeated if necessary until the full due, including all expenses, is collected. [Sec. 265, LGC] 2. Distraint of personal property The notice of delinquency shall state that personal property may be distrained to effect payment. It shall likewise state that any time before the distraint of personal property, payment of the tax with surcharges, interests and penalties may be made. [Sec. 254, LGC] 3. Judicial Action The LGU concerned may enforce the collection of the basic RPT or any other related tax by civil action in any court of competent jurisdiction. The civil action shall be filed by the local treasurer within the period prescribed for

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The provincial or city treasurer shall decide the claim for tax refund or credit within 60 days from receipt thereof. [Sec. 253, LGC] Remedy in case of denial by the local treasurer In case the claim for tax refund or credit is denied, the taxpayer may follow the procedure in questioning an assessment (i.e., appeal to the LBAA, then to the CBAA, and subsequently to the CTA En Banc). [Sec. 253, LGC]

c. Compromising assessment

an

RPT

Condonation or reduction of RPT 1. The Sanggunian:, in case of general failure of crops or substantial decrease in the price of agricultural or agri-based products or calamity, may, by ordinance, condone or reduce taxes and interest for the succeeding year/s in the city or municipality affected by the calamity. [Sec. 276, LGC] 2. 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 municipality within Metro Manila. [Sec. 277, LGC] Compromise by authority of the President The CTA allowed the compromise agreement between Batangas City, represented by its Mayor, and the taxpayer since it was entered into in line with an executive order issued by the President to address the real property tax issues of independent power producers through the reduction of their tax liabilities and the condonation of fines, penalties and interest on deficiency taxes. [Kepco Ilijan Corporation v. CBAA, CTA EB No. 909 (2013)]

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IV. JUDICIAL REMEDIES A. JURISDICTION OF THE COURT OF TAX APPEALS [R.A. 1125, as amended by R.A. No. 3457 and further amended by R.A. 9282 and R.A. 9503, and A.M. No. 05-11-07-CTA or the Revised Rules of the Court of Tax Appeals (RRCTA)]

1. Civil Cases a. Exclusive Original Jurisdiction of the Court in Divisions The Court in Divisions shall exercise exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more. [Sec. 3(c)(1), Rule 4, RRCTA]

b. Exclusive Appellate Jurisdiction in Civil Cases The Court in Divisions shall exercise exclusive appellate jurisdiction over appeals from the judgments, resolutions or orders of the RTCs in tax collection cases originally decided by them within their respective territorial jurisdiction. [Sec. 3(c)(2), Rule 4, RRCTA] The Court in Divisions shall exercise exclusive original or appellate jurisdiction to review by appeal the following: 1. Decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR;

TAXATION LAW

2. Inaction by the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR, where the NIRC or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the CIR within the one hundred eighty day-period under Section 228 of the NIRC 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 CIR on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the CIR on the disputed assessments beyond the one hundred eighty day-period above mentioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the NIRC; 3. Decisions, resolutions or orders of the RTC in local tax cases decided or resolved by them in the exercise of their original jurisdiction; 4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures of other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; 5. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the Government under Section 2315 of the Tariff and Customs Code; and

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criminal offenses arising from violations of the NIRC or the Tariff and Customs Code and other laws administered by the BIR 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 RTC in the exercise of their appellate jurisdiction over criminal offenses arising from violations of the NIRC or the Tariff and Customs Code and other laws administered by the BIR or Bureau of Customs. 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 falling within the exclusive appellate jurisdiction of the tax court. [City of Manila v. Grecia-Cuerdo, G.R. No. 175723 (2014)]

TAXATION LAW

Procedure i. Filing of an 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 Taxpayer’s Remedies – 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. L66160 (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 threshold amount.

on

jurisdictional

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.

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Local taxes, fees, or charges may be collected within 5 years from the date of assessment by administrative or judicial action.

for reconsideration or new trial may appeal within 15 days from receipt of the copy of the decision.

No judicial or administrative action for collection can be instituted after lapse of the period for assessment except when there is fraud or intent to evade tax. [Sec. 194 LGC]

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.

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]

3. 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

b. Suspension of Collection of Taxes General rule: No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any property of the taxpayer for the satisfaction of his tax liability as provided under existing laws. Exception: Where the collection of the amount of the taxpayer’s liability, sought by means 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]

c. 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, R.A. 1125, supra. 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)]

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IV. JUDICIAL REMEDIES A. JURISDICTION OF THE COURT OF TAX APPEALS [R.A. 1125, as amended by R.A. No. 3457 and further amended by R.A. 9282 and R.A. 9503, and A.M. No. 05-11-07-CTA or the Revised Rules of the Court of Tax Appeals (RRCTA)]

1. Civil Cases a. Exclusive Original Jurisdiction of the Court in Divisions The Court in Divisions shall exercise exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more. [Sec. 3(c)(1), Rule 4, RRCTA]

b. Exclusive Appellate Jurisdiction in Civil Cases The Court in Divisions shall exercise exclusive appellate jurisdiction over appeals from the judgments, resolutions or orders of the RTCs in tax collection cases originally decided by them within their respective territorial jurisdiction. [Sec. 3(c)(2), Rule 4, RRCTA] The Court in Divisions shall exercise exclusive original or appellate jurisdiction to review by appeal the following: 1. Decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR;

TAXATION LAW

2. Inaction by the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR, where the NIRC or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the CIR within the one hundred eighty day-period under Section 228 of the NIRC 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 CIR on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the CIR on the disputed assessments beyond the one hundred eighty day-period above mentioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the NIRC; 3. Decisions, resolutions or orders of the RTC in local tax cases decided or resolved by them in the exercise of their original jurisdiction; 4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures of other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; 5. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the Government under Section 2315 of the Tariff and Customs Code; and

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6. Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture, in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. [Sec. 3(a), Rule 4, RRCTA] 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 RTC 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 Division in the exercise of its exclusive

TAXATION LAW

original jurisdiction over tax collection cases; and 4. 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.

2. Criminal Cases a. Exclusive Original Jurisdiction of the Court in Divisions The Court in Divisions shall exercise exclusive original jurisdiction over all criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR 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 RTC in their original jurisdiction in criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR 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

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criminal offenses arising from violations of the NIRC or the Tariff and Customs Code and other laws administered by the BIR 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 RTC in the exercise of their appellate jurisdiction over criminal offenses arising from violations of the NIRC or the Tariff and Customs Code and other laws administered by the BIR or Bureau of Customs. 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 falling within the exclusive appellate jurisdiction of the tax court. [City of Manila v. Grecia-Cuerdo, G.R. No. 175723 (2014)]

TAXATION LAW

Procedure i. Filing of an 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 Taxpayer’s Remedies – 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. L66160 (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 threshold amount.

on

jurisdictional

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.

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