Tax Law Notes

Taxation I

Objectives of the Power of Taxation

INTRODUCTION Power of Taxation, Defined  

Process of collecting money to defray expenses of the government Inherent power of the state: no need for a constitution or enabling statute for the State to exercise the power of taxation

1. 2.

(a) Promotion of general welfare  Taxation can be used as an implement of police power e.g. Excise Tax: a type of business tax; higher rate of tax can be imposed to certain industries (cigarettes, alcohols because the state discourages the use of these products) (b)

Regulation  PAL v Edu: The state imposed a regulatory tax Regulatory Tax: A tax imposed to raise revenues and regulate a subject matter

(c)

Reduce Social Inequity  Progressive System of Taxation

Local Government Units and Power of Taxation   

Prior to the 1987 Constitution, there needs to be an enabling law before LGUs can collect taxes. With the effectivity of the 1987 Constitution, the power of taxation is no longer delegated to the LGUs but is directly conferred by the Constitution. The Constitution has a provision on Local Autonomy (Article X)

Sec.5 Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.

“Ability to pay” principle: the higher the income, the higher the tax. (d) Encourage Economic Growth  Congress can grant incentives to promote a particular industry (e)

Protectionism  Imposition of custom duties to protect locally manufactured goods e.g. “smuggled goods”

Characteristics of Taxation Being A Power 1. 2.

Inherent Supreme, Plenary, Unlimited and Comprehensive  Can cover all subject matters provided in accordance with limitations (both inherent and constitutional limitations)

Power To Tax: Power To Destroy? 

Justice Marshall: The power to tax includes the power to destroy  The state can use the power of taxation to kill any business

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Justice Holmes: The power to tax does not include the power to destroy while this court sits

Lifeblood Doctrine

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If a tax imposed is valid, it can be used by the state to destroy. If it is an invalid tax, the state cannot use the power to tax to destroy a business.

Taxes are lifeblood of nation. Without taxes, the states cannot exist. The source of the power to tax is the main existence of the state

Justifications of the Power of Taxation 1.

Benefits-Received Theory  We pay taxes because of the protection that we receive from the state

2.

Symbiotic Relationship Theory  Notwithstanding reluctance, we must pay taxes because without it, the government cannot provide protection to its citizens.

3.

Necessity Theory  Taxes are necessary for the government to operate  Kindred to the Lifeblood doctrine

How to reconcile? The principle of Justice Marshall applies only to valid taxes, while that of Justice Holmes applies to invalid taxes.

Revenue Purposes Non-revenue Purposes

Benefits-Received Theory Benefits have been received, so we must pay tax.

Symbiotic Relationship Theory We must pay tax because benefits will be received from the government

Characteristics of the Power of Taxation 1. 

Must be for public purpose Produce direct or indirect benefits to the people

2. 3.  4.  5. 6.

e.g. Collection of tax to prevent tuberculosis o Living in a healthy society is an indirect intangible benefit Inherent Inherently Legislative The power of taxation can only be exercised by the legislature by enactment of a law authorizing a tax Territorial It can only be exercised within the jurisdiction of the state Recognizes Tax Exemption of State Limited

Sison vs. Ancheta The power to tax is the power to build With the modern times, there is a need for more revenues to meet increasing social challenges. Lifeblood doctrine “It is manifest that the field of state activity has assumed a much wider scope xxx Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To paraphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence.”

Philippine Health Care Providers vs. CIR   

Documentary Stamp Tax of PHCP: 376 Net worth of PHCP: 259M (assets minus liabilities) PHCP alleges that the state is taxing it out of existence CIR alleges the principle of “Power to tax is the power to destroy” since the case involved valid tax

Supreme Court  VAT was found valid  DST was invalid DST can only be collected if the industry is an insurance provider. PHCP is not an insurance provider but a health service provider. Thus, DST cannot be imposed upon it. Since DST is an invalid tax (being imposed to a health service provider), the power to tax is not the power to destroy. While it is true that the power to tax is unlimited, supreme, plenary, unlimited and comprehensive, it must be exercised with precaution to avoid injury to proprietary rights of taxpayer. It must be fairly, equally and uniformly imposed. “The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is

counter-productive and ultimately subversive of the nation’s thrust towards a better economy which will ultimately benefit the majority of our people”

CIR vs. Algue Lifeblood doctrine “Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved” Symbiotic Relationship Theory Those who can contribute must do so; Government responds to the taxes that we pay in the form of tangible and intangible benefits “It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, 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.”

Taxes must be reasonably collected “Even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.”

NAPOCOR vs. City of Cabanatuan Source of the exercise of taxing power: the very existence of the state Theory behind the power of taxation: Necessity  So that the government can also provide for the citizens  To promote general welfare LGU can exercise the power of taxation It is directly conferred by the Constitution (Sec 5. Article X, 1987 Constitution) The Local Government Code was enacted by the Congress Q: Does it grant the power to tax to the LGUs? A: No. It only sets limitation to the taxing power of the state and does not grant the power to collect the tax. It is the Constitution that grants the power to tax.

Philippine Airlines vs. EDU  

Fees are being imposed to PAL in the form of registration fees. SC: these fees imposed are actually in the nature of taxes.

“They are taxes. Tax are for revenue, whereas fees are exactions for purposes of regulation and inspection, and are for that reason limited in amount to what is necessary to cover the cost of the services rendered in that connection. 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.”

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The fees are used for construction of highways. Only a portion is used for the operation of the motor vehicles. Since the fees are used for a public purpose, they are considered taxes. Tio vs. Videogram Regulatory Board

Tax Credit: deduction from tax liability Tax Deduction: reduction from the income “xxx Tax deduction -- defined as a subtraction "from income for tax purposes," or an amount that is "allowed by law to reduce income prior to [the] application of the tax rate to compute the amount of tax which is due." On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before.” Elements of the Power of Eminent Domain 1. Taking of private property: 20% of the gross sale 2. For public use: discount for the senior citizens 3. For just compensation: tax credit 

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The corporation can incur whatever has been lost through the grant of tax credit. RA 9994: The 20% discount is already considered as tax deduction.

Taxes were not considered oppressive and were upheld to be valid. “It is beyond serious question that 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 venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. “

Tax was used both as a regulatory and revenue measure

Three Stages in the Tax Process 1.

Levy  Power of Taxation can be exercised through the law-making body  How? By enactment of laws  Nature: inherently legislative

2.

Assessment  Computation of taxes  Nature: administrative

3.

Collection  Administrative in character

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the realization that earnings of videogram establishments of around P600 million per annum have not been subjected to tax, thereby depriving the Government of an additional source of revenue

Tax as an instrument of police power: to protect video industry Lutz vs. Araneta

Tax as an implement of police power to promote general welfare “The tax is levied with a regulatory purpose, i.e. to provide means for the rehabilitation and stabilization of the threatened sugar industry. The act is primarily an exercise of police power and is not a pure exercise of taxing power. As sugar production is one of the great industries of the Philippines and its promotion, protection and advancement redounds greatly to the general welfare, the legislature found that the general welfare demanded that the industry should be stabilized, and provided that the distribution of benefits had to sustain.”

CIR vs. Central Luzon Drug Corporation Tax Credit vs. Tax Deduction

Principles of a Sound Tax System 1.

Fiscal Adequacy  Fiscal: money Adequacy: sufficient Fiscal adequacy: Sufficient funds  As much as possible, there should be no deficit and excessive surplus.

2.

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

3.

Theoretical Justice

Founded on the “ability-to-pay” principle  Pay because you’re able  Kindred concept of progressive system of taxation The higher the income, the higher the tax 

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Section 28, Article VI of the Constitution The Congress must evolve a progressive system of taxation Q: Will a violation of these principles result to unconstitutionality of the tax law? A:

General Rule: NO

Definition and Characteristics of Taxes Taxes are enforced, proportionate contribution levied by the law-making authority which has territorial jurisdiction over the source of the tax. Characteristics:

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These are merely principles. They are guidelines and are therefore not mandatory The Constitution provides that the Congress must evolve a progressive system of taxation, but does not prohibit regressive system of taxation. For example, VAT is valid eventhough it does not consider the ability to pay principle because it is automatically imposed upon the consumers. The progressive system of taxation is merely encouraged and regressive system of taxation is merely frowned upon.

Article III, Section 20 (1987 PC) No person shall be imprisoned for debt or non-payment of a poll tax Q: Can a person legally refused to pay taxes? A: No. The privilege of living in a civilized society is a benefit derived from payment of taxes to the government.

Exception: If a law is violative of theoretical justice and in effect is harsh, oppressive and confiscatory such that it violates due process.

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2. PROPORTIONATE CONTRIBUTION Progressive System of taxation and ability to pay principle.

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3. LEVIED BY LAW-MAKING AUTHORITY Only the Congress has the authority to levy taxes through enactment of laws.

Diaz v. Secretary of Finance Concept of Administrative Feasibility  Petitioner was assailing the validity of the impending imposition of valueadded tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators  The implementation of Section 108 of NIRC is not administratively feasible “In order to claim input VAT, the name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT by rounding off the toll rate and putting any excess collection in an escrow account is also illegal, while the alternative of giving change to thousands of motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively feasible” Non-observance of the canon of administrative feasibility would not make the law invalid. “Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired. Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution.” Moreover, the issue on the implementation is premature because it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature.

1. ENFORCED Mandated by law Poll tax: mandatory, but non-payment would not subject the person to imprisonment

Exceptions: a. Local Government Units b. Flexible Tariff Clause

Article VI, Sec 28 (2), 1987 PC 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. c.

Purely Administrative Functions

4. 

HAVE TERRITORIAL JURISDICTION OVER THE SOURCE OF TAX Tax Situs (Section 42 of Tax Code)  Place of Taxation

5.

PERSONAL IN NATURE  One cannot make others liable for his own tax liability

Note: Tax Liability vs. Burden of Tax  

Tax Liability  Direct mandate of law Burden of Tax  Who will shell out the funds

Q: VAT is an indirect tax. When someone buys a meal from Mcdonalds, a part of the purchase price that the consumer pays is the VAT. Is it a violation of the nature of Tax as personal in nature? A: No. Only the burden of tax is shifted to the consumer and not the tax liability.

Capital Gains Tax (CGT) Commonly the seller pays the tax of the property being sold. However, they can stipulate that the buyer will pay the CPG instead.

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Q: If the buyer did not pay the tax, can the government run after the buyer? A: No. CPG is personal in nature. What was only shifted to the buyer was the burden of tax and not the tax liability. Hence, the liability remains to the seller. The government should run after the seller. The remedy of the seller is to file a complaint against the buyer. 6.

Q: Is his income subject to tax? A: Yes, regardless of the source of income, because he is a Filipino citizens. Withholding Tax  Income earned by an employee  The payor is the withholding agent: the employer. He serves as the collector of the government

Illustration: Manny Pacquaio is being paid an income by Las Vegas. Q: Can this income be subject to a withholding tax? A: No. It would be a violation of international comity. The Philippines cannot constitute the foreign corporation (“Top Rank Corp”) as a withholding agent, since the corporation has no business in the Philippines. Obligation of Pacquaio is to declare the income for income tax.

PUBLIC PURPOSE

Basic test of public purpose: it must be used for the support of the government  To promote welfare for the common good.

Inherently Legislative The power to tax cannot be delegated to other branches of the government

Pascual vs. Secretary of Public Works and Communications et al.   

A law was enacted wherein funds were appropriated for the construction of Pasig feeder road terminals, which have no connection with any government highway. Respondent Zulueta donated the feeder roads to the government AFTER the enactment of the law. SC: The law was invalid because public funds were appropriated for a private property. At the time of the enactment of the law, the property is still a private property.. The donation by Zulueta was made only to give semblance of legality to the project.

“The test of the constitutionality of a statute requiring the use of public funds is 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. The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an amendment of the organic law, removing, with retrospective operation, the constitutional limitation infringed by said statute. Xxx Inasmuch as the land on which the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result is that said appropriation sought a private purpose, and hence, was null and void”

International Comity 

Courteous recognition and friendly relations between two sovereign states

Q: Can the Philippine Government impose tax to the income of the US Government? A: No. It will be a violation of international comity

Illustration: Manny Pacquaio is a Filipino citizen who is also being given an income by other states during his competitions.

Exceptions: 1. 2. 3.

LGU’s taxing power President’s taxing power Purely administrative function

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Congress has the power to determine coverage of taxation, object of taxation, nature of taxation, the kind of tax to be imposed, and the tax rate.

Double Taxation Pepsi-Cola Bottling Company vs. Municipality of Tanauan There was no double taxation because there are different taxing authorities “Moreover, double taxation, in general, is not forbidden by our fundamental law, since we have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality.”

There was no undue delegation of the power of taxation “It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. xxx Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law."

Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. City of Butuan

Q: May the condominium be imposed with real property tax? A: No. It is located outside the Philippines.

Double taxation is not prohibited by our Constitution. It is only unconstitutional if it is obnoxious.

Eclectic Theory

Type kinds of Double Taxation

Q: May the income of Ryan be subject to income tax in the Philippines? A: Yes. The income is based on a right. Ryan is still a Filipino citizen who can be imposed with income tax by the Philippine Government even though he is a non-resident.  Citizenship Principle

Direct Same type Same subject matter Same taxable period Same taxing authorities

Indirect Same type Same subject matter Same taxable period Different taxing authorities

However, the imposition of tax of 6% was found to be violative of due process and is considered confiscatory and obnoxious by the Supreme Court

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Tax laws cannot extend beyond territorial jurisdiction of a State

Q: BUT is it subject to tax? A: No. RA 8429 (Tax Code) provides that only resident-citizens shall be subject to tax within or outside the Philippines Others are subject to tax only if the source is from the Philippines

xxx it would still be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the City of Butuan, would be exempt from the disputed tax.

Tax Exemptions 

GOCCs are not exempted from tax, except if its charter so provides that they are exempted.

Light Rail Transit Authority vs. Central Board of Assessment Appeals

Territoriality 

Tax Situs: depends on the subject matter

Principles:   

Source Principle Citizenship Principle Residence Principle

Source Principle  State can impose tax to an income if such income has been earned in that State Citizenship Principle  Tax is imposed to the income of all citizens of the State Residence Principle  Tax is imposed to the income of the residents of a state

Taxes on Properties   

Real properties: where it is located Personal properties  Tangible: where it is located  Intangible: mobilia sequitur persona follows the domicile of its owner

Illustration: Ryan is a Filipino Citizen who resides in Japan He owns a condo at Japan He earns P30,000 per month

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The carriageways and passenger terminal stations are not public roads. They were merely elevated and only serve as improvements. “ XXX it must be emphasized that these structures do not form part of such roads, since the former have been constructed over the latter in such a way that the flow of vehicular traffic would not be impeded. These carriageways and terminal stations serve a function different from that of the public roads. The former are part and parcel of the light rail transit (LRT) system which, unlike the latter, are not open to use by the general public. The carriageways are accessible only to the LRT trains, while the terminal stations have been built for the convenience of LRTA itself and its customers who pay the required fare.”

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Petitioner is a GOCC and is not exempted from real property taxes

“ Though the creation of the LRTA was impelled by public service -- to provide mass transportation to alleviate the traffic and transportation situation in Metro Manila -- its operation undeniably partakes of ordinary business. Petitioner is clothed with corporate status and corporate powers in the furtherance of its proprietary objectives. Indeed, it operates much like any private corporation engaged in the mass transport industry. Given that it is engaged in a service-oriented commercial endeavor, its carriageways and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a government-owned or controlled corporation.”

Mactan Cebu International Airport Authority vs. Hon. Ferdinand J. Marcos (1996) GOCC’s are taxable entities. Exception: If the charter provides for exemption.

However, the charter of MCIAA was already repealed upon enactment of the Local Government Code Instrumentalities of the government are exempted from real property taxes as provided by the Local Government Code. They are not taxable entities. MCIAA case on June 15 2015 MCIAA is no longer a GOCC and is now a government instrumentality In 2006, MIAA case was decided and Supreme Court considered it as an instrumentality, subject to tax exemption MCIAA filed a petition to the Court saying that it has the same functions with the MIAA and must also be exempted from real property taxes  granted

Manila International Airport Authority vs. Court of Appeals

Constitutional Limitations Due Process Clause 2 Aspects: a. Substantive Due Process

 No tax imposed if no law enacted

b.

Procedural Due Process 

Government cannot levy property if no opportunity to be heard is given.

Basic Concepts to understand the CREBA Case Gross Sales: amount received from a business Cost of Sales: expenditure directly related to the earning of gross sales Gross Income: Gross Sales minus Cost of Sales Expenses: merely incidental expenditures Net Income: Gross Income minus Expenses

Illustration: MIAA is not a government-owned or controlled corporation Section 2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock corporation. MIAA is a government instrumentality vested with corporate powers. As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA Complex. 20% of its income reverts back to the government. Under Section 133 of the LGC, it is exempt from taxes SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxxx (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units

MIAA is exempt from real property taxes but not as to those properties leased to private entities, since these are taxable entities. SEC. 234. Exemptions from Real Property Tax. — The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; Portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land area for a consideration to a taxable person and therefore such land area is subject to real estate tax.

Atty. Carantes wants to sell 40 pcs of Boy Bawang. Her capital costs P40 (P1 per piece). She sold it for P5 per piece. Gross Sales: P200 Cost of Sales: P40 Gross Income: P160 Expense: P14 (jeepney fare) Net Income: P146

CREBA v. The Hon. Executive Secretary Alberto Romulo Under the Tax Code, a corporation can become subject to the Minimum Corporate Income Tax (MCIT) at the rate of 2% of gross income, beginning on the 4th taxable year immediately following the year in which it commenced its business operations, when such MCIT is greater than the normal corporate income tax. CREBA argued, among others, that the use of gross income as MCIT base amounts to a confiscation of capital because gross income, unlike net income, is not realized gain. It will be like imposing a tax even if there is no income yet.  

In our earlier illustration, if the gross income is only P160 and the tax imposed is P170, there will be a net loss of –P10 Thus, CREBA alleges that it is confiscatory

MCIT is valid and is not confiscatory.  MCIT is not an additional tax imposition. “It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross income.” The purpose of MCIT is to prevent declaration of normal income tax that is suspiciously low.

CWT: P250,000 Tax Code aims to prevent corporations from bloating up their expenses to appear that they have no income. 

MCIT is not a tax on a capital

“The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is imposed on gross income which is computed by deducting from gross sales the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.” 

300,000 250,000 ----------P50,000  Creditable next year

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If you have no income 0 250,000 --------250,000  Can be utilized next taxable year

Taxation as an attribute of sovereignty

“Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.”

Q: What if the business suffered loss until closure? Will CWIT be a confiscation of property? A: If the taxpayer cannot utilize the CWT, he can petition for tax refund 2 years from payment. 

The government did not forfeit the CWT

COCA COLA  

Creditable Withholding Tax is valid

Concept of CWT -

Imposed on the Gross Selling Price/Market Value of the property at the time of the sale

Illustration Real Property: P5M Seller receives 95% of this price Buyer withholds 5% and remits it directly to BIR Thus, petitioner alleges that it is confiscatory because the seller will not be assured that he/she will receive income. SC Ruling: CWT is Valid. It is imposable on the income. At the end of the year, income will be totaled and the CWT will be deducted.

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Supreme Court: the amendatory law was null and void for non-compliance with the publication requirement, which is a requirement of due process  Double Taxation: two ordinances imposed the same kind of tax Same subject: privilege of doing business Same taxing authority: City of Manila Same purpose: contribution of revenue Same jurisdiction: City of Manila Same period: per calendar year Same character: Local Business Tax 

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It is not an additional tax imposition but an advance payment of it during the taxable year. It only deals with method of tax collection. “The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the governments cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies”

Illustration: Real Property: P1m Tax (30%): P300,000

Tax Ordinance No. 7794, Section 21 provides for the exemption of Coca-Cola from additional taxes apart from local business tax Year 2000: The City of Manila amended the ordinance and removed the tax exemption of Coca-Cola

Direct Duplicate Taxation: the taxing measure becomes obnoxious Double Taxation is not unconstitutional. However, if it constituted direct double taxation and results to a measure that is obnoxious and confiscatory, it becomes unconstitutional and violative of due process.

Mayor Antonio J. Villegas vs.Hiu Chiong Tsai Pao Ho  

Ordinance provides for an imposition of employer permit (P50) to alien residents before employment Supreme Court: Ordinance is unconstitutional

 Violative of Due Process The fee imposed is not merely fore regulatory purposes but is actually for revenue. It results to a withdrawal of livelihoods from aliens without due process 

Violative of Equal Protection Clause

2. “The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it. Although the equal protection clause of the Constitution does not forbid classification, it is imperative that the classification should be based on real and substantial differences having a reasonable relation to the subject of the particular legislation. The same amount of P50.00 is being collected from every employed alien whether he is casual or permanent, part time or full time or whether he is a lowly employee or a highly paid executive” 

The power granted to the mayor was an undue delegation of powerOrdinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion. It has been held that where an ordinance of a municipality fails to state any policy or to set up any standard to guide or limit the mayor's action, expresses no purpose to be attained by requiring a permit, enumerates no conditions for its grant or refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary and unrestricted power to grant or deny the issuance of building permits, such ordinance is invalid, being an undefined and unlimited delegation of power to allow or prevent an activity per se lawful.

Nature Purpose Force

Requirement

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Ordinance No. 6537 is void because it does not contain or suggest any standard or criterion to guide the mayor in the exercise of the power which has been granted to him by the ordinance Mayor cannot impose tax: violation of legislative nature of taxation

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The fee is for revenue purpose Power of taxation is inherently legislative Mayor is granted unrestricted authority

City of Baguio vs. de Leon 

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There is no double taxation since there are two different taxing authorities 1. National government 2. City of Baguio Indirect double taxation is not prohibited by the Constitution. What is prohibited is an obnoxious taxing measure such as direct double taxation.

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Instances of due process violation: 1. Beyond jurisdiction of the state 2. Not for a public purpose 3. Retroactive statute that is so harsh and unreasonable 4. When it becomes oppressive and arbitrary.

CIR v. CA and Fortune  

Procedural due process 2 types of administrative issuances: 1. Legislative Rule

Legislative Rule Subordinate legislation Provide details of the law Force and effect of a law, given weight by the court and must be binding upon the courts Publication, notice and hearing

Interpretative Rule Guidelines Interprets the law Force and effect of a law but is merely given weight by the courts Issuance

Memorandum Circular: administrative issuance  Reclassified cigarette brands to locally manufactured bearing foreign brands  Higher tax rates are imposed The issuance adds burden to taxpayer  Legislative Rule  As a legislative rule, it should have undergone publication, notice and hearing.  Not having complied with the requirements, the rule should be unconstitutional When the issuance is merely interpretative, its applicability needs nothing further than its mere issuance Administrative issuance cannot go beyond the limits of the law.  If it goes beyond the law, it will be an illegal administrative issuance

Reminder on how to answer questions If the argument is based on “procedural due process answer that the law is unconstitutional If the argument is based on the issuance going beyond the limits of the law  answer that the issuance is illegal

CIR v. MJ Lhuiller  

Sison v Ancheta 

Interpretative Rule



Due Process violation 5% tax is imposed on pawn shops where the law imposed such tax ONLY to lending investors The issuance imposed the same tax without notice and hearing

Supreme Court  The issuance is unconstitutional for violation of due process  The issuance is illegal for going beyond the provision of the law

Equal Protection Clause 

All persons subject of legislation shall be treated alike under similar circumstances, both in privilege conferred and liabilities imposed.

ABAKADA Guro vs. Purisima

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Definition of Rational Basis Test  There should be a reasonable foundation in the classification of the subject matter of the tax and such classification should not be arbitrary. Grant of incentives to BIR and BOC employees

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Supreme Court:  There is substantial distinction with employees of other agencies  BIR and BOC are revenue-generating agencies  Substantial classification.  Reasonable foundation  Classification is not arbitrary

Now: VAT is pegged at the rate of 20% 

Association of Custom Brokers vs. Manila  

Ordinance imposed tax to all vehicles passing through the City of Manila but only to those registered in the City of Manila The taxes were used for construction of roads

Issue: Was there a violation of the Equal Protection Clause? Supreme Court: Yes  There is no substantial distinction between those vehicles registered in Manila and those that are not. They are all passing through the City roads.  There is violation of Equal Protection Clause  Hence, unconstitutional

Shell vs. Vano  

Tax is imposed to all installation managers There was only one installation manager in the whole municipality

Issue: Was there a violation of Equal Protection Clause for the act of singling out the petitioner? Supreme Court: No.  Tax imposed is applicable to all installation managers who will occupy the same profession in the future.

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Shell vs. Vano

Ormoc Sugar Central The law evidently singled out not the sugar industry but Ormoc Sugar Central itself. There is violation of Equal Protection Clause

Tan v. Del Rosario Difference of tax treatment between single proprietors and corporations/partnerships

Individual Taxpayer Subject to scheduler tax rates  Depend on income brackets (tax tables)  5%-32% Schedular system of taxation  Income of taxpayer should be classified into its nature (e.g. income from profession is subject to normal tax while individual earned prize is subject to a withholding tax od 10%)  

Tax imposed to “Ormoc Sugar Central” (specifically mentioned in the ordinance) There is violation of Equal Protection Clause for singling out the industry

The classification is based on profession. Applicable to all industries with the same profession There is no violation of Equal Protection Clause

No violation of equitability principle  It recognizes exemption of those individuals who do not reach the threshold amount  If amount is less than P200,000  Exempt from VAT Now: P1,919,500 is the threshold amount  Small storeowners (sari-sari stores) are exempt from VAT, since their income is only for daily sustenance  Farmers selling farm and marine products: also exempt from VAT

Equality and Uniformity  All taxable articles of the same class shall be taxed at the same rate  The legislature, in the exercise of its taxing power, has authority to make a reasonable classification  Inequalities resulting from singling out a particular class does not infringe any constitutional provision or limitation.

Ormoc Sugar Central vs. Ormoc Treasurer 

Kapatiran vs. Tan Value-added Tax No violation of uniformity principle  It is imposed to all goods except as to those exempt by law Rate: 0-10%

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Corporations/Partnerships Subject to fixed rate  Pegged at 30%

Global tax system  All kinds of income are combined (e.g. corporate income and prizes will be both based on fixed rate of 30%)

Petitioner alleges violation of Equal Protection Clause Supreme Court: No violation. There is a substantial distinction between individual taxpayers and corporations/partnerships.  Taxing authorities have the power to classify subjects of tax as long as classification complies with the 4 elements a. Based on substantial distinction b. Germane to the purpose of the law c. Applicable to future conditions d. Applicable to all members of the same class

Philreca vs. DILG Philreca is a cooperative registered under PD 269

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A law was passed imposing real property taxes on cooperatives registered under PD 269  Local Government Units Sec 190: Blanket withdrawal of tax exemptions Sec 234: Enumerates properties exempt from tax, one of which are properties of duly registered cooperatives under RA 6938 Issue: Was there a violation of Equal Protection Clause?

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An appropriation law must not favor a particular religion No funds must be appropriated in favor of a religion American Bible Society vs. City of Manila License fee is imposed prior to conduct of activity No payment of fee, no selling of bibles

Issue: Was there a prior restraint imposed by the government? Held: No. There is a substantial distinction between cooperatives registered under PD 269 and RA 6938 PD 269 Members are not required to pay reasonable contributions; Only membership fee of P5.00 which is nonrefundable Cooperatives must be controlled by NEA

RA 6938 25-25 rule compliance 25% of authorized contributions must be subscribed, 25% of subscribed contribution must be paid. Subsidiarity  They can act on their own without much governmental control or supervision  Still controlled by government but exercises subsidiarity

Held: Yes The religious institution will not be able to express their religious belief “The power to tax the exercise of a privilege is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of this religious practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. Those who can tax the privilege of engaging in this form of missionary evangelism can close all its doors to all those who do not have a full purse. Spreading religious beliefs in this ancient and honorable manner would thus be denied the needy” Q: What if after the ABS sells the bible, it earned P2M and the government imposed VAT on that earning? A: There will be no violation of Freedom of Religion since there is no prior restraint. If the tax is an imposition before the activity, there is a violation of Freedom of Religion. If the tax is imposed after the activity, there is no prior restraint and no violation of constitutional freedom of religion.

Those registered under PD 269 are not exempted from real property taxes.

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Judy Anne Santos v People Case of Regine: dismissed by prosecutor Case of Judy Anne: not dismissed

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Tolentino vs. Secretary of Finance No violation of Free Exercise Clause since the licensed fees are not prior restraints. Imposition of VAT to particular sectors is not prior restraint but an administrative imposition

Issue: Was there a violation of Equal Protection Clause?  

Held: NO.  Prosecution of guilty and non-prosecution of non-guilty is not violative of equal protection clause.   

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Progressivity Petitioner: VAT is an indirect tax and regressive tax which does not consider the ability to pay of the taxpayer Supreme Court: Constitution does not prohibit regressive system of taxation.

Refer to People v. Dela Pena Statute in conformity with a valid classification is valid. There is a violation of Equal Protection Clause only if the application and enforcement of a law leads to undue discrimination Equal Protection Clause cannot be invoked as a defense if you do not have clean hands.

NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAXES 

Other kinds of taxes: 1. 2.

FREEDOM OF RELIGION 1.

Free-exercise Clause  A freedom to act on a religious belief without restraint by government  The restraint must be a prior restraint

2.

Non-establishment Clause

Poll tax/Persons Tax Subject: person E.g. Community tax, cedula

Property Tax Excise Tax  Transaction, right, interest or privilege Income tax: right to earn income Donor tax: privilege of donating gratuitously.

Q: If a person does not pay poll tax, will he be liable for an offense? A: Yes, through the Revised Penal Code and not by non-payment of taxes.

NON-IMPAIRMENT CLAUSE o

No law shall be passed abridging contracts

o o

Also applies to taxation Applicable only in the exercise of government of its proprietary function.  If in the exercise of government’s sovereignty function, non-impairment clause should not be invoked.   

Casanova vs. Hord Non-impairment clause has been applicable since 1902 Government entered into a contact with the taxpayer The non-impairment clause applies because the contract was entered into by the exercise of the State’s proprietary function.

A: Yes. The contract was through the exercise of proprietary function of the state, and thus the non-impairment clause can be invoked. What is involved is a government loan agreement Government: debtor Taxpayer: creditor

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Cagayan Power vs. CIR Congress granted tax exemption in favor of Cagayan Power  Cagayan power will only pay 3% franchise tax. Congress enacted Internal Revenue Code  All corporate taxpayers shall pay income tax Cagayan Power: invokes non-impairment clause. It asked for amendment of its charter so that it will only pay 3% franchise tax only.

Supreme Court  No impairment of contract o The state exercised its governmental function o What is granted is a legislative franchise. o Constitution provides that the State may grant public franchise subject to amendment, revocation and alteration by the Congress. o Congress may enact a law revoking the previously granted franchise. Hence, the tax exemption may also be revoked.  Cagayan Power must pay taxes from the effectivity of the Internal Revenue Code up to the amendment of its charter.

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MERALCO vs. Province of Laguna Contractual tax exemptions: tax exemption granted in a contract between government and taxpayer, such is present in cases of government bonds and debenture Government bonds: offered by banks  Risk-averse  High interest  Fixed rates  There could be tax exemption Invoking non-impairment clause is applicable if what is granted is Contractual Tax Exemption RA 100678: T-bills  Grant of tax exemption depends on type of bill obtained for a period based on the stipulation of the grant  Interest income shall be exempt from tax Legally, income is subject to 20% final withholding tax. But with the enactment of this law, interest income is exempt from tax. The law states that the exemption is good for 5 years. After lapse of 2 years, Congress revoked the exemption

RCPI vs. Provincial Assessor Legislative franchise  RCPI shall be exempt from real property tax  Charter was granted prior to enactment of LGC Section 191 of LGC provides for the blanket withdrawal of tax exemptions previously granted to entities, except as to those enumerated under Sec 234

ISSUE: Was there a violation of Non-impairment Clause? HELD: No. Grant of legislative franchise is revocable. It is an exercise of governmental function so non-impairment clause cannot be invoked. Bayantel: same as Cagayan Power Smart Communications: legislative franchise repealed by Congress

Problem Government enacted RA 11111 which provides that all enterprises which will invest P10m and employ atleast 100 employees shall avail of income tax holiday for a period of 5 years. X Corporation invested P10m and employed 100 employees. After 2 years, Congress enacted a law revoking exemption. Q: Can the non-impairment clause be invoked? A: No. No contract was executed between government and taxpayer. For non-impairment clause to be invoked, there must be a contract. Tax exemption granted by RA 11111 is only a privilege that is given to those who comply under the law. If there is a contractual taxpayer exemption, non-impairment clause shall be invoked.

TRADITIONALLY EXEMPTED TAXPAYERS Article VI, Section 28 (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. 1.

Subject Matter of the Tax: Lands, buildings, improvement  Property tax only  Not excise tax; Not poll tax

2.

Usage of Property: Actually, directly, exclusively  Not the ownership of property but the usage

3.

Purpose: Religious, charitable or educational

Q: Was there a violation of the non-impairment clause?

 If three elements are present, the institution is exempt from property tax.

3.

Illustrations

Building

1. P-Mall

Church

Lot

P-mall owned by diocese

Mall’s rental income: P1m/year Entire amount goes to church

Q: Is the Mall exempt from property tax? A: No. It is used for a commercial purpose. It does not matter if it is owned by diocese. It is the usage of property that determines its exemption from property tax. Q: What if the church was also being subjected to income tax? A: It is subject to income tax (excise tax: right to earn income) What constitution covers is exemption from property tax.

Lot

Q: Is the building exempt from real property tax? A: As to its first use, it is exempt since it was for charitable purpose. When it was leased to Systems College, it is no longer exempt from property tax. By virtue of the lease agreement, the institution earned rental income. It was used for a commercial purpose. The direct benefit of the owner is its proprietary use. Systems College Plus It is not the ownership or the indirect use that matters. Look on the direct usage of property.

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Q: What if instead of a lease agreement, the building was donated to the SCP? A: It will be exempt from property tax.   

2.

Classroom

Classroom & Gym

Canteen

Boutiques

If owned by B Family Corp, will it be exempted from Property Tax? A: Yes. Ownership is immaterial. It is used for actually, directly and exclusively for educational purpose.

Q: Is this subject to property tax? A: Yes. It is not exclusively used for an educational purpose. Q: What about the part of the building that is used as a classroom?  

Lung Center of the Philippines vs. QC “Actually, directly and exclusively used” means “solely used”. The building must be entirely used for religious, education or charitable purpose.

The building is owned by a charitable institution. At first it was used for orphans. Afterwards, it was leased to Systems College Plus (a proprietary educational institution)

Lladoc v. CIR One corporation gave P100,000 to a diocese to build a church. The money was used to build a church. The diocese was compelled to pay donee’s tax. The diocese avails of constitutional exemption from taxes.

Issue: Was the contract of donation subject to donee’s tax? Held: Yes. The subject matter of donee’s tax is the privilege of receiving donations. It is in the form of an excise tax.  Constitutional exemption applies only to property tax and not to donee’s tax. ABRA VALLEY vs. AQUINO Director’s residence

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Student Residence

Exempted from property tax Incidental use Under the 1935 constitution, the term “used exclusively” includes the incidental use.

Exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. *Note, however, that this has been abandoned in the 1987 Constitution. Note also the case of Lung Center of the Philippines.

BISHOP OF NUEVA SEGOVIA Old Cemetery

Incidental

Remainder & Convent

Exempt

Church Yard & Convent

Incidental

Exempt

Vegetable Garden

*This case was also filed during the effectivity of 1935 Constitution.

xxx As a general principle, a charitable institution 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.

2nd Question: Is it actually, directly and exclusively used for a charitable purpose?  No The portion leased to doctors for private clinics is not exempt from property tax. Other portions: exempt  

 Vacant/ Idle lot

LUNG CENTER OF THE PHILIPPINES Non-stock, non-profit hospital Hospital Portion lease for private clinics

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Elliptical Orchid and Garden Center (accepts entrance fee)

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Supreme Court directed the City Assessor to determine which portion is leased to private individuals and are not exempt from property tax. Those that are not used for proprietary purpose are constitutionally exempted.

CIR vs. ST. LUKES Non-stock, non-profit corporation

Issue: Is the income subject to tax exemption under the Constitution? Held: No. The constitutional exemption pertains only to property tax.

Lung Center accepts paying patients.

1st Question: Is it a charitable institution?  Yes Acceptance of paying patients will not reduce the character of Lung Center as charitable institution. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. It may be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and promotion of the happiness of man. The word charitable is not restricted to relief of the poor or sick. The test of a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage.

ARTICLE XIV, SEC 4(3), 1987 CONSTITUTION

All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institution, their assets shall be disposed of in the manner provided by the law. 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 Matter: Revenues and Assets Taxes: Excise tax (based on a right/privilege), and Property Tax  Does not include poll/capitation tax. Ownership: Non-stock, non-profit educational institutions Usage: Educational Purpose

Exempt from property tax (Section 28(3), Article VI) It is owned by B Family Corporation. It collects tuition fees from students and uses the same for computer and laboratory equipments. Q: Is the revenue used for educational purposes?

A: YES!

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“Taxation is the rule, and exemption is the exception”

Q: But is it owned by a non-stock, non-profit educational institution? A: NO. It is a Family Corporation.

Illustrations: 1. SLU is a non-stock, non-profit educational institution. It sold concert tickets to purchase computer and laboratory equipments. Note that the revenues were from the act of selling the tickets, not from the tuition fees. Q: Is the revenue exempt from income tax? A: Yes.

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Subject Matter: Revenue Ownership: Non-stock, non-profit educational institution Usage: Educational Purpose

A non-stock, non-profit corporation had a revenue of P10m. Revenue was used for charitable purposes.

Q: Is the revenue exempt from income tax? A: No.    

Subject Matter: Revenue Ownership: Non-stock, non-profit educational institution Usage: CHARITABLE PURPOSE (Not educational purpose)

The Articles of Incorporation commonly specifies the character of the corporation as being non-stock, non-profit. However, the purpose of the corporation must be aligned with its designation as a non-stock, non profit corporation.

FORMS OF ESCAPE OF TAX LIABILITY A.

Resulting to Loss from the Government

1.

Tax Avoidance  Tax minimization  Tax-saving device within the means sanctioned by law.

2.

Tax Evasion  Tax dodging  Scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further civil or criminal liability

3.

Tax Exemption

B.

No Result to Loss from the Government

1.

Shifting  Act of transferring the burden of taxation to the consumer/purchaser  Recall: difference between incidence of taxation (burden) vs. impact of taxation (liability)  Tax Liability: direct mandate of the law  Burden of Tax: who will shell out the funds

2.

Capitalization  Reduction of price of the taxed object to reduce the amount of the tax

3.

Transformation  The manufacturer or producer upon who the tax is imposed increases his process of production, with the additional income being used to shoulder the tax absorbed.

Illustration: P100,000 is the gross income. The taxpayer is imposed with P12,000 worth of tax. The taxpayer would increase the production so that the additional income would compensate the tax absorbed.

To invoke Sec 4(3), Article XIV of the Constitution, the purpose must be EDUCATIONAL.

Q: When is a corporation non-stock and non-profit? A: Non-profit: No portion of the income is distributed to its members Non-stock: The structure of the corporation is not divided into shares (?)

Grant of immunity from taxes ad when granted, it should be construed strictly against the taxpayer, following the principle:

Republic v. Heirs of Cesar Jalandoni  

Jalandoni died and left his estate. This was subjected to an estate tax The CIR discovered that there were several items omitted in the inventory when it assessed the estate: 1. Several parcels of lands were not included 2. Value of sugar and rice land was declared in a lesser amount 3. There was discrepancy in value of stocks declared in estate tax return

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Heirs alleged the following: 1. The omission of the three lots was because of an honest mistake 2. The undervaluation occurred because when the heirs valued the sugar and rice lands, they have based it on just judgment 3. As to the discrepancy in the value of stocks, the heirs allegedly did not know the value of the stocks at the time they filed the return. The corporation issued statement regarding the stocks 6 months after the death of Jalandoni.

Was there tax evasion by the heirs? Supreme Court: There was no tax evasion  Tax evasion requires bad faith. The heirs were not in bad faith since they do not have any idea on the value of the shares of stock, since this value fluctuates every now and then.  As to the undervaluation of the sugar and rice lands, the heirs are not in bad faith since they are not appraisers of real property. They are allowed to commit mistakes.  Since there was no tax evasion, the heirs have no criminal liability

Prescriptive Period  Government has 3 years to assess tax. After this, the government can no longer make the assessment.  If there is a clear and convincing proof of fraud, prescriptive period is 10 years.

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In this case, there was no evidence of fraud. Hence, the prescriptive period is 3 years. However, the assessment of the government was done beyond the 3year period. The government cannot assess the estate anymore.

Everytime a customer will order from Jackbilt, the customer invoice is issued by Norton. 100% of the shares of stock of Jackbilt goes to Norton. The operation of Jackbilt is also managed by Norton. The compensation of the employees of Jackbilt is dictated by Norton. The invoices received by the customers indicate that Norton and Jackbilt are intertwined. 

CIR vs. Yutivo and Sons (1961)

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GM—Yutivo—SMI     

GM is a distributor. Yutivo is a wholesaler. SMI is a subsidiary of Yutivo. Yutivo imports products for amount of P6M. GM, as the distributor, is imposed with sales tax. GM then withdrew its appointment as a distributor. Yutivo was authorized as an importer of products and distributor to SMI and customers. Yutivo now pays the sales tax. CIR alleges that Yutivo is guilty of tax evasion. Sales tax must be imposed to Yutivo, not to SMI.

Was there an unlawful scheme?

Is there tax evasion? 

YES

First, the sales invoice is indicative of bad faith. If Jackbilt is the customer of Norton, then Norton should have issued the sales invoice to Jackbilt, and the latter would issue the same to the customer. In this case, the sales invoice is issued to the customer directly. Second, Jackbilt is operated by Norton. This indicates that they are one entity. Hence, the separate and juridical personality of the two corporations is disregarded.

None. There was no bad faith in the part of Yutivo.  Prior to appointment of Yutivo, GM has been paying the sales tax. This was continued by Yutivo upon withdrawal of GM as a distributor.  There was no tax evasion. SMI has been existing even prior to appointment of Yutivo as a new distributor. Moreover, Yutivo even continued the payment of sales tax.

Another case in relation to Yutivo Law imposed sales tax to manufacturers of cigarette packs IF there will be 20 cigarettes per pack. A manufacturer produced 10 cigarette sticks per pack. These packs are thus not subject to tax. The manufacturer created a subsidiary to which the other 10 sticks would be transferred. This subsidiary is not imposed with the sales tax since it is not a manufacturer.

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Note also that under the present law, there is no more sales tax. All are under the category of a business tax. Philippine Acetylene v. CIR  

The subsidiary was clearly made to avoid the tax. Unlike in the case of Yutivo wherein SM as the subsidiary was already existing prior to the appointment of Yutivo as manufacturer, the case here involves a scheme created by the manufacturer after the enactment of the law imposing sales taxes on manufacturers of cigarettes which produce 20 cigarettes per pack. It was done to circumvent the imposition of sales tax.

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CIR v. Norton Norton and Jackbilt had an agreement. Norton becomes the exclusive distributor of Jackbilt while the latter will sell Norton’s products to its customers.

Elements of tax evasion: 1. Fraud 2. Loss on the part of the government (either by reduction of tax or no payment of tax at all).

Note: Under the present law, corporate taxpayers are subject to 30% tax based on net income. If this present law is applied, there will be no different if the corporations are treated separately or as one entity. Hence, there will be no tax evasion by Norton since there is no reduction of tax in the part of the government.

Is there bad faith in the part of the manufacturer?  YES



Norton and Jackbilt are both corporate taxpaters. If their income is taken separately, it would be subjected to lower tax. If the income of Norton and Jackbilt is combined as to treat the two as one entity, higher tax will be imposed.

Philippine Acetylene sold goods to NPC and VOA By virtue of the international agreement between the Philippine Government and the United States, NPC’s charter provides that it is exempt from direct and indirect tax. VOA’s charter also provides the same but with respect to several items only. Philippine Acetylene says that it should not be liable for sales tax in the transaction with NPC and VOA because these entities are exempt from taxes. Thus, Philippine Acetylene cannot shift the burden of taxation to them.

Should Philippine Acetylene be exempt from sales tax? NO.

What has been shifted to NPC and VOA is the burden of tax which is merely a matter of economics. The tax liability still remains to Philippine Acetylene as the taxpayer. What NPC and VOA paid is not the tax itself but the part of the purchase price. Its exemption to sales tax would not redound to the benefit of PA. CIR vs. JOHN GOTAMCO & SONS  

Under an international agreement, the WHO is exempt from direct and indirect tax Gotamco transacts with the WHO. It alleges that it should not be liable for contractor’s tax, a form of indirect tax. Since its consumer is exempt from tax, Gotamco cannot shift the burden, hence it must also be exempt from tax.

Should Gotamco also be exempt from contractor’s tax? YES. Gotamco must be exempt from contractor’s tax. WHO is exempted from tax because there is a provision in the international agreement that exempts it from such. In addition to this, the international agreement also provides that “any person or entity that contracted with WHO on the construction of WHO building shall likewise be exempt from tax”.

Philippine Acetylene The charter and the agreement between the Philippines and USA do not contain provisions that any individual or entity transacting with NPC and VOA is likewise exempted

Gotamco The international agreement contains provisions that individuals and corporations transacting with WHO in the construction of WHO building shall likewise be exempt from tax.

ORIGIN OF REVENUE, APPROPRIATION AND TARIFF BILLS FLEXIBLE TARIFF CLAUSE ABAKADA Guro Partylist vs. Ermita 1.

Was there a violation of the constitutional provision on the origin of tariff bills?

NONE. The bill was initiated by the House of Representatives. “It is not the law – but the revenue bill – which is required by the Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute – and not only the bill which initiated the legislative process culminating in the enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s power not only to " concur with amendments" but also to "propose amendments." Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by the Constitution to originate in the House. ... Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.33 Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill. 2.

exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can be made. The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the wordshall is used in the common proviso. The use of the word shall connotes a mandatory order. Xxx Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress TAXATION BY LOCAL GOVERNMENT UNITS  Nature: directly conferred by the Constitution  Subject to the limitations provided by the Congress.  These limitations were laid down through the enactment of the Local Government Code. VOTING REQUIREMENTS RE: GRANT OF TAX EXEMPTION  Majority of all the members of the congress DOCTRINE OF JUDICIAL NON-INTERFERENCE  Courts cannot inquire into the motive, policy, wisdom or expediency of legislation. 

TAXPAYER’S SUIT  In order for a taxpayer’s suit to prosper, there must be an illegal disbursement of a public fund.  No illegal disbursement, no taxpayer’s suit 

Was there an undue delegation of power to the President due to the standby authority granted to the latter?

NONE. The general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions: (1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution; (2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution; (3) Delegation to the people at large; (4) Delegation to local governments; and (5) Delegation to administrative bodies.

Exception: if the law is arbitrary

Public Interest Center vs. Roxas (January 31 2007)  Fixed another condition for a taxpayer’s suit: The taxpayer must show his sufficient interest in preventing the illegal expenditure.

FORMS OF ESCAPE OF TAX LIABILITY A.

Resulting to Loss from the Government

1.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate; and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to which the delegate must conform in the performance of his functions

Tax Avoidance  Tax minimization  Tax-saving device within the means sanctioned by law.

2.

Tax Evasion  Tax dodging  Scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further civil or criminal liability

The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its execution, to be

3.

Tax Exemption



Grant of immunity from taxes ad when granted, it should be construed strictly against the taxpayer, following the principle:

“Taxation is the rule, and exemption is the exception”

Prescriptive Period  Government has 3 years to assess tax. After this, the government can no longer make the assessment.  If there is a clear and convincing proof of fraud, prescriptive period is 10 years. In this case, there was no evidence of fraud. Hence, the prescriptive period is 3 years. However, the assessment of the government was done beyond the 3year period. The government cannot assess the estate anymore.

B.

No Result to Loss from the Government

1.

Shifting  Act of transferring the burden of taxation to the consumer/purchaser  Recall: difference between incidence of taxation (burden) vs. impact of taxation (liability)  Tax Liability: direct mandate of the law  Burden of Tax: who will shell out the funds

 

GM—Yutivo—SMI GM is a distributor. Yutivo is a wholesaler. SMI is a subsidiary of Yutivo. Yutivo imports products for amount of P6M. GM, as the distributor, is imposed with sales tax. GM then withdrew its appointment as a distributor. Yutivo was authorized as an importer of products and distributor to SMI and customers. Yutivo now pays the sales tax. CIR alleges that Yutivo is guilty of tax evasion. Sales tax must be imposed to Yutivo, not to SMI.

Capitalization  Reduction of price of the taxed object to reduce the amount of the tax

 

3.

Transformation  The manufacturer or producer upon whom the tax is imposed increases his process of production, the additional income being used to shoulder the tax absorbed.

Was there an unlawful scheme?

P100,000 is the gross income. The taxpayer is imposed with P12,000 worth of tax. The taxpayer would increase the production so that the additional income would compensate the tax absorbed. Republic v. Heirs of Cesar Jalandoni





2.

Illustration:

 

CIR vs. Yutivo and Sons (1961)

Jalandoni died and left his estate. This was subjected to an estate tax The CIR discovered that there were several items omitted in the inventory when it assessed the estate: 4. Several parcels of lands were not included 5. Value of sugar and rice land was declared in a lesser amount 6. There was discrepancy in value of stocks declared in estate tax return Heirs alleged the following: 4. The omission of the three lots was because of an honest mistake 5. The undervaluation occurred because when the heirs valued the sugar and rice lands, they have based it on just judgment 6. As to the discrepancy in the value of stocks, the heirs allegedly did not know the value of the stocks at the time they filed the return. The corporation issued statement regarding the stocks 6 months after the death of Jalandoni.

None. There was no bad faith in the part of Yutivo.  Prior to appointment of Yutivo, GM has been paying the sales tax. This was continued by Yutivo upon withdrawal of GM as a distributor.  There was no tax evasion. SMI has been existing even prior to appointment of Yutivo as a new distributor. Moreover, Yutivo even continued the payment of sales tax.

Another case in relation to Yutivo Law imposed sales tax to manufacturers of cigarette packs IF there will be 20 cigarettes per pack. A manufacturer produced 10 cigarette sticks per pack. These packs are thus not subject to tax. The manufacturer created a subsidiary to which the other 10 sticks would be transferred. This subsidiary is not imposed with the sales tax since it is not a manufacturer. Is there bad faith in the part of the manufacturer?  YES The subsidiary was clearly made to avoid the tax. Unlike in the case of Yutivo wherein SM as the subsidiary was already existing prior to the appointment of Yutivo as manufacturer, the case here involves a scheme created by the manufacturer after the enactment of the law imposing sales taxes on manufacturers of cigarettes which produce 20 cigarettes per pack. It was done to circumvent the imposition of sales tax. CIR v. Norton

Was there tax evasion by the heirs?



Supreme Court: There was no tax evasion  Tax evasion requires bad faith. The heirs were not in bad faith since they do not have any idea on the value of the shares of stock, since this value fluctuates every now and then.  As to the undervaluation of the sugar and rice lands, the heirs are not in bad faith since they are not appraisers of real property. They are allowed to commit mistakes.  Since there was no tax evasion, the heirs have no criminal liability

    

Norton and Jackbilt had an agreement. Norton becomes the exclusive distributor of Jackbilt while the latter will sell Norton’s products to its customers. Everytime a customer will order from Jackbilt, the customer invoice is issued by Norton. 100% of the shares of stock of Jackbilt goes to Norton. The operation of Jackbilt is also managed by Norton. The compensation of the employees of Jackbilt is dictated by Norton. The invoices received by the customers indicate that Norton and Jackbilt are intertwined.

 

Norton and Jackbilt are both corporate taxpaters. If their income is taken separately, it would be subjected to lower tax. If the income of Norton and Jackbilt is combined as to treat the two as one entity, higher tax will be imposed.

YES. Gotamco must be exempt from contractor’s tax. WHO is exempted from tax because there is a provision in the international agreement that exempts it from such. In addition to this, the international agreement also provides that “any person or entity that contracted with WHO on the construction of WHO building shall likewise be exempt from tax”.

Is there tax evasion? 

YES

First, the sales invoice is indicative of bad faith. If Jackbilt is the customer of Norton, then Norton should have issued the sales invoice to Jackbilt, and the latter would issue the same to the customer. In this case, the sales invoice is issued by Norton to the customer directly.

Philippine Acetylene The charter and the agreement between the Philippines and USA do not contain provisions that any individual or entity transacting with NPC and VOA is likewise exempted

Second, Jackbilt is operated by Norton. This indicates that they are one and the same entity. Hence, the separate and juridical personality of the two corporations is disregarded. 

Elements of tax evasion: 3. Fraud 4. Loss on the part of the government (either by reduction of tax or no payment of tax at all).

Note: Under the present law, corporate taxpayers are subject to 30% tax based on net income. If this present law is applied, there will be no difference if the corporations are treated separately or as one entity. Furthermore, there will be no tax evasion by Norton since there is no reduction of tax in the part of the government. Note also that under the present law, there is no more sales tax. All are under the category of a business tax.

Philippine Acetylene v. CIR   

Philippine Acetylene sold goods to NPC and VOA By virtue of the international agreement between the Philippine Government and the United States, NPC’s charter provides that it is exempt from direct and indirect tax. VOA’s charter also provides the same but with respect to several items only. Philippine Acetylene says that it should not be liable for sales tax in the transaction with NPC and VOA because these entities are exempt from taxes. Thus, Philippine Acetylene cannot shift the burden of taxation to them.

Should Philippine Acetylene be exempt from sales tax? NO. What has been shifted to NPC and VOA is the burden of tax which is merely a matter of economics. The tax liability still remains to Philippine Acetylene as the taxpayer.

Maceda vs. Macaraig Is NPC exempt from direct and indirect taxes? YES. The NPC is a non-profit public corporation created for the general good and welfare wholly owned by the government of the Republic of the Philippines. From the very beginning of its corporate existence, the NPC enjoyed preferential tax treatment to enable the Corporation to pay the indebtedness and obligation and in furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No. 6395" The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric generation of power and production of electricity from other sources, as well as the transmission of electric power on a nationwide basis, to improve the quality of life of the people pursuant to the State policy embodied in Section E, Article II of the 1987 Constitution. It is evident from the provision of P.D. No. 938 that its purpose is to maintain in the tax exemption of NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No. 380 if it is to attain its goals. NPC is thus exempt even from indirect taxes, because its charter provides for the same. It can even refuse to pay the tax component of the purchase price of the goods it buys from other companies. Will all companies transacting with NPC be likewise exempt from tax? NO. When NPC becomes their customer, what is only shifted is the burden and not tax the liability, which remains to them as the statutory taxpayers. Hence, the exemption of NPC would not redound to their benefit.

NOTE: In the new charter of NPC, even the suppliers are now exempt from indirect taxes. The aim of this exemption is to encourage the companies to continuously transact with NPC without the burden of indirect tax imposed to them.

What NPC and VOA paid is not the tax itself but the part of the purchase price. Its exemption to sales tax would not redound to the benefit of PA. CIR vs. JOHN GOTAMCO & SONS  

Under an international agreement, the WHO is exempt from direct and indirect tax Gotamco transacts with the WHO. It alleges that it should not be liable for contractor’s tax, a form of indirect tax. Since its consumer is exempt from tax, Gotamco cannot shift the burden, hence it must also be exempt from tax.

Should Gotamco also be exempt from contractor’s tax?

Gotamco The international agreement contains provisions that individuals and corporations transacting with WHO in the construction of WHO building shall likewise be exempt from tax.

CIR vs. PLDT 

Difference between direct and indirect taxes.

Direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof

can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.



and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchase price.”

PLDT is not exempt from indirect taxes.

The clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed by the limiting or qualifying clause "on this franchise or earnings thereof", suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to PLDT’s franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT’s franchise or earnings, are outside the purview of the "in lieu" provision. Capital Gains Tax (CGT) is a direct tax. When a taxpayer sold a property, the gross sale price or the fair market value would be subject to CGT of 6%. However, by stipulation of the buyer and seller, the burden of paying the CGT could be shifted to the buyer. This stipulation is recognized because of the autonomy of contracts, where the parties are free to stipulate terms and conditions of their contract as long as these are not contrary to law, morals, public policy, public order, and good customs.



 

Can it claim for tax refund? NO. First, Contex is not a VAT-registered entity. Second, when Contex was imposed with VAT, only the burden of tax was shifted to it and the VAT became part of the purchase price. It is not the statutory taxpayer. Hence, it has no legal personality to claim for the refund of VAT.

VAT is an indirect tax imposed on goods and services. It can be shifted to the buyer to form part of the purchase price.



Both CGT and VAT can be shifted to the buyer. But CGT is a direct tax, while VAT is an indirect tax. Where lies the difference?  

In CGT, the shifting was made by virtue of a contracted stipulation between the parties. Without this stipulation, the burden of paying the CGT cannot be shifted. In VAT, there could be shifting of the tax burden even without a contractual provision. The nature of VAT as an indirect tax is sufficient to shift the burden to the buyer. Silkair Singapore vs. CIR

  

Silkair purchased petroleum products from Petron. It also paid the VAT component. Petron remitted the VAT to the government. Silkair realized that it should not have paid because what is involved is a zero-rate sale. It claimed for tax refund.

Is Silkair entitled to claim for the tax refund? NO. Silkair is not the statutory payer, thus it is not the proper party to claim the refund. When Petron shifted to Silkair the VAT component, it never shifted the tax liability but only the burden. Petron remains as the statutory taxpayer. As such, Petron is the proper party to claim for a tax refund.

 

ESTATE OF BENIGNO TODA CIC allegedly sold a property to Altonaga worth P100M, subject to 35% corporate tax. Altonaga then allegedly sold it to RMI, for P200M, subject to 5% individual capital gains tax.

Is CIC guilty of tax evasion? YES. Tax evasion connotes the integration of three factors: (1) The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) An accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) A course of action or failure of action which is unlawful. All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga, CIC received P40 million from RMI, and not from Altonaga. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.

Lecture Notes:  

If Petron is successful in claiming for the refund, it must hold the refund in trust for Silkair. “The proper party to question, or seek a refund of, an indirect tax 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. Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP

Contex vs. CIR Contex bought material from suppliers Contex is not registered under VAT.



The end to be achieved  Payment of a lesser tax by CIC (35% of 100M instead of the entire P300M) Accompanying state of mind  If property was indeed purchased from CIC to RMI, then there is bad faith in all the parties by the use of Altonaga as a mere conduit.  RMI should have reflected in its books that property was brought from CIC. Instead, RMI made it appear that Altonaga sold the property  presence of bad faith A course of action that is unlawful  Fabricated evidences

If the corporate tax of 35% will be properly imposed to the P300M purchase price, the tax that CIC should have paid will amount to P105M. 300M x 35% = 105M

Because CIC made use of a scheme, what it paid was only P45M. 100M (sale to Atonaga) x 35% = P35M 200 M (sale of Altonaga to RMI) x 5% = P10M -------P45M Thus, there is a lesser tax paid by CIC by use of its scheme.

Under the present law When a corporation sells property used in its business, a 30% tax is imposed based on the net income. If the property sold is not used in business, 6% capital gains tax is imposed. If an individual taxpayer sells a real property, 6% capital gains tax is also imposed based on the purchase price or the fair market value, whichever is higher.

Bar Exam Question: What is the liability of CIC? Answer: If the property sold is a capital asset of CIC, CIC will have no liability. If the property sold is an ordinary asset, there will be tax evasion committed by the CIC, hence the following are the liabilities: 1. Deficiency 2. Interest of 20% per annum 3. Surcharge of 25% 4. Compromise penalties

RULES OF CONSTRUCTION OF TAX LAWS Note: 

Only apply the rules if there is ambiguity.  If the provision is too clear to be mistaken, do not apply the rules of construction

1.

If the provision is on imposition of tax liability  apply the strict interpretation rule “Any ambiguity in the provision of the law imposing tax shall be strictly construed against the government”.

2.

If the provision is on the exercise of the power of taxation  it must be liberally construed in favor of the government.  The power of tax is an inherent power of the state.  If the provision grants tax exemption: strictissimi juris shall be applied  Taxation is the rule and exemption is the exception  Any ambiguity in the law granting tax exemption shall be strictly construed against the taxpayer

So if the factual milieu of this case is applied on the present time, there will still be tax evasion. What must be rightfully paid

Coporate tax by CIC -

300M (Purchase Price as CIC sold to RMI) 100M (Cost of building) -------200 M (Net income) x 30% (tax) = 60M *CIC should have paid P60M.

What CIC would pay if the scheme is used 3.

Corporate tax by CIC -

100M (Purchase price as CIC sold to Altonaga) 100M (Cost of building) -------0M (Net income) x 30% (tax) = 0M *Corporation will have ZERO tax liability

If the law has ambiguous provisions both on imposition of tax and the grant of exemption  Apply the strict interpretation first: determine if the act that is being subjected to tax is indeed covered by the law imposing tax. If it is not clearly provided by the law that a subject is taxable, construe the ambiguity against the government and in favor of the taxpayer. Remember that before a subject can be imposed with tax, it must clearly be provided by a law imposing such.  If it is already determined that the subject is indeed covered by the law as taxable, apply the strictissimi juris. Construe the ambiguity of the grant of exemption against the taxpayer. So if the activity being taxed is already established to be covered by a tax law, taxation now becomes the rule and exemption is the exception. In order for exemption to be granted, it must be proven that the exemption is clearly provided by the law.

Individual Capital Gains Tax by Altonaga 200M (Gross Selling Price) x 6% = P12M *Only capital gains tax of P12M will be imposed by virtue of the sale because the scheme was used. The corporate tax is eliminated. A lesser tax is paid, therefore there will be tax evasion. QUESTION: What if the property is the corporate asset of CIC?  No tax evasion. Whether the scheme is used or not, the amount of tax to be paid is the same.  If the property is a corporate asset, 6% tax is imposed based on the Gross Selling Price or fair market value, whichever is higher. What CIC must pay if the two transactions are considered as one 300M (Gross Selling Price) x 6% = 18M What CIC would pay if the scheme is used 100M (Gross Selling Price, to Altonaga) x 6% = 6M 200M (Gross Selling Price to RMI) x 6% = 12M -----18M

CIR vs. ATENEO 

CIR alleges that IPC is liable for 3% contractor’s tax since it is an entity for profit. IPC does not fall into the exempted entities and should be considered as an independent contractor.



According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.

Supreme Court 1. IPC is not an independent contractor. It does not exist for profit and only provides public service. 2. Ateneo is not liable for contractor’s tax

Nature Applicability



Apply strict interpretation first

The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly,

expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.” To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. Only after such coverage is shown does the rule of construction — that tax exemptions are to be strictly construed against the taxpayer — come into play. After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university.

Binding to the courts



General Rule: Tax laws are not penal laws.  However, a tax law may also provide for penal provisions (e.g. NIRC of 1997) Since tax laws are not penal laws, ex post facto laws are not applicable.

1. 

Constitution Does not impose any tax liability. It merely limits or restricts the power to tax.

2.  

Statutes Legislations by the congress National in scope

3. 

Issuances by the Secretary of Finance Either by the Secretary of Finance or the BIR

SOURCES OF TAX LAWS

Issuing Authority

Revenue Regulations Secretary of Finance

To taxpayers who requested for the ruling No; Entitled to great weight by the courts

Gulf Air Co vs. CIR (September 18 2012)  Legislative approval by reenactment by administrative law. Where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the Legislature thereafter re-enacts the provisions without substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose." Thus, there is tacit approval of a prior executive construction of a statute which was re-enacted with no substantial changes. In this case, Revenue Regulations No. 6-66 was promulgated to enforce the provisions of Title V, Chapter I (Tax on Business) of Commonwealth Act No. 466 (National Internal Revenue Code of 1939), under which Section 192, pertaining to the common carrier’s tax, can be found:

Sec. 192. Percentage tax on carriers and keepers of garages. – Keepers of garages, transportation contractors, persons who transport passenger or freight for hire, and common carriers by land, air, or water, except owners of bancas, and owners of animal-drawn two-wheeled vehicles, shall pay a tax equivalent to two per centum of their monthly gross receipts. [Emphasis supplied]

NATURE OF TAX LAWS 

Implements the law; In the nature of a subordinate legislations To all taxpayers; Has the force and effect of a law Yes; Sub legislation

If the issuance does not involve an issue already decided Best guess of the commissioner

This provision has, over the decades, been substantially reproduced with every amendment of the NIRC, up until its recent reincarnation in Section 118 of the NIRC. The legislature is presumed to have full knowledge of the existing revenue regulations interpreting the aforequoted provision of law and, with its subsequent substantial re-enactment, there is a presumption that the lawmakers have approved and confirmed the rules in question as carrying out the legislative purpose.25 Hence, it can be concluded that with the continued duplication of the NIRC provision on common carrier’s tax, the lawmaking body was aware of the existence of Revenue Regulations No. 6-66 and impliedly endorsed its interpretation of the NIRC and its definition of gross receipts.

Administrative Issuances by the BIR include:    Administrative Rulings  Commissioner If the issuance involves a novel issue which has never been addressed before by the Commissioner 

Subordinates

Rulings Circulars Memorandum

Section 246 of Tax Code: Non-retroactivity of rulings

Any revocation, modification, or reversal of any of tax rules and regulations or any of the rulings or circulars promulgated by the Commissioner shall not have any retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayer. Exceptions: (MOBS)

1. 2. 3.

If taxpayer deliberately misstates or omits material facts If the facts upon which the ruling is based are materially different from the facts subsequently gathered by BIR If taxpayer is in bad faith

 

BURROUGHS





CIR vs. CA and Fortune A circular cannot supplant basic provisions of the law. If a circular goes beyond the law, the circular is void. Administrative issuance must contain provisions in line with the law it seeks to implement.

Note: the years indicated are not the actual dates in the case. 2014 and 2016 are used only as an analogy to show the retroactive application of the laws. 

Hence, the ruling of the Supreme Court CAN be retroactively applied.

Burroughs is a foreign corporation with a branch in the Philippine. The branch remits profits to the head office, and such remittance is subject to branch profits remittance tax of 15%. The law does not clearly mention whether the tax is based on the actual remittance or the amount earmark for remittance.

There is difference between the two. For example, a company earns P3M. The allotment of the profit is as to the following: 1M: money left in the Philippines to answer for expenses. 1M: remitted to the head office this year. 1M: to be remitted next year.



If the provisions are too clear to be mistaken and taxpayer relied upon an erroneous interpretation of the tax law, the taxpayer cannot use the non-retroactivity of laws in order to escape tax liability.

4. 

Tax Ordinances issued by the legislative branch of the Local Government unit

5.   

Tax Treaties Bilateral agreements between states First step: determine the existence of the tax treaty. If the existence of the treaty is established, the taxpayer has the responsibility to invoke the treaty.

SC Johnsons

The actual remittance is P1M— what is actually remitted this year. The earmark remittance is P2M—the money remitted this year and the one to be remitted next year.  

In 2014: CIR Ruling: the 15 % tax is based on the actual remittance. So Burroughs paid accordingly. In 2016: There was a new commissioner who revoked the previous ruling. The 15% tax must be based on the earmark remittance.

Is the ruling of the new commissioner retroactive? No. The revocation of the previous ruling was prejudicial to Burroughs. If the new ruling will be retroactively applied to it, Burroughs will be burdened to pay additional taxes. Burroughs acted in good faith to the CIR ruling. Moreover, the case involved a complicated issue due to the ambiguity of the law.

  

PB COM vs. CIR In 2014: CIR Ruling provides that the tax refund can be claimed within 10 years from the date of payment, applying the prescriptive periods in the Civil Code. PB Com claimed for refund beyond the 2 year period but within 10 years. In 2015: a new commissioner is appointed. Also, the Supreme Court nullified the issuance of the previous circular. The Supreme Court held that Section 2 of the Tax Code is clear that the claims for refund must be filed within 2 years from the date of payment regardless of supervening evens.

Is the ruling of the Supreme Court subject to retroactive application? Yes. Even though the revocation will be prejudicial to PB Com because it can no longer file for the claim for refund, PB Com cannot acquire any vested right upon a wrong construction of law. The provision of Tax Code is too clear to be mistaken. There is no ambiguity or any complexity in the issues involved.

CIR vs. San Roque Section 246 of the Tax Code (non-retroactivity) shall apply regardless of the body or entity which revoked or modified the ruling. Section 246 shall only apply if  the taxpayer acted in good faith; and  the issues are complicated (issues arise because of gray areas or ambiguous provisions of the law)



Johnsons claim for tax refund for its excess payment of the withholding tax as royalties. It alleges that it should only pay 10% tax as provided in the RP-Us treaty.

RP-US: 10% RP-Germany: 25% Supreme Court: apply the 10% under the RP-US agreement  Tax Treaty The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. The purposes of these international agreements are: 1. to reconcile the national fiscal legislations of the contracting parties; and 2. to eliminate international double taxation: International double taxation: 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  2 Methods In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax.

Note:

State of source: where the income was earned State of residence: domiciliary state

Exemption method

Credit method

Impose tax

Impose tax

Does not impose tax; grant exemption

Also impose tax; But grant tax credit equivalent to the tax imposed by the state of source



Government a case against the improperly accumulated earning tax beyond the 10 years prescriptive period. The improperly accumulated earnings tax is in the nature of a penalty. It is not regularly paid, hence is not covered by a return. The government can collect forever. Apply the general rule: taxes are imprescriptible.

   3.

RP-US Treaty: uses the credit method.

PRINCIPLES IN TAX LAWS 1. 

 a. b.

Prospective Application General Rule: tax laws are prospective in application  Exception: if the tax law provides for retroactive application.

c. d.

CIR vs. Acosta

Is there a need for a written claim for a refund?    

Acosta filed a return where he showed overpayment of tax for the taxable year of 1996, so he claimed for the excess He did not file for a written claim for refund. This was denied by the BIR. Court of Tax Appeals: if there is no written claim, refund must be denied. Acosta invoked Section 24 (c) of the 1997 Tax code where a written claim is not mandatory if the

e.

2. 

5.

No Set-Off  Taxes are not subject to set-off  Similar to the concept of compensation The parties are mutual creditors and debtors of each other. Their debts to each other are already compensated.



RATIONALE: The government and the taxpayers are not mutual debtors and creditors of each other.

Imprescriptibility General Rule: Taxes are imprescriptible.  Exception: If their declaration is covered by a tax return.

What are covered by tax return?     

Income tax Donor’s tax Estate tax VAT Percentage tax  

These taxes covered by a tax return are prescriptible. The government has a prescriptive period to assess tax liability. Otherwise, it is already barred from assessing the same. For extraordinary circumstances, the government has 10 years prescriptive period.

Improperly accumulated earnings tax

Statute granting tax exemption provides for a liberal construction. In cases of special taxes relating to special cases and affecting only special classes of person. Tax exemption pertains to public functions Tax exemption granted to religious, educational and charitable institution and properties. Tax exemption granted to the government and political subdivisions, and instrumentalities.

Equitable Recoupment  Claim for refund which is prevented by prescription may be allowed to be used as payment for unsettled tax liability IF both taxes arise from the same transactions.  PB Com: Tax refunds are in the same standing with tax exemptions. Thus, they must be strictly construed against the tax payer.

Petition for Review to the Court was filed on August 4 1999.

 The 1997 Tax Code cannot be retroactively applied. The right to refund accrued in 1996. During this time, the 1997 Tax Code was still not effective and the applicable law provides that there is a need for a written claim of refund, without any exception. Hence, Acosta cannot make use of the 1997 Tax Code retroactively in order to get a favorable judgement.

Exemptions:

4.

return shows in its face its overpayment 

Strictissimi Juris  Tax exemptions are highly unfavored.  Tax exemptions are strictly construed against the taxpayer.

Philex Mining Corporation Taxes cannot be subject to compensation for the simple reason that 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 have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.

INCOME TAXATION  

Income: flow of wealth other than the return of capital Capital: resource used to earn income; wealth itself

Illustration:

Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of one's labor. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services.  The income is subject to tax Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax upon the taxable net income received during each taxable year from all sources by a citizen of the Philippines, whether residing here or abroad. Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment. Petitioners being subject to Philippine income tax, their dollar earnings should be converted into Philippine pesos in computing the income tax due therefrom. Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption. Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing and not contrary to law, are valid.

Debtor obtained loan from Creditor for the amount of 100k. It is to be paid within a month including the interest, for the total amount of 100k. The debtor pays 100k to the creditor. Is this 110k considered an income in the part of the creditor?  

100k: return of capital, but not an income 10k: return on capital: income

Madrigal vs. Rafferty 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 an income. Capital is wealth, while income is the service of wealth.

Income Flow Flow of service rendered by the capital Service of Wealth

The creditor instead gave the 10k to the debtor instead of constituting it as an interest. Is this 10k considered an income in the part of the debtor? 

Yes. There is a flow of wealth in the part of the debtor since he gained

10k.  This income, however is not subject to income tax but to donor’s tax (to be imposed to the donor-creditor) Conwi vs. CIR  



Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments. Income, defined

Capital Fund Fund of property existing at an instant of time Wealth

In case of community property or conjugal property which earned an income:  50% of the income must be reflected by the husband in his annual income tax return  The other 50% must be reflect in that of the wife’s.

TESTS APPLIED IN DETERMINING THE EXISTENCE OF INCOME 1.

Severance Test/Realization Test  Income is recognized when there is separation of something which is exchangeable in value

2.

Tax Benefit Rule  When there is seemingly an event that is non-taxable but shall be considered as taxable because a tax benefit is given to a taxpayer

3.

4.

Economic Benefit  When there is increase in net worth, when there is income.  Applies to networth method: If there is increase in networth, it is presumed that you have earned an income. Claim of Right Doctrine  Taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return.

REQUISITES FOR THE TAXABILITY OF AN INCOME 1.

Existence of a gain 

2.

Realization of gain a. b.

c.

Illustrations: a.

Subject to the tests mentioned above.

Creditor loans 100k to debtor, which the latter has to pay.

Does the debtor have a claim of right over the 100k? Yes

Actual realization  Taxpayer has full control over the income Constructive realization  Income is not yet on the hands of taxpayer but such income is subject to his control or disposition Presumptive realization  Gain is provided or dictated by law.

Illustration: Rodney is a salesperson in a boutique. He is paid 20k a month.

Is there an absence of the definite unconditional obligation to return the 100k? No. He has the obligation to return the money since it was merely loaned to him.

If the salary is paid on cash, it is an actual realization of gain.

Hence, the 100k is not an income of the debtor, based on the claim of right test.

If the salary is given through a postdated check: it is a constructive realization of gain since he has control of the disposition of the check, but the money itself is not yet on his hands.

b.

The owner left her 100k in the table accidentally. It was taken by another person who had no idea who left the money.

Does the person have a claim of right over the 100k? Yes. He found it so he has the right to claim it. Is there an absence of unconditional obligation to return the money? Yes. He does not know to whom the money shall be returned. Hence, the money is his income. 5.

Income from whatever source principle  An income shall be taxable regardless of its source, whether legal or illegal. CIR vs. Javier   

Usually, Javier receives $1,000 as remittance per month. However, he suddenly received $10000 for the next month since the bank erred in crediting In his annual income tax return, he included the $1,000,000.00 as a footnote, but NOT as an income

Is the $10000 remittance considered an income? Yes. There is a flow of wealth in the case of Javier since suddenly, he received 10,000.  

Claim of right Absence of a definite obligation to return

It is an income, even if it is unlawfully obtained, subject to the “income from whatever source principle”.

Presumptive realization of gains can be illustrated as to the following: (i)

Capital Gains Tax

Sec 24 (b) of the Tax Code provides that on sales of real properties, if the property is a capital asset of the seller (not used in the business), the capital gains tax of 6% is imposed based on the gross selling price of fair market value of the property as prescribed by the city or provincial assessor or by the BIR. Ma’am Tin owns lot worth P3M (market value). She sold the house to Reynolds in the amount of P2M. There was no income in the part of Ma’am Tin. She even suffered a loss worth P1M. Can income tax be imposed upon the loss? No. Income tax is based on net income, which is equivalent to gross income minus expenses. If there is no net income, no income tax can be imposed. However, in the case of Capital Gains Tax (CGT), there is a presumptive realization of gains. The law says that CGT is based on Gross Selling Price (GSP) or Market Value. The law already presumes that the GSP or the Market Value is your income. (ii)

General Professional Partnership vs. Business Partnership

General Professional Partnership (GPP) Purpose is not to earn profit 2 or more individuals who bind themselves together to practice profession

Business Partnership (BP) Purpose is to earn profit 2 or more persons who bind themselves to contribute money, industry or property to a common fund for the purpose of sharing profits.

Not an income taxpayer No personality of its own; merely a pass-through entity

(4)

Income taxpayer Has personality of its own; Treated as corporate taxpayer

One who is previously considered as a non-resident and who arrives in the Philippines anytime during the taxable year to reside thereat permanently. However, they shall only be considered a non-resident from the start of the taxable year up to the date of his arrival.

Note: (1) and (2) are applicable to overseas workers

General Professional Partnership (GPP)

(3) is applicable to citizen who resides in the Philippines but has to work outside the Philippines

A GPP is formed by Lariosa, Busain and Mangalubanan  (LBM Partnership) The partnership earns P3M, but they agreed to distribute only 1.5M to the three of them. They earned 500k individually. How much of their income is taxable? The entire amount of 3M. Thus, 1M per partner. A GPP is not an income taxpayer. The taxpayers are the partners themselves since the partnership is merely a pass-through entity.

Business Partnership

Illustration: Mr. X is an educator. He works outside the Philippine From January to June, and also from October to December. He is a non-resident citizen since his employment requires him to be out of the country most of the time.

*Same facts How much income is taxable per partner? 500k. The business partnership is a corporate taxpayer. It has a separate personality from the partners and stockholders. The income of 3M is not to all partners, but the income of the partnership.

 

Since only 1.5M is distributed to the partners, only 500k is considered an income of the partners.

3.

Gain must not be excluded under Section 32 (b) of the Tax Code

INCOME TAXPAYERS 1.

Individuals

Types of individual taxpayers:

a.

Resident citizens 

(2) (3) (4)

b.

In the previous example, is the income of Mr. X earned outside the Philippines subject to tax? No. He is a non-resident citizen. Since the income was earned from his engagement outside the Philippines, the state cannot impose tax to such income.

c.

Those who are citizens of the Philippines at the time of the adoption of this Constitution Those whose fathers or mothers are citizens of the Philippines Those born before January 17 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority Those who are naturalized in accordance with law

Resident Aliens  

One who is a resident and a citizen under Article IV of the Constitution (1)

Why is there a need to classify residents from non-residents? The tax implication would vary depending on the status. If resident citizens  Tax can be imposed on the income earned within and outside the Philippines.  Worldwide income is subject to tax.  RA 8424: applies only to resident citizens. To all other taxpayers, their income is subject to Philippine tax only if earned within Philippines.

d.

Non-Resident Aliens Engaged in Trade and Business (NRAETB) 

Non-resident citizens 

Four definitions under Section 23 of Tax Code: (1) (2) (3)

One who established to the satisfaction of the CIR the fact of his physical presence abroad with the intention to reside therein One who leave the Philippines during the taxable year in order to reside abroad as an immigrant or for employment on a permanent basis. One 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.

Tax treaty between RP-US: 183 days

e.

Not citizens of the Philippines but resides in the Philippines If the alien stays for more than 1 calendar year in the Philippines, the alien must be classified as resident aliens.

One who is neither a citizen nor resident of the Philippines BUT engages in trade or business in the country.

Non-Resident Aliens NOT Engaged in Trade and Business (NRANETB) 

One who is not a citizen, not a resident, and NOT engaged in trade or business in the Philippines

Tax Code, 180-day rule 

If a non-resident alien resides in the Philippines for more than 180 days, such alien shall be deemed as engaged in business in the Philippines. (Presumption)



If there is no evidence that a non-resident alien is engaged and he stays for exactly 180 days, he is deemed as not engaged in business in the Philippines.

Note: the presumption only applies if the alien resides for more than 180 days. Why is there a need to classify non-resident aliens engaged and not engaged in business or trade in the Philippines? 

The tax to be imposed also varies as between them.

Engaged in business Can avail of allowable deductions, also considered operating expenses. Subject to normal tax based on scheduler tax rate (based on net income)

NOT engaged in business Tax is based on gross income; cannot be allowed to reduce the gross income through availment of allowable deduction Subject to final tax rate of 25%, based on gross income

Why is final tax imposed to non-resident aliens not engaged in business? The moment the final tax had been remitted to the government, it already extinguishes the tax liability of the taxpayer. This is imposed to non-residents not engaged in business in the Philippines because of the risk of flight.

Illustration: Selena Gomez had a concert here in the Philippines. She need not file income tax return annually since she is a non-resident alien who is not engaged in business in the Philippines. But the law imposes final tax on the income she earns during the concert. Once this final tax is paid, her liability extinguishes. All she has to do is pay, without the need to file an annual tax return declaring the proceeds of the concert as her income.

 

If it is a domestic corporation, it is subject to tax as to the income it earned within or outside the Philippines If it is a resident or non-resident foreign corporation, it is subject to tax only as to income it earned within the Philippines.

Resident Foreign Corporation Subject to tax based on net income; Can deduct allowable expenses Subject to normal tax

3.

Estate



Estate is another classification of a taxpayer only if such is under judicial settlement Under the Tax Code, an individual taxpayer can adopt a taxable period that starts from the month of January and ends in the month of December (Calendar Year)



Illustration: June 1: A died. He left properties. When he was alive, he earned a monthly income of P10,000. From January to before June 1, the taxpayer is A, since he was still alive at that time. From June 1 to December 31, the taxpayer would depend on the following:  If the estate was settled extra judicially, the heirs become the taxpayer. By succession, they became the owners of the estate.  If the estate was settled judicially, the estate itself is the taxpayer. 4. 

*If an alien is engaged in business in the Philippines, that alien must file an income tax return annually

Trust Parties in a trust agreement:  Trustor: the person who appoints another person to manage his property; the real owner of the property  Trustee: the person appointed to manage the property of another  Beneficiary: the person to benefit from the trust agreement

through himself or appoint authorized representatives.*

2.

Corporate

Kinds of corporate taxpayers

a.

Domestic Corporation

 

Entity incorporated under the tax laws of the Philippines Speaks of the place of incorporations, not the nationality of the stockholders. e.g. if registered under the Security and Exchange Commission, it is a domestic corporations

b.

Resident Foreign Corporation



A foreign corporation which is engaged in the Philippines

c.

Non-Resident Foreign Corporation



A foreign corporation not engaged in Philippines

There is a need to classify in order to determine the type of corporate tax to be imposed.

Non-resident Foreign Corporation Subject to tax based on gross income; Cannot deduct allowable expenses Subject to final tax of 30%

Illustration:

If the designation of the beneficiary is revocable: the agreement is a revocable trust If the designation of the beneficiary is irrevocable: the agreement is an irrevocable trust

A – trustor B – trustee C – beneficiary If it is an irrevocable trust, who shall be the taxpayer? The trust itself. Since C is the beneficiary, no benefit redounds to A as the trustor. If it is a revocable trust, who shall be the taxpayer? A as the trustor. He is still the owner of the property. He can still revoke the designation of C as the beneficiary. He still has the control over the property.

TAX SITUS 

Situs: the source of the income.

 

It does not refer to the place of the income but to the activity or property that had produced the income. Section 42 of the Tax Code: situs depends on the subject matter.

1.

Service 

and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor’s tax.

Tax Situs: the place where the service has been rendered CIR vs. Baier-Nickel

Illustration: Reynold is an accountant in a Japanese firm. In 2015, the firm sent Reynolds to Japan to work on the firm’s branch office. It is in Japan where the salary and allowances are being earned.

Cited the case of CIR vs. British Overseas Airways Corporation  

Where is the situs of the income? Japan 

If Reynolds is a resident citizen, regardless of the source of income, such income is subject to Philippine tax.  If Reynolds stayed at Japan for 9 months, he is considered as a nonresident citizen, thus only income earned within the Philippines could be subject to tax. Since the income is earned because of the service rendered in Japan, it must not be subject to tax in the Philippines.

Under the RP-Japan Treaty, if a citizen of a country resides on another country for more than 183 days, he is considered as a non-resident citizen. If he stayed in Japan only for 6 months, it is equal to 180 days, which means that he is considered a resident citizen of the Philippines and thus his income is subject to tax regardless of whether such income is earned within or outside the Philippines.

CIR vs. MARUBENI 

Marubeni (Japan corporation), the NDC and Philphos entered into an agreement entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project Between National Development Company and Marubeni Corporation.

The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondent’s entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on products). Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. Clearly, the service of design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination of the two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical

BOA has no landing rights in the Philippines. There is no passenger, excess baggage or carriage that originates from the Philippines. BOA, however, has lines of offices and agents selling tickets in the Philippines for routes outside the Philippines

Is the income from the sale of the tickets subject to tax? Yes The phrase place of income refers to the activity or property that had produced the income. In this case, BOA is a non-resident foreign corporation that can only be subject to tax as to those income earned within the Philippines. The activity that produced the income is the sale of ticket that is being done in the Philippines. Hence, the income is sourced within the Philippines, subject to income tax.

2.

Interest Income

 

Situs: the place of the residence of the debtor. The Tax Code says “obligation of the resident”

Mr. X borrowed money from Hongkong Bank (HKB) for principal amount of $1M. The agreement provides that the loan is subject to 10% interest per annum. This shall be paid after 1 year. If $1M is paid back to HKB, is it subject to tax? NO. It is merely a return of capital. There is no income, so it is not subject to income tax. The interest of 10%, equal to $100,000, is subject to tax.  Status of the taxpayer (Hongkong Bank): non-resident foreign corporation A non-resident foreign corporation is subject to tax as to income sourced from within the Philippines.  Nature of the income: Interest income The situs of an interest income is the residence of the debtor. The debtor is Mr. X, as resident citizen. As a resident citizen, he is subject to tax as to the income paid from within or outside the Philippines. Hence, the interest income is subject to tax. NDC vs. CIR 

The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus: SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: (1)

The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or other interest-bearing obligations, but by the obligor. The residence of the obligor which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the Philippines.

 

Dividend Income In a dividend income, the income earner is the stockholder. The source of dividend income of the stockholder depends on the issuing corporation  Domestic corporation: the dividend income is entirely sourced from within  Non-resident foreign: the income sourced from outside the Philippines  Resident foreign corporation: it depends on the ratio of the gross income sourced from within during the 3-year period prior to the taxable year of declaration of dividends that bears over the worldwide gross income

Legend: R: Ratio GI: Gross income WGI: Worldwide Gross Income

R = GI (within) (3 year) WGI where WGI= GI (from within) + GI (outside the Philippines )  

If the ratio (R) is 50% or more, the dividend income is considered sourced from within. If the ratio is less than 50%, we have to prorate depending on the ratio.

Illustration: Gross income sourced from within = P1M Gross income sourced from outside = P3M -------

P4M

Ratio of the GI (within) bears over the WGI: 1M 4M

1 4   

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

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. The law, however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila.

3.

Worldwide Gross Income (WGI)



¼ is equal to 25% 25% is less than 50% Hence, the dividend is considered sourced from within 75% of the dividend income is considered sourced from outside of Philippines.

X corporation is a resident foreign corporation. During the taxable year, it was determined that 40% of its gross income during the 3 year period prior to the declaration of the dividend is sourced from within During the taxable year, it declared that 100k dividends in favor of its stockholders, one of whom is Mr. A, a non-resident citizen Who is the taxpayer? Mr. A. He received 100k. What is the nature of the income received? Dividend income Where is the source of the dividend income? Resident foreign corporation In this case, the ratio is 40%. Subject to the rues mentioned above, we need to prorate since it is less than 50%. 40% of the 100k is sourced from within, 60% is sourced from outside. 40% of 100k = P40,000 Only this portion is considered sourced from within and is subject to tax. What if 50% is sourced from within? The entire amount of 100k is subject to tax. If ratio is 50% or more, the entire amount of dividend is considered sourced from within.

4.

Sale of Real Properties



Situs: place where the property is located.

Illustration: If the real property sold is in Japan, the sale proceeds would not be subject to Philippine tax, unless:  The seller is a Filipino citizen; or  The seller is a Domestic Corporation 5.  

Sale of Personal Properties Situs is based on the passage of title test.  Ownership is transferred upon delivery. If the personal property is to be shipped abroad, determine if it involves a freighton-board shipping point or a freight-on-board destination

Transfer of ownership Risk of loss

FOB Shipping Point Ownership is transferred at shipping point Buyer

FOB Destination Ownership is transferred at point of destination Seller

4.



6.

Rent or Royalties



Situs: place where rent or royalty shall be exercised

Read: RMC 44-2005 and BIR Ruling February 26 2008

GROSS INCOME 

Capital Dealings

Gross Income is equivalent to Gross Sales minus Cost of Sales

Income arising from sale of capital assets

What about prizes and winnings? Prizes With exertion of effort If 10k or less, it is subject to normal tax If more than 10k, it is subject to 20% final withholding tax

Winnings With no exertion of effort Regardless of amount, it is subject to 20% final withholding tax.

32A of Tax Code: income derived from whatever source principle

1.

Exclusion from Gross Income

Compensation Income  

All income arising from employer-employee relationship Recall the four-fold test of employer-employee relationship: a. Power of selection b. Payment of compensation c. Power of dismissal d. Power of control

Examples:  Compensation for services  Annuities (e.g. life insurance proceeds) arising from employer-employee relationship  Pension arising from employer-employee relationship

2.

Income from Business, Trade or Profession 

If the income does not arise from such relationship, the income is considered from business trade or profession

Examples:  Compensation income from trade  Rents  Annuities (e.g. life insurance) not arising from employer-employee relationship  Pension not arising from employer employee relationship  Partner’s distributive share from net income of general professional partnership Recall: a general professional partnership has no separate juridical personality from the partners. Compensation Income Taxpayer is not allowed to deduct allowable expenses Qualifies to substituted filing subject to requirements by law

3.

Income from Business, Trade or Profession Allowed to deduct allowable expenses No substituted filing

Passive Income 

Earned without exertion of effort from the taxpayer

Examples:  

Prizes and winnings Income arising a business partnership  Business partnerships are corporate taxpayers. The share received by the stockholders are considered dividends, and are therefore passive income.

1.

Proceeds from Life Insurance   

Paid to heirs and beneficiaries upon death of the insured taxpayer. In the nature of indemnification to the heirs. This provision does not refer to the premium but to the proceeds of the insurance.

Illustration: (i)

A secured life insurance from insurer for the amount of P1M. The beneficiary is B, the sole heir of A. A died.

Who shall receive the proceeds? B. There is a flow of wealth in the part of B since he received P1M. However, this income is not subject to tax because under Section 32 (b) of the Tax Code, proceeds of life insurance are exempt from income tax. This does not apply to premium payments.

Illustration: (i)

Employer insured the life of the employee, since he has insurable interest over the life of this employee. The employer paid the premium

Employer: Atty Tin. Employee: Kris Beneficiary designated: Atty Tin. Is the premium paid a taxable income on the end of Kris? No. There is no income to begin with since there is no flow of wealth. For a flow of wealth to exist, benefit must redound to Kris. In this case, there is no flow of wealth in the part of Kris since it is the employer who benefits from the insurance proceeds if Kris would die, having been designated as the beneficiary. Is this a taxable income on the end of the employer? No. The proceeds is received by reason of the life insurance. Under Section 32 (b) of the Tax Code, life insurance proceeds are excluded from imposition gross income. Life insurance proceeds are in the nature of indemnity for the life of a person, in this case, a valuable employee. (ii)

The beneficiary designated in the insurance is the sole heir of Kris.

Is the premium payment paid by the employer a taxable income in the part of Kris? Yes. Kris obtains benefit even though it was the employer who paid the premium. There is a real gain in the part of Kris, and such gain is not excluded from 32B of the Tax Code. If Kris dies, the sole heir receives the proceeds. Such insurance proceeds is excluded from gross income, as provided under Section 32 (b) of the Tax Code.

2.

Return of premium



The amount received by the insured as the return of premium paid by him in a life insurance shall be excluded from gross income An individual may receive only the cash surrender value and not the proceeds, if he outlived the period of the insurance



The BIR imposed an income tax to the value of the house and lot, alleging that such property was in the form of a compensation for services of the G.R.O. to the old man. Was the imposition of income tax proper? No. The consideration of the property was mere love and affection of the old man to the G.R.O. It is in the form of a donation and not as a compensation for rendering of the service. The donor’s tax was already paid accordingly.

Illustrations: (i)

Kris borrowed P100k from Atty Tin. The loan is to be paid after 1 month. However, Kris failed to pay. Atty Tin said that Kris does not have to pay it anymore since she’s already rich.

Requisites: (1) (2)

Return of premium Premium must be paid by the insured

Illustration: Kris took a life insurance. He paid the premium of 500k. The policy says that if he survives within 5 years, he will get 700k. He survived and was granted the 700k. Is this 700k considered a taxable income?  500k: not subject to tax; it is a return of premium which is in the nature of return of capital  200k: subject to tax; a return on capital.

3.

Gifts, bequests and devise  

Properties that are transferred gratuitously The properties themselves are not subject to tax. However, they are subject to the following:  Transfer of gift: donor’s tax  Transfer of bequests and devise: estate tax.  What is being taxed is the privilege of transferring property to another person. ABELLA vs. CIR

 



Political contributions are in the nature of gifts. Notwithstanding, they are also exempt from donor’s tax. The BIR cannot impose income tax over these political contributions received by politicians since gifts, bequests and devises are excluded from gross income. If BIR issued a ruling imposing these contributions with income tax, it would violate due process since tax impositions must be embodied in a statute. The remedy is for the Congress to amend the law.

Actual case on BIR Ruling A G.R.O once served an old man. The old man gave her his house and lot. He paid donor’s tax for the transfer of the property to the G.R.O. The old man died.

Is it in the nature of a gift? Yes. Atty. Tin cancelled the obligation due to her generosity. As a gift, it is not subject to income tax. (ii)

Kris borrowed P100k from Atty. Tin. He failed to pay the same. Atty. Tin said that all Kris had to do is to simply clean Atty Tin’s house. If Kris cleans the whole house, she would cancel the obligation.

Is the amount of 100k taxable or not? It is taxable. The cancellation of the indebtedness of Kris by Atty. Tin is an income on the part of Kris. It was earned for the rendition of his service by cleaning the house of his creditor. As a compensation, it is taxable. (iii)

Mr. Gipit obtained a loan from Mr. A amounting to 100k. The loan was to paid for four installments. Mr. Gipit already paid the first monthly installment worth 25,000. After this payment, Mr. A cancelled the obligation of Mr. Gipit as long as Mr. Gipit would clean the house of Mr. A.

Is this a taxable income? Yes, but only as to the amount of the remaining P75,000 since Mr. Gipit already paid the 25,000. This 75,000 was an income of Mr. Gipit. The cancellation of indebtedness was by virtue of his rendering of service. This is no longer a donation that is subject to donor’s tax but a remuneratory donation which is subject to income tax.

4.

Compensation for personal injury or sickness



Amounts received from accident or health insurance or under workmen compensation act as compensation for personal injury or sickness plus the amounts of any damages received whether by suit or agreement on account of such personal injury or sickness

Illustration:

(2)

X was driving a car. He had a passenger. Y was driving a truck. The truck hit the car. The passenger of X died.      

Hospital expenses: not taxable Cost of repair of car: not taxable Moral damages: not taxable Atty’s fees: not taxable Unearned salary of X: not taxable Loss of profits of a business: TAXABLE; no personal injury involved.

Note:

The law does not require that the injury be physical. The law is clear that compensation may be for any kind of personal injury. Hence, even moral damages by reason of a crime of libel would be covered by the provision.

5. 

Income Exempt from a Treaty Obligation of the taxpayer to be exempt from tax: invoke the tax treaty

6.

Separation Payment



The grant of separation payment is mandatory on dismissals due to authorized causes. If the dismissal is based on just cause: separation pay is not mandatory  unless the CBA provides for the same.

Review on Labor Law: 



Whether or not the separation pay is exempt from tax depends on the nature of the separation of the employee  If the separation is voluntary in nature: separation pay is taxable  If the separation is involuntary: separation pay is non taxable.

Illustration: If the employee was dismissed by reason of retrenchment: Separation pay is nontaxable because the employee separated from employment by a reason beyond his control. If the employee was dismissed because he always sleeps at work: Separation pay is taxable. If the employee resigned: separation pay is taxable since he voluntarily severed his employment. 7. 

Retirement Payment

*These two requisites do not apply when the retirement pay was granted pursuant to a CBA. If this is the case, the retirement pay is automatically exempt from tax.

Illustration: (i)

Are the retirement pays taxable? Yes. If there is no indication, the presumption is that the retirement pay was granted with a reasonable retirement benefit plan (RPBP). As to the retirement pay she received from Proctor and Gamble, she was only 35 years old when she retired and claimed for the pay. RA 4917 provides that the taxpayer must atleast be 50 years old. Hence, the retirement pay is taxable. When she received the retirement pay from Accenture, she was only 45 years old. Hence, it is also taxable. (ii)

A third company hired DJ for 10 years. She received a retirement pay of P2.5M. Is the retirement pay taxable? NO. BIR Ruling: The third requisite provides that the benefit of tax exemption must have been granted only once. This requisite refers to the availment of the tax exemption and not to the benefit itself of receiving the retirement pay. In this case, the retirement pay received by DJ is nontaxable because all the requisites are present. (1) She was 55 years old when she retired (2) She rendered 10 years of service (3) She only received the benefit of tax exemption once. The first two separation pays she received were both taxable and no tax exemption was granted before.

8.

13th Month Pay and Other Benefits



Mandatory benefits provided under labor laws (Labor code and other pertinent labor laws):  13th month pay  Service Incentive Leave (minimum of 1 year of service)  But if vacation leave and sick leave are already granted, Service Incentive Leave is no longer mandatory Rule on Taxability  If the 13th month pay or other benefits do not exceed P82,000, it will not be subject to tax  If it exceeds P82,000  The 82,000 will not be subject to tax.  The excess from the 82,000 will be subject to tax.

With RPBP: RA 4917 is the governing law. (1) (2) (3)

Taxpayer must be atleast 50 years old Taxpayer rendered 10 years in service Benefit of tax exemption must have been granted only once.

Without RPBP

2 Requisites: (1)

The recipient must be 60 years but not more than 65 years old

DJ is working as consultant in Proctor & Gamble. The corporation has control on the means and methods used by DJ in her employment. She started at the age of 20. She worked there for 15 years. When she retired, she received a retirement pay of P1M.

DJ was hired by Accenture as a consultant for 10 years. When she retired, she received a retirement pay of P2M.

Whether retirement pay was granted without a reasonable retirement benefit plan (RPBP)

Requisites for tax exemption:

The recipient rendered 5 years of service



9.

De Minimis Benefits

a)

Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year; Monetized value of vacation and sick leave credits paid to government officials and employees; Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month; Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more that P1,500; Uniform and clothing allowance not exceeding P5,000 per annum; (last amended by RR No. 8, 2012) Actual medical assistance not exceeding P10,000 per annum; Laundry allowance not exceeding P300 per month; Employees achievement awards 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 Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; 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;

b) c) d) e) f) g) h) i) j)



Medical Assistance: 20k

*1,500 per month x 12 months 10k (item c)

10k (excess) TOTAL: 82k

All will be non-taxable. The de minimis benefits are automatically non-taxable. Moreover, the benefits that fall under the category of “other benefits” amount to exactly 82k. Remember that in “13th month and pay and other benefits” must not exceed 82K in order for it to be exempt. In this case, the 13th month pay and other benefits amounted to exactly 82k. Hence the entire amount is non-taxable. If the employer grants another benefit in the form of gift certificate amounting to 20k:  not a de minimis benefit since item h speaks of awards “which must be in the form of a tangible personal property other than cash or gift certificate”  falls under “other benefits” but would already exceed the 82k limit provided by law. Hence, this excess would be taxable.

10. Representation and Transportation Allowance (RATA)  

RATA given on a monthly basis shall not be subject to tax if RATA was received by a government officer or employee If RATA received by private employee, it forms part of the compensation income of the employee

These are not subject to tax

11. Benefit by Reason of Social Legislation

Illustrations:



(i)

Nutri Chippy granted rice subsidy to its employees, amounting to 1500 per month. This is not subject to tax since it is considered as de minimis benefit. Nutri Chippy is not required to withhold taxes on the benefits of the employees.

Excluded from gross income and not subject to tax.  GSIS  Social Security Benefits  Benefits by reason of being a war or veteran  Received by any person residing in the Philippines and such benefit has been granted by US Veterans Administration

12. Income derived by foreign government 

Income derived from investments in the Philippine by a. foreign government, b. financial institution owned and controlled by foreign government c. international or regional financial institutions established by a foreign government Reason: international comity

(ii) The following benefits are granted to employees: 13 month pay: 30k 14th month pay: 30k Productivity bonus: 10k Christmas bonus: 10k Rice subsidy: 25k Medical assistance: 20k th

13. Prizes and awards

Are these benefits subject to tax? o

First step: determine which among the benefits are considered as de minimis benefits. All others would fall into the category of “other benefits” under item no. 8 which is named “13th month pay and other benefits”. De minimis

13th month pay: 30k 14th month pay: 30k Productivity bonus: 10k Christmas bonus: 10k

10k (item h) 5k (item i)

Rice subsidy: 25k

18k (item e)

“Other benefits” 30k 30k 5k (excess not covered by de minimi benefits) 7k (excess)



General Rule: subject to tax

 

Winnings: regardless of amount, subject to 20% final withholding tax Prize:  Amount exceeds 10k: subject to 20% final withholding tax  Amount is 10k or less: price is subject to normal tax



Exceptions: 1. Prize or award was made in recognition of religious, educational, charitable, literary, artistic, scientific, or civic achievement; 2. Prize was received by the recipient without any action on his part to enter the contest or proceeding; and 3. The recipient is not required to render future substantial services to receive the prize.

Illustration: (i)

Atty. Tin is a resident citizen. She won a prize in USA by entering the contest “The Voice”. She won P10M.

Generally, is it subject to final withholding tax? Yes. It is a prize since she exerted an effort. The amount of the prize exceeds 10k. Thus, it is subject to final withholding tax.

Under Revenue Memorandum Circular. 53-2011 -The amount of Gross Income excluded shall only be equivalent to the amount of mandatory contributions -IF the amount contributed by TP is more than the Mandatory Contributions the excess shall not be excluded from the Gross Income

Is it subject to income tax? Yes. Atty. Tin is a resident citizen. Hence, all income derived within or outside the Philippines can be taxable.

Example: Gross Compensation Income (GCI) SSS Phil Health Pag Ibig Witholding Tax

Can the Philippines impose final withholding tax to the prize? No. The Philippine Government cannot constitute The Voice, USA as a withholding agent. What Atty. Tin should do is declare it in the Income Tax Return and subject the same to normal tax.

RATIO of deduction: The mandatory contributions to SSS, Phil Health, Pag-ibig are deducted from GCI because they should be EXCLUDED AND NOT SUBJECT TO TAX.

(ii)

If a non-resident won the same, can it be imposed with an income tax by the Philippines? No. It is sourced outside the Philippines. Non-resident citizens can only be imposed with tax on income earned within the Philippines. (iii)

What if the winnings were in the form of a trophy or a crown. Can it be subject to tax? Yes, equivalent to the value of the crown. But it cannot be subject to final withholding tax because the Philippines cannot constitute the organizers of the contest in the foreign country as withholding agents. (iv) Tripartite agreement X Corporation employed Y Corporation, a non-resident foreign corporation to troubleshoot the corporation’s program. The service is rendered in the Philippines.

30,000 (

100

( ( ) (

) ) )

Q: If the under the law the mandatory contribution for Pag-ibig was only 100, what if the contribution made by the Taxpayer is 1,200/month? Will the entire amount of 1,200 pesos be deducted from GCI? A: NO. Under RMC 53-2011 the amount to be excluded from the Gross income must only be equivalent to the Mandatory Contributions. The excess therefore which amounts to 1,100 cannot be deducted from the Gross Compensation Income and is NOT exempt from Income tax. NOTE: The Law makes no Qualification. The Law does not expressly state it must be equivalent to the mandatory contribution what law merely states is that all GSIS, SSS, Pag-ibig and Phil Health contributions shall be excluded from Gross Income without qualification. Therefore the exclusion only applies to the amount equivalent mandatory contributions and any excess shall NOT be deducted from the Gross Income.

Y Corp hired non-resident alien (NRA) who was at the Philippines.

 Will the amount of income received by Non-Resident Alien subject to tax? YES Subject Matter: Service Situs: place where the service is rendered Philippines Ask yourself, can a non-resident alien be subject to tax sourced from within the Philippines? Yes. Hence, his income is taxable.

14. Prize or award rendered in sports competition   

Requisite: Granted to an athlete in a local or international sports competition whether held in the Philippines or abroad and sanctioned by their respective sports organization. BIR Ruling: Sport organization means the Philippines Olympics Committee

TAX CODE PROVISION: Section 32 (B)(7)(f) - GSIS, SSS, Medicare and Other Contributions - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.

TAX CODE PROVISION: Section 32 (B)(7)(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness -Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.

RULES: 1. It must be for MORE THAN 5 years 2. IF EXACTLY 5 years – it is not excluded from income and therefore not exempt from tax.  Section 4 (b) of RA 9994 – “Expanded Senior Citizens Act of 2010” Section 4 (b) exemption from the payment of individual income taxes of senior citizens who are considered to be minimum wage earners in accordance with Republic Act No. 9504; -Exemption is granted from Income Tax provided they are minimum wage earners and such income arises from an Employer-Employee Relationship. RA 9504 - Tax Exemptions for Minimum Wage Earners and Increased Tax Exemptions Q: Who are Minimum Wage Earners? 

A: refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned Q: Would the computation include Overtime Pay (OTP), Night shift differential (NSD), Hazard Pay (HaPay) and Holiday Pay (HoPay)? A: Yes. Provided he is a minimum wage earner EXAMPLE: A earns P 285/day Q: Is his OTP, NSD, HaPay and HoPay exempt from income tax? A: Yes, provided the Income earner is a minimum wage earner. NOTE: -Under RA 9504 Minimum Wage Earners are exempt from payment of income tax on their taxable income; The Holiday pay, Overtime pay, Night shift differential pay and Hazard pay by such minimum wage earner shall likewise be exempt from income tax. - presupposes Employee receives minimum wage UNDER RA 9504 which was expanded by RMC 5-2011 IF an employee receives 13th month pay and other benefits : -IF income does not exceed 30,000 – entire amount is NOT TAXABLE -IF Income exceeds 30,000 – 30,000 is NOT TAXABLE but excess of 30,000 is TAXABLE - shall be subject to Final Withholding Tax and normal tax AT PRESENT - IF an employee receives 13th month pay and other benefits IF income does not exceed 82k – 82k is NOT TAXABLEE IF income exceeds 82k – 82k is NOT TAXABLE but excess of 82k is subject to tax. Q: If A receives 82,000, is he considered as a Minimum Wage Earner? A: Yes. Therefore his COMPENSATION INCOME inclusive of OTP, NSD, HoPay and HaPay is not subject to tax Q: IF A receives 13th pay and other benefits amounting to 100,000? A: 82,000 is NOT subject to tax while the excess or 18,000 shall be TAXABLE. THEREFORE the moment a MWE receives 13th month pay and other benefits in excess of 82,000, then entire amount of Compensation Income shall now be subject to tax. Q: IF Minimum wage earner receives income other than income subject to final tax? A: “Final tax” – amount of tax withheld from income of Tax payer As a RULE : The act of withholding the Final withholding tax EXTINGUISHES the Taxpayers liability. ILLUSTRATIVE EXAMPLE Eman is an employee and earns a salary of P 10,000/month. Eman joins a singing contest where he received P 100,000 as consolation prize. 20% of 100,000 will be withheld. Therefore 20% of 100,000 is equivalent to 20,000 which will be WITHHELD. Q: After the withholding of 20,000 is the Taxpayers Liability extinguished? A: Yes. Only 80,000 shall be included in Taxpayers Income Tax Return (ITR) and no longer the full amount of 100,000.

Q: What is the legal implication as to Eman’s salary? A: IF prize is more than 10,000, such prize shall be subject to Final Withholding Tax. Therefore, it would not be added to the computation of annual income tax. Merely remitting the same would extinguish the liability. Since it is not added to the computation of income of Eman, Eman remains to be a minimum wage earner. IF income is less than 10,000 it shall be subject to Normal Tax. It will be added to the computation of income of Emman. Hence, his entire compensation will NOW be subject to tax. NOTE: Creditable Withholding Tax is in the nature of advance payment of Tax. Therefore the act of withholding and remittance to Government does not extinguish Taxpayers liability. Q: Will taxpayer still report 10,000 in AITR at end of taxable period? A: Yes. DISCUSSION ON FINAL WITHHOLDING TAX Assuming: Salary Annual Income Tax 10,000/month 120,000/year – Amt of salary x 12 months (500)/month ( 6,000/year) – deduction from tax liability aka TAX CREDIT GR: Passive income is subject to Final Withholding Tax (FWT) Q: What are the types of Passive Income? A: (DRIP) Dividends, Royalties, Interest Income, Prizes and Winnings Q: If the MWE –minimum wage earner received Interest income during the taxable year, will the interest income form part of the earnings? A: NO, it is not included – because interest income is subject to Final Withholding Tax Q: IF MWE derives income from Business (IBTP – Income derived from Business, Trade or Profession)? Is income earned from Business, Trade or Profession subject to Final Withholding Tax? A: No. IBTP is subject to normal tax. Therefore, it will be added to the earnings of the MWE. Q: IF a MWE earns money from IBTP during taxable year, is the MWE subject to tax? A: Yes. Compensation Income and IBTP are now all subject to tax BUT UNDER RMC 5-2011 1) MWE earner shall not be subject to FWT as to his compensation income 2) Amount of income from employer employee relationship is subject to normal tax EX. Business 15,000/month

Salary 5,000/month

Q: Will the entire amount from his Business be subject to tax? A: Yes. Because the MWE earns income from other sources, other than income subject to final tax. Q: Will 5,000 be subject to Withholding Tax? A: No. Eman receives income of 5,000 without withholding tax but at the end of the taxable year it will be subject to tax.

SUMMARY OF RULES: 1) IF MWE – not subject to tax 2) IF MWE receives OTP, NSD, HaPay, Hopay – he is still considered as a MWE 2) IF MWE receives 13th month pay and other benefits more than 82,000 – he is NO LONGER considered as MWE and Therefore his COMPENSATION will now be subject to tax 4) IF MWE earns income subject to final withholding tax – he is still considered a MWE RATIO: because it is not yet included in the computation of Annual Tax Liability 5) Q:IF MWE earns income from other sources, other than income subject to final withholding tax. Is he still a MWE who is exempt from tax? A: No. The entire amount if income is now subject to normal tax. The compensation income is still exempt from Withholding tax, but shall still be subject to normal tax. Employer’s Convenience Rule -privileges granted to an employee which will redound to the benefit of the employer shall not be subject to tax IF BEYOND ambit of ECR -Taxable -NOT redound to benefit of the Employer Q: As to Gas expenses? A: covered by ECR provided: 1) It must be in the name of the Company/Corporation 2) It redounds to the benefit of the Company/employer Q:Mobile allowance? A: CIR v Arthur Henderson Henderson was the president of a corp. He was provided a three bedroom house for the benefit of his family. Henderson claims such is not subject to tax as he entertains guests of the corporation and ultimately redounds to the benefit of the Corporation. Q: Should it be treated as a taxable benefit as to Henderson? A: SC: The reasonable value of a house used by Henderson and his wife is a taxable benefit on part of Henderson, the excess will not be taxable as to Henderson and such will be considered as an expense on part of the Corporation. -not subject to tax if the nature of the job calls for such expenditure and falls within the ambit of the Employer’s Convenience Rule and therefore not subject to tax. EX. President of Corp was granted a vehicle (BMW) -President claimed she originally asked only for a Toyota Car which would have a reasonable value of 10,000 only but the company insisted that a BMW must be used to uphold the image of the Company -the reasonable value of the BMW car was at 40,000/month -BIR assessed the same and found deficiency in taxes Q: How much is taxable as against the President? A: -Only 10,000 is taxable to the President -The 30,000 is considered as an expense on the part of the Corporation.





Benefit granted to managerial and supervisory employees, subject to fringe benefit tax.  If a rank and file employee receives the same benefit, it will be treated as a compensation income subject to normal tax.

 Exceptions (where rank-and-file employees would also be exempt from tax)

a. b. c.

Nature of a fringe benefit tax: final tax. Rate 32%

25% 15%

d.

Receiving employee Resident citizen Non-resident citizen Resident alien

2.

Non-resident alien Resident citizen employed by 1. 2. 3.

4.

Regional area headquarter Regional operating headquarter Offshore banking unit Foreign service contractor or subcontractor engaged in petroleum operation

3.

Combination of Monetary Value (MV) plus Fringe Benefit Tax (FBT) In other words, it is the value of the fringe benefit inclusive of the tax.

4.

Personal expenses of a managerial/supervisory employee



If the expenses are directly related to the business of the employer  NOT taxable because of the employer’s convenience rule

Vehicles Vehicles used for free for the personal benefit of the employee

Household Expenses Expenses for household of the employee



Examples:  salary of the driver  salary of the housemaid  garbage dues  homeowner association fees

Monetary Value

68%



 If the employee can use the vehicle only for business purposes, it is not subject to tax, because of the employer’s convenience rule.

Fringe Benefit Tax

32%

5.

Interest Employer’s actual rate is lower than the market rate imposed in cases of loan This does not pertain to the legal rate which is 6% per annum.

 

Computing GUMV when the MV is given Gross Up Monetary Value (GUMV) = MV + FBT GUMV= 68% + 32%

Employer’s Convenience Rule Housing benefits adjacent to business premises o “Adjacent”—maximum of 50kms from the business premise Housing benefits that are temporary in nature o Period of 3 months or less Housing benefits granted to AFP personnel

Expenses



Gross Up Monetary Value  

If it is received by rank-and-file employees, it is subject to normal tax.



FRINGE BENEFIT

6.

Membership dues Membership dues must be paid by the employer to a social and athletic club or other similar organizations “Other similar organizations”: organizations akin to social and athletic clubs



Illustration: Monetary Value = 100,000 100,000 is the MV which represents 68% of the GUMV How to get 100% which would represent the GUMV? Divide the monetary value 100,000 by 68%

 Manila Country Club—social club  Golf Club—athletic club

GUMV=100,000 68%

 

PICPA— association of accountants in the Philippines Professional Tax Receipt—paid to LGU’s to practice profession

If MV is given and what is being asked is the value of GUMV, the formula is

GUMV=

7.

MV 68%



Different Fringe Benefits (HEVHIMTHEL) 1. Housing Benefits 

Foreign Travel

Must be received by a managerial or supervisorial employee



Travel expenses pertain to personal travel of the employee

 If the travel is for the business of the employer, it is nontaxable because of the employer’s convenience rule Limitations If the expenses is for a business meeting

 

It must be properly documented If there are no documents, the presumption is that it is for the personal benefit of the employee.

 If with proper documentation: a. Inland travel  All expenses are not subject to tax b. Accomodation  $300 per day  If the employee spend more than $300 per day, the excess would be subject to fringe benefit tax, even if it is made in relation to a business meeting or convention c. Airfare  If the airfare shouldered by the employer is an economy or business ticket, it will not be subject to tax.  If the ticket is first class,  Only 70% is not taxable  30% is subject to tax

8. 9.

Holiday Expenses Educational Assistance  

Granted to an employee and his dependents

 10% FWT

Prizes 

Winning 

b.



If the educational assistance granted to dependents is through a competitive scheme under a scholarship program of the employer, it is not subject to tax

10. Premium Payments paid by the employer for the Life Insurance of the employee

Winnings With no exertion of effort Regardless of amount, it is subject to 20% final withholding tax.

If more than 10k, it is subject to 20% final withholding tax

INTEREST INCOME FROM BANK DEPOSITS AND DEPOSIT SUBSTITUTES General Rule: Subject to 20% Final Withholding Tax (FWT) If the interest income is not earned from bank deposits and deposit substitutes, it will be subject to normal tax.  1. 2.

If the educational assistance granted to employee is for the convenience of the employer, it is not subject to tax, because of employer’s convenience rule.

The educational assistance is directly connected to the business, trade or profession of the employer There is a written contract requiring the employee to render future substantial services

A reward for an event that depends on chance such as winning from gambling, lottery or raffle ticket.

Prizes With exertion of effort If 10k or less, it is subject to normal tax

When is educational assistance for the benefit of the employer? a.

A reward for a contest or a competition.

Exceptions Long term deposits, with a maturity period of 5 years or more. Foreign Currency Deposit System  Exempt from tax

Pre-termination of long term investments  If deposit or investment was pre-terminated before the 5th year, a tax shall be imposed on the entire income and shall be deducted and withheld by the depositary bank from the proceeds of the long term deposit investment certificate based on the remaining maturity thereof. 4 years to less than 5 years 3 years to less than 4 years Less than 3 years

5% final withholding tax 12% final withholding tax 20% final withholding tax

Earnings from Foreign Currency Deposit System

ROYALTIES, PRIZES AND WINNINGS Royalty income 

Payment or portion of proceeds paid to the owner of a right, such as an oil right or patent for the use of it, or a portion of the proceeds from the work of an author or composer.

Earnings by a resident citizen Earnings by a non-resident citizen

DIVIDEND INCOME 

Tax Implication of Royalties  General Rule: subject to 20% FWT  (a) (b) (c)

Exceptions: (LBM) literary works books musical composition

Subject to 7.5% final withholding tax EXEMPT



Income earned by a stockholder as his share in the net earnings of the corporation The tax implication of a dividend income would depend on the type of dividend income

Types of dividend income   

Cash dividend Property dividend Liquidating dividend



Stock dividends

Non-resident alien engaged in trade or business Non-resident alien not engaged in trade or business Domestic Corporation Resident Foreign Corporation Non-resident Foreign Corporation

Liquidating dividend 

Dividend income distributed to stockholders upon dissolution of the corporation

Illustration



A stockholder invested P100k in a domestic corporation The corporation was dissolved The Bureau of Directors directed the distribution of P150k to its stockholders

 

100k is not taxable because it is merely a return of capital 50k is taxable as it is considered an income

Stock dividend   

Type of dividend income in the form of shares of stock General Rule: stock dividends are not taxable Exception: Principle of Dividends Equivalence

 

Tax Implication of Dividend Income 

Issuer is a DOMESTIC CORPORATION

Intra-corporate Dividend Principle: If the dividend income is earned by either a domestic corporation or a resident foreign corporation from a domestic corporation, the dividend income shall be exempt from tax.

Resident citizen Non-resident citizen Resident alien Non-resident alien engaged in trade or business Non-resident alien not engaged in trade or business Domestic Corporation Resident Foreign Corporation Non-resident Foreign Corporation

10% Final Withholding Tax (FWT) 20% FWT 25% FWT EXEMPT EXEMPT 30% FWT based on gross income Except if tax-sparing rule is applicable



Note:

Issuer is a RESIDENT FOREIGN CORPORATION

A resident foreign corporation can be constituted as a withholding agent since it is transacting within the Philippines. There would be no violation of international comity. However, the dividend income will not be subject to final withholding tax. It will form part of the gross income of the resident foreign corporation subject to normal tax. Resident citizen Non-resident citizen Resident alien

Considered as Gross income Gross income (as to income sourced from within) Gross income (within)

Gross income Gross income (within) Final Withholding Tax (within)

Issuer is a NON-RESIDENT FOREIGN CORPORATION

Resident citizen Non-resident citizen Resident Alien Non-resident Alien Domestic Corporation Resident Foreign Corporation Non-resident Foreign Corporation

Is the 150k a taxable income?

Gross income (within) 25% Final Withholding Tax

Gross income Exempt Exempt Exempt Gross income Exempt Exempt

A Domestic Corporation obtains protection from the State. Hence, its dividend income is considered sourced from within. A Non-Resident Foreign Corporation does not obtain protection from the State. Its dividend income is sourced from outside.

Stock Dividends      

As a general rule: not subject to tax. A corporation has a separate entity from its stockholders. The assets are not owned by the incorporators but by the corporation itself. The ownership of the incorporators only pertains to the shares of stock and not to the corporate assets. A corporation distributes dividend income based on percentage of ownership If it is a cash dividend, the basis is on their shares of percentage of ownership If it is a property dividend, the basis is the same or as dictated by the Board Resolution.

Illustration There are 5 incorporators. They all have a 1/5 percentage of ownership and contributed 10k each. They distributed the stock dividends based on the percentage of ownership. The corporation decided to distribute 50k worth of stock dividends. Each of the incorporators would receive stock dividends based on their percentage of ownership. Hence, they receive 10k each. After the declaration of stock dividends, the total amount of stocks owned by each of them is 20k each (their contribution plus the stock dividend distributed to them)  

There was no flow of wealth. Flow of wealth pertains to the interest of the incorporators after the issuance of stock dividends. In this case, the interest of the incorporators did not increase because their percentage of ownership remains to be 1/5

Each of them received 20k after the declaration of stock dividends. The total stock dividends amount to 100k. Hence, 20_ = 2 = 1 100 10 5



This is the logic why the general rule is that stock dividends are not taxable. After declaration of stock dividends, there is no increase of interest to the incorporators. The percentage of ownership remains the same. 

1.

Exceptions



If corporation decided to issue cash, property or stock dividends and some of stockholders exercise the option to receive the cash or property dividends, then the stock dividends shall be taxable.

Illustration

1

Purchased shares of stock 10

2 3

10 10

4 5

10 10 2. 

Stock Dividend *Opted for cash divided* + 10k SD *Property dividend* + 10k SD + 10K SD

Stock dividend owned after declaration 10

Percentage of interest

Tax Implication

20 10

1/4 1/5

TAXABLE

20 20

1/4 1/4

TAXABLE TAXABLE

1/5

Dividend Equivalence Rule If the corporation cancels or redeems stocks issued as a dividend at such time and in such manner as to make the cancellation and distribution or redemption essentially equivalent to the distribution of a taxable dividend, the amount distributed in the redemption or cancellation of stock dividend shall be considered as a taxable income.

Elements: 1. 2. 3.

There must be redemption or cancellation The transaction involves stock dividend The manner and the time of the transaction makes it essentially equivalent to the distribution of taxable dividend.

Logic behind Dividend Equivalence Rule Family members established a Family Corporation. They declared stock dividends when they distributed the dividend income since stock dividends are not subject to tax. They agree that they will just redeem the corporation later, since redemption is not subject to tax (prior to the effectivity of the dividend equivalence rule). Redemption is a capital transaction that is not subject to tax. Hence, the family members would not be subject to tax during the issuance of the stock dividends, and during the redemption. This scheme could be used to evade taxes. This is the loophole that is sought to be resolved by the Dividend Equivalence Rule.

General rule:

Reason:  

CIR v. CA and ANSCOR, Jan. 20, 1999 A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.

Stock dividends represent capital and do not constitute income to its recipient. The mere issuance thereof is not yet subject to income tax as they are nothing but an "enrichment through increase in value of capital investment." Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax.

Exception: 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 it represents a distribution of earnings or profits Requisite before this exception can apply 1. there is redemption or cancellation; 2. the transaction involves stock dividends and 3. the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Loophole that was sought to be resolved by the exception: Corporate earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends previously issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of taxable cash dividends which was used to escape the tax. Principle as applied in this case  First Requisite ANSCOR redeemed shares of stocks from a stockholder twice  Second Requisite At the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends.  Third Requisite The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining "dividend equivalence". ANSCOR mentioned that the redemption of the corporation was because of the alleged "Filipinization" plan: buying back the corporation to make it a Filipino corporation 

The legitimate business purpose must pertain to the issuance of the stock dividends and not to the redemption. In this case, the records did not show why stock dividends were given instead of cash. Although the redemption has a legitimate purpose, the issuance of the stock dividends has none.

SALE OF REAL PROPERTIES (24B)  

In every sale of real property, there is an imposition of Capital Gains Tax (CGT) pegged at 6%, based on the Gross Selling Price of the Fair Market Value whichever is higher. Market Value: higher value between the value prescribed by the BIR which is also called the zonal value, or the value prescribed by city or provincial assessor also called as assessed value.



CGT covers the following:  Sale  Exchange  Other dispositions of real property located in the Philippines



The following are dispositions also covered by CGT:

  

Illustrations: (i)



Pacto de retro  Pacto de retro is a sale with a contractual stipulation of the vendor’s right to repurchase.  CGT is imposed upon execution of the sale  Once the sale is executed, ownership is already transferred to the vendee Conditional Sale Conditional Sale There is already a sale executed, but the ownership is suspended since it is dependent on the happening of a condition. CGT is imposed since there was already a sale.

Contract to Sell There is no sale yet.

No CGT is imposed since there is no sale involved upon execution of the contract. The transfer of ownership is subject to the condition that there shall be an execution of a deed of absolute sale.

X corporation has shares that are not listed in stock exchange Ryan bought 100k worth of shares. He sold it for 150k. The net gain of Ryan is worth 50k. Since this is less than 100k, the whole net gain is subject to 5% tax.

(ii) 

Determine if there is a net gain Subject to 5% tax of the first 100,000 net gain. The excess will be subject to 10% tax.

Ryan sold the shares for 250k. The net gain is worth 150k. 100k is subject to 5% tax = 5,000 50k (excess) is subject to 10% tax = 5,000 CGT = 10,000



CGT in this case is in the form of an income tax.  The basis of tax is not the Gross Selling Price but the Net Gain.  You cannot subject capital to an income tax (Note: CREBA case)

ALTERNATIVE TAXATION IN CASE OF SALE TO GOVERNMENT 

Rule: If the buyer of real property classified as capital asset is the government or any of its political subdivisions or agencies, or to GOCCs, the tax liability shall be determined either:

Public Auction  Highest bidder  Execution of the Certificate of Sale  1 year redemption period (no ownership is transferred yet)  Consolidation

1.

Under Sec. 24(A), graduated income tax rates applied on taxable income.  Normal Tax Rate, based on the net income

*Note, if the mortgagor is a financial institution, the redemption period is 2 years*

2.

6% Capital Gains Tax based on gross selling price or fair market value, whichever is higher (Sec 24d)

When is CGT imposed in a foreclosure sale?

 

If the seller is an individual, he has the right to choose between the two. If the seller is a corporate taxpayer, the taxpayer would automatically be imposed with Capital Gains Tax.



 

Forced Sale  Example: foreclosure sale  Recall the process of a foreclosure sale

RMC 4-99: CGT is imposed 30 days after the expiration of the redemption period. If the mortgagor exercises right of redemption, there is no imposition of CGT.

SHARES OF STOCKS  

Earned by someone who is not a stockholder, by either selling his share or reducing the percentage of ownership. The tax implication of the shares of stock will depend on whether the activity is listed in the stock exchange.

Listed in Stock Exchange  Subject to stock transaction tax which is in the nature of other percentage tax.  Rate: ½ of 1% based on the Gross Selling Price  The realization of gain is a presumptive realization of gain because the law already presumes that the Gross Selling Price is your income.  “Other Percentage Tax” is a form of business tax.  Tax imposed on the privilege to engage in business and not the right to earn income. Not Listed in Stock Exchange

If the real property sold is an ordinary asset and NOT a capital asset: CIR v. UCPB, October 23, 2009 Revenue Memorandum Circular 58-2008: If the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax shall be due and paid within ten (10) days following the end of the month in which the redemption period expires. Moreover, the payment of the documentary stamp tax and the filing of the return thereof shall have to be made within five (5) days from the end of the month when the redemption period expires.

CANCELLATION OF INDEBTEDNESS 1.

Remuneratory Donation  Recall the example on Mr. Gipit.  The indebtedness is cancelled by reason of the debtor’s rendition of service

2.

Generosity  Under Section 32B of the Tax Code, gifts, bequests and devices are excluded from gross income and are exempted from tax.  Subject to donor’s tax

3.

Corporation and Stockholders  The cancellation is treated as declaration of dividends and is subject to tax. The kind of tax would depend on the issuing corporation.

5M = 500k 10yrs Each year, the value of the improvement depreciates for 500k. At the end of 5 years (the lease period), the value of the improvement depreciates up to 2.5M

At the end of 5 years, the improvement is worth 2.5M because of the depreciation in value.

Hence, 2.5M was transferred to the lessor at the end of the lease.

INSTALLMENT TRANSACTIONS

Illustration: Y Corporation borrowed from X Corporation. Y Corp is a stockholder. After maturity date, X Corporation cancelled the indebtedness of X Corp. Tax implication: The cancellation is treated as declaration of dividends. Since the issuer of the dividend is a domestic corporation and the stockholder is a domestic corporation, the transaction is not subject to tax. Apply the Intracorporate Dividend Principle.

INCOME FROM LEASE AND LEASEHOLD IMPROVEMENT Leasehold Improvement: improvements constructed by the lessee which would redound to the benefit of the lessor at the end of the agreement.

Section 49 of the Tax Code  When the initial payment does not exceed 25% of the selling price, the transaction shall be treated as an installment transaction and the seller can recognize income on an installment basis. Initial Payment  Payment rendered in cash or property other than the evidence of indebtedness during the taxable period in which the sale or disposition is made. Regular Sale: the sale of personal property by the taxpayer on an installment basis. It is considered as an installment transaction. As such, the income can be recognized in an installment basis. 

Is it an income in the part of the lessor? YES. It is in the nature of a rental income subject to 5% Creditable Withholding Tax. Two Methods of Recognition of Income 

1.

Outright Method  Recognition of income during the year of completion of the leasehold agreement and amount of income is equivalent to the fair market value upon completion.

2.

Spreadout Method  Recognition of income from leasehold improvement where value of improvement at the end of the lease term shall be spread out during the entire term of the lease.

Illustration: The improvement was worth P5M. The lease term was for a period of 5 years. The estimated useful life of the improvement (period where the taxpayer can utilize the improvement) was 10 years. There was a stipulation that there will be transfer of ownership to the lessor at the end of 5 years. Spreadout Method The worth of improvement is P5M. Its estimated useful life is 10 years.

The lessor already possess ownership over the improvement, but subject to the lease agreement for a period of 5 years. The improvement still depreciates in value every year for 500k.

Outright Method It is assumed that the improvement belongs to the lessor at the start of the lease.

25% rule had been varied with respect to the sale of personal property. In a sale of personal property, there is a qualification if the transaction involves a casual sale.

Casual Sale: the taxpayer is not engaged in the business of regularly selling personal property on an installment basis. Rules for a casual sale to be considered an installment transaction: 1. The selling price must be more than P1K. 2. There must be compliance with the 25% rule.  The initial payment must not exceed 25% of the selling price.  If the initial payment exceeds 25%, it is a cash sale.

Illustrations: (i)

The taxpayer sold real property for P1M. The buyer pays a downpayment of P350K. The remaining P650K shall be paid for four quarterly installments.

In this case, the initial payment if P350K, which is 35% of the selling price. The initial payment is more than 25%. It cannot be considered as an installment transaction. Rather, it is a deferred sale, where the entire amount of income arising from the transaction shall be recognized in the year of sale. (ii)

Atty. Tin sells her painting worth P1M. Clyde bought the painting in 2015. In June 2015, he paid 200k. In December 31 2015, he paid 150K.

The balance of 650K would be paid for four quarterly installment after December. 

It cannot be considered as an installment transaction because of non-compliance with the 25% rule.

In an installment transaction, the initial payment must be not more than 25% of the selling price. The initial payment is not tantamount to the downpayment. Initial payment pertains to the payment made in the year of the sale. In this case, in the year of 2015, Clyde already paid 350K (200k in June, 150k in December). The initial payment of 350K is 35% of the selling price. Hence, this is a deferred sale. The income must be recognized at the year of the sale. (iii)

Same facts; but there was no payment in December 31.

It can be considered as an installment transaction, since the initial payment would amount to only P200k. Thus, there is compliance with the 25% rule. As an installment sale, the income need not reflect at the end of the year of sale. The income must also be recognized in an installment basis. (iv)

Two types of recognition of income: 1. Percentage of Completion Method  Tax is paid and income is recognized based on the percentage of completion 2. Lump Sum  Income is recognized during the year of completion  Utilized by taxpayer if the project will be completed for not more than a year. 

If the completion of project is more than a year, only the percentage of completion method can be used.

QUESTION There is a leasehold agreement. After 1 year, the property was destroyed. The entire value of the building was completely lost.

What is the tax implication? If the lessor adopted the spreadout method, the income will be recognized at the end of the year.

Can he recognize a loss in the income when the property was destroyed?

Clyde paid for the painting for 200K in the month of June. He issued promissory note to cover the 800K balance.

Yes. He was correct in recognizing the property as his income because of the stipulation in the leasehold agreement that the improvement would belong to him at the end of the lease period. His right has ripened at the end of the lease contract and the ownership is transferred to him at the end of such year.

The promissory note is not an initial payment. The definition of initial payment comprises those payments “other than the evidence of indebtedness”.

What if the promissory note has been discounted? Discounted promissory note: the note has been converted into cash. Since the note has already been converted into cash, the seller would have sufficient cash at the end of the year of sale, having received the entire purchase price. 

The sale would be considered as a casual sale.

Rationale of Section 49 of the Tax Code (on installment transaction)  The income is not recognized at the end of the year of sale because the taxpayer does not have sufficient cash on that year. He received only a partial payment of the purchase price. Banas vs. CA Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash. Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default.

ALLOWABLE DEDUCTIONS How to compute for the Net Income -

Gross Sale/ Gross Receipt Cost of Sale/Cost Receipt Gross Income

-

Gross Income Allowable Deductions Net Income

Gross Sales vs. Gross Income Gross Sales Amount received from a business transaction

Deductions, defined. 

When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting.

LONG TERM CONSTRUCTED PROPERTY

Gross Income Gross Sales minus Cost of Sales

Deductions are amounts of expenditures granted as a privilege to reduce the amount of gross income

Deductions vs. Exclusions Definition

Deductions amounts of expenditures granted as a privilege to

Exclusions items specifically excluded under Tax Code from gross income

reduce the amount of gross income Nature

nature of expenditure

Utilities nature of an income

Deduction expenditure on top of the amount of capital

Cost amount of capital

Deductions vs. Credit Deduction reduction from the gross income 

Importance of knowing the difference between Revenue and Capital Expenditure  

Deductions vs. Cost

Credit reduction from tax liability

Senior Citizen Discount: in the nature of deduction.  It is a reduction from the gross income.

Motor vehicle

Revenue Expenditures: treated as allowable deduction during the taxable year Capital Expenditure: only a portion thereof shall be treated as allowable deduction.

Illustration: If a taxpayer purchases a machinery worth 1M, and such machinery is expected to be utilized for 10 years. Only 1/10 of the value of the capital expenditure shall be treated as allowable deduction. It is the portion actually utilized by the taxpayer during the particular taxable period.

KINDS OF ALLOWABLE DEDUCTIONS

CIR v. Central Luzon Drug Corp, June 2008 Tax credit o an amount that is "subtracted directly from one’s total tax liability." o an allowance against the tax itself or a deduction from what is owed by a taxpayer to the government. Tax deduction o a subtraction "from income for tax purposes," or an amount that is "allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due." A tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in order to arrive at taxable income. A tax credit is used only after the tax has been computed; a tax deduction, before.

When is deduction allowed? It must be specifically provided under the statute



Under the tax code, allowable deductions can be availed of by a taxpayer who earns income from business, trade of profession.  Compensation income earners cannot avail of allowable deductions. It must comply with conditions of deductability provided under the law.

Revenue Expenditure vs. Capital Expenditure Nature

Treatment as allowable deduction Examples

Revenue Expenditure It benefits the taxpayer for one taxable period only. The taxpayer expects he will be benefitted by such expenditure for a certain taxable period. Treated as allowable deduction during the taxable year Office supplies

Optional Standardized Deductions (OSD)



An expense with a theoretical amount equivalent to:  40% of gross sales in case of individual taxpayers; or  40% of gross income in case of corporate taxpayers



This type of deduction is practical under two circumstances:  When the taxpayer did not keep any receipt to evidence his expenses  Total amount of itemized deductions is less than 40% of gross sales for individual taxpayers or less than 40% of the gross income for corporate taxpayers.

Distinctions between individual and corporate taxpayers Individual Taxpayer The basis of OSD is the gross sales. It cannot deduct cost of sales

Corporate Taxpayer The basis of OSD is the gross income It can deduct cost of sales

Irrevocability of Option (Secretary of Finance 16-2008 as amended by Revenue Regulation 2-2010)

1.

2.

1.

 

Can General Professional Partnership avail of OSD? 

Capital Expenditure An expenditure that is expected to benefit more than one taxable year.

Only a portion thereof shall be treated as allowable deduction. Furnitures

When the taxpayer opted for a particular type of allowable deduction, such option is irrevocable during the taxable year when the choice has been made If the taxpayer did not signify any option in his return, he is deemed to have chosen Itemized Deduction. Yes.

If the GPP availed of OSD, can the partners also avail of OSD? 

No. When the GPP has chosen OSD, the partners are actually the ones who utilized such option. Therefore, they cannot again utilize OSD as it would result to a double recognition of expense.

Illustration: A GPP has a gross sale of 1M. If the GPP avails of OSD, it will have a deduction of 400k.

x

-

1M (Gross Sales) 40% 400k 1M (Gross Sales) 400k (allowable deduction) 600k (Net Income)

If the GPP has three partners, the net income is entirely distributed to them equally, giving them 200k each.  

GPP is merely a pass through entity. It is NOT separate from the partners. The individual taxpayers are the partners themselves. Hence, the incidents of tax will fall upon the partners. The partners CANNOT opt for OSD since if they do so, they will be able to deduct another 40% from the income they received. They will be deducting more than the 40% that is allowed by the law.

Revenue Regulation 2-2010 GPP utilized Itemized Deduction (ID)





2. Interest 3. Taxes 4. Expenses (ordinary and necessary) 5. Depreciation 6. Depletion 7. Losses 8. Charitable and other contributions 9. Pension trust contribution 10.Research and development costs

Kinds of Itemized Deductions a.

BAD DEBTS



Refer to debts resulting from the worthlessness or uncollectibility, in whole or in part, of amount due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered

 (1)

Requisites of Bad Debts

(2)

The claim must be connected with the business, trade or profession of the taxpayer.

Partners can utilize (ID provided that the partners will not utilize ID already utilized by the GPP

For example, a taxpayer-seller is involved in merchandise and owns a grocery store. A customer acquired grocery items without paying the taxpayer-seller. The debt of the customer can be deducted from the income of the taxpayer since such debt is connected with the business of the taxpayer. It is a bad debt which is an allowable deduction.

cannot utilize OSD

Irrevocability of option: if taxpayer chose one type of deduction, it can no longer avail of the other.

utilized OSD

The GPP’s choice was actually the choice of the partners.  cannot utilize OSD It will result to a recognition of expense that was already recognized by the partnership  cannot utilize ID Irrevocability of option

2.

Itemized Deductions (ID)

a.

Must comply with substantiation requirement.  The expenses must be duly substantiated with receipts Deductions must also comply with requisites of deductability under the Tax Code, particularly Section 34 thereof.

Requisites: b.

Section 34: Itemized Deductions (BITE-DeDe-Loss-CPR) 1. Bad debts

There must be a valid and subsisting claim o Valid: also includes voidable claims o Subsisting: the claim must not be barred by prescription.

If the same taxpayer-seller gave a loan to another person, and the latter did not pay the loan, the debt is not an allowable deduction since it is not connected with the business of the taxpayer-seller. The loan is a transaction completely separate from the business of the taxpayer which is a merchandise (grocery store). Hence, this is not a bad debt and is not an allowable deduction. (3)

The claim must not be between related taxpayers.

Related Taxpayers under the Tax Code (Sec 36B) 

    

Between members of the family o Brothers and sisters (whether full-blood or half-blood) o Spouses o Ascendants o Lineal descendants Between individual and a corporation where more than 50% in value of the outstanding stock of which is owned by such individual Between two corporations where more than 50% in value of the outstanding capital stock is owned by the same individual Between a grantor and a fiduciary of any trust Fiduciary of a trust and fiduciary in another trust, if the same person is a grantor with respect to each trust Fiduciary of a trust and beneficiary of such trust

Common denominator: they have common interest with respect to each other.

(4)

There is possibility of manipulation or fabrication. Any added expense arising from transactions shall not be treated as allowable deduction. This requisite also applies to interest expense and losses.

Y is the debtor. X is the creditor. The loan is due in the year 2014. Collection efforts were made but were unsuccessful.

The claim must be actually ascertained to be worthless in order to be written off from the books of the taxpayer within the taxable year. o Ascertained to be worthless:  The taxpayer must have sent at least 3 demand letters to the debtor/s.  If this has been complied with, the taxpayer is deemed to have exerted due diligent effort to collect the debt. o To “write off”  The amount of claims will be removed from the books of the taxpayer.

In 2016, he chanced upon Mr. Y and the latter paid to him the amount of 1M

Tax Benefit Rule  There is seemingly a nontaxable event but shall be considered as a taxable event by reason of the tax benefit obtained by the taxpayer.  Tax benefit arose from the recognition of an expense.

Illustration: (i)

Kiko borrowed 100k from Maam. After a year, Kiko paid.

Is the 100k paid by Kiko an income in the part of Maam? 

No. It is merely as return of capital. There is no flow of wealth.

(ii) Maam paid the taxes due to the transaction and realized that there is no basis for tax payment. She claimed for refund of the tax paid. The claim was successful.

Is the refund of the tax a taxable event?  (iii)

No. There is no flow of wealth. It is merely a capital transaction, hence, a nontaxable event. There has been a recognition of an expense.

Kiko borrowed 100k. Maam is engaged in lending business. After service of 3 demand letters, she cannot collect since Kiko's whereabouts are unknown.

Is the receivable of Kiko already worthless? 

Yes. Maam can write off the income from the books. If did so. It is a bad debt expense.

There is a possibility that she had obtained tax benefit because of the recognition of the bad debt expense. There is tax benefit received by the taxpayer, hence the tax-benefit rule may apply.

On the year 2015, Mr. X ascertained that obligation of Mr. Y is worthless. He wrote off P1M from his books.

Situations (three different income tax returns) (a) In 2015, the financial gains tax of Mr. X reflect the following figures in his return: Gross income: 2M Allowable deduction: 2M Net income: (O) Recognized bad debt expense: (1M) Resulting to net loss of: (1M)

Was there a benefit received by the taxpayer? 

If he did not recognize the bad debt expense, he would not pay anything (See Net Income with the value of Zero). If he recovered the bad debts, the recovery is not an income, as it is merely a return of capital. There is no taxable benefit in the part of Mr. X. The taxable benefit rule will not apply. (b) If the financial gains tax of Mr. X reflect the following figures in his return: Gross income: 5M Allowable deduction: 3M Net income: 2M Bad debts recognized as expense: (1M) Net income: 1M There is taxable benefit in the amount of 1M. Instead of reflecting 2M income in his tax return (See Net income of 2M), he only reflected the amount of 1M. If he recovers the bad debts which was previously written off, the 1M is a taxable income. (c) The following figures were indicates in his return: Gross income: 3M Allowable deduction 2.5M Net income 0.5M Recognize bad debt expense (1M) Net loss (0.5M) He obtained a taxable benefit by amount of 500k.

Why only 500k?



How so? 

No benefit

See example below.

(iv) General facts: Mr X delivered 1M to Mr. Y by reason of a loan agreement that both of them entered into.

Note that his net income was 0.5M, which means that he has to declare this amount in his return. However, he was able to recognize the bad debt expense. Out of the 1M bad debt expense, only the 0.5M is needed to make his tax liability zero. Mr. X benefitted in such a way that by reason of the 500k, he acquired no more tax liability. SUMMARY OF RULES AS APPLIED IN THE SITUATION ABOVE



Bad debt is recognized in the year of recovery.

 

The recovery of the bad debt itself is not a taxable income. It is merely a return of capital and as such is not taxable. However, there is a possibility that the taxpayer will obtain a taxable benefit because of the recognition of the expense. If the taxpayer has benefitted in such a way that his tax liability has been reduced (or totally eliminated as in the third case) because of the recognized bad debt expense, the tax benefit rule would apply.

Bar Question:

Reason: There is a Civil Code provision that if interest is not stipulated in writing, such stipulation of interest is void. 2. 3. 4.

Rule on amount of interest:

Dona Evalina paid local business tax to the City of Makati. A year after, she successfully refunded the local business tax that she has paid. NOTE: Deductible Expenses



General rule: Interest expense is deductible in whole.



Exception: When the taxpayer earned interest income subject to 20% final withholding tax during the same year that the interest expense has been incurred.

Under Section 34 of Tax Code, the following are expenses deductible: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Community tax Automobile registration tax Municipal tax Import treaties Local business tax Documentary stamp tax Occupational tax. Percentage tax: BIR had issued ruling that VAT are not deductible taxes. Excise tax: syntax



The local business tax, which was paid by Dona Evalina, is an allowable deduction.

Is there tax benefit by reason of the refund of the local business tax? 

It must be made in connection with the trade, business, or profession of taxpayer. It must have been paid or incurred during the taxable year. It must not be between related taxpayers.

There is a need to qualify

In the bar question, there is no mention of the circumstances that would show if Dona Evalina obtained tax benefit. If Dona Evalina obtains a taxable benefit arising from the recognition of the expense, it will be considered as a taxable income in the year it was refunded. Philex Mining Corp. v. CIR, April 16, 2008

Note: Bank deposits and deposit substitutes are subject to 20% final withholding tax

 In this case, the interest expense shall not be deductible in whole. The interest expense shall be reduced by the tax differential rate of 33% of the interest income which was subject to 20% final withholding tax. 

Reason behind the rule: to avoid tax arbitrage scheme

Tax Arbitrage Scheme: the taxpayer gets an unfair advantage due to an imposition of a lower rate of tax on the interest income from deposit or deposit substitutes. 

When does the exception occur?

 It occurs when the taxpayer incurred interest expense, and likewise earns interest income subject to 20% final withholding tax during taxable year.

Illustration: The taxpayer is a corporate taxpayer. He incurred an interest expense worth 100k. Note that a corporate taxpayer is subject to tax rate of 30%, equal to 30k. In the same year, the taxpayer earns an interest income worth 100k from a bank deposit. Note that bank deposit and deposit substitutes are subject to 20% final withholding tax, equal to 20k.

The advances made by Philex in favor of Baguio Gold for the management of Sto. Nino Mine are NOT considered bad debt that can be deducted from the former's gross income.

Interest Expense Interest Income Difference

30k 20k 10k (10%)  10% out of the 30% is loss in the part of the government.

Petitioner’s advances as investments in a partnership known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same to the former under the "Power of Attorney".

10 30

 This is where the government got the tax differential rate of 33%.

Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

= 33.33 %

Tax differential rate seeks to subsidize the loss of government by imposition of the lower rate of interest income tax.

Should the taxpayer recognize entire amount as interest expense? 

b.

INTEREST

Requisites: 1.

Interest must be stipulated in writing.

No. The taxpayer shall reduce 33% of the interest income.

If the Interest income is 100k, 33% will be 33k. Interest Expense Tax Differential Rate

100k 33k 67k

(33% of the interest income)

 Deductible Interest Expense amounts to 67k. Optional Tax Treatment  Recall the topic on Alternative Taxation.  Alternative Taxation applies in sales of real property in the nature of a capital asset to the government or its political subdivisions or instrumentalities.  The taxpayer must be an individual taxpayer  The property must be located in the Philippines.  The individual taxpayer has the option to choose to apply either of the following: o Normal tax o Capital Gains Tax 



Optional Tax Treatment, as applied in Interest Expense  Taxpayer has the option to capitalize the interest expense or to expense it outright. o If the taxpayer opted to capitalize, the taxpayer treats the interest expense as capital expenditure. The interest expense is added to the cost of the property. o If the taxpayer opted to expense it outright, the taxpayer treats it as a revenue expenditure. It is treated as allowable deduction in the year that the expense has been incurred.

When can the taxpayer avail of Optional Tax Treatment? 

c.

If taxpayer acquires a depreciable property to be used in business.

TI per country Worldwide Income 

It must be made in connection with business, trade or profession of the taxpayer. It must have been paid or incurred during the taxable year.

Foreign Income Taxes

x

PTD

VS.

Actual Tax paid to the foreign country

Get the lower amount of tax.

2. The total amount of the credit shall not exceed the same proportion of the tax against which the credit is taken, which the taxpayer's taxable income from sources outside the Philippines bears to his entire taxable income for the same taxable year. TI (in one country) + TI (another country) x PTD Worldwide Income 

VS. Actual Tax paid to the foreign country

Get the lower amount of tax.

Illustration: Manny Pacquiao earned 9M pesos in boxing contest abroad. He also earned 1M in Philippines. 9M – sourced without (US) 1M – sourced within (Philippines 10M (total income)

90% of the total income 10% of the total income

Should Manny declare the 10M as an income inside the Philippines? 

TAXES

Requisites of deductibility of taxes: 1. 2.

TI— taxable income PTD—Philippine Tax Due

Yes, since he is a resident citizen who can be subjected to tax as to income sourced within and outside the Philippines.

Will he be subjected to international double taxation? 

Yes, since US will also impose tax on his 9M income earned abroad.

One of the methods to avoid international double taxation is the use of tax credit. Manny can use Foreign Tax Payment as Tax Credit as long as he signifies it in his return.



If there is treaty, apply the provision of treaty on how to treat a foreign tax payment.

If the US Government imposes a tax rate of 40% upon the income and the Philippine Government imposes a tax rate of 30%, the following computations would apply:

 

Under Section 34 of the Tax Code Foreign tax payments are treated as either deduction or tax credit.

Ceiling Amount =

If taxpayer treated it as deduction, it will reduce the amount of gross income. If taxpayer treated it as tax credit, it will reduce tax liability.

=



In order to avail of foreign tax payment as tax credit, he must signify such intention in his return.  If not, the foreign tax payment shall be treated as a deduction.

U.S. Tax

Two limitations on Credit: 1.

Formula:

The amount of the credit in respect to the tax incurred or paid in any country (foreign tax payment) shall not exceed the same proportion of the tax against which the credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income in the same taxable year.

_TI per country__ Worldwide Income

= =

_9M_ 10M 90% 2.7M

= =

9M 3.6M

x

Philippine Tax Due

x

30% of 10M

x

3M

x

40%

Manny paid this 3.6M in the US.

Can he deduct the entire amount of foreign tax payment (3.6M) against his tax liability in the Philippines? 

NO. Apply the tax credit limitation. Since the ceiling amount is only 2.7M, only this portion can be deducted from the entire foreign tax payment.

The ceiling amount is the extent of tax imposed to income sourced from outside the Philippines. Foreign tax payment seeks to benefit only the income that is earned from sources outside the Philippines. If even the income sourced from within the Philippines can be benefitted by the foreign tax payment, it will cause prejudice to the Philippine Government because lesser tax will be imposed and collected from the citizens.

d.

EXPENSES

Requisites for expenses to be deductible:

1.

It must be ordinary and necessary

2.

It must be substantiated with receipts



Substantiation rule: all expenses must be substantiated by receipts officially issued by the CIR. Cohan rule: expenses need not be substantiated, as long as such expense is reasonable and credible.

 

3.

The general rule is Substantiation Rule.  The Cohan Rule is merely an exception, which would apply only if the receipts are established to be missing and there are sufficient support (e.g. testimonies) that can be presented by the taxpayer.

It must be reasonable in amount

Reasonableness CIR v Isabela Cultural Corporation, February 12 2007 Requisites for the deductibility of ordinary and necessary trade, business, or professional expenses (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers Accrual Method Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,

expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year.13 All-events Test The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability.

Reasonable accuracy The test merely requires that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is

unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. The taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. 

ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services.

The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant. The deductible expenses for the security services were properly allowed because such were incurred in 1986, and were also claimed in the same year.

CIR v. General Foods, April 24, 2003 To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.

To be deductible, an advertising expense should not only be necessary but also ordinary. These two requirements must be met. It is uncontested that the expense was necessary. The question is as to whether or not it is ordinary. 

The Court found the subject expense for the advertisement of a single product to be inordinately large.

The subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: First, "reasonableness" of the amount incurred and; Second, the amount incurred must not be a capital outlay to create "goodwill" for the product and/or private respondent’s business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time. Reasonableness of an advertising expense The right to a deduction depends on a number of factors such as but not limited to: 1. The type and size of business in which the taxpayer is engaged; 2. The volume and amount of its net earnings; 3. The nature of the expenditure itself; 4. The intention of the taxpayer and the general economic conditions. In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was almost one-half of its total claim for "marketing expenses." Furthermore, this is almost double the amount of respondent corporation’s P4,640,636 general and administrative expenses. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under the law. Two kinds of advertising (1) advertising to stimulate the current sale of merchandise or use of services; and (2) advertising designed to stimulate the future sale of merchandise or use of services.

 

If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

Burden of proof as to reasonableness The burden of proof to establish the validity of claimed deductions is on the taxpayer. In the present case, that burden was not discharged satisfactorily.

CM Hoskins v. CIR, Nov. 28, 1969 Petitioner engaged in real estate business filed its income tax return showing a net income of P92,540.25. CIR and CTA disallowed the principal item of petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amount of P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's disallowance of three other minor items.

No evidence has been presented as to the nature of the said "farming expenses" other than the bare statement of petitioner that they were spent for the "development and cultivation of (his) property". No specification has been made as to the actual amount spent for purchase of tools, equipment or materials, or the amount spent for improvement. Respondent claims that the entire amount was spent exclusively for clearing and developing the farm which were necessary to place it in a productive state. It is not, therefore, an ordinary expense but a capital expenditure. Accordingly, it is not deductible but it may be amortized. Also the law provides that in computing net income, no deduction shall in any case be allowed in respect of any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate

Representation Expense 

In order to be reasonable, a representation expense must comply with this condition:  The amount must be not exceeding 1% of net receipts or 1/2% of the net sales.  Receipt: pertains to amount received by taxpayer engaged in service enterprise. e.g. rental income  Sales: pertains to manufacturing or retail enterprises

4.

If income payment is subject to withholding tax, the taxpayer must withhold the corresponding tax and remit the same to the BIR.

 If such payment of P99,977.91 were to be allowed as a deductible item, then Hoskins would receive on these three items alone (salary, bonus and supervision fee) a total of P184,977.91, which would be double the petitioner's reported net income for the year of P92,540.25. Test of reasonable compensation Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The conditions precedent to the deduction of bonuses to employees are: a) The payment of the bonuses is in fact compensation; b) It must be for personal services actually rendered; and c) The bonuses, when added to the salaries, are 'reasonable… when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer' Factors in determining the reasonableness of compensation: a) The amount and quality of the services performed with relation to the business. b) Payment must be 'made in good faith c) The character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporation d) The size of the particular business e) The employees' qualifications and contributions to the business venture, and f) General economic conditions Gancayco v. Collector, 1 scra 980 On Cohan rule: Gancayco's claim for representation expenses aggregated P31,753.97, of which P22,820.52 was allowed, and P8,933.45 disallowed. Such disallowance is justified by the record, for, apart from the absence of receipts,

invoices or vouchers of the expenditures in question, petitioner could not specify the items constituting the same, or when or on whom or on what they were incurred.

The case of Cohan v. Commissioner, cited by petitioner is not in point, because in that case there was evidence on the amounts spent and the persons entertained and the necessity of entertaining them, although there were no receipts an vouchers of the expenditures involved therein. Such is not the case of petitioner herein. 

 Rent, salary and professional fees are subject to withholding tax. The withholding agent must withhold the amount of tax and remit the same to the BIR.  Illustration: Atty Tin owns building, lessor. Toni is the lessee. A rental charge is imposed upon Toni. The unit is worth 10k per month. Atty. Tin will only receive 9500 because Toni has obligation to withhold 5% of the 10k rent (amounting to P500) and remit the same to the BIR. Toni is the withholding agent (i.e.collector of the government) Still, income of Tin is 10k because the rental charge is worth that amount. She can use the 500k per month multiplied by 12 (months in a year) as tax credit. As a tax credit, this amount can be deducted from gross income. In the same case, Toni was the employer of Clyde. The salary of Clyde is 10k per month. This is also subjected to 5% withholding tax Note: 5% is only a hypothetical tax rate.

Toni, as the employer, withholds the 5%. He has the obligation to remit it to the BIR. Toni did not withhold any of the amounts mentioned above. Instead, he paid the whole 10k to Ma’am Tin as a rental charge and also the whole 10k to Clyde as the salary. At the end of the year, Toni wants to reduce the gross income by reducing the rent expense (which he paid to Maam Tin) and the salary expense (which he paid to Clyde) from his compensation income. In his return, he indicated the following:

Farming expenses are not deductible because they were considered as capital expenditure

Compensation Income: 500k Salary Expense: 130k (salary of Clyde including 13th month pay) Rent Expense: 120k (10k per month multiplied by 12) Net Income: 250k

Properties subject to depreciation: 1.

Tangible Property susceptible to wear and tear, decay or decline from natural causes, to exhaustion and to obsolescence due to the normal process of the art or due to the inadequacy of the property to meet growing needs of the business. e.g. Machines and equipments that must be replaced by new invention.

2.

Intangible Property, the use of which in trade or business is of limited duration e.g. patents, royalties, franchise

The salary and rent expense were disallowed by the BIR.

Was the disallowance proper?    

Yes. These expenses are income payment subject to withholding tax. Failure to withhold the tax and remit the same to the government shall disallow the recognition of the expense. Toni should have indicated 500k in his return. For his failure to indicate the proper amount of tax in his return and to do his duty as the withholding agent, he incurred two-tiered liability: (1) Deficiency income tax (2) Liable as the withholding agent.

Methods recognized under the Tax Code: 1. 2. 3.

What if the BIR committed a mistake in the assessment of the income tax return. Can the taxpayer be exempted from liability?   

No. The government cannot be estopped by mistake of employee. It is a mandate of the law to withhold the tax, not a contractual obligation. Hence, even if the BIR employee made a mistake, the withholding agent must still comply with his duty.

5.

It must not be contrary to law, morals and public policy



In recognition of income, the "income from whatever source" principle is applicable. Income shall be subject to tax regardless of source whether legal or illegal  This tenet is not applicable to recognition of expenses  The expenses, to be deductible, must be legal



4.

Straight line Method  Amount of acquisition cost of the property divided by estimated useful life Declining Method  Uses a rate to the declining book value of the assets Sum of the years digit  Bigger depreciation expenses are provided during the early years of the fixed assets which gradually diminish until the total depreciation is equal the cost of the assets Other methods prescribed by Secretary of Finance

Requisites of Deductibility: 1. 2. 3.

Depreciation must be reasonable in amount Depreciation must have been incurred during the taxable year Property must be used in business

Note: Corporations can avail of depreciation expense with respect to one vehicle for one employee. g.

LOSS

Kinds of Loss: 1. 

Casualty Loss or Ordinary

Frizzy Corporation instructed its employee to steal trade secrets of the competitor corporation. The employee was successful. Frizzy Corporation paid success fee to the employee.

Requisites of deductibility: a. Must be sustained during the taxable period b. Must not be compensated by insurance or other forms of indemnity c. Must arise from theft, robbery, embezzlement and other casual and unusual

Is this success fee deductible?

d.

Illustration:

 No. One of the requisites of deductibility of business expense is that it must not be contrary to law. In this case, the success fee was given in consideration of an illegal act. Hence, it cannot be allowed as allowable deduction.

6.

It must be incurred or paid and deducted during the taxable year.

e.   

DEPLETION Reduction in the value of a wasting asset such as oil, gas wells, mines, etc. This is the removal, extraction or exhaustion of a natural resource such as mines and gas wells as a result of production or severance from such mines or walls. Natural resources cannot be replenished over a short period of time

f.

DEPRECIATION

2.  

sudden occurrences. Taxpayer must notify CIR of such loss within 45 days from date of discovery of the casualty.

Abandonment Loss Peculiar to petroleum operations If petroleum operators ceases its operation, all the unamortized loss of the property being used in the petroleum operation shall be treated as abandonment loss.

Illustration: There is a 10M worth equipment. The operator already utilized 2M of the equipment. 8M can still be utilized if the operation is continued. However, the operator decided to abandon the business. The 8M is unamortized. This value can be treated as abandonment loss. 3.

Wagering Loss



Same as gambling loss



General rule: Wagering loss cannot be deducted.  Exception: Gambling loss is deductible only to the extent of gambling winnings. If there are no gambling winnings, gambling losses cannot be deducted.

4.  

Capital Loss Loss that arises from dealings of capital assets. Capital assets: defined as assets not classified as ordinary assets.



The following are ordinary assets: a. Stocks in trade b. Inventoriable properties c. Properties held for sale d. Real property used in business e. Depreciable properties

Can the remaining 500k be used as a carry-over in 2014? 

Net Operating Loss Carry Over  

There is an excess of deduction over the amount of income during the previous years. The amount of excess can be carried forward to the next three immediately succeeding taxable years, provided that: (1) The amount of deductions must not have been incurred during the year when the taxpayer was exempt from tax. (2) There must be compliance with interest retention rule.

Illustration: Gross Income Allowable Deduction Net Operating Loss

0.5 (2013) 1M (2010) Net Loss of 0.5M -

Note that out of the 1M Net Operating Loss in 2010, only 500k was carried forward in the year 2013, since only that amount was necessary to make the net operating loss in 2013 zero.

Any gain arising from capital assets are treated differently from gains arising from transactions dealing with ordinary assets. Rules on ordinary and capital losses are also different.  If the loss arises from capital assets, it shall be treated as capital loss. For example: loss in the sale of shares of stocks. Shares of stocks are capital asset. Loss of such stocks are considered as capital loss.  Securities are investments. If securities have become worthless and the taxpayer is not engaged in buying and selling securities, the value of the securities that has become worthless are capital loss. (24b)



In the year 2010, the taxpayer has a net operating loss amounting to 1M which he can carry forward for the next three years, specifically until 2013. The taxpayer can deduct 1M net operating loss (in 2010) from the net operating loss of 0.5M in 2013.

NO. The net operating loss can be carried over only for the next three immediately succeeding year. Since the net operating loss was incurred in 2010, it can only be carried forward until 2013. 2014 is already beyond the 3-year period imposed by law.

In 2014, can he use any net operating loss? 

-

YES. In the year 2011, the taxpayer incurred a net operating loss of 3M. He can use 1M out of this to be carried over in the year 2014.

1M (2014) 1M (2011) 0 

The unused 2M out of the net operating loss of 3M in the year 2011 can no longer be used in the year 2015, since it will be beyond the 3-year period.

Interest retention rule Section 34 d (3)  There must be no substantial change in the ownership in the enterprise.  "No substantial change in ownership": not less than 75% of the nominal value of the shares must be held for and in behalf of the same persons. Merger: A+B= A or B Consolidation: A + B = C Apply interest retention rule when there is merger or consolidation.

Illustration: 2010 3M

2011 2M

2012 5M

2013 5M

2014 5M

(4M)

(5M)

(5M)

(4.5M)

(4M)

(1M)

(3M)

0

0.5M

1M

For Year 2013 Net operating loss can be carried over for the next 3 years immediately succeeding the taxable year that loss was incurred.

(1)

PNB and Allied Bank became PNB. Allied Bank has net operating loss of 1B.

Can PNB utilize the net operating loss of allied bank?  

It depends if there is compliance with interest retention rule. There must be no substantial change in ownership of the bank who incurred the net operating loss.

New percentage of ownership over PNB 

If stockholders of Allied Bank owns atleast 75% of the stocks, PNB can utilize the Net Operating Loss of Allied.

(2)

Reynold’s Corporation was composed of the following stockholders: Luther, Ryan, Emman, Rodney, and Reynolds.

Tin’s Corporation has the following stockholders: Kim, DJ, and Jeldawn



If NGO is not accredited, the donation can still be deducted but subject to limitation.

3.

Donations made in favor of foreign institution where an international agreement provides full tax exemption with respect to such donation. Only deductible in full if a tax treaty or international agreement provides for such.

The two corporations merged and became Tin’s Corporation.

Can Tin's Corporation use the net operating loss of Reynolds Corporation?   

It depends. Atleast 75% of Tin's Corporation must be owned by any of the stockholders of Reynolds Corporation. If not, the Net Operating Loss of Reynold’s Corporation cannot be used. The Interest Retention Rule was enacted because big corporations have the habit of purchasing small corporations for the sole purpose of using the net operating loss of the latter.

 4. 

PICOP v. CIR, December 1, 1995 Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations. The statutory purpose here may be seen to be the encouragement of the establishment and continued operation of pioneer industries by allowing the registered enterprise to accumulate its operating losses which may be expected during the early years of the enterprise and to permit the enterprise to offset such losses against income earned by it in later years after successful establishment and regular operations. To promote its economic development goals, the Republic foregoes or defers taxing the income of the pioneer enterprise until after that enterprise has recovered or offset its earlier losses. We consider that the statutory purpose can be served only if the accumulated operating losses are carried over and charged off against income subsequently earned and accumulated by the same enterprise engaged in the same registered operations. In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. RPPM far from benefiting from the tax incentive granted by the BOI statute, in fact gave up the struggle and went out of existence and its former stockholders joined the much larger group of Picop's stockholders. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated losses. In effect, to grant Picop's claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. Under the CTA and Court of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of its income from taxation thereof although Picop had not run the risks and incurred the losses which had been encountered and suffered by RPPM. Conversely, the income that would be shielded from taxation is not income that was, after much effort, eventually generated by the same registered operations which earlier had sustained losses. h.

CHARITABLE CONTRIBUTION

 1.

Instances of deductibility

2.

Donations made in favor of the government or any of its political subdivisions involving priority projects or activities.  If does not involve priority project, deduction is not deductible in full but subject to a limitation that the donation is exclusively for public purpose. Donations made in favor of accredited NGOs.

Donations made in favor of domestic corporations engaged in religious, educational, charitable, scientific and youth activities. If the donations is made in favor of a domestic corporation which has been established for rehabilitation of war veterans, the deduction is subject to a limitation  Not more than 30% of the donation must be used for administrative purposes.

Limitation of charitable contribution under tax code  For Individual Taxpayer 10% of taxable income before the charitable contribution or prior to the recognition of the charitable contribution  For Corporate Taxpayer 5% of taxable income prior to the recognition of the charitable contribution. If the donation is beyond that which are contemplated under Section 34 of the Tax Code, it is not a charitable contribution.

Illustration: If ABS CBN will donate relief items to victims of Yolanda, the donation is subject to donor's tax, since such donation is not contemplated under Section 34 of the Tax Code. The ABS CBN in this case cannot claim for allowable deductions by reason of the donation made. If the donation by ABS CBN is made to a social welfare institution (i.e. Sagip Kapamilya) and donation will not be used for administrative purposes, such donation is exempt from donor's tax. Also, ABS CBN can claim this an allowable deduction, provided that there is a notice of donation to the BIR if it exceeds the amount of 50k. i. 

PENSIONS Any pension funds established by employer to employees shall be treated as allowable deduction.

j. 

RESEARCH AND DEVELOPMENT If the research and development does not pertain to a capital expenditure, it is treated as an expense in the year that it has been incurred. But if the research and development will benefit succeeding taxable period and cannot be capitalized to any depreciable property, the research and development shall be treated as capital expenditure to be amortized by a period of not more than 60 months (equivalent to 5 years) In accounting, this is called Pre-operating Expense





SPECIAL FORM OF DEDUCTIBLE EXPENSES: Premium Payment for Health and Hospitalization Insurance 

Applicable only to Individual Taxpayers

Conditions:

1. 2.

Amount of premium payments that a taxpayer can deduct must be equivalent to P2400 per annum or 200 per month of the amount of premium paid for the taxable year The family income must not exceed P250, 000 during the year. Family income: the income of all members of the family. This includes the husband, wife and the children.

Who can avail of this deduction?  a. b. c.

The spouse who is entitled to deduct additional exemption: the husband  Except if: The husband is unemployed. The husband is an overseas worker. The husband executes a written waiver. EXPENSES NOT DEDUCTIBLE FROM GROSS INCOME (36B)

1. 

Personal, living and family expenses Common requisite of deductibility of all expenses is that it must be made in connection with trade, business and profession of a taxpayer.  Personal, living and family expenses are not connected with the trade, business or profession of a taxpayer.

2.

Any amount paid out for new buildings and permanent improvements that will increase the value of any property or estate This is not deductible since it is considered as a capital expenditure.

 3.  4.

Any amount expended in restoring a property or in making good the exhaustion thereof for which an allowance is or has been made. Considered as capital expenditure. Premium payments paid on the life insurance policy covering the life of any officer or employee or any person financially interested in any trade or business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy.

If a premium payment on life of employee is paid by employer, will the premium payment be a taxable income in the part of the employee?  

If beneficiary is the family of the employee, yes. If beneficiary is the employer, no. No benefit redound to the employee.

Illustration: The employer disbursed the funds for the premium of the employee.

Can the employer treat the cash outlay for the premium payment as an expense?  

If beneficiary is family of employee, the premium payment is deductible. If beneficiary is employer, the premium payment is not deductible.

What if employee dies? If the proceeds will be received by  The family  It is not a taxable income. Under section 32 (b) of the Tax Code, proceeds of life insurance are excluded from gross income.  The employee Still not a taxable income. Same reason as above.

SPECIAL INCOME TAX TREATMENT OF GAINS AND LOSSES FROM DEALINGS IN PROPERTIES Importance of determining whether the asset is ordinary or capital  

The tax treatment of the dealings of these properties will vary. It will also depend if property is real or personal

Real Property

Ordinary Asset Normal Tax

Personal Property

Normal Tax

Capital Asset Capital Gains Tax of 6% (for Individual Taxpayers, under 24D) Normal Tax

Example: A share of stocks is a personal property If ordinary asset: Normal Tax. If capital asset  If listed in stock exchange— subject to Stock Transaction Tax of 1/2 of 1% of GSP  If not listed in stock exchange— subject to CGT of  5% for the First 100k  10% for the amount exceeding 100k.

How to compute gains and losses? 

Difference between the amount realized and the adjusted basis.

****NOTE: Know the definition of an adjusted basis If the amount realized (AR) is more than the adjusted basis (AB)— GAIN If the amount realized (AR) is less than the adjusted basis (AB) — LOSS 

The special rules on capital transactions shall be applicable to capital gains and losses.  Not applicable to ordinary gains and losses.  Not applicable to capital gains of real property subject to capital gains tax or capital gains of shares of stocks subject to gains tax.

China Banking Corp. v. CA, July 19, 2000 Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposittaking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share. In the course of the regular examination of the financial books and investment portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income. Assuming that the securities had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary.

What if she held the limousine for 2years?

Supreme Court: 

Equity investment is a CAPITAL ASSET, not an ordinary asset of the investor.



Shares of stock would be ORDINARY ASSETS only to a:

a. 

Dealer in securities a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom.

 b.

 

It is still a capital loss. Apply the special rules: Holding period states that if capital asset was held for more than 12 months, then only 50% shall be recognized.

3.

Net Capital Loss Carry Over



A net capital loss in a taxable year in an amount not in excess with the taxable income for that year shall be deducted from the net capital gains of the next succeeding year only.

Illustration: Loss Limitation Rule

Person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. 

Shares of stock would be CAPITAL ASSETS in the hands of another who holds the same by way of

1.

investment. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.

Special Rules on Capital Transactions (Rules on Capital Gains or Losses)

-

1.

Loss Limitation Rule



Capital losses shall deducted only to the extent of capital gains.

Capital Gain Capital Loss  Allowed

-

Capital Gain Ordinary Loss  Allowed



Ordinary Gain Capital Loss NOT Allowed

-

Ordinary Gain Ordinary Loss  Allowed

2.

Holding Period Rule



The percentages of gains or loss to be taken into account shall be 100% if capital asset has been held for 12 months or less and any gain or loss shall be called short-term gain or short-term loss. The percentages of gains or loss to be taken into account shall be 50% if the capital asset has been held for more than 12 months, and any gain or loss arising from such transaction is called long term gain or loss.



Ordinary Gain Capital Gain 1M Capital Loss - 1.5M Net Capital Loss 0.5M Taxable Income

2M

2M

You have an ordinary gain of 2M BUT a Net Capital Loss of 0.5M.

In order to arrive at the total taxable income, should you deduct the net capital loss from the Ordinary Gain?  

 2.

NO. The Loss Limitation Rule provides that capital losses shall be deducted only to the extent of the capital gain. Thus the (net) capital loss of 0.5M cannot be deducted from the 2M ordinary gain. Since the ordinary gain cannot be deducted with the capital loss, the whole amount of 2M comprises the taxable income. Ordinary Gain 2M Capital Gain 1.5M Capital Loss 1M Net Capital Gain 0.5M Taxable Income 0.5M + 2M =

2.5M

Instead of a Capital Loss, you incurred a Capital Gain.

Illustration: Atty. Tin bought a limousine for P4M. She sold it for P3M, 2 months after she bought it. Amount realized: Adjusted basis: Loss:

3M 4M 1M

Is it considered as a capital or ordinary loss?  

If the car is not used in business, it is a capital loss. It is a loss that arose from dealing of a capital property. Apply the special rules.

Should she recognize the entire amount of 1M as a loss? 

Yes. It was a short-term loss since she held the asset for less than 12 months. As such, the percentage of the loss shall be 100%.

Can you add the (net) capital gain to the Ordinary Gain?  

YES. Adding a capital gain to an ordinary gain is not prohibited by the loss-limitation rule. The rule only prohibits the deduction of a capital loss from an ordinary gain.

How much is the taxable income?  

2.5M Add the net capital gain and the ordinary gain Holding Period Ordinary/Business Income Short Term Capital Gain *100% is recognizable since it is held for 12months or less (short term)

1M 1M

Long Term Capital Loss

-

0.8M  0.4M

 Since the ordinary gain cannot be deducted with the capital loss to arrive at a taxable income, the ordinary gain itself will now constitute the taxable income. Hence, the taxable income is equal to 1M.

*Only 50% recognizable since it is held for more than 12months (long term)

Net Capital Gain Taxable Income 

0.6M

0.6M +

1M =

1.6M



The (net) capital gain of 0.6M can be added to the ordinary income of 1M since it is not prohibited by the loss limitation rule. The loss limitation rule only prohibits the deduction of a capital loss from an ordinary gain. What is involved here is the addition of capital gain to an ordinary gain

In 2015 Ordinary Income Short Term Capital Gain Short Term Capital Loss Short Term Net Capital Gain

Net Capital Loss Carry Over (NCLCO) 1.

Ordinary Income Capital Gains 1M Capital Loss - 1.5M Net Capital Loss (0.5M) Taxable Income



2M

Long Term Capital Loss

-

1M  0.5M

*Only 50% is recognizable

Long Term Net Capital Gain 2M



The Net Capital Loss of 0.5M can be carried over for the next succeeding taxable period.

2.

In 2014 Ordinary Income Short Term Capital Gain Short Term Capital Loss Short Term Net Capital Loss Long Term Capital Gain Long Term Capital Loss

3M  1.5M

*Only 50% is recognizable

Because of the loss-limitation rule, which states that capital loss can only deducted up to the extent of the capital gain. Since the ordinary gain cannot be deducted with the capital loss, the ordinary gain (2M) will now constitute the taxable income.

*Only 50% is recognizable

2M 1M - (0.5M) 0.5M

Long Term Capital Gain

-

1M -

0.5M 1M (0.5M)

1M

Total Capital Gain = Short Term Gain+ Long Term GAIN = 0.5M + 1M = 1.5M

To arrive at a taxable income, why can you not deduct the capital loss of 0.5M from the Ordinary Income/Gain of 2M? 

The total capital loss of 1.5M can be carried over to the next taxable year.

Instead of immediately adding this capital gain to the ordinary gain, we can first recognize the loss incurred in 2014, because the capital loss in such year can be carried over to the next succeeding year, which is in 2015. The total capital loss in 2014 was 1.5M. Can this entire amount be carried over in 2015?  NO. The rule on carry over is subject to a limit  The limit is the amount of the taxable income earned by the taxpayer during the year that the loss has been incurred. Note that the taxable income in 2014 is 1M. The net capital loss that can be carried over to the next year is limited only to this amount. Instead of deducting 1.5M (the whole amount of the net capital loss), only 1M capital loss can be deducted from the capital gain.

1M  0.5M

Total Capital Gain in 2015 Capital Loss deductible from 2014 Net Capital Gain

3M  1.5M

Can this capital gain be added to ordinary gain?

*Only 50% is recognizable

Long Term Net Capital Loss Taxable Income



(1M) 1M

Total Capital Loss = Short Term Loss + Long Term Loss = 0.5M + 1M = (1.5M) This is the total capital loss.

To arrive at the taxable income, can you deduct this capital loss from the ordinary income/ordinary gain?  NO, because of the loss limitation rule which prohibits deduction of capital loss from an ordinary gain.

-

1.5M 1M 0.5M

Yes. What is involved in this case is addition of a capital gain to an ordinary gain which is allowed. The loss limitation rule prohibited only the deduction of a capital loss from an ordinary gain.

Taxable Income = Ordinary Gain + Net Capital Gain = 2M + 0.5M = 2.5M

Net Operating Loss Carry Over (NOLCO) vs. Net Capital Loss Carry Over (NCLCO) Year/s of carry over Deductibility

NOLCO 3 years Can be deducted from capital gains and ordinary gains

NCLCO 1 year Can only be deducted from capital gains

Limitation of amount of deductibility

No limitation, provided that deduction is done within 3 year period

Limited to the amount of the taxable income during the year that the loss has been sustained

Applicability of Rules to Corporation and Individual Taxpayers Loss Limitation Rule Holding Period Rule NCLCO

Corporation Yes No No

Individual Yes Yes Yes

SPECIAL CAPITAL TRANSACTIONS 1.

Short Sale



A dealer of the security or share does not yet own the security or share that he has sold

In law of sales, can an individual sell what he does not own?  

  

No, because of the principle nemo dat quod non habet: you cannot sell what you do not own. One can sell an item which he does not own provided that he owns it at the time of the delivery. In short sale, dealer of the security or share does not yet own the security or share being sold Tax implication: any gain or loss from the short sale shall be considered as capital gain or capital loss. Short sale must involve a dealer of security or shares of stocks.

Note that normally, if assets are ordinary assets (sold by a dealer of a property), any gain or loss from such sale is considered as an ordinary gain or ordinary loss. However, in short sale, even if what is being sold is an ordinary asset, any gain or loss from such transaction is considered as capital gain or loss. Reason: In short sales, you are selling a share that is not yet owned by you. Hence, any gain or loss must be considered as capital gain or loss.

2.

Failure to exercise option to buy properties

Earnest money vs. Option money Earnest: part of the consideration of the contract of sale Option money: distinct from the consideration

 Option to buy, not exercised If B decides not to purchase the property, the option money is treated as a capital gain in part of the realtor.  Option to buy, exercised. If B decided to purchase the property, option to buy was exercised, the 100k is treated as an ordinary asset, since the property is already sold. As to B, the worth of the asset is 2M, since this is the gain that he received for the sale of the property which he bought for 1M and he sold for 3M. This will be subjected to normal tax based on the net income of 2M. Rule if the option to buy is exercised:  The option money shall form part of the consideration for the sale of the lot in the part of the realtor in determining his ordinary gain or ordinary loss. In his return, realtor will reflect 2.1 M ordinary gain 2M – Net Income 100k – Option money 2.1M

3.

Securities becoming worthless



If the securities are capital assets which became worthless and written off during the taxable year, the loss is considered a capital loss.

WASH SALES    

Sale of securities or share of stocks where substantially identical securities are acquired or purchased within a 61 day period, beginning 30 days before the sale and ending 30 days after the sale. Substantially identical: of the same class or in the case of bond, the terms thereof must be the same. Losses from wash sales are not deductible. Gains however are taxable (income from whatever source principle)

Principles involving wash sales shall not apply to sales made by individuals acting as dealers in stocks and securities. The principles will not also apply to short sales. 

Congress has included a provision of wash sale because wash sale transactions are fraudulent.

Illustration: X is a realtor. He bought a property worth 1M, which he wants to sell for 3M. An additional stipulation in the contract of sale is that B will have a 1 month period to decide whether to purchase the property. For this grace period, he needs to pay 100k. Upon the expiration of 1 month and he did not buy the property, the amount 100k is forfeited in favor of X. What is involved in this case is an option money, since a period was given to prospective buyer for him to decide whether to buy or forego with the purchase of property.

61day-period 30 days

30 days

___________________________ | ____________________________ Sale securities or shares of stocks NOTE: If the quiz states that the taxpayer is a dealer, do not apply the rules on wash sales.

Illustrations:

(i) Seller is not a dealer 12/1/2014 - purchase 100 shares of stock of common stocks of M Co. for 10k 12/15/2014- purchase 100 shares of stock of common stocks of M Co for 9k 1/2/2015- sold 100 shares of stocks purchased on 12/1/2014 for 9k

75 shares



How many shares were sold on the date of sale? 

100.

There are two purchases involved in this case. The sale in 1/2/2015 however indicates that the stocks sold were the ones purchased on 12/1/2014.

Are the shares identical?

Is there a gain or a loss?

Is there a loss or a gain?

Amount realized vs. Adjusted Basis = 9k vs. 10k The amount realized is lesser than the adjusted basis. Hence, there is a loss of 1k

Amount Realized: 4k Adjusted Basis—amount of property sold: 5k

If the problem does not indicate which among several purchases is the subject of the sale, the Revenue Regulation provides that the shares of stocks sold must be the first stocks purchased. In accounting, this is called “First in, first out” (FIFO)

Is the loss of 1k deductible?  

To know this, determine first if the loss is a capital or an ordinary loss. Since the seller was not a dealer, the loss is not an ordinary loss but a capital loss. Hence, apply the rules on wash sales.

Is there wash sale? Steps: a.

Know the Date of the Sale In this case, the sale was done on 1/2/2015

b. Determine if there is purchase 30 days before and after the same. Is there a purchase 30 days before the sale? Yes, since there was a sale on December 15 2014. Is there a purchase 30 days after sale? None c.

Then know if the purchase involves substantially identical sales.



Yes. They are all common stocks from M Co.

Note that the shares being sold in 12/2015 were the ones purchased on 9/21/2014. On that date, the amount of the common stocks purchased was 5k.



Since the amount realized is lesser than the adjusted basis, there is a loss amounting to 1k.

Is this loss deductible?  

Partially.. This case involves shares that are covered by wash sales and shares that are not. Only those shares that are covered by wash sale are the non-deductible losses. Those shares that are not covered by wash sales are deductible losses.

Covered by wash sales (shares purchased on Dec 21 and 26: 75  

Out of the 100 shares sold, only 75 shares are covered by wash sale. Hence, only 75% of the 1k loss is considered non-deductible loss. The 25% is not covered by wash sale. This is a deductible loss.

(iii) 4/5/2014- taxpayer purchased 100 shares of stocks of M Co. for 5k 2/1/2015- sold these shares of stocks for 4k On each of the 4 days from 2/15/2015 to 2/18/2015, she purchased 50 shares of stocks per day of substantially identical stock for 2k per purchase.

In this case, the sales are identical since they involve the same shares: common shares of the same corporation  

In this case, there is WASH SALE. In wash sales, losses are not deductible. Hence, the loss of 1k is not deductible.

(ii) 9/21/2014- purchase 100 shares of stocks of common stocks of M Co for 5k 12/21/2014- purchase 50 shares of stocks of common stocks of M Co. for 2750k 12/26/2014- purchase 25 shares of stocks of common stocks of M Co for 1,125k 1/2/2015- sold 100 shares purchased on 9/21/14 for 4k Date of Sale: 1/2/2015

Was there a purchase 30 days after sale? 

None



The purchases on 12/21/2014 and 12/26/2014

Was there a purchase 30 days before sale? How many sales covered by wash sale? 12/21/2014: 50 shares 12/26/2014: 25 shares

Is there a loss? If yes, is it deductible?  

Start analysis from the date of sale, which was on Feb 1 2015 Then, determine if there is a purchase of substantially identical share within 61 day period

Is there a purchase 30 days before sale? 

None.



Yes, from February 15 to February 18 (these are still within 30 days from the sale on February 1)

Is there a purchase 30 days after sale?

The problem states that from February 15 to February 18 (four days), the taxpayer purchased 50 shares per day. Within this period, 200 shares of stocks were purchased. 50 shares x 4 days= 200 shares of stocks These 200 shares of stocks are all covered within the 61-day period. 

There is a wash sale.

Was there a gain or loss? 

In wash sales, if there is a gain, the gain is taxable. If there is a loss, such loss is non-deductible.

Amount realized: Adjusted basis:

4k 5k



Tax is paid on installment basis.



If transaction does not comply with the requisites under Sec 49 and there are still amortized payment, the sale is a deferred sale In a deferred sale, there should be no installment payment of taxes, as the income shall be recognized within the year of the sale. Hence, the entire tax must also be paid within the same year.



The amount realized is lesser than the adjusted basis, hence there is a loss.

Is the entire loss non-deductible? 

Determine the number of shares sold as compared to the number of shares covered by the wash sale

INSTANCES WHEN GAINS ARE TAXABLE BUT LOSSES ARE NON-DEDUCTIBLE 1. 2.

100 shares were sold on February 1, 2015. 200 shares were covered (50 shares x 4 days, starting from Feb 15 to 18)



Therefore, the entire loss is non-deductible in full since all shares sold are within the number of shares covered by the wash sale.

RR 6-2008: Summary of rules 



If shares acquired within 61 days (in other words, shares covered by the wash sale) is less than shares sold, loss will not be non-deductible in full. There is a need to prorate. (See second example) o Only the percentage of the loss covered by the wash sale is nondeductible. Those losses not covered by the wash sale are deductible. If shares acquired within 61 days is greater than shares sold, loss will be nondeductible in full. (See third example)

3. 4.

Wash sales Illegal activities  Except as to wagering loss similar to a gambling loss  Gambling loss is deductible only to the extent of gambling winnings. If there are no gambling winnings, gambling losses cannot be deducted. Merger or consolidation, if the exchanges is not solely in kind See Sec 40 (c ) below

Transactions between related taxpayers

INSTANCES WHEN GAINS AND LOSSES ARE NOT RECOGNIZED FOR TAX PURPOSES Section 40(c) of Tax Code

Two aspects: 1.

The transfer of the property by a person either acting alone or together with other individuals but not exceeding 4 who shall obtain corporate control

Corporate control: obtaining at least 51% of the standing shares of stocks of the corporation

INSTALLMENT SALES Sec 49 of the Tax Code Real Properties  For the sale to be considered as an installment sale, it must comply with the 25% rule.  There is installment sale if the initial payment is not more than 25% of the purchase price. Personal Properties  For the sale to be considered as an installment sale, determine first if it involves casual sale or sale on installment basis.  If the sale is on installment basis, it is automatically an installment sale.  If the sale is a casual sale, the selling price must be at least 1k and there must be compliance with the 25% rule, for it to be considered as an installment sale. Initial payment: all payments received other than certificate of indebtedness during the year of the sale. Effect of installment sale

2.  

Merger or consolidation It is not necessary that the participating corporation shall obtain corporate control The exchange is non-taxable if and only if the exchange is solely in kind  If the exchange is not solely in kind, there will be a recognition of gain.

General Rule: Gains are not taxable Losses are not deductible

Covered by 40 (c )   

Shares – shares Shares – securities Shares –properties

Illustration: X bpi Y family bank Family Bank decided to transfer its net assets to BPI Bank pursuant to the article of merged executed by both corporations Net assets of Family Bank amounted to 10m Fair market value of the assets amount to 30m BPI bank transferred shares of stocks to Family Bank

In return, Family Bank transferred the shares of stocks amounting to 30m

How much of the gain must be recognized?

Amount realized— Adjusted basis—

Amount Realized—

30M 10M

The amount realized is greater than the adjusted basis. Hence there is a gain amounting to 20M. 

This situation is governed by sec 40(c) on the merger or consolidation involving exchange solely in kind. In this case, gains are not taxable.

Mr. X is a stockholder of Family Bank The proportionate value of ownership of Mr. X is 100k shares of BPI. He received this in exchange of BPI share worth 100k in exchange for the 10M worth of net assets of Family Bank. Let us assume that the net assets with respect to the percentage of ownership of Mr. X is 30k Amount realized – Adjusted basis— 

100k 30k

There is a gain.  The gain is non-taxable, since his receipt of shares is still pursuant to the merger of BPI and Family Bank.

What are mergers or consolidations that are solely in kind? a. b. c.

Shares transferred in exchange of share Shares in exchange of shares and securities Share in exchange to properties

What are mergers or consolidations that are not solely in kind? a. b.

shares in exchange for shares plus cash or property shares in exchange for securities plus cash or property



In this case (when exchange is not solely in kind), gains shall be recognized in an amount not exceeding the sum of the cash and the fair market value of the property received excluding the proportionate amount of dividend income received by the taxpayer.

Limit of the amount of gain: Cash + Fair Market Value of the Property – Dividend Income

Illustration: Mr. J transferred his shares of stocks with a value of 110 pesos By reason of the transfer, Mr. J receives the following:  shares of stocks with the value of 150 pesos  cash amount of 40 pesos  20 pesos of this cash represents dividend income  property worth 30 pesos

Will there be a gain to be recognized by Mr. J?  

This involves an exchange that is not solely in kind There is a gain to be realized

220k

Shares+cash+property

Adjusted Basis -110k Total Amount of Gain 110k NOTE: Limitation of amount of gain to be recognized  the sum of cash and the fair market value of property excluding the amount of dividend income that forms part the cash and fair market value (fmv) of the property + –

Cash : 40 FMV of Property : 30 70 Dividend income 20 50 

This is the only amount of gain to be recognized

Recap of Rules If a transaction involves exchanges solely in kind, gains are non-taxable, loss are nondeductible if and only if the situation falls under Section 40(c 2) of the Tax Code: 1. Transfer involving corporate control 2. Merger or consolidation  If merger is not solely in kind, gains shall now be taxable (with a limit) and losses are still non-deductible. Limit of recognizable gain: does not exceed the amount of cash received by taxpayer and fair market value of property received by the taxpayer excluding the amount of dividend income that forms part of the value of cash or fair market value of property.

If there is liability assumed by transferee, is there a gain in the part of the transferor? For example: Worth of net assets transferred is 1M Out of 1M, 500k is subject to encumbrance Encumbrance is assumed by transferee by reason of the transfer. Supposed that the transferee is BPI. Note that the transferee is always the one who issues shares. Hence, BPI issued shares. Transferee likewise assumed the liability of transferor

In the part of transferee will there be a gain? 

No. There is no flow of wealth in the part of transferee

In the point of view of the transferor: Apply Section 40 (c4) Liability assumed is considered money received by transferor

Illustration: Assets are worth 1M. These were transferred to the transferee. Out of the assets worth 1M, 500 was encumbered. CIR VS. FILINVEST FDC owns outstanding stocks of 80% of FAI and 67% of FLI. FDC and FAI entered into a deed of exchange with FLI. The agreement states that FDC and FAI will transfer lands to FLI and in return, FLI will develop the lands for residential and commercial buildings. Also, FLI will issue shares to FDC and FAI. FDC and FAI asked for a ruling from BIR, alleging that no gains or losses should be recognized in such instances when a property is transferred to another corporation, either acting alone or with others not exceeding 4, the persons gaining corporate control. FDC and FAIR received formal notice for deficiency. They both protested to the BIR but BIR did not act on the protest. CTA: cancelled the deficiency income which the CA affirmed. The CIR held that there was a gain realized by FDC ecause of the transaction, hence Section 40( c ) is not applicable, the requisites not having been met. Instead of FDC having controlling interest in the FLI, the interest of FDC was even reduced from 67 to 61%. Supreme Court: Section 40c is applicable. All the requirements were met. Requirements 1. Transferee was a corporation FLI was a corporation 2. Transferee exchange its shares of stocks with properties of the transferor FLI issued shares and the transferor issues properties 3.

Transfer was made by person either acting alone or with others not exceeding 4.

4. Result: persons will have control over corporation Both FDI and FAI gained control over FLI. Cir separated FDC from FAI. The court held that these shall not be separated as they are both parties of the merger agreement. Hence, their shares must be added with each other. FDC had 61% shares after the transfer while FAI had 9%. With these combined, the two corporations have a total of 70& of the shares. They have corporate control since the law only requires atleast 51% of the standing shares of stocks of the corporation.

 The transferor obtained a gain Instead of or paying his liability (encumbrance), the transferee pays by reason of the transfer. Clarification in the case of Filinvest: There was no merger or consolidation involved in this case. What has been executed between the parties is merely a deed of exchange. The Supreme Court looked into the acquisition of corporate control because the situation falls under the first instance under Section 40(c ), involving the transfer between a corporate and a person (or a group of persons not exceeding four). Pointers to Review for the Deptals: Wash sales Personal exemption Section 30 MCIT 2 questions on deductions (So remember the requisites!) 2 to 3 questions on Income tax Estates and trusts Admin requirements (Recall those indivs not required to file annual income tax return) St lukes 20 questions-- 200%



TAXATION OF INDIVIDUAL TAXPAYERS CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS AND THE FACTORS AFFECTING THEIR TAXABILITY Five types of individual taxpayer 1. 2. 3. 4. 5.

Resident Citizen Non-resident Citizen Resident Alien Non-resident Alien Engaged in Trade or Business Non-resident Alien NOT Engaged in Trade or Business

Deduction of Expenses

Resident Citizen

Non-Resident Citizen Resident Alien Non-Resident Alien Engaged in Trade Non-Resident Alien NOT Engaged in Trade

Can deduct expenses regardless of the source of the expense. Can deduct only those expenses that are related to the income sourced from within. Reason: Because only their income sourced from within are subject to tax

Tax Base

Tax is based on the net income

Allowable Deduction Can avail of allowable deductions.

Kinds of Passive Income 1. Dividends 2. Royalties 3. Interest Income 4. Prizes and Winnings

If the dividend income is received by an individual taxpayer from a Domestic Corporation, the rate of tax will depend on the type of the individual taxpayer. Type of Individual Taxpayer who receives the Dividend Income Resident Citizen Non-resident Citizen Resident Alien Non-resident Alien Engaged in Trade or Business Non-resident Alien NOT Engaged in Trade or Business

Tax is based on the gross income

Cannot avail of allowable deductions

Returnable amount includes the income earned by the taxpayer from business trade or profession.  Income earned from business, trade or profession is subject to normal tax, based on the net income. Compensation income is not a returnable amount.

Tax implication: subject to normal tax based on taxable income Compensation income earners cannot avail of allowable deductions. Allowable deductions are incurred only in connection with trade, business or profession.

NO.

10% final withholding tax

20% final withholding tax 25% final withholding tax

If dividend income is received from a Resident Foreign Corporation All incomes sourced from within the country form part of the taxpayer’s gross income.

Royalties General Rule: Subject to 20% final withholding tax Exceptions: 1. Literary works 2. Books 3. Musical compositions,  Subject to 10% final withholding tax

Interest Income If interest income is received from bank deposits and deposit substitutes  20% final withholding tax If not from bank deposits and deposit substitutes  normal tax

Can the excess of allowable deduction over the gross income earned from business be deducted from the compensation income? 

Rate of Tax

If dividend income is received from a Non-Resident Foreign Corporation Only Resident Citizen is subject to tax.

RULES APPLICABLE TO RETURNABLE INCOME



RULES APPLICABLE TO PASSIVE INCOME

Dividend Income

To determine the taxability of an income, a factor to be considered is the source of income.  Only Resident Citizens can be taxed for income regardless of its source.  All other types of individual taxpayer can only be subject for incomes sourced from within the country.

Deductible Expenses

An allowable deduction can only be deducted against the income to which it is related.



Exceptions:

1.

Long term deposits, with a maturity period of 5 years or more  In this case, the interest income is exempt from tax, except if preterminated.  If there is pre-termination, the rate of tax would depend on the duration of deposit before withdrawal was made.

If deposit or investment was pre-terminated before the 5th year, a tax shall be imposed on the entire income and shall be deducted and withheld by the depositary bank from the proceeds of the long term deposit investment certificate based on the remaining maturity thereof. 4 years to less than 5 years 3 years to less than 4 years Less than 3 years 2.

5% final withholding tax 12% final withholding tax 20% final withholding tax

Foreign Currency Deposit System

Earnings by a resident citizen Earnings by a non-resident citizen

Subject to 7.5% final withholding tax EXEMPT

2. 3. 4.

Winnings Subject to 20% final withholding tax, regardless of amount.

Exceptions where prizes will be exempt from tax:

Additional exemption Amount: 25k per dependent, not exceeding 4 dependents

Maximum of 100k.

 

NO. Prior to the effectivity of RA 9504, it was material. However, under the current law, what is only material is that the dependent must be a qualified dependent.

Chief support: principal or main support  There is chief support provided by the taxpayer if more than 50% of the expenses for the dependent is shouldered by such taxpayer. Living with the taxpayer: the dependent is residing with the taxpayer  If the taxpayer goes outside the usual residence for the purpose of schooling, he is considered to be residing still with the taxpayer if the personal residence of the dependent is in the personal residence of taxpayer. Change in status under Sec 35(c) of the Tax Code

Prize or award was made in recognition of religious, educational, charitable, literary, artistic, scientific, or civic achievement; Prize was received by the recipient without any action on his part to enter the contest or proceeding; and The recipient is not required to render future substantial services to receive the prize. Prize or award rendered in sports competitions sanctioned by the Philippines Olympics Committee

1.  

Taxpayer marries It will be deemed as if such event occurred in the beginning of the year. This change in status is no longer material since at the present time, whether the taxpayer is single or married, he may still avail of basic personal exemption.

2. 

Taxpayer dies The event would be treated as if it had occurred at the close of the taxable year, the estate can still avail of personal and additional exemptions.

NOTE: in these instances, the prize is the one exempt from tax, not the winnings.

3. 

Additional dependents It will be deemed as if it had occurred at the beginning of the taxable year

Is there a possibility of a winning to be excluded from gross income? 

2.

years of age.

Amount is 10k or less: subject to normal tax

1.

Two Kinds of Personal Exemptions 1. Basic Personal Exemption Amount: 50k for the entire year

Qualified dependent: a legitimate or illegitimate child who is chiefly dependent upon or living with the taxpayer and who is not married, gainfully employed, and not more than 21

General Rule: subject to tax



Personal exemption  The theoretical amount of personal, living or family expenses of an individual taxpayer that can be deducted from the gross income.  This can only be availed of by individual taxpayers  This amount will represent the amount of daily sustenance of the individual.

Is there a need to determine if the taxpayer is the head of the family?

Prizes and Winnings

Prizes Amount exceeds 10k—subject to 20% final withholding tax

PERSONAL EXEMPTIONS

None, except if it is provided to be so excluded under a special law.

Illustration: Anton and Ina got married in 2011. Ina gave birth on December 31 2013 with twins. On November 30 2014, Ina again gave birth with triplets

How much is the amount of personal exemption of both taxpayers in 2011? 

Since an individual taxpayer may avail of basic personal exemption amounting to 50k per year, Anton and Ina can both avail of this exemption.

Can Ma’am Tin avail of additional exemption?

Anton— 50k Ina— 50k

How much is the amount of personal exemption of both taxpayers in 2013?

 

In 2013, the couple had two dependents since Ina gave birth to twins. The event of having additional dependent is deemed as if it had occurred at the beginning of the taxable year. Hence, even if Ina gave birth to the twins only on December 31, 2013 (the last day of the year), such event shall be deemed as if it had occurred at the beginning of 2013. Anton—100k 50k: basic personal exemption 50k: additional personal exemption 25k per dependent. They had two dependents

Ina—50k as a basic personal exemption. NOTE: Under the law, it is the husband who can avail of additional exemption, except: The husband is unemployed. The husband is an overseas worker. The husband executes a written waiver

How much is the amount of personal exemption of both taxpayers in 2014? Anton— 150k 50k: basic personal exemption 100k: additional personal exemption 25k per dependent, maximum of 4 dependents. Even if the couple already had five dependents, Anton can only claim a maximum of 100k for an additional personal exemption

Ina— 50k 4. 

The dependent dies, or is gainfully employed, or marries, or becomes 21 years of age during the taxable year (Sec 35c) It will be deemed to have occurred at the close of the taxable year.

Illustrations (i) With the same facts stated above, if on January 3, 2014 one of the twins died, the additional personal exemption that can be claimed by Anton in 2013 is 50k, since in that year the twins are still alive. The death only occurs in 2014. If concerns death, or if dependent is gainfully employed, marries, or becomes 21 years of age during the taxable year, it will be deemed to have occurred at the close of the taxable year.

(ii) On January 1 2016, your child started to work in Going Bulilit until December 2016. The fact that the dependent has been gainfully employed will be deemed to have occurred at the close of taxable year

(iii)

January 15 2016: Toni is the son of Ma’am Tin. Toni is only 20 years old when he got married. He and his wife was still living with Ma’am Tin.

For 2016, Yes. Event of dependent getting married is deemed to have occurred at the close of the taxable year. For the following years, not anymore. Even if Toni and his wife is still living in the same house with Ma’am Tin, he is no longer qualified dependent.

Taxable Benefit Rule  

If the event is beneficial to the taxpayer, it is deemed to have occurred at the start of the taxable year If the event is not beneficial, it is deemed to have occurred at the close of the taxable year.

Illustration Yanne is Ma’am Tin’s daughter. Yane and Reynold got married in 2014, while they were still studying. In 2015, Yanne gave birth to Crystal. In 2016, Ma’am Tin said that she will just take custody of Crystal since she’s rich. The couple agreed. In June 2016, Ma’am Tin took Crystal with her to US.

Can Reynolds avail of additional exemption?  

In 2015, yes In 2016, no. It does not pertain to a dependent dying, being gainfully employed, or reaching 21 yrs of age. Hence the events is deemed to have occurred at start of taxable year. PANSACOLA vs. CIR

Non-retroactivity of NIRC January 1 1998: NIRC took effect Section 35 (C) of the NIRC allows a taxpayer to still claim the corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents’ status took place at the close of the taxable year. The filing of the return was on April 15 1998, covering the income earned in 1997. The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998. Hence, NIRC cannot be applied. Nature of personal exemptions Personal exemptions are treated as deductions. Deductions are in the nature of exemptions. Hence, the principle of srictissimi juris shall be applied, wherein tax exemptions are construed strictly against taxpayers.

PERSONAL EXEMPTION FOR NONRESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS. They can avail of personal exemptions.  If the non-resident alien is not engaged in trade or business, he will be subject to tax based on gross income. He cannot avail of allowable deductions and personal exemptions. Reciprocity Rule:

The Philippine government grants personal exemption in favor of non-resident alien engaged in trade or business if his domiciliary country grants the same exemptions in favor of Filipino citizens not residing therein  Provided that such amount will only be equivalent to the amount of personal exemptions granted to such Filipino citizens  Provided further that such amount shall not exceed the amount granted to citizens and aliens in the Philippines.

Crystal is a minor. She is 17 years of age. A property was transferred to her from her father by a deed of donation. Crystal received this property from his dad. The property was rented to individuals, wherein Crystal earns 100k per month.

Conditions to take into consideration: 1. The grant of personal exemptions in the domiciliary country 2. The amount granted in domiciliary country 3. The amount granted in the Philippines

General rule: the living parent (the father) shall declare the income, except if donor’s tax is paid or the transaction was exempt from tax, wherein the minor will be the one to declare.



BIR issued a ruling that non-resident alien engaged in trade or business can avail both basic personal and additional exemption.

TAXATION OF MARRIED INDIVIDUALS Sec 51: The reporting of income shall be made individually.  

If the income is directly attributable to either, each of them shall reflect income individually. If the income cannot be attributed to either of them, it shall be divided equally.

Filing of income tax return General rule: the filing shall be joint  Exception: If joint filing is impracticable, they shall file separately but BIR will consolidate it for verification purposes.

Note that the transfer has been subject of a deed of donation.

Who will reflect the rental income?

  

THEREFORE, Crystal will report income. There is already a presumption that the tax is already paid.  If a net gift is equivalent to 100k or less, and donation is given to a relative, the donation will not be subject to tax.

Who is a relative? 

Illustration: Yanne and Reynolds are married. Yanne has an income of 2M Reynolds has an income of 500k. They have a business which earns 1M.

In this case, a deed pf donation was executed. The requirements were already submitted to BIR. The BIR assessed the tax to be paid. After payment of tax, BIR will issue certificate authorizing registration. Hence, if there is already a certificate authorizing the registration of the donated property, it would signify that the taxes pertinent to transaction has already been paid. The Register of Deeds will not accept document requirements not unless it includes the certificate authorizing registration. If title passes to transferee, it is with presumption that tax has already been paid, since one of the requirements for transfer is certificate authorizing registration.

Spouse, ascendant, lineal descendants, brothers, sisters and relative within 4th degree of consanguinity.

If the transfer is between a living parent and minor child, it is considered as a gift between relatives. Hence, apply the rule that if the net gift is equal to 100k or less, it is exempt from tax. 

If the gift is given to a stranger, gift is subject to 30% tax.



Instead of collecting the liability due, the commissioner may cancel the liability because the administrative cost of collecting liability is greater.

 

Calendar Year: 12 month period, beginning January ending in December. Fiscal Year: 12 month beginning in a month other than January, ending in a month other than December

Since the business earnings are not identifiable as to who earned them, they shall be divided equally. Yanne and Reynolds are treated as separate taxpayers.

Are they required to file separate return? 

No, since they are married individuals. The general rule is joint filing. However, if such is impracticable, they can file separately.

TAXATION OF MINOR INDIVIDUALS If the minor individual earned income, he should file his income tax return through his guardian. If the minor earns income from property derived from a living parent, the living parent shall declare the income  Except 1. If donor tax is paid, or 2. The transfer is exempt from donor's tax  in these cases, the minor shall file.

Illustration:

ABATEMENT OF TAX LIABILITY

ACCOUNTING PERIODS (SEC 43)

General Rule: A taxpayer can choose either Exception: where only calendar year may be employed 1. 2. 3.

If the taxpayer does not employ any method of accounting If the net of the accounting adopted does not reflect true income If taxpayer has no accounting method

4. 5.

If taxpayer dies not keep books of accounts If taxpayer is individual

ADMINISTRATIVE REQUIREMENTS FOR INDIVIDUAL TAXPAYERS I.

4.

What if the minimum wage earner earns income from business? 

Filing of Annual Income Tax Return

Resident Citizens Non-Resident Citizens, as to income sourced from within Resident Alien, as to income sourced from within Non-Resident Alien Engaged in Trade or Business as to income sourced from within 

Non-Resident Aliens Not Engaged in Trade or Business are NOT included since they are subject to 25% final withholding tax. The moment it has been withheld and remitted, it would extinguish taxpayer’s liability.

Individuals who are required to file may be exempt from filing under the following instances: 1.

If the gross income does not exceed the personal exemption (both basic and additional exemptions)

However, if the alien of citizen earns income from business trade or profession, he is required to file annual income tax return regardless of the amount of the gross income. 2.

If the income that has been derived forms purely compensation and the income taxes has been currently withheld.

He is now required to file. Under RA 9504, the moment the minimum wage earners earns incomes from business, trade or profession, all income including the compensation income shall be subject to income tax

II.

Who are required to file? 1. 2. 3. 4.

Income earned by minimum wage earners or individuals exempt from tax.

Revenue Regulation 2-2011: Requirement of Filing Annual Information Return.

Annual Information Return does not involve assessment tax liability but requires only taxpayer to declare certain amounts of income. Annual Information Return must be filed under the following instances: 1.

If the gross income does not exceed the personal exemption (both basic and additional exemptions).

The taxpayer is required to file annual information return if income exceeds 500k. 2.

If taxpayer is not required to file annual income tax return, there is a need to file annual information return.

3. If the taxpayer sole income is subject to final withholding tax File Annual Information Return IF the aggregate tax withheld exceeds 125k during the year. 4. If the taxpayer is a minimum wage earner If the annual income exempt from tax exceeds 500k, there is a need to file annual information return.

Quarterly Filing of Return Requirements: 1. Employee receives purely compensation income. 2. Employee receives compensation income from one employer in the Philippines. 3. The amount of tax due must be equal to the amount of tax withheld. 4. The employer files the annual information return of income taxes withheld on compensation.

  

 BIR 1604-cf: filed by employer to BIR Names of employees and income of all these employees for the entire taxable year, and the income taxes withheld for the entire taxable year are indicated. Summary of all BIR Form 2316 issued by employer to employees. Considered equivalent to income tax return of the employees This is where substituted filing comes in, since the employer is the one filing the return.

NOTE: In substituted filing, the amount of tax due must be equivalent to tax withheld.

5.

The employer issues a certificate of compensation payment 

3.

Exception: if the compensation income earner earns income from two or more employee concurrently during the same taxable year.

If the taxpayer earns an income solely subject to final withholding tax.

Last day of 1st quarter: March 31 Filing of quarter income return: April 15. 60 days is to corporate taxpayers. Last day of 2nd quarter: June 30 Filing: August 15 Last day of 3rd quarter, September 31 Filing: November 15 Fourth Quarter: Filing is also on April 15 (for the annual income tax return). So on April 15, you file two returns: the first as the 1st quarter return, and the second as the annual return Cumulative basis Even if income in 1st quarter is already reflected in quarterly return, it shall still be reflected in the second quarter, and so on. The annual income tax return reflects all income from January to December.

TAXATION OF CORPORATE TAXPAYERS What is considered a Corporation? 1. 2. 3. 4. 5.

Partnership no matter how created or organized. Joint stop companies. Joint accounts Associations Insurance companies

What are not included as a Corporation?  

GPP Consortium for the purpose of :  Construction project  Petroleum, coal geothermal and other energy operations pursuant to a consortium agreement with the government.

TEST IN DETERMINING EXISTENCE OF A CORPORATION ONA VS. CIR Doctrine: co- ownerships become taxable in the event co-owners used the properties as a common fund with intent to produce profits FACTS: Julia died leaving Lorenzo Ona and their five children. In the estate proceeding, the husband was appointed as the administrator. Since the children are also minors at that time, Lorenzo became administrator of estate of the children. The court ordered the property to be partitioned by the heirs. However, the heirs did not execute partition. Lorenzo became manager of all properties, lands, houses. Two of the lands were acquired after death of Julia using a loan which was taken by the heirs and Lorenzo. CIR alleges they should pay deficient taxes as they have formed unregistered partnership. The heirs alleged that they are only co-owners since they only own the undivided share in the inherited property. RULING: There was an unregistered partnership in this case. The law allows the heirs to be co-owners of the property but only for a certain time. All the incomes derived from the properties were not divided by them but were put in a common fund and used to gain income. The heirs did not receive their share since these were pooled as a common fund. In short, they are deemed to have formed unregistered partnership since they have their resources put in a common fund for the purpose of deriving profits therefrom. Lecture Notes:  If there was a judicial settlement of estate, the estate becomes the taxpayer.

After A’s death, who will recognize?  

It depends on whether the estate is under judicial settlement or extrajudicial settlement If the estate is under judicial settlement, the taxpayer is estate. If the estate is under extrajudicial settlement, the heirs are the taxpayer.

If heirs pooled their inheritance together in order to gain income, who shall be taxpayer? The unregistered partnership of the heirs. In this case of Ona, the properties were divided among the heirs. Hence, the second rule applies, where all the heirs are taxpayers. If it is an unregistered partnership, it is deemed a corporate taxpayer subject to corporate income tax. PASCUAL AND DRAGON vs. CIR Doctrines:  mere sharing of gross returns does not of itself establish or constitute a taxable partnership  the character of habituality peculiar to business transactions for the purposes of gain must be present FACTS: Petitioners are Pascual and Dragon In 1965: they purchased two lands In 1966: they purchased three lands The first two lands were sold to M Dev Corp. The three lands were sold to 2 individuals. They realized a capital gain of 165k in the first transaction and 60k in the second. They paid capital gains tax by availing tax amnesties in 1973-1974. In 1979, the BIR assessed them of corporate income tax deficiency. Taxpayers opposed since they have availed of tax amnesty. The CIR alleges that being co-owners of the real estate transactions, it is unregistered partnership and subject to corporate income tax. Tax amnesties granted to them did extinguish individual taxes but not the corporate income taxes. RULING: They are not considered as a corporation. The petitioners were just owners of the property for 5 years in comparison with the case of Evangelista where they are owners of the property for fifteen years. Petitioners isolated transactions in 1968 and 1970 were not for gain or profit. To be defined as partnership, the two elements must be present: 1. Intention to create common fund 2. Purpose of which is to derive profits It is not disputed that there was a common fund, but the purpose of profits and gains was not present. OBILLOS VS CIR

If A dies in June, who will reflect income from January to June? 

A, since he was still alive.

Doctrines:

 

mere sharing of gross returns does not of itself establish or constitute a taxable partnership, whether or not the persons sharing them have joint or common interest a sale of co-ownership property does not necessarily establish that intention

FACTS: The siblings bought lands from a company and they contributed around 170k. In the torrens title, they appear as co-owners of the property. CIR requested the payment of corporate income tax in addition to individual income since they formed an unregistered partnership. According to CIR, the siblings realized profits for around 130k since they bought the lands for 170k which they sold for 300k. RULING: They are not liable for corporate income tax Civil code provides that sharing gross returns alone on itself whether these persons have common interest over the property does not entail that they formed unregistered partnership. There must be an intention to form partnership. There was no intention to form a partnership in this case since the intention of the siblings was to build houses on the residential lands. As the building of the houses was not feasible because of high cost of construction, their only choice is to resell the lands and divide the profits among themselves.

FACTS: Lots were purchased and leased to several persons. In 1945, BIR assessed the taxes of the siblings. It alleges that they should pay corporate residence tax and real estate tax since they are a corporation. Siblings answered that they are not a corporation but co-owners of the lots. RULING: They are liable for corporate income tax They should be treated as a partnership. The money involved are not inheritance from their father but a common fund contributed by them to purchase the lots and subject them to rent. NOTE:  Pascual is the only case where there is no unregistered partnership. In that case, the activity of selling the lands was for the purpose of terminating coownership.  In the other cases, they pooled funds for a business motive.  If heirs are treated as unregistered partnership, the tax rate is 30% since they are considered as corporation. I  Since they are considered as corporation, the income distributed to individuals are treated as dividend income.

KINDS OF CORPORATIONS

The profits in this case are merely incidental and not the main intention of the parties.

AFISCO INSURANCE CORP. VS. CIR

1. 2.

the Philippines. a. Resident: those foreign corporation engaged in trade or business within the Philippines b. Non-resident: those foreign corporation not engaged in trade or business within the Philippines

A pool of machinery insurers is a taxable association or corporation as an unregistered partnership Reasons: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. (2)

The pool functions through an executive board which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies.

(3)

True, the pool itself is not a reinsurer and does not issue any insurance policy: however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share “in the business ceded to the pool” and in the “expenses” according to a “Rules of Distribution” annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pool’s formation. EVANGELISTA VS. CIR

“Doing or engaging in” or “transacting 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 insistent to and in the progressive prosecution of commercial gain or for the purpose and the object of the business organization (Comm. vs. British Overseas Airways Corporation – BOAC case 149 S 395).

RULES APPLICABLE TO RETURNABLE INCOME: SEE RA 9337 RULES APPLICABLE TO PASSIVE INCOME Tax-Sparing Rule 

Doctrines:  The term “partnerships” does not only refer to partnerships in its technical meaning.  The phrase “no matter how created or organized” includes that a joint venture need not be undertaken in any of the standard forms or in conformity with the usual requirements of the law on partnerships in order that one could be deemed to be so for tax purposes  Also included are joint accounts and associations, none of which have a legal personality of its own independent of that of its members

Domestic: those created or organized in the Philippines or under its laws. Foreign: those created organized or existing under any laws other than those of



This rule is applied when a nonresident foreign corporation receives a dividend income subject to Philippine tax wherein 30% final withholding tax is imposed. This tax will be lowered to a preferential rate of 15% if the domiciliary country of the nonresident foreign corporation shall grant a tax credit equivalent to the tax deemed paid in the Philippines. The tax deemed paid shall be equivalent to the tax foregone.

Tax foregone: equivalent to 15%, which is the amount that is not anymore collected by the Philippine Government.

Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

Why 15%? 

The non-resident foreign corporation should have paid the 30% final withholding tax. However, because of the tax sparing rule, the corporation’s tax was lowered to 15%. From 30% to 15%, it was spared of tax by 15%. This spared tax is deemed to have already been paid in the Philippines. This is the tax foregone.

NOTE: Today, the ordinary tax rate is 30% and the preferential tax rate is 15%. The 15% difference is the “taxes deemed paid” or the “tax foregone”.

TAXES PECULIAR TO CORPORATION

CIR vs. Procter and Gamble Tax Sparing Rule The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation (Sec24[b], par 1 of NIRC).

Minimum Corporate Income Tax Normal Corporate Income Tax (NCIT) 30% based on taxable income No relief

In the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate. Did the US comply with such requirement?

Requisites: 1.

US Tax Code provides: 1. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA; 2. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil. The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits.

2.

It is imposed beginning the fourth (4th) taxable year immediately following the taxable yr. in which such corporation starts its business operation. It is imposable only if such corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the Normal Corporate Income Tax (NCIT) due from such corporation.

MCIT Carry Forward Provision  Any excess of MCIT over normal tax may be carried forward on an annual basis and be credited against the normal tax for the 3 immediately succeeding years. (Sec 27 e(2) NIRC)

From what date do you reckon the four year period? 

General Rule: from the registration to the SEC or the BIR, whichever comes earlier

If thrift banks: from the registration to the SEC or the issuance of Certificate of Authority to Operate by the BSP, whichever comes later. MCIT is imposed on the 4th year after the close of the taxable year beginning the date of commencement of operation.

What is, under US law, deemed paid by P&G USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil. NIRC does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). NIRC merely requires, in the case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable.

Minimum Corporate Income Tax (MCIT 2% based on gross income The Sec. of Finance, upon recommendation of the Commissioner may suspend the imposition of MCIT, upon showing that the corporation suffers losses due to any of the following causes: Prolonged labor dispute (e.g. strikes for more than 6 months) Legitimate business reverses (e.g. theft) Force majeure (e.g. war)

2013

1st

2nd

2014

2015

Date of Commencement

3rd

4th

2016

2017 Impose MCIT (if higher than NCIT)

MCIT is imposed on the 4th year after the close of the taxable year beginning the date of commencement of operation. The commencement of operation was dated in 2013. Wait for the close of this taxable year, then count four year. On the fourth year, apply MCIT. In 2017, start comparing your MCIT with NCIT, then apply which is greater.

MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income

Illustration 2013 was already the 5th year since the operation of the business. MCIT is already possible in this year. Compare now the NCIT and the MCIT. NCIT

MCIT

2013

100

150

2014 2015

100 100

130 20

What shall you pay? MCIT, since it is greater MCIT NCIT

In 2013, you have an excess of MCIT over the NCIT in the amount of 50.

Can you carry this forward to the next year (2014)? 

No. The excess of MCIT over the NCIT can only be carried forward to the value of the NCIT. The excess can only reduce the value of NCIT within the three immediately succeeding years. You cannot apply the excess of 50 in 2014 since in that year, you are mandated to pay MCIT, not NCIT. You cannot carry forward the excess of 50 to reduce the value of your MCIT.

In 2014, you have an excess of MCIT over the NCIT in the amount of 30. Adding this to the excess incurred in 2013, you have a total excess of 80.

Can you carry this forward to the next year (2015)? 



Yes. In the year 2015, you are mandated to pay NCIT since it is greater than the MCIT. Note that the excess of MCIT over the NCIT on the previous year can be applied on the value of the NCIT on this year. Hence, apply the excess of 80 to reduce your NCIT. Your original NCIT was 100. Since your excess of 80 in the previous years can be carried forward to this year, the NCIT will be lowered down to 20. By MCIT, the government is merely seeking for advance payment of tax since at the end of the day, the tax liability of the taxpayer is just the same.

MANILA BANKING CORP vs. CIR Under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Petitioner bank was registered with the BIR in 1961. However, in 1987, it was found insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve (12) years, or on June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of Incorporation which was approved on June 22, 1999. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999.

CIR vs. PAL Section 13 of Presidential Decree No. 1590 gives PAL the option to pay basic corporate income tax or franchise tax, whichever is lower; and the tax so paid shall be in lieu of all other taxes, except real property tax. The income tax on the passive income of PAL falls within the category of "all other taxes" from which PAL is exempted, and which, if already collected, should be refunded to PAL. The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT is different from the basic corporate income tax, not just in the rates, but also in the bases for their computation. Not being covered by Section 13(a) of Presidential Decree No. 1590, which makes PAL liable only for basic corporate income tax, then MCIT is included in "all other taxes" from which PAL is exempted.

IMPROPERLY ACCUMULATED EARNINGS TAX CREBA vs. ROMULO Recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation commenced its operations. This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT. MCIT: Not a Tax on Capital The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Nature and Purpose: The improperly accumulated earning tax of 10% in addition to the regular corporate income tax shall apply to every corporation formed or availed for the purpose of avoiding of any other corporation by permitting earnings and profit to accumulate instead of being divided or distributed. CYANAMID PHILS vs CA Section 25 of NIRC was implemented because there were corporations who do not distribute dividends to avoid the payment of tax.

Surtax is imposed as a penalty because of undistributed dividends of Cyanamid Philippines. Cyanamid argued that in the jurisprudence of American Federal Courts, closely held corps such as them are not supposed to pay surtax on undue accumulated earnings. The Supreme Court ruled that the American jurisprudence has already been nullified. It held that the Cyanamid Philippines can be liable for undue accumulated earnings. NOTES: At the present time, only domestic corporations classified as closely held corporations are subject to surtax. Closely held corporations Those entities, at least 50% of outstanding capital of which is being directly or indirectly held by not more than 20 persons. Did it pass the immediacy test? No. The improperly accumulated earnings were not reasonable. Their capital is way more than the liabilities they have to pay. The need is also not immediate. A need is only reasonable if need is immediate including reasonably anticipated needs. To determine the reasonable needs of the business in order to justify an accumulation of earnings, the Courts of the United States have invented the so-called Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply.

SPECIAL CORPORATIONS Exempt Organizations and Corporation 1. 2. 3. 4. 5.

6. 7.

(SEC. 30 OF NIRC) Labor, agricultural or horticultural organization not organized principally for profit. Mutual savings bank not having a capital stock represented by shares and cooperative banks w/o capital stock organized and operated for mutual purposes and without profit. A beneficiary society or association operating for exclusive benefit of the members or a mutual aid association or non-stock corporation organized by employees providing benefits exclusively to its members or their dependents. Cemetery company owned and operated for the exclusive benefits of its member Non-stock corporation or association organized and operated exclusively for religious, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of it net income or asset shall belong to or inure to the benefit of any member, organizer, or officer or any specific person Business league chamber of commerce, or board of trade not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual Civic league or association not organized for profit but operated exclusively for the promotion of social welfare

8. 9.

A non-stock and non-profit educational institution. Farmers’ fruit growers or like organization organized and operated as sales agent for the purpose of marketing the products of its member. 10. Farmers’ or other mutual typhoon or fire insurance company or like organization of a purely local character, the income of which consists solely of assessment, dues and fees collected from members for the sole purpose of meeting its expenses. 11. Government educational institution Income of whatever kind and character of the foregoing organizations from any of their properties, real or personal or from any of their activities “conducted for profit” regardless of the disposition made of such income shall be subject to tax.

What other corporations are exempted from income tax under special laws? 1. 2. 3.

Cooperatives under the Cooperative Code of the Philippines Foundations created for scientific purposes under RA 2067 Local Water Districts

RMC 51-2014 For an entity to be qualified as non-stock non-profit that is exempt from income tax under Section 30 of the Tax Code, its earnings or assets shall not inure to benefit of officers, members, organizers, trustees, or any specific persons. The following are considered as inurements of such nature: 1. 2. 3.

4. 5. 6.

Payment of compensation, salaries and honorarium to its trustees or organizers Payment of unreasonable amount of compensation to its employees The provision of welfare aid and financial assistance to its members. An organization is not exempt from income tax if its principal activity is to receive and manage funds associated with savings or investment programs, including pension or retirement programs. This does not cover a society, order, association, or non-stock corporation under Section 30© of the NIRC providing for the payment of life, sickness, accident and other benefits exclusively to its members or their dependents. Donation to any person or entity except donations made to other entities formed for the purpose/s similar to its own Purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services from an entity in which one or more of its trustees, officers or fiduciaries has an interest; and When upon dissolution and satisfaction of all liabilities, its remaining assets are distribute to its trustees, organizers, officers or members.

PAGCOR vs. BIR Is PAGCOR’s gaming income is subject to both 5% franchise tax and income tax? As to Franchise Tax – YES; As to Income Tax – NO Under PD 1869, as amended, petitioner is subject to income tax only with respect to its operations of related services. Accordingly, the income tax exemption ordained under Section27(c) of RA 8424 clearly pertains only to petitioner’s income from operation of related services. Such income tax exemption could not have been applicable to petitioner’s income from gaming operations as it is already exempt therefrom under PD 1869. There was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operating as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax. The

exemption attached to the income from gaming operations exists independently would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) then when it was not granted at all in the first place. Is PAGCOR’s income from operation of related services is subject to both income tax and 5% franchise tax? As to Income tax - YES; As to Franchise tax - NO Petitioner’s Charter is not deemed repealed or amended by RA 9337; petitioner’s income derived from gaming operation is subject only to the five percent (5%) franchise tax, in accordance with PD 1869, as amended. With respect to petitioner’s income from operation of other related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no application with respect to petitioner’s income from other related services, in view of the express provision of Section 14(5) of PD 1869, as amended. Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis therefor.

Branch Profit Remittance Branch Profits: gains or profit which are effected or connected with a trade or conduct of a branch. Applicable to multinational corporations. Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. All profits of a branch are expectedly to be remitted to the head office for consolidation or reconciliation purposes. Once these profits are remitted, the branch profit remittance tax is imposed under the Philippine jurisdiction. 15% tax imposed on the profit is remitted by the Philippine branch to head office based on total profit or earmarked without any reduction (Section 98, NIRC)

Remittances not subject to branch profit      

Interests Dividends Rents Royalties Remuneration for technical services and Other determinable annual periodic casual gains or capital gains received by foreign corporations

International Carrier



2 ½% on Gross Philippine Billing

Gross Philippine Billings In International air carrier

Gross Philippine Billings refer to the amount of gross revenue from (a) carriage of persons, excess baggage cargo and mail originating from the Phils. in a (b) continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. In International shipping,

Gross Philippine Billing means gross revenue whether for passenger, cargo or mail originating from the Philippines up to the final destination, regardless of the place of sale or payments of the passage or freight documents.

BRITISH OVERSEAS AIRWAYS CORP. VS. CIR An international airline with no landing rights is considered doing business in the Philippines Reasons: a) Series of sale of transport documents (airline tickets) b) Continuity of commercial transactions c) Appointment of an agent is an indication that it is doing business in the Philippines Source of income is construed to mean the activity that produced the income.

SOUTH AFRICAN AIRWAYS VS. CIR South African Airways is not subject to Gross Philippine Billings tax. Gross Philippine Billings is the amount of gross revenue derived from the carriage of passengers, cargoes, excess baggage originating from the Philippines. South African Airways does not transport passengers from the Philippines. Hence, it is exempt from Gross Philippine Billings Tax. However, as to the activity of selling passenger documents through sales agent, it shall be taxed based on taxable income as to income sourced within the Philippines. Synthesis of BOAC and SAA  

The imposition of normal corporate income tax upon income sourced from within is different from gross Philippine billings tax. Gross Philippines Billings Tax is imposed if there is a revenue representing the carriage of persons, cargoes, or excess baggage originating from the Philippines. If it involves transshipment, the net flow from the point of transshipment is subject to Gross Philippine Billings tax.

If the revenue will not fall within the concept of GPB, it does not mean that the revenue of international carrier is not subject to tax. If such revenue is sourced within Philippines, it will still be subject to normal corporate income tax.

TAX RETURNS AND OTHER ADMINISTRATIVE REQUIREMENTS Paseo Realty vs. CA Section 76: If the amount of tax due is not equal to amount of payment made during the taxable year, the taxpayer can: 1. Pay the balance if and when the amount of tax due is greater than amount of payment; or 2. If the amount of tax due is less than the amount of payment: apply for tax refund or tax credit; or carry forward the excess payment within the next three immediately proceeding years.

CIR vs. Mirant Operations Corporation It must be stated in the return that the creditable withholding tax is being credited against the tax liability of the company. It must also be stated in the return the amount of the tax withheld and the tax due. Sec 76: If taxpayer chooses to carry over the excess credits, such choice shall be considered as irrevocable.

CIR vs. PL Management International Philippines Sec 76: If taxpayer chooses to carry over the excess credits, such choice shall be considered as irrevocable.

TAXATION OF ESTATES AND TRUSTS TAXATION OF INCOME OF ESTATES General Rule: Estates are subject to income tax in the same manner as individuals Exceptions: 1. Personal exemption is limited to only 20,000 2. No additional exemption is allowed 3. Distribution to the heirs during the taxable year of estate income is deductible from the taxable income of the estate (BIR Ruling 233-86).

TAXATION OF INCOME OF TRUSTS

St. Luke’s vs CIR St. Luke’s is a non-profit, non-stock corporation. They received notice of deficiency which lead to this case. BIR argued that St, Luke’s is liable for 10% income tax because under tax code, proprietary educational institutions and hospitals are subject to 10% income tax if the total gross revenue which is unrelated to the business of hospital exceeds 50% of their total income. S. Luke’s alleged that Section 30 provides that Charitable Institutions are exempt from tax. BIR answered that because of the imposition of 10% income tax under Section 27, St. Luke’s loses the character being tax exempt.

General Rule: Subject to income tax in the same manner as individuals (Sec 60 [A] NIRC)

Ruling: Sec 27 and Sec 30 are not conflicting

Exceptions: 1. Personal exemption is limited to only 20,000 (Sec 62, NIRC) 2. No additional exemption is allowed 3. Distribution to the beneficiaries during the taxable year of trust income is deductible from the taxable income of the trust. Deduction is allowed only when the distribution is made during the taxable year when the income is earned (Sec 62 [A}, NIRC)

St Luke’s is a charitable institution, hence is tax exempt under Section 30. However there is additional clause in Sec 30 which qualifies the profit that the institution earns. It provides that income from whatever kinds or character for profit is taxable. If a charitable institution is engaged in a transaction for profit, revenue is taxable but the character of being tax exempt is not removed.

Who shall file and pay the income tax?

Section 30 provides for a list of exempt entities. All these entities are non-stock, non-profit educational entities. The second paragraph however provides for the taxability of these exempt entities such that if these entities will derive income form proprietary income, the income is no longer exempt from tax. Under this provision, taxability arises regardless of the disposition. It is the source of the income which is material.

General Rule: If the income: 1. Is distributed to beneficiaries The beneficiaries shall file and pay the tax 2. Is to be accumulated or held for future distribution The trustee or beneficiary shall file and pay the tax. Exceptions: 1. In a revocable trust, the income of the trust will be returned to the grantor (Sec 63, NIRC) 2. In a trust where the income is held for the benefit of the grantor, the income of the trust becomes income of the grantor (Sec 64, NIRC). 3. In a trust administered in a foreign county, the income of the trust, administered by any amount distributed to the beneficiaries shall be taxed to the trustee (Sec 61[c], NIRC) OSSORIO PENSION FOUNDATION vs CA The owners of the lot were VMC and Ossorio Pension Fund. Ossorio is the administrator of employee’s trust fund of VMC. The proceeds of sale of lot is exempt from tax because the income shall redound to the benefit of the employees trust and the latter is exempt from income tax. However, the income of VMC is subject to tax. Employee’s trust are exempt from income tax Check whether or not the income will redound solely in favor of the employee trust. The portion that does not redound for the benefit of the trust shall not be exempt from tax.

NOTES:

Under Section 27, proprietary educational institution and hospitals shall comply with the predominance test in order for the preferential tax rate to be applied. Predominance Test: If 50% or more of the income has been sourced from school related activities or hospital activities, tax rate shall be 10% preferential tax rate based on taxable income. If the proprietary educational institution or hospital does not comply with the predominance test, the 30% corporate income tax shall be applied. In this case, St. Luke’s is established as a non-stock, non-profit hospital. However it accepts paying patients. It earned 1.7 billion worth of income from paying patients. Recall that in the case of Lung Center, the act of accepting paying patients does not derogate the character of a charitable institution. This principle was applied in St. Luke’s. Under section 30, St. Luke’s is an exempt entity and thus is not subject to income tax. But if we will apply last paragraph of Section 30, the source of the income is proprietary. The income is earned from paying patients. It shall be subject to tax since the source of the income is a proprietary activity. Since St. Luke’s is considered hospital, apply Section 27. If it passed the predominance test, the tax preferential rate of 10% shall be applied.

TRANSFER TAXATION Transfer Taxation: taxes imposed upon the gratuitous disposition of properties What are gratuitous disposition of properties?  Donation  Succession Is it the same as capital gains tax?  NO. Capital gains tax is not a transfer tax, as it is imposed on sale of real properties. Sale is an onerous disposition of properties. Types of Transfer Taxation: 1. Estate Tax: imposed upon the privilege of transferring property gratuitously or the privilege to succeed or receive property at or after the death of the decedent  It is in the nature of an excise tax: a tax on privilege 2.

Donor’s Tax: imposed upon gratuitous transfer of property during lifetime of transferor

Note: At the present time, we do not have donee’s tax and inheritance tax. Donee’s Tax is imposed to the privilege of receiving gift. Inheritance Tax is imposed on the privilege of receiving inheritance. Kinds of Transfer Subject to Transfer Taxes: 1. Succession 2. Donation  Intervivos: effective during the lifetime of the transferor  Mortis Causa: effective upon or after death of the transferor. Review: Classification of taxes as to subject matter or object 1. Personal, poll or capitation tax  Tax of a fixed amount imposed on individuals residing within a specified territory without regard to their property or the occupation in which they may be engaged.  E.g. community tax 2. Property tax  Tax imposed on property, whether real or personal, in proportion either to its value or in accordance with some other reasonable method of apportionment.  E.g. real estate tax 3. Excise or privilege tax  Tax imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation.  E.g. estate tax, donor's tax, income tax, value added tax, other percentage taxes, professional tax

ESTATE TAXATION Estate: mass of property left by the decedent Extension of the personality of the decedent Estate Tax: tax on the right to transmit property at death and on certain transfers which are made by the statute the equivalent of testamentary dispositions

NATURE OF ESTATE TAX  

Excise or privilege tax The object of estate tax is to tax the shifting of economic benefits and enjoyment of property from the dead to the living

JUSTIFICATIONS ON THE IMPOSITION OF ESTATE TAX 1. Benefit Received Theory  State can collect taxes because of the services rendered by government in the distribution of the estate  For the performance of services and other benefits that accrue to the estate and the heirs, the State can collect taxes. 2. State Partnership Theory  State is a passive and silent partner in the accumulation of the properties by the estate. 3. Ability to pay theory  The receipt of inheritance, which is in the nature of unearned wealth, places assets in the hands of the heirs, thereby creating an ability to pay the tax and thus to contribute to governmental income. 4. Redistribution of wealth  The receipt of inheritance is a contributing factor to the inequalities in wealth and income. The imposition of tax reduces the property received by the successor, thus helping bring about a more equitable economic environment 5. Back tax  Taxes that should have been imposed by the government for the services it had rendered.  Taxes that were not imposed upon the accumulation of the property. Difference between Back Tax and State Partnership Theory:  Tax imposed in state partnership theory is in the nature of a privilege tax. The tax imposed in the back tax theory is in the nature of a back tax (should have been imposed but was not)

GENERAL PRINCIPLES  

Death is not a mode of transferring ownership. Death is the generating source of power to impose and collect the tax. Pursuant to Art 777 of Civil Code, the transfer of property occurs at the time of death by operation of law.

When will estate tax accrue?  At the time of death.

TAXATION LAW 

A transmission by inheritance is taxable at the time of the predecessor’s death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.

When will the obligation to pay accrue?  Within 6 months from the date of death. What is the governing law?  Law effective at the time of death.

GROSS ESTATE Section 85, NIRC  All property, real or personal, tangible or intangible, wherever situated existing at the time of death  It shall not include the separate (exclusive) properties of the surviving spouse.  It is to be reduced by the decedent's debts (including taxes), share of the surviving spouse, and other permissible deductions to arrive at a net taxable estate. Will a co-owned property form part of the gross estate? X and Y co-own a parcel of land. If this land has fair market value (FMV) of 5m at X’s death, will you include the entire amount of 5m in his gross estate?  NO. Include the value of the interest of X, which is only 2.5M. NOTE: The story will be different if X and Y are married and that the property is conjugal or community. In this case, the entire value of 5M will be included. Kinds of Decedents: 1. Resident Decedent  Resident or Citizen of the Philippines.  Resident Citizen, Non-resident Citizen, Resident Alien  They are taxed for properties, real or personal, wherever situated 2. Non-Resident Decedents  Decedents who are not residents or citizens of the Philippines  Non-resident Aliens  They are taxed for properties located in the Philippines.  provided, that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity under Sec. 104 of this Code NOTE: compare this with income taxation. In income taxation: only resident citizens are taxed worldwide. All others are taxed as to income sourced from within the Philippines. In estate taxation: Resident citizens, Non-resident citizens, and Resident aliens are taxed worldwide. Nonresident aliens are taxed on properties located within the Philippines. Mobilia sequitur persona/Mobilia sequuntur persona  The situs of personal properties is the domicile of the owner  Movables follow the domicile of owner



Shall not apply to the following:

1. 2.

Shares of stocks of domestic corporations Shares of stock of foreign where at least 85% of business operations is located in the Philippines. Shares, obligations or bonds that accrued business situs in the Philippines Franchises exercised in the Philippines Shares and rights in any partnership established in the Philippines All these are considered as properties within the Philippines

3. 4. 5. 

Reciprocity Rule  an exception to the rule that non-resident decedents are subject to tax as to properties within the Philippines  Intangible personal properties of non-resident decedent located within the Philippines shall not be subject to tax if the domiciliary country of non-resident decedent grants an absolute exemption from transfer taxes in favor of Filipino citizens not residing therein. Elements: 1. 2. 3. 4. 

Property: Intangible personal properties Location: Within the Philippines Ownership of the estate: By non-resident decedent Domiciliary country: of the non-resident decedent  grants FULL exemption If the domiciliary country grants exemption to Filipino citizens not residing therein, Philippine shall likewise not impose tax on these personal intangible properties of the nonresident decedent

Illustration In a case, the domiciliary country of non-resident decedent grants exemption from estate tax but not from inheritance tax. The Philippines is imposing estate tax on the property of the non-resident decedent. The exemption granted to Filipino citizens must be in the nature of an absolute tax exemption. It must cover both inheritance tax and estate tax. In this case, the domiciliary country of the non-resident decedent was merely a partial exemption. Hence, reciprocity rule does not apply. His properties shall be subject to tax.

Inclusions on the Gross Estate 1.   

Decedents interest Interests not yet possessed at the time of death but the decedent already acquires right over such property at the time of death It refers to the value of any interest in property or rights accrued in favor of the decedent on or before his death which have been received only after his death Interest, defined: A right to have the advantage accruing from anything; any right in the nature of property, but less than title

Examples: a) Dividends declared on or before the death of the stockholder and received by the estate after said stockholder's death b) Partnership's profit earned prior to death of the partner, received by the estate after the partner's death

©Ignacio 2016-2017

78

TAXATION LAW c) Accrued interest and rents on or before the time of death, but collection was made after death d) Proceeds of life insurance policy payable to a designated revocable beneficiary e) Right of usufruct Illustration: X owns shares of stocks. The corporation will distribute portion of its earnings in the nature of dividends. There are two dates to consider: the date of declaration and the date of distribution. The date of declaration is when it has been resolved that dividends shall be distributed. The date of distribution may happen in a later time.

4.

Property passing under GPA

Power of Appointment: right to designate the person/s who shall enjoy or possess certain property from the estate of a prior decedent General Power of Appointment: authorizes the donee with the power to appoint any person he pleases, including himself, his spouse, his estate, his executor/administrator and his creditor thus having full dominion over the property as though he owned it.

Date of declaration: December 26 2016 Date of distribution: February 14 2017

Illustration: A transferred property to B with a general power of appointment. B can appoint himself, or he can appoint C to enjoy A’s property.

X died Feb 1 2017. Since there was already a declaration of dividends prior to X’s death, his shares shall form part of gross estate. He already has a right over it at the time of death.

Since GPA is given, B can appoint anyone who can enjoy the properties of A. Properties will be included in the gross estate of B.

At the date of declaration, shareholders already have the right over the shares. Moreover, tax will accrue at the date of declaration.

Special Power of Appointment: Donee can only appoint among a restricted or designated class of persons other than himself.

2.  

Transfer in contemplation of death The thought of death is the controlling motive why the decedent transferred the property. The death induces the decedent to transfer the prop during his lifetime to avoid the payment of estate tax.

General Rule: The thought of Death is controlling motive. Exceptions (where death is NOT the controlling motive) a.

3.  

Transfer with retention of interest  Shall be classified under transfer in contemplation of death.  There would be retention of possession or enjoyment or the power to designate who may enjoy the property

GENERAL POWER When it authorizes the donee of the power to appoint any person he pleases, including himself, thus having as full dominion over the property as though he owned it.

SPECIAL POWER When the donee can appoint only among a restricted or designated class of persons other than himself.

Makes the appointed property form part of the donee's property.

Makes the property not includible in the gross estate of the done

5. 

Proceeds of life insurance Condition: Must be taken out by the decedent upon his own life.

b.

Donacion mortis causa  Donation take effects after death

Recall in income tax: Life insurance proceeds are excluded from income tax.

c.

Transfer with reversionary interest  Decedent shall have the power to reacquire any right that had been transferred

If premium payment is given by employer in favor of the employee, it depends on beneficiary.  If beneficiary is employee, it forms part of the taxable income of employee.  If beneficiary is the employer, it does not form part of the taxable income of the employee.

Revocable Transfer Any transfer made by the decedent during his lifetime where the decedent expressly reserved the right to alter, amend, revoke or terminate. It depends on the power vested upon the seller or the decedent Power to alter the provision of contract, revoke or relinquish any right of the buyer  Even if there is failure of the seller to give notice to buyer, it will be considered as if the power to alter, amend, relinquish or revoke has been exercised.  Even if there was a stipulated period when the revocation shall be exercised and the period already lapsed without the transferor revoking the transfer, it will be considered as if the power to alter, amend, relinquish or revoke has been exercised. Common denominator between transfers in contemplation of death and revocable transfer: decedent has control

Will the premium payment be a deductible expense in the part of the employer?  If beneficiary is employee, yes  If beneficiary is employer, no. Now to estate tax: Proceeds of life insurance are not part of gross income regardless of the beneficiary. Will it form part of the Gross Estate?  It depends on the designation of beneficiary. If revocable, the decedent has control over the beneficiary. The proceeds of life insurance shall form part of the gross estate. If irrevocable, the proceeds shall not form part of the gross estate

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TAXATION LAW Except: 

Absolute community property regime applies if spouses do not have marriage settlement agreement.

Beneficiary is himself, his estate, or administrator or executor in their official capacity.

What if designation is silent?  The presumption is that it is revocable

 Absolute Community Property The community of property shall consist of all the property owned by the spouse at the time of the celebration of the marriage or acquired thereafter.

The following proceeds are excluded from gross estate: a. a. b. c. d.

Accident insurance proceeds Group insurance taken out by the company for its employees Proceeds from GSIS or SSS policies Life insurance payable to the heirs of deceased members of the military personnel of the US Army or of the Philippine army

Conjugal or separate character of life insurance proceeds If the premiums were fully Proceeds are separate or POLICY WAS TAKEN paid by the decedent before exclusive property of the BEFORE MARRIAGE the marriage decedent If the premiums were paid The proceeds are exclusive with the exclusive property of the surviving property of surviving spouse spouse Premiums were paid partly The proceeds are with separate and partly with proportionately separate conjugal funds during the property and conjugal marriage property The proceeds are conjugal property POLICY WAS TAKEN DURING MARRIAGE 6. 

Prior interest Interest accruing prior to the death of decedent

7. 

Transfers for insufficient consideration Transfer with consideration in money or money's worth but is not a bona fide sale for an adequate and full consideration Only applies if transfer is after death.  If during lifetime of the transferor, it is subject not to estate tax but to donor tax. The amount shall be equivalent to the difference between the fair market value of the property at the time of death and the consideration received

 

Reason why congress included this provision  To run after tax payers who had evaded their taxes during their lifetime.  This contemplates a simulated sale: gross selling price is undervalued.  This will never apply to sale of real property classified as Capital Asset under Section 24d Why? Because the government has already collected tax based on FMV of the asset

Exclusions from gross estate 1. 

Exclusive property of surviving spouse Effectivity of Family Code: August 3 1988

b. c. d.

Properties excluded from community property Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; Property for personal and exclusive use of either spouse.  However, jewelry shall form part of the community property; Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property; Property redeemed using exclusive properties or its income.

 Conjugal Partnership of Gains The husband and wife place in a common fund the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements. Exclusive properties of spouses: a. That which is brought to the marriage as his or her own; b. That which each acquires during the marriage by gratuitous title c. That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and d. That which is purchased with exclusive money of the wife or of the husband Illustrations: (i) Yanne and Reynolds are married in 2014 Yanne was already a lawyer. She had accumulated property worth 10M. Reynolds, also a lawyer, accumulated 2m worth of property. After marriage, they accumulated property worth 5M. Reynolds died first. During marriage, Yanne inherited property with FMV of 5M. What comprises the Gross Estate of Reynolds? 2m (Reynold’s property) 5m (Community property) 10m (Accumulated property of Yanne before marriage) 17m If celebrated in 1986 (conjugal partnership would apply) 2m (Reynold’s property) 5m (Community property)

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TAXATION LAW 7m Why is it important to know what comprises conjugal or community property and exclusive property?  Share of surviving spouse is 50% of the conjugal or community property and not including the exclusive property.

Fiduciary heir: Heir who has the duty to preserve and transmit the property to the second heir (fideicommissary) after the lapse of a certain period Fideicommissary: Refers to a person designated who has the real or beneficial interest in an estate or fund, the title or administration of which is temporarily confided to another REQUIREMENT: Relationship between fiduciary and fideicommissary shall be one degree.

(ii) Anton acquired property before marriage in the amount of 5M. Ina acquired property in the amount of 2M. During existence of marriage, they accumulated property amounting to 10M.

Illustration: C is the son of B.

Anton accumulated property worth 1M. Ina inherited 3M.

A transfer to B the title to A’s property. In case B dies, it now goes to C.

Anton died. What shall form part the gross estate of Anton? Assume that marriage is celebrated after effectivity of family code. Thus, community property is the property regime.

 

The transfer from A to B is subject to estate tax Transfer from B to C is no longer subject to estate tax. This is already included in the first transfer tax.

4.

Transmission from the first heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor. Similar to the above rules, except that the relationship between the first heir, legatee or donee and the other beneficiary need not be one degree.

 Community: 5m (Anton’s property before marriage) 1m (Anton’s accumulated property during marriage) 10m (Community property during marriage) 2m (Ina’s property before marriage) 18m 

5. Transfer to social welfare cultural and charitable institution Requirement: not more than 30% should be used for administrative purposes. 6. 

50% is share of surviving spouse with the presumption that there are no ordinary deductions.

Quiz reminder: have a good grip on the rules of conjugal and community property.



2. Merger of usufruct and the owner of the naked title Usufruct, defined: The legal right to use and enjoy the benefits and profits of something belonging to another

Reciprocity Rule This is applied if estate involves intangible personal property owned by nonresident citizen and the property is located in the Philippines, and the domiciliary country of the nonresident decedent grants an absolute exception in favor of Filipino citizens not residing therein. A decedent's intangible personal property may be subject to taxes both in his place of domicile or residence and in the place where such property has a situs or is found. THUS, to prevent multiplicity of taxation of the same intangible personal property with a situs in the Philippines left by a non-resident decedent, no tax shall be collected on such property in two instances, namely: a) Foreign country does not impose transfer tax b) Foreign country imposes transfer tax but grants similar exemption

Parties in a usufruct:  Usufructuary: person who has the right of enjoying the use and the fruits of the property belonging to another  Owner of Naked Title: person vested with the ownership or title of the property. Illustration: The transfer of naked title from A to B is written in the will of A. In the said will, A also gives the right to use the property to C. He also manifested the intention to transfer the right to use to B if C dies.   3.

The transfer from A to B is subject to estate tax. If C dies, property will transfer to B. In this case, no estate tax will be imposed anymore. The transfer from C to B is a transfer still included in the first transfer. Transmission or delivery of inheritance or legacy by the fiduciary heir to fideicommissary

NET ESTATE AND DEDUCTIONS Computation of Net Estae Less Less Less

Gross estate Ordinary Deductions (Expenses, Loses, Indebtedness, Taxes, Transfer from Public use, RA 4017, Vanishing Deduction Net Estate Before Share of Surviving Spouse Share of Surviving Spouse Net Estate After Share of Surviving Spouse Special Deductions (Family home, standard deduction, medical expense NET ESTATE Fixed at 6% under the TRAIN

Ordinary Deductions

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TAXATION LAW 1.

Expenses



Funeral Expenses and Judicial Expenses Medical expense is a special deduction. It is not an ordinary deduction.

No longer deductible under TRAIN

Why is it important to know if a deduction is ordinary or special?  A non-resident decedent cannot avail of special deductions. Only resident decedents can avail of such. a.

Expenses covered (RR 2-2003) (1) Actual funeral expenses: those which, whether paid or unpaid, were actually incurred in connection with the interment or burial of the deceased and paid for from the estate of the deceased (2) The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial. (3) Expenses of the wake preceding the burial, including food and drinks. (4) Publication charges for death notice (5) Telecommunication expenses in informing relatives of the deceased. (6) Cost of burial plot, tombstones, monument or mausoleum but not their upkeep.  In case the deceased owns a family estate or several burial lots, only the value corresponding to the lot where he is buried is deductible. (7) Interment and/or incremation fees and charges (8) All other expenses incurred for the performance of the rites and ceremonies incident to interment  Existence of memorial plan: When some of the items which are actual funeral expenses are covered by a memorial plan, the value of the memorial plan must be included in the gross estate. Requirement imposed by RR 2-2003: the expenses must be substantiated Expenses not covered (1) Expenses incurred after the interment such as prayers, entertainment or the like (2) Expenses borne or defrayed by the relatives and friends of the deceased such as contributions or mutual assistance.



What if settlement of estate is extrajudicial in nature?  Notarial fees are covered. This is also used for the settlement of the estate.  Attorney's fees for the protection of the interest of the heirs are not included. If the expense is for the interest of the heirs and not to the settlement of estate, it is not deductible.

Funeral expense

Requisites: (1) Incurred during Burial or Interment  Must be incurred up the date of interment (2) The deduction shall be limited to the actual amount of the expense or 5% of the gross estate, whichever is lower, but not to exceed 200k.

b. 

Last day of filing of estate tax return: 6 months from date of death Extension: 30 days

Judicial expenses Expenses in relation to:  Inventory taking of assets  Administration of the assets  Payment of debts of the estate  Distribution of the estate among the heirs It must be incurred during the settlement of the state but not beyond the last day prescribed by law or extension thereof for the filing of the estate tax return.

CIR VS. PAJONAR The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during his lifetime should also be considered as a deductible administration expense. PNB provided a detailed accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts which contributed towards the collection of decedent's assets and the subsequent settlement of the estate. Judicial expenses are expenses of administration. Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it. In other words, the expenses must be essential to the proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. 2. Loss No longer deductible under TRAIN Requisites: a. In the nature of a casualty loss Casualty loss: If loss arose from theft, robbery, embezzlement, and other casual sudden occurrences b. Not compensated by insurance c. Not claimed as deduction for income tax purposes. d. Must have been incurred not later than the last day for the payment of the estate tax.  Last day of payment of estate tax: 6 months from date of death 3. Indebtedness Requisites: a. Valid and legally enforceable obligation b. Existing at the time of death c. Reasonable in amount d. Contracted in good faith RR 2-2003  Indebtedness or claims against the estate must not be in the nature of a funeral or judicial expense. Illustration: (i) A owes B 1M, which is due in the year 2001. A died 2015.

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TAXATION LAW Is the debt deductible?  No. The obligation has already prescribed. The claim must be valid and legally enforceable. (ii) What if it was due in 2015. A died in 2016. B condoned obligation of A. Is the debt deductible?  YES. 1M is still considered as existing obligation at time of A’s death. The condonation is a post-death development which is immaterial.



The disallowance is proper. If the deduction is in the nature of unpaid mortgage, an additional requisite is that the fair market value must first form part of gross estate. Otherwise, it is not a deduction against the estate.

Accomodation Loan A, the deceased, obtains a loan from B but proceeds will be delivered to C. Between A and B, A is the debtor while B is the creditor. Can admin of A’s estate deduct the amount of loan from the gross estate?

What if the debt was condoned before the death of A?  It is no longer deductible. At the time of death of A, the obligation no longer exists.

 

Types of Indebtedness: a. Claims against the estate (payable)  The estate is the debtor  There can be an unpaid mortgage such that the obligation is secured by a property.  If the claims against the estate is in the nature of an unpaid mortgage, there is an additional requisite of deductibility: The fair market value of the property mortgage must be included as part of the gross estate, otherwise it cannot be deducted.



b.

Claims against insolvent persons (receivable)  The estate is the creditor. The insolvent is the debtor  It is an asset of the estate since it is a collective/receivable  This asset is considered a deduction since it cannot be collected anymore for the failure of the insolvent person to pay the estate.  In income taxation, this is the called bad debt expense.  Another requirement: To be deductible item, it must first form part of the gross estate.

YES. If C does not pay, B can file case against A since C is not a party in the loan agreement (eventhough he is actually the one to receive the proceeds). Obligation is considered a deduction from gross estate.

Additional requisite: the receivable from the accommodated party must be included as part of the gross estate. His receivable from C is considered an asset in his part. If the amount of accommodated loan is not part of Gross Estate of the deceased, the proceeds of accommodation loan is not treated as deduction from gross estate. Illustration: X and Y owns a property. X and Y secured obligation in amount of 2M. To secure this loan, they executed a real estate mortgage over the property worth 5M. X died without the loan being paid. Administrator of estate of X paid 2M to the creditor.

Illustration: The decedent has claims against his cousin equal to 100k. The cousin’s asset is 20k. His liability is 100k. With this information, we can readily presume that the only liability of the cousin is his debt to the decedent.

How much is the amount of gross estate assuming X has cash of 3M in the bank? 3M 2.5M (Since X and Y are co-owners, only half of the 5M is considered the interest of X) 5.5M

How much shall be included in the Gross Estate of the decedent?  The entire 100k— receivable from the cousin.

How much can be claimed a deduction?  His interest on the unpaid mortgage = 1M

How much shall be claimed as a Deduction?  80k. This is the only indebtedness of cousin since the 20k can already be paid through the remaining assets of the cousin.

It does not matter that the administrator of the estate paid the 2m after X’s death. Post-death developments are not material.

Unpaid Mortgage Bar Question: The estate is claiming for a deduction of 10M representing an unpaid mortgage. The BIR disallowed since the administrator of the estate did not include fair market value as part of the gross estate.

4. Unpaid taxes Requisites: a. Taxes are unpaid at the time of death b. Taxes must have accrued before the death of the decedent Illustrations: (i) X died in June. Before June, the incomes earned shall be subjected to tax, to be paid by X.

Rule on the disallowance.

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TAXATION LAW If X died in June without having paid his taxes, this amount is considered an unpaid tax, which could be claimed as a deduction. What about the estate tax? Can it be deducted?  No. Estate tax is accrued after death. Hence non-deductible.

f.

Property is identified as the one coming from the donor or the prior decedent



This contemplates two transfers that occurred within a period of 5 years. The first transfer could be done through succession or donation. The second transfer should be through succession. There is no vanishing deduction in donor’s tax. It is only applicable on estate tax.



(ii) A transferred property to himself (A) , B and C. A died. His share was transferred to A1 (his heir). The problem is that when he transferred the properties prior to his death, he merely issued the title without paying the transfer tax.

2012 Bar Exam Jose is the son of Pedro and Asunta. They were travelling to Baguio when they met an accident in NLEX.

The transfer tax was paid after his death.

Jose died first. Hours after Jose’s death, Asunta died.

Can the transfer tax be claimed as a deduction?  YES. The tax accrued before A’s death even if it was unpaid at the time of his death. What is material is that the tax accrued before his death even if the payment of such comes after the death.

Asunta and Jose have properties. Some are conjugal while other are exclusive. Jose’s property was purely exclusive equal to 1.2M.

5. Transfer for public use Requisites: a. Transfer must be for the use of the government or its political subdivision b. Transfer must take effect upon death c. Property must be for public use d. Transfer must be testamentary in character. 6. Amount Received under RA 4917  Retirement benefits can also be a deduction, Requirement: amount must be included as part of the gross estate. 7. Vanishing deduction It is a deduction allowed on the property left behind by the decedent which he had acquired previously by inheritance or donation. This applies on property:  Received by him from a prior decedent by gift, bequest, devise or inheritance; or  Transferred to him by gift, where the same has been the object of previous transfer taxation. Rationale: To minimize the effects of double taxation on the same property within a short period of time; the law allows a deduction to be claimed on the said property. The deduction operates to ease the harshness of successive taxation of the same property within a relatively short period of time (up to 5 years), occasioned by the untimely death of the transferee after the receipt of the property from the prior decedent or donor. Two factors necessary in vanishing deductions: a) There are 2 deceased persons and the first is the donor. b) The second decedent dies within 5 years after the death of the prior decedent, or in the case of gift, the decedent-donee dies within the same period after the date of the gift. Requisites: a. Second decedent dies within 5 years from the date of death of the transferor or from the date of gift of the donor.  The first transfer may be a donation or succession b. Estate tax or donor’s tax should have been paid c. Property is located in the Philippine d. No vanishing deduction was claimed on the first transfer e. Property is included in the gross estate or gross gifts of the first transferor

There are two transfers involved here: 1st transfer – Jose to Asunta and Pedro 2nd transfer – Asunta to Pedro Can estate of Asunta avail of vanishing deduction?  Requisite no. 2 (letter b) is the problem here. Was the estate tax or donor’s tax paid? Note that Jose’s estate may be exempt from estate tax. A standard deduction of 1M can be deducted from his gross estate without the requirement of substantiation. 1,200,000 Less 1,000,000 (Standard Deduction) 200,000  Net estate in amount of 200k or less is exempt from tax. Suggested Answers: VP: There can be vanishing deduction because filing of return is considered payment of tax. The administrator of the estate of Jose can still file for the estate tax return within 6 months from death. Even if the estate is exempt from tax, the filing of return is deemed as payment of tax. Atty Tin: There can be no availment of vanishing deduction because the main reason of the grant of such deduction is to reduce the harshness of taxation. If the estate is exempt from tax, there is no purpose to be achieved. Vanishing Deduction is an ordinary deduction. Thus, the principle of Strictissimi Juris shall be applied. The grant of deduction is construed against the taxpayer. Concepts  Value taken of property previously taxed: It is the lower amount between the fair market value during the first transfer and the fair market value during the second transfer.  Initial basis: difference between the value of property previously taxed and the paid mortgage  Final basis: deducting the paid mortgage the expenses, loses, indebtedness, taxes and transfer for public use (ELIT plus T) based on the percentage of the initial basis that bears over the value of the Gross Estate of the present decedent from the value of the property previously taxed Vanishing Deduction is based on time lapse between the two transfers

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TAXATION LAW Time Lapse Within 1 year More than 1 year to 2 years More than 2 years to 3 years More than 3 year to 4 years More than 4 years to 5 years

Percentage of Deduction 100% 80% 60% 40% 20%

Increased to 10M under TRAIN

Illustration: Property is a community property and family home worth 1.5M FMV of the property: 1.5M Decedents interest: 50% (since it is a community property) or 750,000 Decedent’s interest is lower. Hence, family home deduction is 750,000

Illustration:

If family home is exclusive property of decedent FMV: 1.5M Decedent’s interest: 1.5M Limitation is that family home should not be exceeding 1M. Hence, family home deduction is 1M.

Donation from A to B was on January 1 2000 A died on May 5 2001 B died on May 5 2004 Jan 1 2000 is the first mode of transfer, which is through a donation/gift. It is not the right of succession in 2001 that is the mode of transfer. The time lapse between January 2000 and the death in 2004 is more than 4 years  so percentage of deduction is 20% 8. 

Limitation: Fair market value of the property or the decedent’s interest, whichever is lower, not exceeding 1M.

Share of Surviving Spouse Constitutes 50% of the community property after deducting all ordinary deductions

3. Medical Expenses No longer deductible Requisites: a. Must be duly substantiated with receipts b. Must have been incurred within 1year before death c. Amount does not exceed 500k

Valuation: fair market value at the time of death both for real or personal properties. 

Exception: shares of stocks

SPECIAL DEDUCTIONS Ordinary Deductions They reduce the taxable estate as well as the amount of distributable estate to the heirs

Special Deductions Deductions that are categorically permitted by special law as allowance to reduce the taxable estate. Notes: They are deductible from the net estate property of the decedent after deducting the ordinary deductions. They are deductible in full amount in accordance with the limit as provided by law

 

Standard deduction No required substantiation. Increased to 5M under TRAIN The deduction is equal to 1M provided that the decedent is a resident decedent

2. Family Home Requisites: a. Must be the dwelling house/actual residential home of the decedent b. Decedent must secure certification from Punong Barangay that he resides in such barangay c. There must only be one family home d. Decedent must be husband, wife, or head of the family e. Fair market value of family home must be included as part of gross estate

Valuation in shares of stocks would depend if the stocks are listed in stock exchange or not

Listed in stock exchange  Arithmetic mean bet highest and lower quotation at a date nearest the date of death or at the date of death

Example: Highest quotation at time of death: 100 Lowest quotation: 80 Arithmetic mean: 90  Valuation: 90 pesos per share 

1.  

under TRAIN

If not listed in stock exchange  Depends on the type of shares Unlisted preferred shares: valuation is equivalent to par value of the share Unlisted common shares: valuation is equivalent to the book value of the share

Funeral expenses

Medical expenses Family home

SUMMARY OF DEDUCTIONS WITH CEILING AMOUNT Actual funeral expenses, or 5% of the gross estate  Whichever is lower  Shall not exceed 200k Actual medical expenses, or 500k  Whichever is lower Fair market value, or

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TAXATION LAW P1M 

Whichever is lower

TAX CREDIT  

Deduction from the tax liability. It is a remedy against international double taxation. to minimize the onerous effect of taxing the same property twice, tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.

In income taxation, tax payments to foreign country can be considered as a tax credit. If the taxpayer did not indicate in its return that it avails of tax credit, it will already be considered a tax deduction. In estate taxation, foreign tax payments can only be used as a tax credit. No provision indicates that lack of signifying of intention would automatically make it a tax deduction. Limitation: net estate outside the Philippines that bears over the worldwide gross estate Net Estate Outside Worldwide Gross Estate

Assume that 40% of gross estate was sourced from the Philippines. Hence, only 40% of the gross estate that had been sourced from the Philippines can be subject of deduction. This is because only the properties located within the Philippine can be taxed in the first place. 3rd requisite of deductibility: Gross estate sourced from outside the Philippines must be declared in the return. Even if the law says that property outside the Philippines cannot be taxed if the decedent is nonresident, his estate tax return shall still include the properties located outside the Philippines. These properties will not be taxed; but they are required to be indicated in the return so that the BIR can compute the ratio of the Philippine Gross Estate over the Worldwide Gross Estate. 

If administrator did not indicate the properties sourced from outside the Philippines, he cannot deduct ELIT. But the administrator can still deduct Transfer from public use, Vanishing deduction and Share of surviving spouse (TVS) since these are not dependent on the ratio PGE over WGE.

based on Philippine Estate Tax Due

ADMINISTRATIVE REQUIREMENTS

Who can avail of Tax Credits? In income taxation: resident citizens In estate taxation: non-resident decedents

Section 84 of Tax Code Tax base of the estate tax is the net estate. If the value of the net estate is between 0-200k: exempt from tax Lowest rate is 5%  Highest rate is 20%

DEDUCTIONS THAT A NONRESIDENT DECEDENT CAN AVAIL OF 1. 2.

Expenses, loses, indebtedness, taxes, transfer for public use, vanishing deductions, shares of surviving spouse (ELIT TVS) With respect to expenses, loses, indebtedness, taxes (ELIT), such ELIT can only be deducted based on the percentage of the Philippine Gross Estate that bears over the worldwide gross estate

Example: Judicial expenses: 100k Funeral expense: 50k Medical expense: 400k Claims against estate: 500k TOTAL: 1,050,000

DOCUMENTS TO BE FILED:  Notice of death  Estate tax return  Statement of a certified public accountant Document Gross Estate Exceeds Notice of Death Indicate date of death 20k No longer required under TRAIN

Estate Tax Return

The decedent is nonresident. What deductions can he claim?   

Judicial expense Funeral expense Medical expense?

100k 50k

Statement of Certified Public Accountant

200k; or includes a registered or registrable property regardless of the amount. 2M 5M under TRAIN

Due Date 2 months from the date of death; or from the date when the administrator or executor has been qualified 6 months from date of death wherein 1 month is equivalent to 30 days

6 months from date of death Extension: 30 days 1 year under TRAIN

(No; it is a special deduction which a non-resident decedent cannot claim)



Claims against estate 500k TOTAL: 650k

Can the estate avail of this total amount as the deduction from the gross estate?  No. It is subject to a limitation. The limitation shall be based on the percentage of Philippine Gross Estate that bears over Worldwide Gross Estate.

Failure to file a Notice of Death:  Compromise Penalty (1k) Statement of a certified public account must contain: Itemized asset Itemized deduction

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TAXATION LAW Estate tax due

 

PLACE OF FILING OF THE RETURN  At the place where the decedent resides at the time of death If certification of death indicates that decedent died in Baguio, presumption is that he died in his residence. But if you prove with documents that he resides in Ilocos Sur, then you can file it in Ilocos Sur



Yes. The Government has the option either to collect from all heirs up to the extent of his share or to collect from one heir alone. Surviving spouse can be liable to pay the entire tax liability but subject to her right of reimbursement from all other heirs, Condition: Extent of liability of the heir shall not exceed his distributive share.

What if liability is 700k?  The state cannot collect the entire tax liability from one heir alone.

Note: If you don’t comply with the proper place of filing, the tax would be subject to a 25% surcharge. MARCOS II vs. CA What if the decedent has no legal residence in the Philippines? Where is place of filing?  RR 2-2003: Filing of estate tax return depends on whether or not the decedent has administrator  If yes, it must be filed at the place where the administrator or executor is registered. If admin or executor is not registered, then file at place of his residence  If no, file in the office of commissioner of internal revenue



PAYMENT at time of filing of return, which is 6 months from death

If this is not complied with, the estate is subject to  20% interest per annum  25% surcharge Extendible only if the estate has no sufficient cash to settle tax liabilities under TRAIN. Can it be extended? If estate is under judicial settlement: payment can be extended up to 5 years If under extrajudicial settlement: payment can be extended up to 2 years  

There must be application of extension of time to file the return and pay the tax Application of extension is filed at revenue district office where the estate is required to file the return. If application is granted, the commission has option to require the posting of a bond not exceeding double the amount of tax. LIABILITIES

Who is primarily liable?  The executor or administrator  The heir or beneficiary has subsidiary liability for the payment of the tax which his distributive share bears to the value of the total net estate Illustration: Net Distributable Estate: 500k Surviving heirs are the Spouse and 4 LCDs. Under intestate succession, they will equally divide the estate among themselves. They receive 100k per person. What if tax liability is 100k? Can it be collected from the surviving spouse alone?

Nature of Inheritance Tax The assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by decedent. Enforcement and Collection of Estate Tax: Executive in Nature The enforcement and collection of estate tax, is executive in character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. The state's authority to collect internal revenue taxes is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude the assessment and collection, through summary remedies, of estate taxes over the same. Claims for payment of estate and income taxes due and assessed after the death of the decedent need not be presented in the form of a claim against the estate. These can and should be paid immediately. The probate court is not the government agency to decide whether an estate is liable for payment of estate of income taxes. Wellsettled is the rule that the probate court is a court with special and limited jurisdiction. The Approval of the Probate Court is not a requirement sine qua non for the collection of estate taxes The approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected. On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid.

CIR vs. Pineda 16 heirs involved. Each heir received 2500 worth of inheritance. BIR Final Assessment of Tax Liability: 760 Manuel Pineda alleges that he shall only be liable to his proportionate share out of the 760. The Government has two ways of collecting the tax in question. 1. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received.

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TAXATION LAW 2.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need. And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax.

statutes being construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.

GABRIEL vs. CA LORENZO vs. POSADAS When inheritance tax accrues  From the moment of death of the decedent.  Successional rights are transmitted on the death of decedent.

Whether probate court can order the payment of taxes to the heirs The probate court can rightfully take cognizance of the unpaid taxes of the estate of the deceased; if the estate is found liable, the probate court has the discretion to order the payment of the said taxes.

The date of payment of tax is dictated under the law. It is not the same with the date of accrual of the tax, which is the date of death. When should the valuation of the estate be done as basis of the inheritance tax?  Upon the death of the decedent  Principle of date of death valuation. Any post-death developments will be immaterial. Is the net value of the estate tax subject to deduction of the compensation being claimed by the trustee?  NO.  The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within the class or reason for exempting administration expenses.  To determine whether deductible: determine “who will benefit?”  If it would be in favor of the heirs, not deductible. Trust expense: benefit is to the heirs rather than the estate. What is the governing law?  ACT 3031 is the governing law as it is the law effective at the time of death.

DIZON vs. CTA Whether the actual claims of the creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors We express our agreement with the date-of-death valuation rule. First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax

GIFT TAXATION NATURE OF GIFT TAX   

Excise tax: the subject matter is the privilege of transferring a property gratuitously during lifetime of transferor The tax imposed on the transfer without consideration of property between two or more persons who are living at the time the transfer is made. It is not a tax on property: It is not a tax on property, which is the subject of the gift, because its imposition does not rest upon general ownership although the amount of the tax is measured by the value of the property donated.

CONCEPT OF GIFTS Sec. 98(B). The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Two Types: 1. Direct Gifts  Presence of animus donandi: donative intent. Requisites for a taxable donation: a. Capacity of the donor b. Intent to donate c. Delivery of gift  Under RR 2-2003, it is not only necessary that a gift be perfected; it must also be completed. d. Acceptance  It is an elementary principle that before a donation can be valid, it is required that the gift be accepted. Without this, gift is not perfected. Problems: (i) A gift was given by a wife to a husband amounting to 1M.

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TAXATION LAW Is the gift taxable?  NO. The requisites presuppose that the gift must be a valid gift. Take into consideration the validity of gifts under civil code. The following are restrictions under the Civil Code: o Gift to paramour: void o Gift to husband and wife: prohibited o Gift involving real property: must be in a public instrument (ii) In a donation contract, A was forced to sign. Is the gift taxable?  YES. What is involved here is merely a vice of consent, which makes the contract voidable. A voidable contract is considered valid until annulled. Such contract being valid, it is subject to donor’s tax.  Void gifts are the ones which you cannot subject to gift tax. (iii) Your boyfriend gave you 5k as a gift. He wrote a love letter informing you about this gift. Is it taxable?  YES. It is subject to donor’s tax.  Under the Civil Code, donations worth 5k or more shall be made in writing. In this case, the donation was made in writing (not necessarily in a public instrument). What is the tax rate?  30% if in favor of a stranger

c. 

RENUNCIATION

2 Types: 1. General Renunciation: An heir renounces his distributive share in favor of all other remaining heirs  Not subject to Donor’s Tax 2. 

Specific Renunciation: Renunciation of distributive share of inheritance in favor of one or some but not all of the heirs Subject to Donor’s Tax

Bar Question: X died leaving a house and lot worth 2M. After his death, the surviving spouse renounced all her interest over the property in favor of her 4 children. Would the renunciation be subject to donor's tax?  Partly. X’s property is worth 2M. 1M of this is the interest of X while the other 1M pertains to the interest of Y, the Surviving Spouse. X’s interest of 1M is to be divided to 5 Heirs. 1/5 belongs to the Surviving Spouse, equivalent to 200k. She renounces this 200k in favor of her children. She is actually donating her entire interest of 200k.

 Tax Implication Donor’s Tax Income Tax Declaration of Dividends  Final Withholding Tax

TRANSFER FOR INSUFFICIENT CONSIDERATION Transfer for consideration in money or money’s worth but is not a bona fide sale The difference between selling price and fair market value will be subject to estate tax or donors tax depending when transfer takes effect

If at the time of death of decedent: subject to estate tax If during lifetime of the transferor: subject to donor’s tax. 

d.

This donation is not subject to tax.

The other 1M constitutes the Surviving Spouse’s own interest which she also donates to her children. This is not her distributive share so the renunciation rules would not apply.

a.

b.  

It is still considered as a gift; therefore subject to donors tax



2. Indirect Gifts  Have no donative intent CONDONATION Mode of Condonation By pure generosity Remuneratory donation Obligation of a stockholder condoned by the corporation



This concept does not include sales under sec 24d: sale of real property classified as capital asset subject to capital gains tax WAIVER Through a particular document not denominated as deed of donation, the transferor relinquishes right in favor of another individual

This donation may be subject to tax.

FACTORS AFFECTING LIABILITY FOR GIFT TAXES 1.  

Relationship of donor and donee If relatives: tax rates would be based on schedular tax table ranging from 2% to 15%. If strangers: tax rate would be fixed 30%.

Who are relatives within contemplation of donor taxation? a. Spouses b. Ascendants c. Descendants d. Brothers e. Sisters f. Relatives within 4th civil degree of consanguinity (SADBroS4c) Note: it does not include relative in affinity Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger. (RR 02-03 Bar Question:

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TAXATION LAW Husband and wife donated 400k in favor of daughter (d) and daughter's husband (dh)

2. Donations in favor of national government, political subdivisions and GOCCS Condition: Must be for public purpose

What is the tax implication of the transaction/s?   

Husband and wife are considered as separate donors. Thus there are two donors in this problem. Husband donated 200 to d and dh. Wife donated 200 also to d and DH. If the donation to a relative is 100k or less, it is exempt from tax. In this case, D receives 100k from Husband and 100k from Wife. Since these are separate donations and not cumulative, the two donations are exempt from tax. As to the donations received by DH, the tax rate of 30% shall be used as the donor and the donee are not relatives of each other. They are mere in-laws.

D: 100 Not subject to tax

Husband DH: 100 Subject to tax (30%)

D: 100 Not subject to tax

Wife DH: 100 Subject to tax (30%)

3. In favor of Social Welfare Institutions Condition: Not more than 30% should be used for administrative purpose.

VALUATION 

Manner how to compute tax liability: Cumulative basis Problem: X donated 100k to his daughter in January 2016 – exempt In June 2016: X donated 100k again to his daughter since the latter is getting married – Taxable  Computation is cumulative. The 100k donation in January was donated on the same taxable year. In totality, the donation is already 200, so the second donation is already subject to tax. 

DEDUCTIONS OR EXEMPTIONS Deductions from gross gifts are items to be subtracted from the gross value of the property donated to arrive at the value of net taxable gift. 1.

FMV at the time of donation

However, any tax payments made in previous donation could be used as tax credit

Splitting of donations: option not to donate entire gift during the same taxable year In the example above, X can split the donation. He can donate 100k in 2016 and the other half in 2017. The second donation will be exempt because it covers another taxable period.

Dowry

Requisites: a. Donee must be the child whether legitimate or illegitimate b. Donor must be a resident donor Resident donor: a resident or a citizen of the Philippines. c. Gift must be given in celebration of marriage. d. Gift shall be given before marriage or 1 year after marriage. *** Apply the 1 year period only if the gift is given after marriage e. Amount shall not exceed 10k per donor.

TAX TREATMENT OF POLITICAL CONTRIBUTIONS 

Under Section 13 of RA 7166, such contributions, be duly reported to the COMELEC, shall not be subject to the payment of any gift tax ABELLO vs. CIR

Problems (i)H and W donate 420k to D and DH who are getting married.

Three elements for a transfer to be a gift: 1. Decrease in the patrimony of the donor 2. Increase in the patrimony of the donee 3. Animus donandi or donative intent

What is the best mode of disposition of the gift? H to D: 110 (so that it will be exempt from tax) H to DH: 100

Donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration.

W to D: 110 (exempt from tax) W to DH: 100

Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. This Court is not convinced that since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners’ contribution of money without any material consideration evinces animus donandi. The fact that their purpose for donating was to aid in the election of the donee does not negate the presence of donative intent.

(ii) Kiko is a muslim. Kiko and A were married in 2010 Kiko and B were married in 2011 Kiko and C were married in 2012 H and W donates to Kiko and A: exempt Donation to Kiko and B: also exempt. These are different weddings. Deduction has not been previously availed of since it is a different marriage.

By virtue of RA 7166: Political contributions are considered gifts that are not subject to donor’s tax. Requirement: The contribution must be properly reported to COMELEC.

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TAXATION LAW RR 8-2009  Mandates political parties or candidates to withhold creditable withholding tax from the income payments made to suppliers, if such income payment were sourced from political contributions  Failure to comply shall make the political candidate party liable as a withholding agent. Illustration: Rodney is running for Congressman. He received 100k to purchase t-shirts for his campaign. He shall be required to withhold taxes from the income payments to be made to the suppliers of t-shirt. If not, BIR will run after Rodney for the creditable withholding tax he failed to withhold. Failure to comply will still not make the contribution taxable. Problem: 2013 RR: Commissioner mentioned that unused and unreturned political contributions shall be subject to income tax on the part of the recipient (political candidate) Is this a valid RR?  NO  Using the case of Abello, political contributions are in the nature of gifts. If gifts are given to an individual, should we treat it as an income?  NO. Section 32(b) provides that gifts, bequests and devises are excluded from gross income.

TAX CREDIT IN DONOR'S TAX SEC. 101(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. (1) In General. – The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's net gifts situated outside the Philippines taxable under this title bears to his entire net gifts. Persons who can avail  Only resident or citizen donors are allowed donor’s tax credit.  Reason: Because they are the only ones taxed worldwide. A non-resident non-citizen is not taxed for his donations in foreign jurisdictions.  For a foreign donor’s tax paid to a foreign country, a credit is allowed to reduce the Philippine donor’s tax to pay, under the formula: 1. Foreign donor's tax paid 2. Limit (using the formula below

Net foreign gifts Net gifts worldwide 

x Philippine Donor’s Tax Due Allowed tax credit is whichever is lower of the foreign donor’s tax paid and the limit.

ADMINISTRATIVE PROVISIONS Filing of notice of donation  Required only if the taxpayer utilizes the donation as an allowable deduction and if the gift is atleast 50k. Filing of donor's tax return.  When: 30 days from date of donation.  Same period of filing of capital gains tax return When is the payment of tax?  Within the same period of 30 days, pursuant to the pay-as-you-file system

VALUE ADDED TAXATION NATURE OF VALUE-ADDED TAX Definition: A tax assessed, levied, and collected on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business as they pass along the production and distribution chain, the tax being limited only to the value added to such goods, properties or services by the seller, transferor or lessor. Described as:  a privilege tax: a tax on the privilege of engaging in the business of selling goods or services or in the importation of goods  cumulative: imposed on all stages from manufacturing, wholesale up to retail  ad valorem tax: based on the value of the property being sold  indirect tax: the burden of paying the tax liability can be passed on to the consumer, Types of Business taxes: 1. VAT 2. Other percentage tax  3% based on gross receipts 3. Sin tax  Tax on sin products: cigarettes, alcoholic beverages VAT and other percentage tax  Same subject matter: privilege of doing business.  A taxpayer cannot be subjected to both tax.  If both are imposed on the same income, same transaction and same privilege, it would constitute double taxation since both are in the nature of a business tax

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TAXATION LAW Kapatiran v. Tan Purpose of VAT The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers, advance sales tax, and compensating tax on importations. It is principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more equitable, to enable the country to attain economic recovery. 

Uniformity

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. The law minimizes the regressive effects of VAT The law provides for zero rating of certain transactions while granting exemptions to other transactions

It is imposed only on sales of goods or services by persons engage in business with an aggregate gross annual sales exceeding the amount set by law.

The transactions which are subject to the VAT are those which involve goods and services which are used or availed of mainly by higher income groups. These include real properties held primarily for sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and other similar property or right, the right or privilege to use industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services of franchise grantees of telephone and telegraph

Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.

On the other hand, small business establishments, with annual gross sales of less than P500,000, are exempted. This, according to respondents, removes from the coverage of the law some 30,000 business establishments.

VAT is considered uniform: o It operates with the same force and effect in every place where the subject may be found. o It shall apply equally to all persons, firms and corporations placed in similar situation. 

Equitable

Other matters: 

It does not unduly discriminate against customs brokers.

The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the payment of an occupation tax under the Local Tax Code. The distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers then, the Court sees no reason why it should protest now. Tolentino v. Secretary of Finance (1994 and 1995) 1994 The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred and as much as possible, indirect taxes should be minimized."

1995 Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in similar situation. The following transactions involving basic and essential goods and services are exempted from the VAT: (a) Goods for consumption or use which are in their original state (agricultural, marine and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds). (b) Goods used for personal consumption or use (household and personal effects of citizens returning to the Philippines) and or professional use, like professional instruments and implements, by persons coming to the Philippines to settle here. (c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum products subject to excise tax and services subject to percentage tax. (d) Educational services, medical, dental, hospital and veterinary services, and services rendered under employer-employee relationship. (e) Works of art and similar creations sold by the artist himself. (f) Transactions exempted under special laws, or international agreements. (g) Export-sales by persons not VAT-registered. (h) Goods or services with gross annual sale or receipt not exceeding P500,000.00. ABAKADA v. Ermita

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TAXATION LAW Under RA 9337, the President upon the recommendation of the Secretary of Finance shall raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). Philosophy behind these alternative conditions: 1. VAT/GDP Ratio > 2.8% The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual. 2. Nat’l Gov’t Deficit/GDP >1.5% The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate  VAT is not confiscatory The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege. The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights. Uniformity and Equitability of Taxation Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. 86 In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337 provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction. Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class. R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or

receipts not exceeding P1,500,000.00. Also, basic marine and agricultural food products in their original state are still not subject to the tax thus ensuring that prices at the grassroots level will remain accessible. Creditable Withholding Tax and Final Withholding Tax (A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as 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 a withholding agent. Thus, in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. … (B) 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. … Taxes withheld on income payments covered by the expanded withholding tax and compensation income (are creditable in nature.

Input Tax and Output Tax; Three Scenarios The Input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise: First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no payment is required; Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR); 69 and Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayer’s option

VAT AS AN INDIRECT TAX Distinction between direct and indirect taxes Direct tax: The tax burden is upon the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it. The burden of paying the tax is not passed on to the consumer or to another individual But can it be passed on?  Yes, by stipulation. Indirect tax: It may be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services as part of the purchase price in the absence of any showing that the

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TAXATION LAW transferee, etc. is exempt from indirect tax The burden of tax is passed to the consumer notwithstanding the absence of any stipulation or contractual stipulation between the two parties: seller and purchaser. If the seller can pass on the VAT, will the tax liability remain to be with the seller?  Yes. What is only passed is the burden. Seller remains to be the statutory taxpayer. Coverage of VAT system: 1. 2.

Sale, barter, exchange or lease of goods or services made in the ordinary course of business. Importation of goods



If the coverage is importation, it does not matter whether it has been made in the ordinary course of business.  Except: IF the importation is exempt under the law.  Importation of personal goods exempt from custom duties is likewise exempt from VAT

Are the dues collected by sports organization subject to VAT? NO. Analyze: Is the collection made in the course of business?  No. It shall only include the use of facilities and allowances of the trainers.  Membership dues are not subject to VAT unless it is in the ordinary course of business.  If the costs cover the use of facilities, then membership dues are not part of it. Is the collection of association dues in condominiums subject to VAT? NO. Under Property Law: There are condominium units specifically owned and there are common areas. Condominium homeowners association would own the deeds and would maintain the common areas. They would collect homeowners association dues for this maintenance. Bar Question similar to the above: The argument of BIR: it is subject to VAT because it concerns lease of service in the ordinary course of business. The condo corporation: alleges that activity being conducted was not for business. It is only for the maintenance of the common area. Answer: The association dues are not subject to VAT. The collection is not made in the ordinary course of business. In the case of Yamane v. CA, the court held that condominium corporations are not engaged in business. The issue there is whether gross receipts are subject to local business tax. If we would use the logic behind that ruling, it is obvious that gross receipts are also not subject to VAT because collection of association dues are not made in the course of business. Special Characteristics of an Indirect Tax 1.

Tax imposed on the seller/lessor/importer/service provider CIR vs. Magsaysay Lines

The VAT is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. The “course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VATregistered activity of NDC is leasing personal property Other lecture notes: Will a change of ownership be classified as a cessation of business?  Yes. In this case, there was a change of ownership so it may be considered as a transaction deemed sale. This is the main argument of BIR  However, in this case the Supreme Court held that it is not a transaction deemed sale. Change of ownership in this case did not lead to the cessation of the business. The business of NDC is the leasing of personal property, which continued its operation even after the sale.  But if a sole proprietorship transferred property to a corporate taxpayer, there is change of ownership so it is a transaction deemed sale  Another point to consider: the transaction must be subject to VAT in order to be classified as a transaction deemed sale. 2.

Not a tax on the buyer/lessee/service availer Philippine Acetylene v CIR

FACTS: Philippine Acetylene made sales to National Power Corporation (NPC), an agency of the Philippine Government, and to the Voice of America (VOA) an agency of the United States Government. These two agencies are exempt from indirect tax. Philippine Acetylene alleges that it shall likewise be exempt from tax since it cannot shift the burden of paying the VAT to its purchasers. 

VAT liability remains to be with the seller

What is passed on to the consumer is merely the burden of paying the tax. The VAT passed on to the consumer forms part of the purchase price. If the purchaser is exempt from vat, then the seller cannot capitalize on such exemption of such purchaser because what had been passed on to the purchaser is merely the burden of tax and not the tax liability. 

The act of passing the burden to the purchaser is just a matter of economics.

The tax burden may not even be shifted to the purchaser at all if the seller does not want to. A decision to absorb the burden of the tax is largely a matter of economics. Then it can no longer be contended that a sales tax is a tax on the purchaser

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TAXATION LAW We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on the manufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequential sense.

CIR vs. JOHN GOTAMCO & SONS, INC Under an international agreement, the WHO is exempt from direct and indirect tax.

CIR vs. American Rubber Claim of American Rubber: the sale of rubber material is exempt from VAT because it is a sale of agricultural products in its original state 

The seller is the proper party to ask for the refund because he remains to be the statutory taxpayer. Therefore it has personality to claim for refund.

In the event that refund is successful, seller will hold it in trust for the consumer who shouldered the burden of tax. *** PRECAUTION*** This has been promulgated before RA 9337. The law effective at that time provides that agricultural products in original state are exempt from VAT whether food or nonfood. After effectivity of RA 9337, only agricultural food products are exempt from VAT. Bar Question: The taxpayer is engaged in the sale of flowers. Is it subject to VAT?  

If decided prior to the effectivity of RA 9339, it is exempt. It is an agricultural product sold in original state If decided after the effectivity of RA 9337, it is subject to VAT since it is non-food.

Notes:  

Under RA 9337, if the annual gross receipts or gross sales exceeds 1,919,500 (amount specified in a Circular) the taxpayer shall be mandated to pay VAT. Agricultural food products are exempt both from VAT and Other Percentage Tax

Gotamco transacts with the WHO. It alleges that it should not be liable for contractor’s tax, a form of indirect tax. Since its consumer is exempt from tax, Gotamco cannot shift the burden. Hence it must also be exempt from tax. Gotamco must also be exempt from contractor’s tax Gotamco must be exempt from contractor’s tax. WHO is exempted from tax because there is a provision in the international agreement that exempts it from such. In addition to this, the international agreement also provides that “any person or entity that contracted with WHO on the construction of WHO building shall likewise be exempt from tax”. The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it. Others: The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from any taxes in connection with the construction of the WHO office building. The 3% contractor's tax would be within this category and should be viewed as a form of an "indirect tax" On the Organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building. Difference between Philippine Acetylene and Gotamco Philippine Acetylene Gotamco The charter and the agreement between the The international agreement contains Philippines and USA do not contain provisions provisions that individuals and corporations that any individual or entity transacting with transacting with WHO in the construction of NPC and VOA is likewise exempted WHO building shall likewise be exempt from tax.

In the case of Philippine Packing Corporation v CIR The term “agricultural products" as used by the fisherman or fishing herein shall not include cultured operator, whether in their fish and other products raised or not, produced in fishponds, and those which have undergone the process of manufacturing as defined in section one hundred ninety-four (x) of this Code. Under Section 109 of the Tax Code Products are still considered in their original state even if they have undergone simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking, or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their original state.

SPECIFIC CHARACTERISTICS OF VALUE ADDED TAX 1.

Tax imposed on the sale/barter/exchange/lease CIR vs. Sony Philippines

CIR issued a letter of authority wherein officers of CIR are authorized to examine books of Sony. CIR now issued a deficiency assessment to Sony for P15m. which represens VAT and Withholding Tax.

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TAXATION LAW CIR’s Allegation: Sony should be liable to VAT. Since Sony’s advertising expense was reimbursed by SIS (Sony’s office in Singapore), the former never incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the said advertising expense should be for the account of SIS, and not Sony Philippines. Despite reimbursement from SIS, Sony Philippines still incurred advertisement expenses. It can still deduct and not liable for VAT. Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that should have been realized from the advertising expense of the latter. It is evident under Section 110 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. There is also no denying that Sony incurred advertising expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the latter paid for the same. Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from is another matter all together but will definitely not change said fact. The fact that due to adverse economic conditions, Sony-Singapore has granted to Sony Philippines a subsidy equivalent to the latter’s advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the most, this is an additional income of Sony Philippines subject to income tax. The amount is an income that is subject to income tax, not to VAT Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s (Sony’s) advertising expenses Other class notes:  Scope of VAT: sale, barter, exchange or lease. In this case, there were no such exchanges, so there shall be no VAT.  Is the subsidy an income in part of Sony? Yes. While it is an income, it is not one that is subject to vat. Since it is income, it is subject to income tax. 2. 

Tax imposed on all levels of the production/distribution process From the purchase of goods or capital equipment up to the sale of the same or goods produced from the same, there is VAT imposed.

Example: A retailer purchases goods from a wholesaler, this is subject to input VAT on the part of the retailer. When the retailer now sells it to another, it is subject to output VAT on the part of the retailer. 3. A.

Tax imposed on the value added

Tax Credit Mechanism

Under the tax credit method, 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.

In other words, it refers to the reduction of Output VAT (OV) against Input VAT (IV) and the reduction of Creditable Input VAT against future tax liabilities Section 110(A) of the Tax Code provides that any input tax evidenced by a VAT invoice or official receipt on purchase or importation of goods or for purchase of services shall be creditable against output tax. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports Question: If a client would ask you: which is better, other percentage or VAT?   

It would depend on the purchases of the taxpayer. If most of his purchases are subject to VAT, then VAT-system is better because there is a tax credit mechanism. He can deduct input taxes from his output taxes. In Other Percentage Tax, there is no tax credit mechanism

First consideration should be the type of business. If leasing residential units What would be his costs?  Salaries to his employees to maintain the units.  These salaries are not subject to VAT. There is no Input VAT component to his expense.  Utilities: electric, water, telecommunication, internet  Subject to VAT So if it is a leasing business, better to subject it to other percentage tax. Few transactions are subject to input vat (since magkano lang naman yung utilities expenses. The taxpayer can only deduct few input taxes. Moreover, he will be subjected to a higher rate which is up to 12%. Output VAT vs. Input VAT Output VAT: VAT imposed on the sale of services or goods. Input VAT: VAT paid for the purchase of goods or services. Illustration: Reynolds is engaged in the business of buying and selling bags. He is VAT-registered. Note: Output VAT and Input VAT are applicable only to VAT-registered entities. Kiko is engaged in buying and selling bags. He is also VAT-registered. Franz is not engaged in buy and sell. He is engaged in the hobby of collecting bags. Reynolds to Kiko Reynolds sold the bag to Kiko for 10k. Since he is VAT-registered, he will pass on the 12% VAT to Kiko. He needs to add 1200 to represent the VAT. Kiko now will pay 11,200. 10,000 (selling price) + 1,200 (VAT) 11,200  Kiko will pay this amount

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TAXATION LAW On the part of Reynolds, selling price is only 10k. The 1,200 to be collected as VAT is not an income. It is an output vat which is required to be remitted to the government. He will only hold the 1200 in trust for the government. Kiko to Franz On the part of Kiko, he paid 11,200. He decided to sell it for 20k. VAT is 2400. Total amount to be paid by Franz is 22,400. 20,000 (selling price) 2,400 (VAT) 22,400  Franz will pay this amount

+

Books of Kiko Gross Selling Price: 20k Output VAT: 24,000 (what he passed to his buyer, Franz) Input VAT: 1,200 (what was passed to him by his supplier, Reynolds)  -

If Output Vat is higher than the Input VAT, it is called vat payable. 2,400 1,200 1,200 considered as vat payable

 If the Input Vat is higher than Output Vat, the difference is called creditable input vat This creditable input VAT may be subject of tax refund or a tax credit B.

Impact of Taxation and Incidence of Taxation

Impact of taxation: the point on which a tax is originally imposed. The impact of taxation is on the seller.

“In the course of trade or business” o The regular conduct or pursuit of a commercial or an economic activity including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization or a government entity. o 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 o Any business where the gross sales or receipts do not exceed P100,000 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of trade or business. In the course of business, elements: 1. Regular conduct or pursuit of the activity, and not merely isolated 2. Include activities incidental to main line of business (RA 9337) 3. It can be conducted by any person  Even by nonstock, non-profit organization, irrespective of the manner on how the income is disposed, as long as the activity is proprietary in nature Two types of persons liable for VAT: 1. Those who voluntarily register business under the VAT system 2. Those who are mandated to register under the VAT system Mandatory registration: o Required if annual gross sales or receipts or expected gross sales or gross receipts exceeds 1,919,500 

Incidence of tax: that point on which the tax burden finally rests or settles down and in most cases, the incidence is on the final consumer. 4.

Consumption-based Tax

Destination principle: VAT shall be imposed only upon goods consumed in the Philippines. Cross border doctrine: VAT shall not be imposed if the goods will be consumed outside the Philippines. These are kindred concepts

However this threshold amount will not apply to franchise grantees of radio and television broadcast  If radio, the threshold amount is P10M.  Sale of residential house and lot, the threshold amount is P3,199,200

Note: If taxpayer opted to register under vat system, such option to register shall be considered as irrevocable for the period of 3 years. Therefore no cancellation within 3 years can be made if the taxpayer voluntarily registered himself under vat system Cases in Point: Magsaysay Lines and Western Mindanao Power Corporation If the case is decided before the effectivity of RA 9337: only activities related to the main activity of the taxpayer shall be subject to VAT; incidental activities are not subject to vat After the effectivity of RA 9337: activities related to main activities and those incidental to main activity are subject to vat.

TRANSACTIONS SUBJECT TO VAT Elements of VAT-taxable transactions 1. It must be done in the ordinary course of trade or business 2. There must be a sale, barter, exchange, lease of goods or properties, or rendering of service in the Philippines. 3. It is not VAT-exempt or VAT zero-rated. If all three elements are present, then the transaction is subject to the 12% VAT. Importations are subject to VAT, whether or not in the course of trade or business

GOVERNING REGULATIONS 1. RR 16-2005, as amended by RR 4-2007 (Consolidated regulation) 2. RR 16-2011 (Adjustment of threshold amount for liability) 3. RR 10-2011 (Clarifying VAT rules on certain transactions)

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TAXATION LAW o o o

RATES OF VAT Three types of vat system 1. 2. 3.

Illustration:

Ordinary Exempt Transaction Zero-Rated Transaction

X is leasing apartment units. The monthly rental per unit is 10k.

Note: Memorize! Be ready to classify whether the transactions are vat-taxable, exempt or zero-rated transactions. ORDINARY RATE OF 12%

1. 

When the gross sales exceed the threshold amount of 1,919,500 If radio, the threshold amount is P10M.

2.

Sale of residential lots or house & lots

Residential lots: threshold amount is 1,919,500 House and lot: threshold amount is 3,199, 200 (RR 16-2011)

1.5 M 2.5 M

Note: Taxpayer must be engaged in the selling of House and Lots; it must be in the ordinary court of business If not: subject to Capital Gains Tax (for capital assets) 3.

Houses: per residential house Dorm, Boarding Houses, Bedspaces: per person Rooms for rent: Per room

Remember there are two conditions to be subjected to VAT: (a) Monthly rental per unit exceeds 12,800; AND (b) Aggregate annual rental exceeds 1,919,500 The lease here will automatically be not subjected to VAT since the first condition (i.e. that the monthly rental per unit must exceed 12,800) is not met. There is no use to know if the second condition is met. The conditions must be concurrently met. X is also leasing bed space units. Per room, there are 5 students whose rental is 7k each per month. Hence, per room, X receives a rental of 35k. Is the lease subject to VAT?  NO.  Per unit in a bedspace unit is per person. Note here that each person’s rental is only 7k. The first condition for VAT to be applied is that the monthly rental per unit is 12,800. Hence it does not matter that X receives 35k per room each month since what is involved is a bedspace unit, in which case “per unit” is defined as “per person”. 4. Piece of Work

Lease of residential units

Conditions: (a) Monthly rental per unit exceeds 12,800; AND (b) Aggregate annual rental exceeds 1,919,500

Is it material to know the annual gross receipt to be subjected to VAT?  No.

Piece of Work vs. Contract of Sale

15 K 3M

Piece of Work Subject to VAT if gross receipts reached the threshold amount

Contract of Sale Subject to VAT if gross sales reached the threshold amount

Income derived

Gross Receipts

Gross Sales

Method of recognition of Income

Cash Method

Accrual Method

Subject to VAT

Reminder: the conjunction used is AND. It means that both elements must concur.  Lease of Commercial Spaces As long as the annual aggregate amount of rentals exceeded the threshold amount, it shall be subject to VAT  Residential Unit (RR 16-2011) Apartment and house and lots used for residential purposes and buildings or parts/units thereof used solely as dwelling places. Does not include:  Hotel  Inn  Pension houses  Motel  Lodging places “Per unit” o Apartments: per apartment unit

Illustrations: Ma’am purchased and sold bag for 10k  Contract of Sale Mam did not collect 10k kasi inutang ni Reynolds (2016). Will Ma’am reflect the 10k as income subject to vat?  Yes. The income is already recognized What if Ma’am made the bag customized and Reynolds did not pay the 10k?  This is now a contract of piece of work.

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TAXATION LAW 

The 10k amount would not form part of cash receipts and therefore not subject to VAT.

In a contract of piece, income can only be recognized if it is already collected. Therefore, Ma’am cannot reflect the 10k as an income subject to VAT.

Another illustration on Rent: Commercial Spaces

Illustration: Ma’am owns a grocery store. She bought products such as soap and shampoo. She took a soap for her personal use. Is this a transaction deemed sale?  Yes, because the items formed part of the inventory. They are originally intended for sale.

Ma’am has a building. Her tenants are Reynolds, Tony and Kiko. Is this a service, retail, manufacture?  Service; so use cash method. Assuming Ma’am is subject to vat, Note that these are commercial spaces so do not apply rule under revenue regulation on Residential units. Reynolds paid an advance of 10k Tony never paid so he incurred a debt for 50k Kiko regularly pays his rent. Is the advance given by Reynolds an income in the part of Ma’am?  YES  Cash method can be used; from the moment the cash was collected, it is reflected in the gross receipts notwithstanding the fact that the income has not yet accrued (since this is an advance)

(b) Distribution or transfer of goods or properties originally intended for sale to either: o Shareholders/investors as share or profits o Creditors as payment of debts Note: only if goods are in the inventory, so as to qualify as ones that are originally intended for sale. (c) Consignment of goods if actual sale is not made within 60 days from the date of consignment and were left unreturned. Consignment: possession is transferred to another but ownership remains with the consignor Who owns consigned goods?  Consignor  Once delivery is made, ownership is still on the consignor. Illustration: Goods worth 100k were delivered by A to B under consignment basis.

Is the 50k unpaid rent of Tony an income?  NO.  It was not yet collected. If this is a contract of sale: Is the 10k advance payment of Reynolds subject to VAT?  NO.

Is the 100k considered as sales of A?  Not yet. The ownership had never been transferred from A to B.  Only if B already sold the goods or B did not return the goods within 60days, it will be subject to VAT. If this is sale and the goods worth 100k were delivered from A to B:  It is considered an income. It forms part of the Gross Sales subject to VAT (d) Retirement from or cessation of business with respect to inventories of taxable goods

Note that in sales: accrual method, method is used. The seller can report the income if it is earned. This is an advance payment, so it is not part of the gross sales.   5.

Is the 50k unpaid rent by Tony subject to VAT? YES. Even if is not yet collected, it has already accrued. Hence it is subject to VAT based on the accrual method.

Transactions Deemed Sale (a) Transfer, use or consumption (not in the ordinary course of business) of properties or goods originally intended for sale.

Note: the amount subject to VAT would only refer to the inventories of taxable goods. Illustration: Individual is VAT-registered. He has a rental business wherein he rents out his 5 buildings. He also has a Corporation named X Corporation. He transferred his business to X Corporation. Necessarily, he needs to cancel his own registration for being engaged in the rental business. Will the cancellation of the registration be tantamount to retirement from or cessation of business?  Yes. The BIR subjected the five buildings of X to VAT.

 

The properties must be originally intended for sale. If not, it is not a transaction deemed sale. The transfer, use, or consumption must not be in the ordinary course of business.

Was the assessment proper?  NO.

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TAXATION LAW 

The buildings in this case are not inventoriable since they are not being sold.

Apply the retirement principle if the properties are inventoriable properties. NOTES:

Before provisions of Transaction deemed sale can be applied, know first if the taxpayer or the transaction involved is subject to VAT It is transaction deemed sale only if the transaction occurred in the ordinary course of business.

EXEMPT TRANSACTIONS o o

No imposition of Output VAT No acquisition of Input VAT

NOTE: these are only some of the exempt transactions. 1. 

Transactions by entities not registered under the vat system Transaction is not subject to vat, unless the amount of gross sales or gross receipts exceeds the threshold amount

2.

Transactions intended for subsistence livelihood

3. 

Sale of agricultural food products in their original state Likewise exempt from other percentage tax

4. 

Export sales of non VAT-registered business Likewise exempt from other percentage tax

Q: Export sales are VAT-exempt, but it can also be zero-rated. How come? A: It is exempt if the entity is not VAT-registered. A transaction cannot be considered a zero rated transaction if the taxpayer is not VAT-registered. 5. 

Importation of good exempt from custom duties and intended for personal use Likewise exempt from other percentage tax

6. 

Services of medical dental hospital and veterinary except those rendered by prof Likewise exempt from other percentage tax

Are services of Doctors exempt from VAT?  No. It is taxable because it is rendered by Professional 7.

Services rendered in favor of senior citizens and products sold to them

8.

Gross sales and gross receipts not exceed threshold



Except if the taxpayer voluntarily registered under the vat system

If gross sales and gross receipts do not exceed threshold, taxpayer is exempt from VAT but not exempt from other percentage tax. If threshold amount is not reached, he shall be liable for 3% other percentage tax 9.  

Services rendered by domestic common carriers by land Exempt from vat but subject to other percentage tax of 3% Exempt from VAT regardless of the amount of gross receipts earned

10. Services by international air or shipping carriers  Subject to other percentage tax of 3% 11. Franchise grantees of gas and water utilities  Subject to 2% other percentage tax  Note: the rate is 2%, not 3%. 12. Sale, barter or exchange of listed shares  Subject to ½ of 1%: stock transaction tax COMPLETE LIST OF EXEMPT TRANSACTIONS 1. Sale or importation of agricultural and marine food products in their original state. Such products are still considered in their original state even if they have undergone simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking, or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their original state. 2.Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds This does not include specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered as pets. 3. Importation of personal and household effects belonging to the residents of the Philippines returning from abroad 4. Importation of professional instruments and implements, wearing apparel, domestic animals and personal household effects belonging to persons coming to settle for the first time in the Philippines 5. Services subject to percentage tax 6. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugarcane into raw sugar 7. Medical, dental, hospital and veterinary services except those rendered by professionals 8. Educational services rendered by private educational institutions duly accredited by DEPED, CHED, and TESDA and those by governmental educational institutions 9. Services rendered pursuant to an employee-employer relationship 10. Services rendered by regional or area headquarters established in the Philippines 11. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws 12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority 13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending is limited to members 14. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority  Provided that the share capital contribution of each member does not exceed P15,000 15. Export sales by persons who are not VAT-registered

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TAXATION LAW 16. Sales of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or sales within the low-cost cap of below 1,919,500 for a residential lot and P3,199,200 for a house and lot and other residential dwelling 17. Lease of a residential unit with a monthly rental not exceeding P12,800 18. Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and is not devoted principally to publication of paid advertisements 19. Sale, importation, or lease of passenger or cargo vessels and aircraft Includes engine, equipment, and spare parts thereof for domestic or international transport operations. 20. Importation of fuels, goods and supplies by persons engaged in international shipping or air transport operations 21. Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries 22. Sale or lease of goods or properties or performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,919,500

go abroad every year for the purchase of food substance which might be grown here. Every dollar's worth of food which the farmer produces and sells in these Islands adds directly to the wealth of the country. The appellant corporation directly produces its goods from the cultivation of land, merely engaging in the suitable preservative processes for the purpose of making the product available at all times, without regard to seasons, and in markets that would not be accessible to the fresh fruit. Appellants does not make its profit upon goods produced by others, and there is no reason why it should not be given the protection that the law affords. ZERO-RATED TRANSACTIONS 

Transaction is subject to VAT. However, the vat rate is not 12% but 0%.

Difference between VAT-exempt and Zero-rated VAT-EXEMPT Transaction is not subject to output tax

transfer of property Philippine Packing Corporation vs. CIR Appellant Philippine Packing Corporation is a domestic corporation engaged in the growing and canning of pineapples in Mindanao for sale locally. Approximately 120,000 tons of pineapple every year are produced by appellant from its plantations, out of which it sells or gives away in fresh state 50,000 tons which are not suitable for canning, for which it is not taxed, and the rest are canned into sliced pineapple, pineapple chunks, crushed pineapple, and pineapple juice. 

The manipulations to which appellant subjects the fresh pineapple fruit grown by it does not amount to a manufacturing process which would make it taxable.

The very text of the law, in exempting "agricultural products — whether in their original state or not," makes it clear that the exemption is not divested merely because the products themselves have undergone processing of some kind. The canning of appellant's products is a mere incident and consequence of its large scale production of pineapples. Appellant perforce had to resort to a preserving process, for the volume of its products (170,000 tons) made it impossible to dispose of the same in the local market. The legislature, in providing a tax exemption for agricultural products, "whether in their original state or not", had precisely in mind that fruit crops could not be raised and sold on a large scale without resort to some process to prevent their deterioration. Purpose of Legislature The exemption was due to the belief on the part of the law making body that by exempting agricultural products from this tax the farming industry would be favored and the development of the resources of the country encouraged. It is a fact, of which we take judicial cognizance, that there are immense tracts of public land in this country, at present wholly unproductive, which might be made fruitful by cultivation, and that large sums of money

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

ZERO-RATED Taxable transaction but does not result in an output tax The input VAT on the purchases of a VATregistered person may be allowed as tax credit or refund Registration is required.

Illustration: Texas Instrument is engaged in export sale. Export sale is a zero rated transaction. Since it is zero rated, it has no Output VAT but may acquire input VAT. Since Input VAT is higher than Output VAT, it may incur creditable input VAT. Texas Instrument has three options of using the creitable input VAT: 1. Carry over to the succeeding years 2. Apply for refund of creditable input vat for a period of 2 years 3. Apply for a tax credit certificate which TI can use to pay off its tax liabilities. If you are tax lawyer of TI, do not advise your client to carry over the creditable input VAT, since in the following years, TI will still be engaged in zero rated transaction. TI can sell its tax credit certificates to other companies. Question: A Revenue Regulation provides that tax credit certificates are no longer transferrable.

requisit es Is this constitutional? under  NO. United According to the case of ABAKADA Guro, the Creditable Input Vat is not a property right but a privilege. Cadiz However, if government already issued the tax certificate, it is already a property right. Any cancellation of tax credit certificate would result to a violation of due process under the constitution. Three types of transactions under zero rated

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TAXATION LAW 1.  

2.

Export Sales products must be consumed outside the Philippines If the taxpayer's activity does not solely deal with the sale of products outside the Philippines, the taxpayer shall be considered engaged in export sales if at least 70% of its transaction shall be sold outside the Philippines. Foreign currency denominated transaction

Elements: a. Service must be performed in the Philippines b. Service must be paid in an acceptable foreign currency in accordance with BSP rules and regulations c. Service must be performed in favor of a non-resident client Question: Is the business process outsourcing subject to 0% rate?  Service is performed in Philippines  Entities are paid in foreign currency Except: if render services for resident clients  Service is performed in favor of a foreign client 

Yes. Transaction is zero-rated

Will it not violate destination principle?  In CIR vs. American Express: this is an exemption from the destination principle

Western Mindanao Power Corporation v. CIR Petitioner WMPC is a domestic corporation engaged in the production and sale of electricity. It is registered as a VAT taxpayer. It sells electricity solely to the National Power Corporation (NPC), which is in turn exempt from the payment of all forms of taxes, duties, fees and imposts, pursuant to RA. 6395. Petitioner’s power generation services to NPC is zero-rated. WMPC filed with the Commissioner of Internal Revenue (CIR) applications for a tax credit certificate of its input VAT. 

The tax refund or credit cannot be allowed for failure to comply with the documentary requirements under the law

In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim under substantive law. It must also show satisfaction of all the documentary and evidentiary requirements for an administrative claim for a refund or tax credit. Hence, the mere fact that petitioner’s application for zero-rating has been approved by the CIR does not, by itself, justify the grant of a refund or tax credit. Under the NIRC, a creditable input tax should be evidenced by a VAT invoice or official receipt, which may only be considered as such when it complies with the requirements of RR 7-95, particularly Section 4.108-1. This section requires, among others, that "(i)f the sale is subject to zero percent (0%) value-added tax, the term ‘zero-rated sale’ shall be written or printed prominently on the invoice or receipt." 

Principle of Legislative Approval by Reenactment

If administrative ruling or issuance is enacted into a law, it is believed that the Congress has approved the validity of the issuance. The subsequent incorporation of Section 4.108-1 of RR 7-95 in Section 113 (B) (2) (c) of R.A. 9337 actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts. Note: when this case was promulgated, the charter of NPC was not yet amended. In the new charter, all entities transacting with NPC shall likewise be exempt from indirect tax. PANASONIC vs. CIR 

Rule-making power of Secretary of Finance

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of Finance for the efficient enforcement of the Tax Code and of course its amendments. Thus SOF has the power to expand the invoicing requirements on zero-rated transactions 

PANASONIC failed to imprint “Zero-Rated” in its invoices

If the claim for refund/TCC is based on the existence of zero-rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. The appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect. Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zero-rated. 

The failure to imprint BIR authority to print is not a ground to deny the claim or refund

Sec. 4.108-1 required the following to be reflected on the invoice: 1. The name, taxpayer’s identification number (TIN) and address of seller; 2. Date of transaction; 3. Quantity, unit cost and description of merchandise or nature of service; 4. The name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. The word "zero-rated" imprinted on the invoice covering zero-rated sales; and 6. The invoice value or consideration. The "BIR authority to print" is not one of the items required to be indicated on the invoices or receipts.

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TAXATION LAW the invoices or receipts should not result in the outright denial of a claim or the invalidation of the invoices or receipts for purposes of claiming a refund. HITACHI GLOBAL CORP vs. CIR Hitachi is a domestic corporation engaged in the business of manufacturing and exporting computer products. Hitachi is registered as a Value-added Tax (VAT) taxpayer. Hitachi is also registered with the Export Processing Zone Authority as an Ecozone Export Enterprise. Hitachi filed an administrative claim for refund or issuance of a tax credit certificate before the BIR. 

The claim for refund must be denied for failure to comply with the invoicing requirements

Sec.4.108-1. Invoicing Requirements. - All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN and address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoices or receipts and this shall be considered as a "VAT invoice." All purchases covered by invoices other than a "VAT invoice" shall not give rise to any input tax. Hitachi’s export sales invoices did not indicate Hitachi’s Tax Identification Number (TIN) followed by the word VAT. The word "zero-rated" was also not imprinted on the invoices. Moreover, the invoices were not duly registered with the BIR.  Tax refunds, like tax exemptions, are construed strictly against the taxpayer. The claimants have the burden of proof to establish the factual basis of their claim for refund or tax credit. In this case, Hitachi failed to establish the factual basis of its claim for refund or tax credit. Silicon Philippines v. CIR Requisites for Refund (Section 112A of NIRC) 1. The taxpayer must be VAT-registered; 2. The taxpayer must be engaged in sales which are zero-rated or effectively zero-rated; 3. The claim must be filed within two years after the close of the taxable quarter when such sales were made; and 4. The creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax. 

Printing the ATP (Authority to Print) on the invoices or receipts is not a requirement for the grant of refund

The ATP need not be reflected or indicated in the invoices or receipts because there is no law or regulation requiring it. Thus, in the absence of such law or regulation, failure to print the ATP on



However, Section 238 of the NIRC expressly requires persons engaged in business to secure an ATP from the BIR prior to printing invoices or receipts. Failure to do so makes the person liable under Section 26452 of the NIRC.

Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated or effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales must be presented. However, since the ATP is not indicated in the invoices or receipts, the only way to verify whether the invoices or receipts are duly registered is by requiring the claimant to present its ATP from the BIR. Without this proof, the invoices or receipts would have no probative value for the purpose of refund. While the pertinent provisions of the Tax Code and the rules and regulations implementing them require entities engaged in business to secure a BIR authority to print invoices or receipts and to issue duly registered invoices or receipts, it is not specifically required that the BIR authority to print be reflected or indicated therein. Indeed, what is important with respect to the BIR authority to print is that it has been secured or obtained by the taxpayer, and that invoices or receipts are duly registered. CIR vs. Manila Mining Corporation Respondent, a mining corporation duly organized and existing under Philippines laws, is registered with the BIR as a VAT-registered enterprise. Respondent’s sales of gold to the Central Bank amounted to P200M. Respondent, relying on a letter from then BIR Deputy Commissioner that gold sold to the Central Bank is considered an export sale is subject to zero-rated if such sale is made by a VAT-registered person, it filed an application for tax refund/credit of the input VAT it paid. The claim for refund shall be disallowed 

The export sale is zero-rated

As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by the seller – respondent herein, which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers. 

However, the respondent failed to substantiate its claim

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registered entity and that it filed its claims within the prescriptive period. It must substantiate the input VAT paid by purchase invoices or official receipts. The respondent failed to do so. Section 16 of Revenue Regulations 5-87 provides: A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted together with the application. The original copy of the said invoice/receipt, however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate or refund. A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the

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TAXATION LAW ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services. A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other settlementbetween seller and buyer of goods, debtor or creditor, or person rendering services and client or customer. These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or quantity of goods sold and their selling price, and taken collectively are the best means to prove the input VAT payments.

3.  

Effectively zero rated transaction One where the taxpayer transacts with an entity exempt from indirect tax provided that the international agreement or the special law effectively subject such transaction to a zero percent rate. Refers to the local sale of goods and properties by a VAT-registered person or a person or entity who was granted direct and indirect tax exemption under special laws or international agreements (RMC No. 50-2007) Contex Corporation vs. CIR

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund 

What was shifted to Contex as the purchaser is merely the burden and not the tax liability

VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. The amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. It is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter. Petitioner is registered as a NON-VAT taxpayer and cannot claim for the tax credit Petitioner is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. 

VAT-EXEMPTION The sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax)

ZERO-RATED SALES These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser.

A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. The seller is not allowed any tax credit on VAT (input tax) previously paid.

The VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties).

The input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations All VAT is removed from the zero-rated goods, activity or firm.

CIR v. Seagate Technology Summary made by Atty. Tin Seagate is located in an ecozone which under the law is considered a separate customs territory. It creates the legal fiction of being in a foreign state. Input taxes were passed on by supplier to Seagate. However, under RA 7916, Seagate should be exempt from national and local taxes except as to preferential tax. Seagate paid for unutilized input tax. It now claims for a refund. Seagate also sells products to its buyers. Under Sec 112: the claim for refund of an unutilized input tax is that the input tax must have arisen from a zero rated or effectively zero rated transaction. How to classify transaction between Supplier and Seagate? Seagate is located in a separate customs territory. Every sale from the supplier to Seagate is classified as export sale, which is zero-rated. Input tax should not have been passed to Seagate. How to classify transaction between Seagate and its buyers? IMPORT! Seagate also passes input vat to its buyers. But this input vat is not attributable to zero rated transaction since this is an import sale. Remember one of the requirements of Sec 112 for a claim of refund is that the input vat must be attributable to either a zero-rated or an effectively zero-rated transaction. So does this mean that Seagate cannot claim for refund of input vat in its transactions with its buyers?  NO! Here is when you differentiate between a VAT-Exempt Transaction and a VAT-Exempt Entity A VAT-exempt party can avail of input vat IF it is a VAT-registered entity. Hence, it is important to know if transactions between Seagate to buyers involve VAT-exempt transaction or VAT-exempt party

CIR v. Phil Associated Smelting and Refining Corp 2014

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TAXATION LAW RA 7916 does not exempt transaction from VAT but exempts Seagate from VAT. Therefore, Seagate is a VAT-exempt entity.

Transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid

Next step is to know if Seagate is VAT-registered. Since Seagate is VAT-Registered, Seagate is allowed to deduct input vat from the output vat. It is a VAT-Exempt party so it cannot be directly or indirectly liable for the output vat. Respondent's exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone. Zero-Rated vs. Effectively Zero-Rated ZERO-RATED Export sale of goods and supply of service

EFFECTIVELY ZERO-RATED Sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate. Intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

Primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales. Tax Rate is Zero Rate does not yield any tax chargeable against the purchaser Seller can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. Total relief is given to the purchaser from the burden of the tax

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves. Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result Difference with the case of Contex: Seagate can claim for a tax refund of the input tax it previously paid to the suppliers because it is a VAT-registered entity. A VAT-registered status, as well as compliance with the invoicing requirements, is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Tax Implication of Seagate’s Transactions Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity (in this case, Seagate) are considered exports to a foreign country; conversely, sales by a PEZAregistered entity (Seagate) to a VAT-registered person in the customs territory are deemed imports from a foreign country If Seagate enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered into with a purchaser for use or consumption in the Philippines, then these shall subject the purchaser to 10 percent (now 12%), unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated. End point: Since Seagate is an exempt entity, it cannot be subjected to VAT. Its purchases cannot be subjected to an input VAT, and its sales cannot be subjected to Output VAT. Whether the transaction is an exempt transaction or not, it does not matter since the entity itself is exempt from VAT.

CIR vs. ACESITE HOTEL CORP

Exempt Transaction vs. Exempt Party EXEMPT TRANSACTION Goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status - VATexempt or not - of the party to the transaction

Party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or nonVAT taxpayer.

EXEMPT PARTY A person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT.

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in Manila. It leases its hotel’s premises to the Philippine Amusement and Gaming Corporation [hereafter, PAGCOR] for casino operations. Acesite incurred from its rental income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to pay the taxes on account of its tax exempt status. 

PAGCOR’s tax exemption privilege includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate

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TAXATION LAW It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes.

ISSUE: Whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337.

Although the law does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424.

HELD:

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax. The express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non exceptis



VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides: Transactions subject to zero percent (0%) rated.— xxxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate The proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR. 

There was erroneous payment of taxes

There is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made." Such payment is held to be not voluntary and, therefore, can be recovered or refunded. 

Solutio indebiti applies to the Government

Enshrined in the basic legal principles is the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempted from the application of this doctrine

PAGCOR v. BIR



It is no longer exempt from corporate income tax .

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs that are exempt from it.



It is still exempt from VAT

As to the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the payment of corporate income tax.

R.A. No. 9337 itself exempts petitioner from VAT, which reads: Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxxx (k) Transactions which are 'exempt under international agreements to which the Philippines is a signatory or under special laws, except Presidential Decree No. 529.37 Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No. 1869, is a special law that grants petitioner exemption from taxes. Moreover, the exemption is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424. Although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons 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.

VAT on Services CIR v. Placer Dome Technical Services

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TAXATION LAW Placer Dome Inc (PDI) owns 39.9% of Marcopper. It undertook to clean-up and rehabilitate the Makalupnit and BOAC Rivers in Marinduque which was affected by its mining operations. PDI engaged the services of Placer Dome Technical Services Limited (PD Canada), a non-resident foreign corporation in Canada which, in turn, engaged the services of Placer Dom Technical Services Philippines (PD Philippines). PD Philippines filed for a claim for tax credit/refund and contends that its sale of services to Placer Dome Canada was zero-rated. The CIR invokes the destination principle, contending that Placer Dome Philippines’ services, while rendered to a non-resident foreign corporation, are not destined to be consumed abroad. 

The tax credit/refund must be allowed

The VAT is a tax on consumption "expressed as a percentage of the value added to goods or services" purchased by the producer or taxpayer. As an indirect tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines. These services must be regularly conducted in this country; undertaken in "pursuit of a commercial or an economic activity;" for a valuable consideration; and not exempt under the Tax Code, other special laws, or any international agreement. Yet even as services may be subject to VAT, our tax laws extend the benefit of zero-rating the VAT due on certain services. The aforementioned Section 102(b) of the 1986 NIRC activates such zero-rating on two categories of transactions: (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; and (2) Services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. 

Services are exemptions from the cross-border principle

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 zero-rated, while imports are taxed. Confusion in zero rating arises because petitioner equates the performance of a particular type of service with the consumption of its output abroad. The consumption contemplated by law does not imply that the service be done abroad in order to be zero-rated. Consumption:  “The use of a thing in a way that thereby exhausts it."  Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability" In this case, the services rendered by respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service establishment s

here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position for legal purposes." The law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]." Thus, for the supply of service to be zero-rated as an exception, the law merely requires that: 1. The service be performed in the Philippines; 2. The service fall under any of the categories in Section 108(b) of the Tax Code; 3. It be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations.

CIR v. American Express Transactions subject to zero percent (0%) rate. -- The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:] ‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); ‘(2) Services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP];’" Zero Rating of "Other" Services The law is very clear. Under the last paragraph quoted above, services performed by VATregistered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. VAT Requirements for the Supply of Service Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all these requirements. First, respondent regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity. Second, such service is commercial in nature; carried on over a sustained period of time; on a significant scale; with a reasonable degree of frequency; and not at random, fortuitous or attenuated.

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TAXATION LAW Third, for this service, respondent definitely receives consideration in foreign currency that is accounted for in conformity with law.

“Senator Herrera: What is important here is that these services are paid in acceptable foreign currency remitted inwardly to the Philippines”

Finally, respondent is not an entity exempt under any of our laws or international agreements.

Respondent’s Services Exempt from the Destination Principle However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]." Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than "processing, manufacturing or repacking of goods" as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated. Ejusdem Generis Inapplicable The canon of statutory construction known as ejusdem generis or "of the same kind or specie" does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96. First, although the regulatory provision contains an enumeration of particular or specific words, followed by the general phrase "and other similar services," such words do not constitute a readily discernible class and are patently not of the same kind. Project studies involve investments or marketing; information services focus on data technology; engineering and architectural designs require creativity. Aside from calling for the exercise or use of mental faculties or perhaps producing written technical outputs, no common denominator to the exclusion of all others characterizes these three services. Nothing sets them apart from other and similar general services that may involve advertising, computers, consultancy, health care, management, messengerial work -- to name only a few. Second, there is the regulatory intent to give the general phrase "and other similar services" a broader meaning. Clearly, the preceding phrase "as well as" is not meant to limit the effect of "and other similar services." Third, and most important, the statutory provision upon which this regulation is based is by itself not restrictive. The scope of the word "services" in Section 102(b)(2) of the Tax Code is broad; it is not susceptible of narrow interpretation Consumed Abroad" Not Required by Legislature Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the legislators not to impose the condition of being "consumed abroad" in order for services performed in the Philippines by a VAT-registered person to be zero-rated.

Legislative Approval By Reenactment Upon the enactment of RA 8424, which substantially carries over the particular provisions on zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval of administrative interpretation by reenactment clearly obtains. This principle means that "the reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction." Other Types of INPUT VAT: 1. 2.

Presumptive Input VAT Transitional Input Tax

PRESUMPTIVE INPUT VAT CONCEPT Persons or firms engaged in the processing of sardines, mackerel and milk, and in the manufacturing of refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. RATE: 4% of gross value of purchases When does Presumptive Input VAT apply? Sale of the following:  Sardines  Mackerels  Milk  Cooking oil  Packed noodles  Sugar Why are these products covered by presumptive input vat?  Their main ingredient is agri-food products Illustration: X is a manufacturer of 666 Sardines. Main ingredient of this is tuna. X buys the tuna from a fisherman. In the purchase, fisherman will not pass input VAT since agri-foods are exempt from VAT as being sold in their original state. When X now sells the sardines, this will be subject to VAT of 12% (output vat). He is at a disadvantage since he cannot deduct input vat from its output vat. So this transaction is subject to a presumptive input vat of 4%. The law already presumes that the input vat arising of the transaction is equivalent to 4%

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TAXATION LAW TRANSITIONAL INPUT VAT CONCEPT A person who becomes liable to VAT or any person who elects to be VAT-registered shall, subject to the filing of an inventory, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 2% of the value of such inventory or the actual VAT paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. Transitional input vat can be availed of by a newly registered taxpayer. Illustration: Amare already expects that its gross sales will exceed the threshold amount. Before registration to the BIR, it already purchased ingredients so it has been subjected to input vat.

Can it still deduct the input vat it paid for its purchases prior to its registration?  Yes. Under transitional input vat, it can deduct. Is the payment of input vat prior to registration a condition sine qua non before you can avail of transitional input vat?  NO.

RR 7-95 cannot limit the application and coverage of Section 105 (now Section 111(A) by stating that in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements. This is a legislative act beyond authority of the CIR and the Secretary of Finance. The term “goods and properties” includes “real properties held primarily for sale to customers or held for lease in the ordinary course of business. Thus, FBDC is entitled to claim transitional input VAT based not only the improvements but also on the value of the entire real property and regardless of whether or not there was actual payment on the purchase price of the real property or not. Rationale of Transitional Input Tax: The transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VATregistered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments.

Fort Bonifacio Devt Corp v. CIR Doctrine: There is nothing in Section 105 of the old NIRC that indicate that prior payment of taxes is necessary for the availment of the transitional input tax credit. All that is required is for the taxpayer to file a beginning inventory with the BIR The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax credit is limited to the amount of VAT previously paid. When the aforesaid section speaks of "eight percent (8%) of the value of such inventory" followed by the clause "or the actual valueadded tax paid on such goods, materials and supplies," the implication is clear that under the first clause, "eight percent (8%) of the value of such inventory," the law does not contemplate the payment of any prior tax on such inventory. This is distinguished from the second clause, "the actual value-added tax paid on the goods, materials and supplies" where actual payment of VAT on the goods, materials and supplies is assumed. Had the intention of the law been to limit the amount to the actual VAT paid, there would have been no need to explicitly allow a claim based on 8% of the value of such inventory.

PROCEDURE RE: REFUND OF VAT Section 112 vs. 229 Purpose of refund

attributed to zero-rated or effectively zero-rated transaction Period for filing refund Reckoning period

The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was paid, whether or not it was actually paid, requires a transaction where a tax has been imposed by law, is utterly without basis in law. Lecture Note: The phrase “or actual vat paid” is considered a phrase imposing ceiling as to the amount that can be availed of. It is not a condition. Transitional Input VAT is not only limited to the improvement of real properties

Section 112 Refund of unutilized input vat

2 years Administrative Claim: from the close of the taxable quarter when the sales were made

purchase from which the input tax arose Period when CIR shall Act on the claim Period for filing a judicial claim for refund

120 days Within 30 days

Section 229 Refund of OIEP a) Overpayment b) Illegal payment c) Erroneous payment d) Penalties not provided by law 2 years Both Administrative and Judicial Claims: from date of payment regardless of any supervening event Note: Administrative claim for refund is required except if on the face of return it shows the overpayment None

Judicial claim may be simultaneously filed with the administrative claim.

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TAXATION LAW  from the date of receipt of CIR decision if made within 120-day period; or  from the expiration of the 120day period, if no decision is made within the 120-day period Must judicial claim be filed within 2 years?

No. 2-year period applies only to the administrative claim.

The only requirement is that it must be filed within 2 years from date of payment regardless of supervening event Yes.

However, there is a need to comply with the mandatory 120+30 days. Southern Philippines Power Corporation vs CIR The following criteria governs claims for refund or tax credit under Section 112(A) of the NIRC: (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)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with BSP rules and regulations; (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 input taxes shall be proportionately allocated on the basis of sales volume; and (9) The claim is filed within two years after the close of the taxable quarter when such sales were made. The law did not distinguish between an invoice and a receipt when used as evidence of a zero-rated transaction. Consequently, the CTA should have accepted either or both of these documents as evidence of SPP’s zero-rated transactions The principle of solution indebiti applies to the government The claim for tax credit or refund, arising out of zero-rated transactions, is essentially based on excess payment. In zero-rating a transaction, the purpose is not to benefit the person legally liable to pay the tax, like SPP, but to relieve exempt entities like NPC which supplies electricity to factories, offices, and homes, from having to shoulder the tax burden that ultimately would be passed to the public.

The principle of solutio indebiti should govern this case since the BIR received something that it was not entitled to. Thus, it has to return the same. The government should not use technicalities to hold on to money that does not belong to it. Only a preponderance of evidence is needed to grant a claim for tax refund based on excess payment. Lecture Notes: If a BPO transacted with a resident client, and the payment is through a foreign currency, the transaction is subject to 12% vat. If it also transacts with a nonresident client and the payment is through a foreign currency, this transaction is zero rated. Necessarily, BPO would make purchases for which it paid input vat. Input vat would not only be related to the zero rated services but would also relate to those transactions subject to 12% VAT (transactions with resident client). Under the requirements mentioned in the above case, the portion subject of refund under sec 112 is only the portion attributable to the zero percent transaction. Hence, those attributable to transactions subject to 12% vat would not be subject of refund. In short, in cases of mixed transaction, the refund must be proportionately distributed to those zero rate transaction over those which are not zero rated. CIR vs. Mirant Pagbilao Corporation Mirant Doctrine: on claims for refund under section 112, the reckoning date is the close of taxable quarter where the sale was made Effectivity of Mirant Doctrine: September 12 2008 Prior to this, what is applicable is the Atlas Doctrine: the two year period must be reckoned from date of payment. Not from close of taxable quarter Effectivity of Atlas Doctrine: June 8 2007 4/14/98: date of payment of Input Vat by MPC 1993-1996: Sales were made Latest progress billing was on Sept 6 1996 Recall: 4 taxable quarters March 31 June 30 September 30 December In this case, the last quarter was in September. Consider not the month where the transaction was entered into but the close of taxable quarter when the sale was made. The sale being mentioned here is the sales made not by the taxpayer but the sales made to the taxpayer. It pertains to input taxes, hence to the purchases made by the taxpayer. Sept 30 1996: last quarter Prescriptive period for administrative claim: 2 years!

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TAXATION LAW Sept 30 1998,: last day of filing 12/1/1999: claim was made. Hence filed out of time. Important note: Do not count from the date of payment of Input VAT. This is not a claim for erroneously paid input tax so the reckoning date is the close of taxable quarter where the sale was made. Another note: If claim for refund is filed during the effectivity of Atlas Doctrine, apply the date of payment as taxable period. CIR vs. Aichi Forging Company of Asia, Inc Aichi doctrine: 120+30 day period for filing a judicial claim is mandatory and jurisdictional Effectivity: October 6 2010 Aichi is engaged in processing of steel products. It has a pioneer status registered under BOI. It is also Vat-registered July 1,2002 up to Sept 30 2002: sales were made Sept 30 2004: Both admin and judicial claims were filed

When to file judicial claim? 30 days after the lapse of the 120-day period. The 120+30 day period is both mandatory and jurisdiction. Discussion by the Court The Court ruled that the administrative claim was timely filed while the judicial claim was premature. In this case, applying the Administrative Code which states that a year is composed of 12 calendar months instead of the Civil Code (a year is equivalent to 365 days), it is clear that Aichi timely filed its administrative claim within the two-year prescriptive period. On the other hand, the claim of Aichi must be denied for non-observance of the 120-day period Where the taxpayer did not wait for the decision of the CIR or the lapse of the 120-day period, it having simultaneously filed the administrative and the judicial claims, the filing of the said judicial claim with the CTA is premature. The non-observance of the 120-day period is fatal to the filing of a judicial claim. The claim of Aichi that such non-observance is not fatal as long as both the administrative and judicial claim is filed within the 2-year prescriptive period is without legal basis. The 2 year prescriptive period refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. Applying the two -year period to judicial claims would render nugatory Section 112(D) of the NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The 120 -day period is crucial in filing an appeal with the CTA.

Aichi now claims for refund for its unutilized input vat attributable to its effectively-zero rated transactions.

CIR vs. San Roque Power Corporation

Two possible scenarios in Section 112:

San Roque Doctrine: exception to the 120 mandatory period

1. CIR issues decision before the lapse of 120 day period Reckoning date of filing judicial claim: [30 days] from the decision of CIR

San Roque:  Vat-registered  BOI-registered  NAPOCOR bought electricity from San Roque  Claiming for refund of unutilized input tax

2. CIR did not decide within 120days Reckoning date of filing judicial claim: [30 days] from the lapse of 120 days. Sec 112 provides that the reckoning period of 2 years for filing a claim for refund is from close of taxable quarter when sale is made The input vat transactions here are until Sept 30 2002 Close of taxable quarter: Sept 30 2002 When to file the claim: Sept 30 2004 Sept 30 2004: claim for refund was filed; hence filed within the prescriptive period. But NOTE! There was a simultaneous filing of both administrative and judicial claim. Is it allowed? Under Section 112, it is not necessary that the judicial claim be filed within the 2 year period. This requirement is only applied in Section 229 for claim for refunds of erroneously paid tax. BUT SINCE it falls under sec 112, it is necessary that 120 day mandatory period be waited Otherwise, judicial claim will be dismissed on the ground of failure to exhaust administrative remedies for premature filing.

Admin claim: 3/28/2003 Judicial claim: 4/10/2003 For taxable period: 2001 Applicable provision: Section 112, where the reckoning period is from the close of taxable quarter when the sale was made Taxable quarters: March 31 June 30 Sept 30 December 31 2001 The sale was made in 2001. December 31 2001: last taxable quarter December 31 2003: last day of filing Administrative claim for refund March 28 2003: Administrative claim was filed. Hence, it was filed on time.

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TAXATION LAW However, the judicial claim was also filed on the same date. Remember that the judicial claim must comply within 120+ 30day waiting period. In this case, the filing of the judicial claim should have been filed in August 2003 (120 days+30days from March). But in this case, judicial claim was already filed on March 28 2003. The filing of judicial claim was premature. It must be denied on ground of failure to exhaust admin remedies by reason of premature filing. The CTA has no jurisdiction yet since there was no CIR decision yet to speak of. Note: The inaction of CIR will be treated as denial which is considered a decision. When the 120day lapsed without the CIR deciding on the claim, it is already proper to elevate the claim to the CTA. The CIR is deemed to have denied the claim. So still treated as a decision. Other note: Taxpayer here raised the atlas doctrine as a defense. The Supreme Court held that Atlas Doctrine is not applicable. The atlas doctrine does not discuss the 120+30 period but the reckoning date of the 2-yr period (from the date of payment) Atlas Doctrine effectivity: June 8 2007 up until the case of Mirant was promulgated Taganito Mining Corporation vs. CIR    

Mining corporation Exporter of nickel oars Vat registered BOI registered

San Roque doctrine: Any judicial claim filed during effectivity of Administrative Issuance (BIR DA 489-03) shall be entertained notwithstanding the non-compliance with the 120+30 day period Under BIR DA 489-03, there is no need for taxpayer to wait for 120 day period in filing of judicial claim. This is a general interpretative rule which can be availed of by taxpayers if they relied in the issuance in good faith. Effectivity date of issuance: December 10 2003 to October 5 2010 Note: On October 6 2010, the Aichi doctrine is already applicable. Philex Mining Corporation vs CIR  

Mining Corporation Claiming for Input VAT for sales made in 2005

March 31 2005: First Taxable Quarter March 20 2006: Administrative claim was filed October 17 2007: Judicial claim was filed 2005: Taxable year Consider the first quarter, March 31 2005 Last day of filing of administrative claim: March 31 2007 In this case, the claim was filed on march 20 2006; hence filed within the prescriptive period The judicial claim has to comply with the mandatory 120+30 day period. From March, the 120+30 days would fall on the month of August.

Taganito Mining Corporaition filed a claim for refund for excessive input vat for year 2005

In this case judicial claim was filed beyond August since it was filed On October 17 2007.

November 14 2005: Administrative claim November 29 2005: Amended administrative claim (the first administrative claim was erroneous) February 14 2007: Judicial claim 2005: taxable year

The 30 day period is mandatory such that the claim must not be filed beyond the said period. In this case there was a late filing of judicial claim for refund. Philex filed to elevate the claim of denial of CIR to CTA within the 30 day period [The inaction of CIR is deemed a denial]. The denial will become final and appealable. Since the right to appeal is a statutory privilege, it must be complied with by the taxpayer. Because Philex failed to comply, its claim for refund shall be denied.

December 31 2005: last quarter when the sale was made December 31 2007: last day for filing administrative claim In this case, claim was made on November 29 2006; hence it was filed on time. For the judicial claim, there must be compliance with the 120+30 day mandatory period. From November, the judicial claim must have been filed around March to April. In this case, the filing was made in February. It was filed within the 120 day period, which violates the mandatory waiting period of 120+30 days. Ordinarily, the judicial claim should not prosper for the failure to exhaust administrative remedies for premature filing. In this case, the judicial claim was not denied despite being in violation of the mandatory waiting period.

***Period to appeal is mandatory in remedial law. Three compelling reasons of the SC’s decision: 1. The 120 day period refers only to the administrative claim 2. The 30 day period would be meaningless if it falls within the 2yr prescriptive period 3. The 2-yr period does not refer to judicial claim for refund. Only the administrative claim is required to be filed within the 2-yr period.

Silicon Philippines v. CIR; 2011 Requisites of credit/refund of input VAT on zero-rated sales: 1. The taxpayer must be VAT-registered; 2. The taxpayer must be engaged in sales which are zero-rated or effectively zero-rated; 3. The claim must be filed within two years after the close of the taxable quarter when such sales were made; and

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TAXATION LAW 4. The creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax. Requisites of credit/refund of input VAT on capital goods: 1. The claimant must be a VAT registered person; 2. The input taxes claimed must have been paid on capital goods; 3. The input taxes must not have been applied against any output tax liability; and 4. The administrative claim for refund must have been filed within two (2) years after the close of the taxable quarter when the importation or purchase was made 2015 Decision SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF INPUT VAT

The lessons of this case may be summed up as follows: A. Two-Year Prescriptive Period 1. 2. 3.

It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi) The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when the relevant sales were made. (San Roque) The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008. Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized input VAT payments should be counted from the date of filing of the VAT return and payment of the tax. (San Roque)

2. 3. 4. 5.

       

January February April May July August October November

What shall be declared?  the gross receipts for such month 2.)

Quarterly Return

   

March 31: gross receipts from January to March June 30: gross receipts from April to June September 30: gross receipts from July to September December 31: gross receipts from October to December

Note: the gross receipts declared in the monthly return are also declared in the quarterly return. Is there double taxation?  No. Any payments made during the months covered by the Monthly Return can be credited to the liability at the end of the quarter. Quarterly return must be accompanied with summary list of sales and purchases

25 days after the close of the taxable quarter

B. 120+30 Day Period 1.

To be filed on those months not considered as end of the quarter month

The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR. As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. (Aichi and San Roque) As an exception to the general rule, premature filing is allowed only if filed between 10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque) Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-48903 was in force. (San Roque)

COMPLIANCE REQUIREMENTS 1.)

Monthly Return

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TAXATION LAW INTERNAL REVENUE TAX ADMINISTRATION, ENFORCEMENT & REMEDIES TAX ADMINISTRATION: GENERAL CONCEPTS Stages of taxation 1.

Levy  The enactment of tax laws or statutes

2.

Assessment  Computation of tax liability

3.

Collection  Payment of tax by the taxpayer

After collection, there could be administrative remedy  by way of protest, or  by claim for a refund. Two modes of collecting taxes 1.

Administrative remedy  BIR issues a warrant of distraint or levy

2.

Judicial remedy  Government needs to file a case in court.

GOVERNMENT AGENCIES INVOLVED IN TAX ADMINISTRATION 1. 2.

Department of Finance Bureau of Internal Revenue

EXTENT OF CONGRESS’ POWER RE TAX ADMINISTRATIOn Coverage of legislative power to tax 1. It involves coverage (subject), object (purpose), nature (kind), extent (amount or rate) and situs (place) [CONES] 2. It involves the power to grant tax exemptions or condonation 3. It involves administrative or judicial remedies for the proper implementation of the tax measure. ABAKADA Guro Party List v. Purisima, Aug. 14, 2008 Legislative veto A statutory provision requiring the President or an administrative agency to present the proposed implementing rules and regulations of a law to Congress which, by itself or through a committee formed by it, retains a "right" or "power" to approve or disapprove such regulations before they take effect.

It radically changes the design or structure of the Constitution’s diagram of power as it entrusts to Congress a direct role in enforcing, applying or implementing its own laws. Congress has two options when enacting legislation to define national policy within the broad horizons of its legislative competence. 1. It can itself formulate the details 2. It can assign to the executive branch the responsibility for making necessary managerial decisions in conformity with those standards. Completeness test: The law must be complete in all its essential terms and conditions when it leaves the hands of the legislature. Thus, what is left for the executive branch or the concerned administrative agency when it formulates rules and regulations implementing the law is to fill up details (supplementary rule-making) or ascertain facts necessary to bring the law into actual operation (contingent rule-making) There is no undue delegation of power of taxation The law is complete in itself and the implementation is given to administrative agencies based on the law.

British American Tobacco v. Camacho, Aug. 20, 2008 *This was based on the digest of Rodney* Paragraph (c) of Section 145 provides for FOUR TIERS of tax rates based on the net retail price per pack of cigarettes. To determine the applicable tax rates of the existing cigarette brands, a survey of the net retail prices per pack of cigarettes were conducted as of October 1,1996. Net Retail Price (NRP) shall mean the price at which the cigarette is sold on retail in 20 major in Metro Manila ( Cigarettes marketed nationally); For brands marketed only outside Metro Manila the NRP shall mean the price at which the cigarette is sold in 5 major supermarkets in the region. As such NEW BRANDS of cigarettes shall be taxed to their current NRP while EXISTING/OLD brands shall be taxed based on their NRP as of October 1, 1996. During such time the BIR had issued RR No. 1-97 to implement RA 8420, which classified EXISTING brands of cigarettes as those duly registered or active brands prior to January 1, 1997. NEW brands were those brands duly registered after January 1, 1997 and shall include duly registered, inactive brands not sold before January 1, 1997. In June 2001, Petitioner British American Tobacco introduced into the market Lucky Strike cigarettes with a suggested retail price of P 9.90 per pack. Pursuant to Sec 145 (c) the excise tax of Lucky Strike would be P 8.96/per pack. On February 2003 RR No. 9-2003 was issued providing among others, a periodic review every two years or earlier of the current NRP for the purpose of establishing and updating their tax classification thus: “For purpose of establishing or updating the tax classification of new brands and variants, their current NRP shall be reviewed periodically through a conduct of survey every 2 years unless ordered by the Commissioner. However notwithstanding any increase in the current NRP, the tax classification of new brands will be the same until changed or altered by an issuance of a Revenue Regulation.”

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TAXATION LAW March 2003, Revenue Memorandum Order No. 6-2003 was issued prescribing guidelines in establishing the current NRP of NEW brands of cigarettes and alcohol.

o o

Each region of the country has a Revenue Regional Director. The country is also divided into Internal Revenue districts headed by Revenue District Officers.

August 2003, RR No. 22-2003 was issued to implement the revised tax classification of certain new brands. Upon conduct of a survey the Lucky Strike cigarettes and variants are found to be sold at the current NRP of P22.54, P22.61 and P21.23. With such the Respondent Commissioner of BIR recommended applicable tax rate of PP 13.44/per pack because the average NRP of Lucky Strike was above P 10/pack. Whether or not RA 9334 of the classification freeze provision is unconstitutional for violating the equal protection and uniformity provisions of the Constitution NO. The freezing mechanism concerned merely underscores legislative intent already in place. The avowed objectives of the assailed law was “to simplify tax administration and compliance with the tax laws that are about to unfold in order to minimize losses arising from inefficiencies and tax avoidance scheme, if not outright tax evasion. Moreover upon perusal of the records of the Bicameral Conference Committee, the frozen classification was intended to give stability to the industry as the BIR would be prevented from tinkering with the classification since it would remain unchanged despite the increase in the NRP of previously classified brands. This would assure the industry players that there would be no new impositions as long as the law is unchanged. In Lutz v. Araneta: "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". Whether or not RR Nos. 1-97 as amended by RR No. 9-2003, RR No. 22-2003 and Rev Memo Order No 6-2003 are invalid. YES. They are invalid as they empower the BIR to reclassify or update the classification of new brands of cigarettes based on their current NRP every two years or earlier. It is clear that RR No. 197, amended by RR No. 9-2003, RR No. 22-2003 and Rev Memo Order No 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC because they authorize the CIR to update the tax reclassification of new brands every two years or earlier subject only to its issuance of the appropriate Revenue Regulation when nowhere in Section 145 is such authority granted to the Bureau. The power of the BIR under the special law was only to validate the suggested net retail price of the new brand against the net retail price. Such classification of new brands and brands introduced shall not be revised except by an act of Congress. NOTE: For final exam There may be a question on extent of power of congress. We may be asked whether to validate or invalidate an administrative issuance.

BUREAU OF INTERNAL REVENUE Composition and Functions (Section 3, NIRC) o o

The BIR is under the supervision and control of the Department of Finance (DOF). It is headed by the Commissioner of Internal Revenue and assisted by 4 Deputy Commissioners

Functions of Revenue Regional Director  Must be within the region and district offices under his jurisdiction 1. 2. 3. 4. 5. 6. 7. 8.

Implement laws, policies, plans, programs, rules and regulations of the department or agencies in the regional area; Administer and enforce internal revenue laws, and rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees. Issue Letters of authority for the examination of taxpayers within the region; Provide economical, efficient and effective service to the people in the area; Coordinate with regional offices or other departments, bureaus and agencies in the area; Coordinate with local government units in the area; Exercise control and supervision over the officers and employees within the region; and Perform such other functions as may be provided by law and as may be delegated by the Commissioner

Functions of Revenue District Officers 1. 2. 3. 4.

To ensure that all laws, and rules and regulations affecting national internal revenue are faithfully executed and complied with To aid in the prevention, detection and punishment of frauds of delinquencies in connection therewith. To examine the efficiency of all officers and employees of the BIR under his supervision, To report in writing to the Commissioner, through the Regional Director, any neglect of duty, incompetency, delinquency, or malfeasance in office of any internal revenue officer of which he may obtain knowledge, with a statement of all the facts and any evidence sustaining each case

Powers and Duties General Powers of BIR 1. The assessment and collection of all national internal revenue taxes, fees and charges  Does not include local taxes 2. The enforcement of all forfeitures, penalties and fines connected therewith 3. Including the execution of judgments in all cases decided in its favor by the CTA and the ordinary courts (must be final and executory) 4. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws Specific Duties 1. Duty to interpret tax laws and decide tax cases 2. Decide disputed assessment, refund, other matters being administered by BIR, penalties collected by the BIR (DROP) If the taxpayer did not protest the assessment within 30 days, the assessment will become final and appealable. There will be no more disputed assessment. Hence, CIR will just deny the motion for lack of

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TAXATION LAW jurisdiction. It can only acquire jurisdiction over disputed assessments. The CIR shall dismiss the case, unless the issue involves other matters.

1.

Interpretation of tax laws and deciding tax cases (Sec 4)

Legislative Rule Nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof Required: a) Publication (atleast 2 weeks before the hearing) b) Hearing

Interpretative Rule Designed to provide guidelines to the law which the administrative agency is in charge of enforcing.

It substantially adds to or increases the burden of those governed

It merely provides for the means that can facilitate or render least cumbersome the implementation of the law

Its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed.

BIR ISSUANCES AND RULES RELEVANT THERETO The Bureau has the power to issue rules and issuances as the case may be but subject to the following rule: SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases: (a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) Where the taxpayer acted in bad faith. SUMMARY: Any revocation modification or reversal of ruling or issuance of CIR shall have no retroactive effect if such revocation, modification or reversal is prejudicial to the taxpayer. CIR v. Burroughs Limited, June 19, 1986 The new revenue ruling cannot be retroactively applied What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect. The prejudice that would result to private respondent Burroughs Limited by a retroactive application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall under any of them.

CIR v. CA and Fortune, Aug. 29, 1996 Two kinds of administrative issuances 1. Legislative rule 2. Interpretative rule

PB COM vs. CIR; Jan. 28, 1999

The new circular may be retroactively applied; a taxpayer cannot acquire any vested right from a wrong construction of law When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. Important points:  Rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.  The State cannot be put in estoppel by the mistakes or errors of its officials or agents.  The nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute. What if the revocation of the previous ruling/circular is not made by the CIR but by the court?  In the case of CIR vs San Roque, the Court held that Section 246 does not make qualification as to who shall exercise revocation, modification or reversal. Whether it is the Court or the CIR who revoked a previous ruling, Section 246 would apply. The taxpayer can invoke 246 if he relied on the administrative issuance in good faith.

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The reliance of the taxpayer on the administrative issuance in good faith may be determined depending on the complexity of the issues involved.



If the previous circular/issuance was made based on a clear provision of the law, the taxpayer cannot claim good faith.

1.

Check if the revocation is prejudicial to the taxpayer If yes, apply Section 246: General Rule is non-retroactivity of ruling

2.

Look on the exceptions! Does the situation fall among these three?

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) Where the taxpayer acted in bad faith.  If the situation does not fall among any of these, apply the general rule. 3. Check if the issue involves a complicated issue of law such that the provision involved is also ambiguous in itself. If yes, good faith can be used as defense. Illustration: DA 489-03 provides that 120 waiting period is not mandatory. This was revoked by the Aichi doctrine May the revocation of administrative issuance under Aichi Doctrine be retroactively applied? Check if revocation is prejudicial: Yes. Look on the exception. Does it fall among these exceptions? : No. Check if the issue is complicated  Yes.

The taxpayer may rely on their good faith since the issues are complicated. Taxpayers who relied on DA 489-03 should not be prejudiced by the revocation.

o o

CIR v. Leal, Nov. 18, 2002

"SEC. 7. Jurisdiction. – The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided – (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other laws or part of law administered by the Bureau of Internal Revenue; xxx Here, as earlier mentioned, respondent Josefina Leal, being a pawnshop owner, is assailing the revenue orders imposing 5% lending investor’s tax on pawnshops issued by CIR Clearly then, she should have filed her petition with the Court of Tax Appeals, not the RTC. Indeed, the Court of Appeals erred in holding that the RTC order should have been challenged before this Court. *** Under RA 9282, only the CTA can enjoin the collection of taxes*** Questions on jurisdiction Where should a memorandum circular issued by CIR questioned as to its interpretation?  Secretary of Finance What if such memorandum circular was questioned first in CIR and the latter decided on it, where should the appeal be made?  CTA CASES THAT MAY BE ELEVATED TO THE CTA

General interpretative ruling Revenue regulation Issued by the Secretary of Finance upon recommendation of the CIR Subordinate legislation Binding upon the courts All taxpayers are covered

Administrative ruling Issued by the CIR or his subordinate except if it involves ruling of first expression Best guess of the commissioner Not binding, but entitled to great weight Applicable to taxpayer who requested for such ruling, except if in the nature of general interpretative ruling

Pursuant to the provisions of Republic Act No. 1125 and other laws prior to R.A. 9282, the Court of Tax Appeals retains exclusive appellate jurisdiction to review by appeal, the following: 1.

Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue;

2.

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 or other penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or part of law administered by the Bureau of Customs [Rep. Act. No. 1125, (1954), Sec. 7]

3.

In automatic review cases where such decisions of the Commission of Customs favorable to the taxpayer is elevated to the Secretary of Finance (Sec. 2315, TCC); and

Administrative ruling should only be applicable to taxpayer who requested for the ruling However, general interpretative rulings may be applied to all taxpayers when no particular taxpayer requested for such issuance

POWER TO DECIDE DROP CASES  Disputed Assessment,

Refund, Other matters being administered by BIR, Penalties collected by the BIR

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals [CTA for brevity]), as amended, such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:

Summary:

1. 2. 3.

  

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TAXATION LAW 4.

Decisions of the Secretary of Trade and Industry, in the case of non-agricultural product, commodity or article, or the Secretary of Agriculture, in the case of agricultural product, commodity or article, in connection with the imposition of the AntiDumping Duty, Countervailing and Safeguard Duty [Republic Act Nos. 8751 and 8752, (1999) Sec. 301 (a) and (p), and Republic Act 8800].

Under Republic Act Number 9282, the CTA's original appellate jurisdiction was expanded to include the following: 1. 2. 3. 4.

Criminal cases involving violations of the National Internal Revenue Code and the Tariff and Customs Code; Decisions of the Regional Trial Courts (RTC) in local tax cases; Decisions of the Central Board of Assessment Appeals (CBAA) in cases involving the assessment and taxation of real property; and Collection of internal revenue taxes and customs duties the assessment of which have already become final.

   

If taxpayer is listed under national office, LOA must be issued by the CIR If taxpayer is listed under regional office, LOA must be issued by the regional office.

If the LOA is served beyond 30 days, the taxpayer has the remedy to refuse the examination of accounts If taxpayer is listed under regional office but LOA was issued by national office, the taxpayer’s remedy is to refuse examination of his book

LOA is different from subpoena duces tecum  

Failure to comply with LOA will not result to a criminal liability to the taxpayer. Failure to comply with subpoena duces tecum would result to criminal liability

Other Notes: General Rule: The taxpayer’s books may only be inspected/examined once. Exceptions: 1. 2.

2. 

Examination of Books of Accounts

CIR has power to:

1. 2. 3. 4. 5.

Irregularity/fraud/bad faith Taxpayer requested for reinvestigation

Examination of book of accounts Third party verification rule Inquiry into bank deposits Summon of persons Taking testimony of persons

CIR v. Sony Philippines, Nov. 17, 2010

Letter of Authority: Authorizes revenue officer to scrutinize the taxpayer's or his customer's books of accounts and perform assessment function.

Letter of Authority (LOA), defined  The authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax.  The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer:  The Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any 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

Who must issue the letter of authority?  The CIR

The audit conducted in 1997 was validly made, but the assessment from January to March 1998 was nullified.

Guidelines:

General Rule: A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing LOAs covering audit of "unverified prior years is hereby prohibited.

Can the CIR obtain information from individuals not subject of an audit?  Yes. Revenue officers can access auditing books of accounts if BIR issued a letter of authority and had service of this letter to the taxpayer A.

Issuance of Letter of Authority

  

Under administrative issuances, the regional director and deputy commissioner are deputized to issue LOA. If issued by CIR, the Regional Director or Deputy Commissioner, such letter of authority must be served within 30 days from the date of the issuance Taxpayer must also verify which office issued the LOA

Exception: If the audit of a taxpayer shall include more than one taxable period, the other periods or years shall be specifically indicated in the LOA

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TAXATION LAW In this case, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR acting through its revenue officers went beyond the scope of their authority because the deficiency VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal year which ended in March 31, 1998.

2.

3.

The CIR knew which period should be covered by the investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should have done so by including it in the LOA or issuing another LOA. B.

Third Party Verification Rule



Cross-reference to other parties transacting with the taxpayer; or to the books of accounts of these parties; or to the government or government agencies.

To obtain books, accounts, records, among others, on a regular basis from: 1. Any person other than the person whose internal revenue tax liability is subject to audit or investigation, or 2. From any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government owned or controlled corporations.

Note: Read RA 10021 D.

Cross reference may be had to other parties transacting with the taxpayer. It would include the examination of the books of the individuals transacting with the taxpayer.

Illustration: A provides sound equipment to SM. A was assessed for deficiency taxes. CIR looks at the accounts of SM and make such as basis of the tax liability of A. It equated the rent expense of SM (1M) as rent income of A (1M) What may be the defense of A? The assessment of BIR is based on disputable presumption and is considered a naked assessment. Expenses are recognized through accrual basis: expense is incurred or recognized regardless of payment. Income is recognized through cash basis: income is recognized upon receipt of payment. Hence, since only a portion is paid by SM, only this portion will be considered as an income. In sum, expenses and income are recognized differently. Thus the BIR’s assessment was based on a disputable presumption that the expense of SM is an income of A. It is a naked assessment which is tantamount to a void assessment. C.

1.

2.

Exceptions The Commissioner is authorized to inquire into the bank deposits of: 1. A decedent to determine his gross estate; and

subpoena duces tecum requiring taxpayer to submit documents or appear before the CIR

To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry

read on process of assessment

Fitness by Design v. CIR, Oct. 17, 2008 Can BIR access documents of the taxpayer through a former employee even without the consent of such employee? 

YES. BIR is allowed to access relevant or material records even if the consent of taxpayer is not obtained.

Petitioner’s lack of consent does not imply that the BIR obtained them illegally or that the information received is false or malicious. Nor does the lack of consent preclude the BIR from assessing deficiency taxes on petitioner based on the documents. The law thus allows the BIR access to all relevant or material records and data in the person of the taxpayer, and the BIR can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. To require the consent of the taxpayer would defeat the intent of the law to help the BIR assess and collect the correct amount of taxes. Does the taxpayer have right to cross examine informant?  

Inquiry of Bank Deposits

General rule: BIR cannot look into bank accounts of taxpayer (RA 1405)

Summon Persons and Take Testimony

CIR has the power to:

Requirement: The third party must have transacted with the taxpayer.  

Any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability  Such application must be accompanied by a written waiver of the taxpayer's privilege under RA1405 or other special laws. As provided under RA 10021: where there is a requesting foreign tax authority  However, the requesting foreign tax authority must comply with the conditions set forth under this law.  Also, there must be a treaty between the state of the requesting tax authority and the republic of the Philippines



NO. Petitioner’s invocation of the rights of an accused in a criminal prosecution to cross examine the witness against him and to have compulsory process issued to secure the attendance of witnesses and the production of other evidence in his behalf does not lie. This is not a criminal case, hence such right may not be invoked.

Can the BIR use affidavit of informant as an evidence in the assessment? Yes. While this affidavit would be considered hearsay evidence, such could be admitted in tax cases provided that the information are properly verified through documents NOTE: In making assessment what is material is the determination of factual basis

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TAXATION LAW 3.

Power to Assess and Prescribe Tax Requirement

A.

Examination of Returns



Made after the filing of the return



If the taxpayer did not file a return, the CIR has the power to prepare a return for the taxpayer, but this must be based on a factual basis.



Amendment of Returns

If a return has already been filed, can it be withdrawn?  No. Tax Code is explicit that any statement or declaration filed by the taxpayer may no longer be withdrawn but may be amended or modified. Requirement: Amendment or modification must be done within 3 yrs from date of filing  Except when there is notice of audit or investigation served upon the taxpayer, in which case there can be no amendment When there is notice of audit or notice of investigation served upon the taxpayer, the return can no longer be amended. Remedy: wait for the assessment, then protest. Questions: Input VAT was not reflected in 2013, the year when the same was incurred. May it be reflected in 2014?  NO. What must be done is to amend the 2013 return instead since amendment can still be done within the 3-year period. In 2011 return, taxpayer declared rent expense even without withholding 5% tax. CIR then assessed tax deficiency, interest and surcharge. May taxpayer just amend his 2011 return to remove the rent expense?  NO. Amendment can no longer be allowed when there was already a notice of audit or investigation served upon the taxpayer. 

Confidentiality of Returns

General Rule: YES 

Section 71: After assessment, the returns shall be filed to the office of commissioner, shall constitute public records and shall be open to inspection only upon order of the president.



Section 270: An officer or employee of BIR is prohibited to divulge information regarding the business, income, and the estate of the taxpayer which was acquired by him in the discharge of his duties. will be criminally liable  If not acquired by reason of duties, this would not apply. trade secrets, business, income, estate,

Exception 1. 2.

Upon order of the President, in which case the returns may be open for public inspection When there is a requesting foreign tax authority (RA 10021)

Summary of RA 10021 (Exchange of Information on Tax Matters Act of 2009) A foreign tax authority may order inspection of income tax returns of taxpayers in the Philippines Income tax returns of specific taxpayers subject of a request for exchange of information by a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of, shall be open to inspection upon the order of the President if the Philippines under rules and regulations as may be prescribed by the Secretary of Finance, upon recommendation of the Commissioner (Sec. 4) Authority of the commissioner of internal revenue to supply information to a foreign tax authority which is at his disposal Any officer or employee of the Bureau of Internal Revenue who divulges or makes known in any other manner to any person other than the requesting foreign tax authority information obtained from banks and financial institutions pursuant to Section 6(F), knowledge or information acquired by him in the discharge of his official duties, shall, upon conviction, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both (Sec. 5) BIR can use information for audit, assessment, enforcement and verification purposes PROVIDED the requesting authority must provide necessary information to determine the foreseeable relevance of the information requested. Willful refusal to supply information If a bank manager or officer of a bank/financial institution refuses to provide information being requested by foreign authority, he shall be liable to a fine or imprisonment.

BIR v. Ombudsman, April 11, 2002 Tax returns do not reflect any trade secret The records do not show how the production of the subpoenaed documents would necessarily contravene the Tax Code on unlawful divulgence of trade secrets. The documents sought to be produced were only the case dockets of the tax refunds granted to Limtuaco and La Tondeña which are public records, and the subpoena duces tecum were directed to the public officials who have the official custody of the said records. We find no valid reason why the trade secrets of Limtuaco and La Tondeña would be unnecessarily disclosed if such official records, subject of the subpoena duces tecum, were to be produced by the petitioner BIR to respondent Office of the Ombudsman. Rule: When the returns are already part of the dockets then they are not covered anymore by the rule on confidentiality of tax returns

B.

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TAXATION LAW CIR shall make a return for the taxpayer: 1. When no return has been filed by the taxpayer at the time prescribed by law; 2. When there is a reason to believe that the return is false, incomplete or erroneous  

However, in the preparation of the return, and in the assessment of the tax, such assessment must be based on the best evidence obtainable. Also, assessment must be based on a factual data. return filed by CIR presumed to be correct

Best evidence obtainable rule  Evidence may be obtained by the CIR in performing its assessment function by exercising the functions under the NIRC particularly: 1. The examination of book 2. Third party verification best evidence obtainable which has been secured through the exercise of the CIR’s authority under the NIRC 3. Summon taxpayers 4. Take testimony  Any factual data derived from the exercise of these functions considered sufficient factual basis for assessment.

CIR are not mandated to compute taxes exactly as long as the said assessment is not arbitrary and capricious. The computations of the EIIB and the BIR on the quantity and costs of the importations of the respondent in the amount of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary and capricious. Lecture: Facts from an informer who received the same from another informer is hearsay but admissible as evidence. However, in this case, the affidavit of the informant was not properly verified and substantiated by other evidence. It is supported by mere photocopies. What was received by the informer from the other informer is a machine copy of the subject document which violates the best evidence rule under the Rules of Court hence not admissible. ***Best evidence obtainable does not include mere photocopies of records Best Evidence (Rules of Court) and Best Evidence Obtainable, construed together CIR, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof.

CIR v. Hantex Trading, March 31, 2005 The Commissioner offered in evidence as proof of the contents of the 1987 Consumption Entries, the photocopies of the Consumption Entries which the respondent objected to for being inadmissible in evidence. She also failed to present any witness to prove the correct amount of tax due from it. BEST EVIDENCE The "best evidence" includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. Hearsay evidence is allowed as best evidence obtainable Best evidence obtainable may consist of hearsay evidence, such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts. The reason for this is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or disregard such evidence, depending on its trustworthiness. BIR assessment are prima facie correct Exception: The prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment," i.e., without any foundation character, the determination of the tax due is without rational basis.

Reason: Such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. CIR v. Embroidery and Garment Industries, March 22, 1999 The assessments were of doubtful validity as they were based on the incompetent evidence consisting of an informant's report and the sworn statement of the disgruntled former general manager of respondent corporation. The assessments must be based on actual facts and proved by competent evidence, not imposed based on unverified information supplied by an informant, or disputed presumptions. Unverified Information It means information from an informer which are not supported or corroborated by other evidence. Class Notes:  An affidavit cannot stand on its own. It must be corroborated by other evidence.  Assessment must be based on actual facts and proved by competent evidence not imposed based on unverified information supplied by an informant.  Assessment must not be based on disputed presumption. Otherwise, will be a naked assessment: assessment without any factual basis  A naked assessment is a void assessment. It cannot bear any fruit and cannot be used as basis of collection by government.

C.

Power to Conduct Inventory Taking, Surveillance, and to Issue Presumptive Gross Sales/Receipts (Sec 6c)

Inventory taking and surveillance When: Any time during the taxable year

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TAXATION LAW Ground: if there is reason to believe that the taxpayer is not declaring his correct income, sales or receipts for internal revenue purposes CIR v. Aquafresh Seafoods, Inc., Oct. 20, 2010

Issuance of presumptive gross sales/receipts Grounds: 1. A person has failed to issue receipts and invoices 2. When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed D.

Power to Terminate Taxable Period

No consultation was made with public and private sectors Although the CIR has the authority to prescribe real property values and divide the Philippines into zones, the law is clear that the same should be done upon consultation with competent appraisers both from the public and private sectors. CIR, thus, cannot unilaterally change the zonal valuation of such properties to "commercial" without first conducting a re-evaluation of the zonal values as mandated under Section 6(E) of the NIRC.

Review: Kinds of Taxable Period  Calendar period: January to December  Fiscal year: Covers months not starting from January to December

The predominant use and not the actual use is the basis for zonal valuation purposes The predominant use of other classification of properties located in a street/barangay zone, regardless of actual use shall be considered for purposes of zonal valuation.

Can individual taxpayer adopt fiscal year?  No. Only calendar year can be used

Note: This applies only to zonal valuation for purposes of CGT, estate tax and other internal revenue purposes

Under tax refunds, tax liability can only be determined at the end of the taxable year. The payments made by taxpayer on quarterly are merely provisional and are not considered final determination by the CIR.

Lecture: If local taxes: actual use, not predominant use, is considered For purposes of local taxes like REAL PROPERTY TAX, the actual use is material

Can CIR assess tax liability of taxpayer in the middle of the taxable year even if the taxable period has not yet lapsed?

Recall: Article VI, Section 28 of the Constitution on exemption of educational institutions from real property tax (ownership is not material but the actual use of the land, buildings and improvements)

Example: BIR assessed Rodney’s canteen in June without waiting for the end of the taxable period (in December).

If A owns a lot in a residential area used for commercial purposes, how do you classify the lot for zonal valuation purposes?  Residential property  What matters if the predominant use: The classification of other properties in the same zone regardless of actual use

Was the BIR act valid?  No. It is considered termination of taxable period.  The taxable period here starts in January and ends in December. Hence assessment may only be made after December. However, the CIR can terminate the taxable period and immediately assess in the following instances: (HIRRO) 1. 2. 3. 4. 5.

Taxpayers hides or conceals his property Taxpayer intends to leave the country to evade the payment of tax Removal of properties in the Philippines Retirement from business subject to tax Taxpayer obstructs proceedings for collection publication posting in city/municipal hall E. Fixing real property values posting in two other conspicuous places Includes authority to: 1. Divide the Philippines into different zones or areas; and 2. Determine the fair market value of real properties located in each zone or area (Zonal Value)  Upon consultation with competent appraisers both from the private and public sectors Sec 60: Market Value  Higher amount between value prescribed by CIR (zonal value) or the amount prescribed by the provincial assessor (assessed value)

But for real property taxation, the lot is classified as a commercial property, since what matters here is the actual use.

F.

Authority to Accredit Tax Agents

*This was not discussed in class, I just copied this from another notes hihi* RR 11-2006 [June 15, 2006] defines a tax practitioner/agent as those who are: 1. Engaged in the regular preparation, certification, audit and filing of tax returns, information returns or other statements or reports 2. Engaged in the regular preparation of requests for ruling, petitions for reinvestigation, protests, requests for refund or tax credit certificates, compromise settlement and/or abatement of tax liabilities and other official papers and correspondence 3. Regularly appear in meetings, conferences, and hearings before any office of the BIR officially on behalf of a taxpayer or client in all matters relating to a client's rights, privileges, or liabilities 

Tax practitioners and agents are required to apply for accreditation.

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TAXATION LAW 

RR 11-2006 [June 15, 2006], as amended by RR 4-2010 [February 24, 2010] and RR 142010 [November 25, 2010] provide for the guidelines on accreditation of tax practitioners/agents as a pre-requisite for their practice and representation before the BIR

G.

Power To Prescribe Procedural/Documentary Requirements

1.

E-filing  CIR determines the coverage of e-filing If CIR expands the coverage of e-filing, is this allowed? Yes. It is within the scope of CIR’s power

2.  

Substituted filing Started in 2002 Employer files Alpha list instead of employee filing an individual ITR.  Employee is not required to file a separate ITR  Original copy of ITR goes to employee; duplicate copy to employer which he will not submit to BIR so long as he has already filed the Alpha list.

H.

Power to Delegate

General Rule: CIR can delegate functions provided under the NIRC Exceptions RICA 1. Recommend promulgation of revenue regulation  Power to recommend RRs: CIR  Power to promulgate RRs: Secretary of Finance 2. 

Issuance of ruling of first impression or the revocation of BIR ruling Ruling of first impression: ruling that involves a novel issue.

3.

Compromise or Abate

Compromise and Abatement, difference Nature Grounds

Requirements: a. The income acquired by employee is purely compensation b. The employee has only one employer during the taxable year c. Amount of taxes has been correctly withheld by the employer.

Compromise Reduction of taxpayer's liability A. Reasonable doubt as to validity of the claim no legal or factual basis

B. Financial position demonstrates inability to pay

Employer files BIR form 1604-CF, which is considered tax return of employee. This contains the list of employees who received compensation from the employer. Employer issues to employee BIR Form 2316 which contains declaration of all income received by taxpayer during the taxable year. 3.

Prescribed minimum rate

Net Worth Method

This is used in tax fraud cases only when there is insufficient record to support the computation of tax liability.

Net Worth  Difference between assets and liabilities.  Taxable income will be computed by computing the value of the beginning net worth (assets-liabilities) and ending net worth with consideration of non-taxable receipts and nondeductible expense Assets: 1M Liability: 0 Net worth: 1M

Compromise Approval of National Evaluation Board is necessary if: 1. Settlement offered is lower than the 40% or 10% limit as the case may be 2. Basic tax due is more than 1M Note: if you want to compromise, you should have filed a protest first. If there was no protest within 30 days from assessment, the amount of tax due becomes final and unappealable. 

1) taxpayer has no books 2) books and records are not available 3) books and records are inadequate 4) taxpayer withholds the books and records subject to investigation

there is legal or factual basis

B. The administrative and collection cost does not justify the collection of the amount of tax due. No limit

If ground is financial inabilityAmount is 10% of the basic tax due

General Theory: The taxpayer’s money and other assets in excess of the liabilities after accurate and proper adjustment of non-deductible and non-taxable items not accounted for in his tax return is deemed to be unreported income. The unexplained increase in net worth of the taxpayer is presumed to be derived from taxable sources 

If ground is reasonable doubt as to validity of claim, taxpayer must pay atleast 40% of the basic tax due

Abatement Cancellation of the entire tax liability of a taxpayer A. Tax or any portion thereof appears to be unjustly or excessively assessed.

 

The act of compromising can only be done by the CIR.  If the compromise was signed by the Regional Directors, it is not a valid compromise. Compromise agreements can only be entered into by CIR and taxpayer, As to abatement, only the CIR can perform the power

Can criminal violations be compromised?

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TAXATION LAW General Rule: Yes. Exceptions: A. Those already filed in court. B. Those involving fraud

RR 30-2002 as amended by RR 8-2004 Cases that can be compromised:

Illustration: Criminal violation was filed against taxpayer for noncompliance with the subpoena duces tecum. Affidavit complaint was filed before prosecutor. Prosecutor called for a clarificatory hearing. Taxpayer submitted all requirements. In the hearing, the legal department of BIR agreed to drop the case if the taxpayer will pay the tax liability amounting to 1M. Compromise agreement was signed by regional director and the legal department. If the criminal case was dropped, is it valid? First question: is it a crime which can be compromised? It has not been filed before the court since it is still before the prosecutor. It also does not involve fraud case. 

Hence, it can be compromised.

Second question: is the compromise valid?  

2.

3. 4. 5.  

Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office; Civil tax cases being disputed before the courts; Collection cases filed in courts; Criminal violations, Except: those already filed in court or those involving criminal tax fraud.

The following instances could not be compromised:

No. It was not entered into by the CIR. Power to compromise and abate is a non-delegable function.

Can civil cases be compromised?

1. 2. 3.

General Rule: Yes Exception:  Cases involving withholding taxes  Except if there is doubtful validity as to duty of withholding agent to withhold the tax (in which case compromise may be made) 4.

1. Delinquent accounts; Delinquent accounts: amounts of taxes due to the taxpayer which have not been paid on its due date. Deficient accounts: same as delinquent only that the taxpayer paid the tax, but the payment is insufficient.  Both concepts are under delinquent accounts,

in

Power to assign and reassign revenue officers and establishments subject to excise tax

The CIR may assign for a period not more than 2 years. NOTE: Read RR 30-2002 as amended by RR 8-2004 on the list of cases that can be compromised!

4.

5. 6.

Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold; confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative; Criminal violations already filed in court; Delinquent accounts with duly approved schedule of installment payments;  Reason: Because the same was already subjected to installment payment and that alone is already deemed as compromise. Cases where final reports of re-investigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis; Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.

Republic vs. Hizon, 13 December 1999 The act of filing of a collection case in court and signing of the complaint is a delegable act Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection.

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TAXATION LAW As the complaint filed in this case was signed by the BIR's Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law

40% - 120m 10%- 30m

Hence, CIR can delegate the act to the legal officer.

But here the settled amount was 10M.

tax pyramiding-> tax subject to another tax

Was there really a compromise? How?   

Through a revenue administrative order Delegation must be covered by a revenue issuance. It is not automatic. If no revenue administrative officer, the act of the legal officer is unauthorized because there is no express delegation.

*************************** So in answering questions in the exam or quiz, consider the following:

It is not a compromise but an abatement of tax. An erroneous tax cannot be a subject of a compromise. The tax here was overly assessed. It is rather a proper subject of abatement There can be a diminution in the amount of tax imposed without limitations. Note that the grounds of compromise and abatement are different. The ground involved here is that of abatement (Ground number 1: When tax or any portion thereof appears to be unjustly or excessively assessed)

1. Does this involve a delegable function? 2. Was there a delegation by the BIR through the revenue issuance or order?

RULE ON ESTOPPEL IN RE: TAX ADMINISTRATION PNOC v. CA, April 16, 2005 Delinquent account  The amount of tax due from a taxpayer who failed to pay the same within the time prescribed for its payment arising from: 1. 2.



It does not apply against government. Government cannot be estopped for the mistakes of its employee Except: for the interest of justice and fair play



It applies against the taxpayer Except: when it pertains to procedural requirements and issuance of assessment.

A self-assessed tax, whether or not a tax return was filed, or A deficiency assessment issued by the BIR which has become final and executory.

ASSESSMENTS AND ITS GOVERNING PRINCIPLES

Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such return was due, and in availing of the compromise, a tax return shall be filed as a basis for computing the amount of compromise to be paid Disputed assessment refers to a tax assessment disputed or protested under any of the following categories: 1) 2)

if the same is administratively protested within thirty (30) days from the date the taxpayer received the assessment, or if the decision of the BIR on the taxpayers administrative protest is appealed by the taxpayer before an appropriate court.

PNOCs tax liability could not be considered a delinquent account since (1) it was not self-assessed, because the BIR conducted an investigation and assessment of PNOC and PNB after obtaining information regarding the non-withholding of tax from private respondent Savellano; and (2) the demand letter, issued against it on 08 August 1986, could not have been a deficiency assessment that became final and executory by 31 December 1985.

People vs. Tan; 16 August 2005 Assessment is in the amount of 340M but was reduced to 302M. SMC and CIR compromised to reduce the same to 10m If we will comply with the limit of compromise in the law, the amount settled must be either:

Assessment defined 

Official action by an administrative or revenue office in determining the amount of tax due from the taxpayer. read Nikon case

What constitutes assessment? CIR v. Gonzales, October 13, 2010 A notice of assessment, defined A declaration of deficiency taxes issued to a taxpayer who fails to respond to a PreAssessment Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course. Contents of a Formal Letter of Demand (the same as a notice of assessment) The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state 1. the fact, 2. the law, 3. rules and regulations or

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TAXATION LAW 4. jurisprudence on which the assessment is based,  otherwise the formal letter of demand and the notice of assessment shall be void Control number is a not a requirement for validity of a notice of assessment As it is, the formality of a control number in the assessment notice is not a requirement for its validity but rather the contents thereof which should inform the taxpayer of the declaration of deficiency tax against said taxpayer. Both the formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under Section 228 of the NIRC. The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCEC’s tax deficiencies but also details of the specified discrepancies, explaining the legal and factual bases of the assessment. It also reiterated that in the absence of accounting records and other documents necessary forthe proper determination of the company’s internal revenue tax liabilities, the investigating revenue officers resorted to the "Best Evidence Obtainable" as provided in Section 6(B) of the NIRC (third party information) and in accordance with the procedure laid down in RMC No. 23-2000 dated November 27, 2000 Lecture Notes: o Preliminary assessment notice is not the same as notice of assessment o Notice of assessment will follow after the issuance of preliminary assessment notice. BIR first issues preliminary assessment notice. After which, a notice of assessment will be issued. o A formal letter of demand must state a demand for payment and must state the facts, the law the rules and regulations or jurisprudence on which the assessment is based.  Effect if this is not complied with: assessment is considered void  Void assessment bears no fruit. It cannot be used as a basis in collecting the tax.

CIR vs. Enron Subic Power Corporation; 19 January 2009 A preliminary letter and audit working paper furnished prior to issuance of the assessment are not valid substitutes for the mandatory notice in writing Formal assessment indicates tax, charge, interest, compromise penalties but did not provide for the specific provisions of the tax code or rules or regulations not complied with by Enron. In other words, it did not contain the legal bases from which the assessment was made. Defense of CIR: the employee of Enron had been properly apprised of the provisions of Tax Code not complied with by Enron since a preliminary letter and audit working paper were furnished to Enron prior to issuance of the assessment SC: These are not valid substitutes for the mandatory notice in writing. The legal and factual bases must be stated in writing in the formal letter of demand. Otherwise, it is void. In this case, no legal basis was stated in the formal letter of demand. The issuance of the preliminary letter and audit working paper were mere perfunctory discharges of the CIR’s duties in correctly assessing a taxpayer. The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the requirement of what such notice must

contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was made. CIR vs. BPI; 17 April 2007 The taxpayer was fully apprised of factual and legal basis prior to the assessment notice. Notwithstanding the fact that assessment notice did not contain these bases, assessment is valid. BPI given the opportunity to discuss with the CIR when the latter issued the former a PreAssessment Notice (which BPI ignored). The examiners themselves went to BPI and "we talk to them and we try to thresh out the issues, present evidences as to what they need." Now, how can BPI and/or its counsel honestly tell this Court that they did not know anything about the assessments? The two cases construed together Assessment notices issued to Enron were served during the effectivity of RA 8424 Assessment notice issued to BPI were issued in1988 which is prior to effectivity of RA 8424 RA 8424: The legal and factual bases must be stated in writing in the formal letter of demand Prior to 8424: it is sufficient that taxpayer is apprised of the CIR's factual and legal finding.

CIR v. Pascor Realty, June 29, 1999 Not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Xxx The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon. When an assessment is deemed made An assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. In the present case, the revenue officers Affidavit merely contained a computation of respondents tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers.

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TAXATION LAW That the BIR examiners Joint Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof. The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment Lecture Notes: 1. Assessment must be addressed to the taxpayer 2. Taxpayer must be certain that it is an assessment notice 3. Assessment must be sent to the taxpayer CIR v. Reyes, January 27, 2006

adduce supporting evidence. In the instant case, respondent has not been informed of the basis of the estate tax liability. Without complying with the unequivocal mandate of first informing the taxpayer of the government’s claim, there can be no deprivation of property, because no effective protest can be made. The haphazard shot at slapping an assessment, supposedly based on estate taxation’s general provisions that are expected to be known by the taxpayer, is utter chicanery. Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of basis for – not to mention the insufficiency of – the gross figures and details of the itemized deductions indicated in the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and collection “should be made in accordance with law as any arbitrariness will negate the very reason for government itself. Other notes:  CIR can use estimates in making assessments— but it must not be arrived at arbitrarily. It must be based on best evidence obtainable gathered by Revenue Officer Samar-I Electric Cooperative v. CIR, December 10, 2014 The assessments issued to the petitioner are valid

"The taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise, the assessment shall be void."

Both Section 228 of the NIRC of 1997 and Section 3.1.4 of RR No. 12-99 clearly require the written details on the nature, factual and legal bases of the subject deficiency tax assessment. I

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act of 1997.

In this case, we agree with the respondent that petitioner was sufficiently apprised of the nature, factual and legal bases, as well as how the deficiency taxes being assessed against it were computed.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR’s findings was changed in 1998 to “informing” the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid. It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law. To be simply informed in writing of the investigation being conducted and of the recommendation for the assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of correctly assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the law and the facts on which the assessment was based. It does not at all conform to the compulsory requirement under Section 228. Moreover, the Letter of Authority received by respondent on March 14, 1997 was for the sheer purpose of investigation and was not even the requisite notice under the law. A void assessment bears no valid fruit. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayers should be able to present their case and

Records reveal that on October 19, 2001, prior to the conduct of an informal conference, petitioner was already informed of the results and findings of the investigations made by the respondent, and was duly furnished with a copy of the summary of the report submitted by the Revenue Officer. Said summary report contained an explanation of Findings of Investigation stating the legal and factual bases for the deficiency assessment. In a letter dated February 27, 2002 petitioner requested for copies of working papers indicating how the deficiency withholding taxes were computed. Although the FAN and demand letter issued to petitioner were not accompanied by a written explanation of the legal and factual bases of the deficiency taxes assessed against the petitioner, the records showed that respondent in its letter dated April 10, 2003 responded to petitioner’s October 14, 2002 letter-protest, explaining at length the factual and legal bases of the deficiency tax assessments and denying the protest.

Kinds of Assessment 1. 

Self-assessment The taxpayer himself computed his tax liability

2. 

Deficiency assessment The examiner determines that:

the tax is assessed after audit

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TAXATION LAW a. b. c.

The amount of tax due exceeds the amount indicated in the return. When no amount is shown in the return No return has been filed by the taxpayer.



Includes both deficient accounts and delinquent accounts

3. 

Illegal or void assessment Examiner has no power to act on assessment

4. 

Erroneous assessment Examiner has power to assess but errs in the exercise of such power

5.   

Jeopardy assessment Assessment issued without a complete or partial audit Likewise defined under RR 30-2002 If a jeopardy assessment is issued, there is a presumption that there exists a doubt in the validity of the assessment

assessment has no factual or legal basis

SECTION 203, NIRC Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day NOTES: o 

Is there a possibility of a proceeding in court for collection of tax without any assessment? Yes, if such proceeding was initiated within the prescriptive period

Principles under assessment, summary 1. 2. 3. 4. 5. 6.

Assessment must be issued to the taxpayer Assessment must be based on actual facts Assessment should not be based on presumptions Authority to assess may be delegated Assessments are prima facie correct Assessment is a discretionary function of the commissioner

Statute of Limitations on Assessment of Internal Revenue Taxes Under Section 203: Government has a period of three years to assess the tax from the date of filing of the return. If the return is filed before the last day prescribed by law for the filing of the return, it will be deemed as if filed during the last day prescribed by law. Does Section 203 speak of collection without an assessment?  Yes, if such collection was done before the expiration of three years from date of filing Notes for exam/quiz: For taxable year 2014, when shall taxpayer file his ITR?  April 15 2015 In the exam, if there was no mention of when the return was filed, presume that it was filed at the last day. So from April 15 2015, CIR has until April 15 2018 to assess. If ITR was filed in April 30 2015, the CIR has until April 30 2018 to assess. If ITR was filed in April 1 2015, it is considered that the filing was done in April 15. If the return is filed before the last day prescribed by law for the filing of the return, it will be deemed as if filed during the last day prescribed by law.

SECTION 222, NIRC Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a preceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, 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 five (5) -year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon (e) Provided, however, That nothing in the immediately preceding and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. SUMMARY Assessment

Collection

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TAXATION LAW Tax assessed Regular Period (Section 203) No tax assessed False/fraudulent Tax assessed return or Failure to file No tax assessed (Section 222) Tax assessed pursuant to waiver

3 years from last day prescribed for filing of return (Proceeding in court without assessment) 10 years

3 years from assessment

3 years from filing of return 5 years from from discovery of falsity assessment (proceeding in court) 10 years from discovery of the fraud Agreed period Agreed period

Date of assessment:  Date when the assessment has been released, mailed or sent to the taxpayer.  Not the date when the taxpayer received the assessment What if the records did not indicate the issue date or release or mail? In the case of CIR v BPI: consider the Date when the taxpayer has received the assessment, only when the records do not show the date of issue, release or mail of the records. If the government discovered fraudulent return, until when the government collect?  5 years from date of assessment Possibility of extension In Section 222: there may be an agreement between the CIR and the taxpayer with respect to the extension for the government to assess and collect the tax.  Waiver of the statute of limitations Until when can the government collect the tax?  5 years from date of assessment 

Except if there is an exemption as to the date of collection of tax

Is a second waiver of statute of limitation allowed?  Yes, provided that the waiver was made before the expiration of the three year period or before the expiration of the extended period RMO 20-90: Requisites for proper execution of waiver NOTE: This has already been superseded by RMO 14-2016. However RMO 20-90 shall still be discussed since there might be a problem where the taxable year is 2015 and thus under effectivity of this RMO. 1.

Waiver must be in an identified form which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three year period

2.

Waiver must be signed by the taxpayer or his duly authorized representative and the CIR and any duly authorized Revenue official Taxpayer's authorized representative must be armed with notarized special power of attorney. In RMO 14-2016: Representative is deemed as duly authorized if he transacted with the BIR during the audit

 

3.  

The waiver must indicate the date of acceptance and the date of execution. Date of acceptance: the date when CIR accepted waiver  CIR's act Date of execution: act of signing the waiver by the taxpayer  Taxpayer's act

4.  

The waiver must indicate that the BIR agreed to and accepted the waiver A void waiver would not toll the prescriptive period for the government Under RMO 14-2016: Date of acceptance is no longer necessary

Two important dates under RMO 14-2016 a. Date of execution: to determine whether waiver is executed before the regular 3yr period b. Expiry date 5.

Waiver must be in three copies

First copy: original must be attached to the docket of the case. o This original copy must indicate the fact of receipt by the taxpayer o In several cases, if the original copy does not indicate the fact of receipt, waiver is void. Second copy: the copy of the taxpayer. Third copy: the copy of the office accepting the waiver. Note: If a case involves two waivers, check if the first waiver was validly made. If not, it means that the regular period to assess was never extended. Hence the second waiver executed during the void extension would also be ineffective. waiver must be executed before the expiration of the period to assess or collect RMO 14-2016 waiver must be signed by the taxpayer or his duly Three minimum conditions: authorised representatives a. The date of expiration must be indicatedexpiry date of the period agreed upon after the regular b. Waiver must be signed by the CIR or histhree-year duly authorized and theintaxpayer or periodrepresentative should be indicated the waiver his responsible official in cases of waiver of the period to assess, there is no c. Indication of the date of execution need to specify the tax being assess Philippine Journalists, Inc. v. CIR, December 16, 2004 Irregularities 1. No expiry date The Waiver of Statute of Limitations, signed by petitioner’s comptroller on September 22, 1997 is not valid and binding because it does not conform with the provisions of RMO No. 20-90. It did not specify a definite agreed date between the BIR and petitioner, within which the former may assess and collect revenue taxes. Thus, petitioner’s waiver became unlimited in time, violating Section 222(b) of the NIRC 

Under the New RMO, the indication of the expiration date is still a requirement

The waiver is also defective from the government side because it was signed only by a revenue district officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain. The conformity of the BIR must be made by either the Commissioner or the Revenue District Officer. This case involves taxes amounting to more than One Million Pesos (P1,000,000.00) and executed almost seven months before the expiration of

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GR: Estoppel not applicable

TAXATION LAW the three-year prescription period. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the BIR 2. No date of acceptance Under the present time, it is no longer a irregularity 3. No fact of receipt This is no longer a requirement today. CIR v. Kudos Metal Corp., May 5, 2010 A perusal of the waivers executed by respondent’s accountant reveals the following infirmities: 1. The waivers were executed without the notarized written authority of Pasco to sign the waiver in behalf of respondent. It was the accountant who signed 2. The waivers failed to indicate the date of acceptance. 3. The fact of receipt by the respondent of its file copy was not indicated in the original copies of the waivers. Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the assessments were issued by the BIR beyond the three-year period and are void Note: these are no longer irregularities at the present time. As to the first, it is still required that the waiver must be signed by the CIR and the taxpayer or its responsible official. Since the accountant is a responsible official, the waiver could have been valid if decided under the effectivity of the new RMO. CIR v. CA and Carnation, February 25, 1999 The three (3) waivers signed by the private respondent are not valid and binding as to toll the running of the prescriptive period for assessment The three waivers signed by Carnation do not bear the written consent of the BIR Commissioner as required by law. These waivers are invalid and without any binding effect on petitioner (Carnation) for the reason that there was no consent by the respondent (Commissioner of Internal Revenue). Notes: o In this case, there was no act done by Carnation that would postpone the collection of taxes, as such estoppel does not apply. o There is no implied acceptance of the waiver by the taxpayer. Waiver is a bilateral act. o In the present RMO, the signature of the BIR is still required. implied consent not applicable because waiver is a contract between the government and the taxpayer RCBC v. CIR, September 7, 2011

Petitioner is estopped from questioning the validity of the waivers. RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers were merely attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate acceptance or agreement of the CIR, as required under Section 223 (b) of the 1977 Tax Code. RCBC further argues that the principle of estoppel cannot be applied against it because its payment of the other tax assessments does not signify a clear intention on its part to give up its right to question the validity of the waivers. Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that "an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon." A party is precluded from denying his own acts, admissions or representations to the prejudice of the other party in order to prevent fraud and falsehood. Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC’s subsequent action effectively belies its insistence that the waivers are invalid. Lecture Notes: In KUDOS, Estoppel does not apply. Kudos did not apply for the extension of the period. It is the accountant who is at fault. Since a procedure is already laid down by the court, there are rules that must be followed and the CIR cannot rest on the defense on estoppel. In RCBC estoppel was applied. Where lies the difference? In RCBC, there was subsequent payment made by the taxpayer after the formal letter of demand. If the taxpayer did not believe that the waivers are valid, the taxpayer would not have paid the taxes in the formal letter of demand that indicates a lower amount of tax liability. If payment was made under protest, it would be different, since protest implies that the taxpayer does not agree to the assessment. In this case, payment was unconditionally made by the taxpayer without protest. IMPORTANT NOTE: RCBC is peculiar. Apply only if factual milieu is the same with this case.

8/15/96: CIR issued Letter of Authority to officials 1997: RCBC executed 2 waivers extending period to assess until Dec 31 2000 01/27/2000: Letter of demand, notice of assessment issued to taxpayer 02/24/2000: Protest by taxpayer (request for reinvestigation)

Instances when the Running of Prescriptive Period is Suspended Section 223 of Tax Code 1.

When CIR is prohibited from making an assessment or beginning distraint or levy, or a proceeding in court and sixty days thereafter.

2. o

When the taxpayer requests for reinvestigation which is granted by the CIR If request was not granted, prescriptive period is not effectively tolled

12/6/2000: Formal letter of demand with reduction of tax liability 12/6/2000 RCBC paid

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TAXATION LAW Request must be in the nature of reinvestigation. If reconsideration, it will not toll the prescriptive period

o

Request for reconsideration: reevaluation of existing document Request for reinvestigation: plea for reevaluation of new or additional documents. 3.

When the taxpayer cannot be located in the address given by him in the returns upon which the tax is being assessed. o If the taxpayer informs the CIR of any change of address, the period will not be suspended.

4.

When a warrant of levy is duly served upon the taxpayer and no property could be located.

5.

If the taxpayer is out of the Philippines. Republic v. Hizon, December 13, 1999

7/18/86: BIR made assessment 1/12/89: Issuance of warrant of distraint or levy 11/03/92: Hizon filed for a motion for reconsideration  Denied in 1994 1/1/97: BIR filed civil case for collection Warrant of distraint or levy must be issued and served to the taxpayer to toll the prescriptive period The mode resorted to in this case are both administrative and judicial modes of collection. There is administrative remedy because CIR issued warrant of distraint or levy. There was also judicial mode of collection since a civil case was filed by CIR. 

The judicial collection is filed beyond the prescriptive period

Assessment was made in 1986; so collection should be made within prescriptive period. Civil case here was filed 11 years after assessment. Hence it would not prosper. 

But the administrative mode of collection was made within the 3 year period from the assessment

Warrant of distraint or levy is effective from the service of the warrant upon taxpayer. This was served on time, even though the enforcement was made afterwards. BIR can still enforce warrant of distraint or levy notwithstanding the fact that the enforcement is made beyond the prescriptive period. BPI v. CIR, October 17, 2005 Oct 20 1989: Notice of assessment Nov 16 1989: Protest Oct 15 1992 warrant of distraint issued  But this was served in 10/23/92

Whether statute of limitation has expired. YES. SC: CIR has only until Oct 19 1992 to issue warrant of levy. It failed to serve the warrant within prescriptive period. Lecture Notes: ANALYZE! 10/20/89 is the date that taxpayer received the Notice of Assessment. You know that the period must be reckoned from date of assessment where notice is sent, mailed, received. In this case, there are no records to show date of mailing, that is why SC used 10/20/89. BUT only apply this if there are no records to show the date of mailing, sending or releasing. Notice of Assessment was made in Oct 20/89 Until when can government assess?  Oct 19/92 (3 years from notice of assessment) Since CIR vs. Primetown was still not decided during the promulgation of this case, SC considered the leap year which affected the counting of the 3-year period. Back then, one year is considered 365 days and not treated as per “calendar year” as it is now. So 3 years from Oct 20 1989 is Oct 19 1992. Maam: WAG GAYAHIN! 

Was there a collection within the prescriptive period? Administrative mode to collect was through the warrant issued in 10/15/92 This is issued within the period BUT served beyond the period (since service was only made on Oct 23 1992.) When will a warrant be effective?  If it has been issued AND served upon the payment. So count the 3-year period upon service to the taxpayer Hence barred by prescription. A request for reconsideration would not toll the running of the prescriptive period The protest letter of petitioner BPI did not specifically request for either a reconsideration or reinvestigation. A close review of the contents thereof would reveal, however, that it protested Assessment No. FAS-5-85-89-002054 based on a question of law, in particular, whether or not petitioner BPI was liable for DST on its sales of foreign currency to the Central Bank in taxable year 1985. The same protest letter did not raise any question of fact; neither did it offer to present any new evidence. In its own letter to petitioner BPI, BIR itself referred to the protest of petitioner BPI as a request for reconsideration. These considerations would lead this Court to deduce that the protest letter of petitioner BPI was in the nature of a request for reconsideration, rather than a request for reinvestigation.

September 11 1997: Denial of reconsideration: was addressed to taxpayer

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TAXATION LAW Provision on statute of limitation must be liberally construed in favor of taxpayer. Any ambiguity must be construed for the interest of the taxpayer. BPI v. CIR, March 7, 2008

How will CIR audit? Through issuance of:  Letter of Authority  Letter notice, if there is informant. Audit findings

Doctrine: A request for reinvestigation must be granted in order to toll the prescriptive period.

Reply

4/7/89: Notice of Assessment 4/20/89: Protest 12/31/94: Waiver 08/9/2002: Denial of protest

CIR issues Notice of Informal Conference

Note: No warrant of distraint or levy was issued.

Taxpayer may or may not attend

SC: BIR is barred from collecting tax. 3 years have already lapsed. BIR has until April 6 1992 to collect the tax. However, BIR only issued decision in 2002

Taxpayer is requested to submit explanation Regional Director will issue Preliminary Assessment Notice

Even if the protest in 4/20/89 is a request for reinvestigation. it will not toll since there is no grant thereof. There is nothing in the records of this case which indicates, expressly or impliedly, that the CIR had granted the request for reinvestigation filed by BPI. What is reflected in the records is the piercing silence and inaction of the CIR on the request for reinvestigation, as he considered BPI’s letters of protest to be. In fact, it was only in his comment to the present petition that the CIR, through the OSG, argued for the first time that he had granted the request for reinvestigation. His consistent stance invoking the Wyeth Suaco case, as reflected in the records, is that the prescriptive period was tolled by BPI’s request for reinvestigation, without any assertion that the same had been granted or at least acted upon. Neither did the waiver of the statute of limitations signed by BPI supposedly effective until 31 December 1994 suspend the prescriptive period. The CIR himself contends that the waiver is void as it shows no date of acceptance in violation of RMO No. 20-90.16 At any rate, the records of this case do not disclose any effort on the part of the Bureau of Internal Revenue to collect the deficiency tax after the expiration of the waiver until eight (8) years thereafter when it finally issued a decision on the protest. BPI’s letters of protest and submission of additional documents pertaining to its SWAP transactions, which were never even acted upon, much less granted, cannot be said to have persuaded the CIR to postpone the collection of the deficiency DST. Lecture Notes: There can be no implied grant of request for reinvestigation. The grant must always be categorically made by CIR either through decision or acts  As to grant of the request through the acts of CIR, this will be discussed later.

This is not the same with notice of assessment or a formal letter of demand or a formal assessment notice. Is issuance of preliminary assessment notice mandatory?  Yes, it is mandatory Except (under Section 228) --- MEMORIZE! 1. If finding is the result of a mathematical error appearing on the face of the return  Because the liability already appears on the face of the return 2.

If the tax withheld is not equivalent to the tax remitted

3.

If there is a claim for refund for excess withholding tax and it was determined that such excess has been carried over

4.

When the excise tax due on excisable articles has not been paid

5.

Where articles locally purchased or imported by exempt persons were sold to non-exempt persons.

Reply Taxpayer has chance to reply within 15 days from receipt of preliminary assessment notice What if taxpayer will not file any reply?  Taxpayer is declared in default. After reply, there is possibility that amount of liability is reduced but this chance is very remote.

Process of Assessment Audit Cir need to establish actual data which would constitute factual basis

CIR issues Formal Assessment Notice

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TAXATION LAW This is the same with Notice of Assessment and Formal Letter of Demand with notice of assessment This is where you start counting the 3-yr prescriptive period. Do not consider the Preliminary Assessment Notice (PAN)!

Appeal to CTA Division Failure to file an appeal makes the assessment final and executory Motion for Reconsideration or New Trial to CTA Division

It might happen that PAN is issued within prescriptive period but FAN was issued beyond such period. If so, you can attack the validity of the assessment. Protest Taxpayer must file protest within 30 days form receipt of FAN Two types of Protest 1. Request for reconsideration 2. Request for reinvestigation If no protest, assessment becomes final and executory  Taxpayer can no longer attack the correctness or accuracy of the assessment. But taxpayer may still raise the defense of prescription Submission of relevant documents Within 60 days from the filing of protest What if the taxpayer did not submit these documents?  Assessment becomes final and executory Most often than not, taxpayers submit relevant documents together with the protest. In this case there is no need for 60 day period since the documents are simultaneously submitted with the protest. CIR has 180 days to decide the protest CIR has 180 days from the filing of the protest or submission of relevant documents if such came after the filing of the protest. What if CIR did not decide within 180 days? Recall in the 120+30 day mandatory period in the claim for refund of credit in VAT, if the 120 days lapsed without the CIR deciding the case, the taxpayer must already file a judicial claim within 30 days from the lapse of 120 days. Eto yung striktong boyfriend. Pag pinalagpas mo, di mo na pwede balikan. Move on ka na. 

IT WOULD NOT APPLY HERE IN PROTEST!

Taxpayer may wait for the decision of CIR no matter how long it would take, before filing of appeal to CTA. Ito yung mabait na boyfriend, kayang maghintay kahit gaano katagal So even if four years have passed without CIR having decided the protest, the appeal to CTA can still be made without being barred by prescription. So the taxpayer has two options in the event of inaction: 1. To wait for the CIR decision 2. To file for an appeal to CTA division after 30 days from the lapse of the 180 days

Within 15 days from receipt of decision of CTA Division If no motion for reconsideration or new trial was filed before the CTA Division, the assessment will become final and executory Appeal to CTA En Banc Within 15 days from the denial of the motion for reconsideration or new trial Appeal to Supreme Court Within 15 days under Rule 45 If no appeal to SC was made, the assessment becomes final and executory Note: In some cases, decisions of the CTA were appealed to CA. This does not apply in the present law since RA 9282 expanded the jurisdiction of CTA. CA can no longer decide on tax cases. In what instances will the assessment become final and executory? 1. When no protest is filed by taxpayer 2. When the taxpayer fails to submit relevant documents 3. When no motion for reconsideration or motion for new trial is filed from the decision of the CTA Division 4. When no appeal is made by the taxpayer from the CTA division to CTA En Banc 5. When no appeal is made from CTA En Banc to Supreme Court Estate of Vda. de Gabriel v. CIR, Jan. 27, 2004 Service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done. Philtrust was the agent of de Gabriel. Under the Civil Code, a mode of extinguishment of Agency is the death of agency. When de Gabriel died, the agency was extinguished. Since the relationship between Philtrust and the decedent was automatically severed at the moment of the Taxpayer’s death, none of Philtrust’s acts or omissions could bind the estate of the Taxpayer. Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable, and, for failure to make the assessment within the prescription period, respondent’s claim against the petitioner Estate is BARRED. The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax, and respondent’s claim for collection, filed with the probate court only on November 22, 1984, was barred.

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TAXATION LAW To whom shall the notice be issued? Notices should have been given to the ADMINISTRATOR or EXECUTOR of the estate of de Gabriel. NOTES:  

If the taxpayer does not reply to the Preliminary Assessment Notice, he will simply be declared in default. It will not have any other detrimental effect. If the Formal Assessment Notice was issued to an unauthorized person, it will not have any effect and cannot be a basis for collection of tax. Even if there was no protest within 30 days form the FAN, the taxpayer may attack the validity of the FAN. So the wise thing to do is to ignore the FAN (for being improperly served) and then wait for the prescriptive period to lapse, so that BIR will already be barred to collect the tax. Possible defense of BIR: If the amount under-declared by the taxpayer is more than 30%, there is presumption that the return is fraudulent, hence the prescriptive period if 10 years. How to rebut this defense: This presumption is disputable and a mere afterthought. An assessment based on disputable presumption is a naked assessment and as such is a void one. It cannot be a basis to collect tax liability CIR vs. Menguito, Sept. 17, 2008

Promulgated prior to effectivity of RA 8424 The issuance of Preliminary Assessment Notice is not mandatory It is incumbent upon the BIR to prove by competent evidence that notice was indeed received by the addressee . Here, CIR merely alleged that it "forwarded" the assessment notices to petitioner taxpayer. The respondent did not show any proof of mailing, registry receipt or acknowledgment receipt signed by the taxpayer. Since CIR has not adduced sufficient evidence that taxpayer had in fact received the pre-assessment notice and post-reporting notice required by law, it cannot be assumed that taxpayer had been served said notices. *THIS DOES NOT APPLY IN THE PRESENT LAW!* CIR v. Metro Star Superama, Dec. 8, 2010 The issuance of Preliminary Assessment Notice is mandatory The case of CIR v. Menguito cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the non - compliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax law. Old requirement: Notify the taxpayer of the factual findings New requirement (RA 8424): Notify the taxpayer of BOTH facts and law. RA No. 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR’s findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid. The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form

Reckoning of Period when Assessment is Made When assessment has been:  Sent  Mailed  Released to the taxpayer

Necessity of Assessment before Prosecution of a Taxpayer for Violation of NIRC Ungab v. Cusi, May 30, 1980 UNGAB DOCTRINE: the filing of a criminal complaint for fraudulent tax evasion would be proper even without a previous assessment of the correct tax. This case involves the filing of a fraudulent income tax return because the defendant failed to report his income derived from sale of banana saplings The protest of the petitioner against the assessment of the District Revenue Officer cannot stop his prosecution for violation of the National Internal Revenue Code. Assessment not necessary An assessment of the deficiency tax due is NOT necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when the violator has, as in this case, knowingly and willfully filed fraudulent returns with intent to evade and defeat a part or all of the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. Protest does not affect prescriptive period of a criminal action Protest of an assessment may affect the suspension of the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of law. CIR v. CA, June 4, 1996 The lack of a final determination of respondent Fortune's exact or correct tax liability is not a bar to criminal prosecution for fraudulent tax evasion. While a precise computation and assessment is required for a civil action to collect a tax deficiency, the NIRC does not require such computation and assessment prior to criminal prosecution for fraudulent tax evasion

RETROACTIVITY OF THE PROCEDURES OUTLINE IN SECTION 228 OF NIRC CIR v. Reyes, Jan. 27, 2006 The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statutes. Section 228 provides for the procedure in case an assessment is protested. The provision does not create new or take away vested rights. In both instances, it can surely be applied retroactively.

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TAXATION LAW Moreover, RA 8424 does not state, either expressly or by necessary implication, that pending actions are excepted from the operation of Section 228, or that applying it to pending proceedings would impair vested rights.

TAX REMEDIES PROPER TAX REMEDIES: GENERAL CONCEPTS IMPORTANCE They exist to enhance the Government’s tax collection efforts, they, too, come in as safeguards against arbitrary action. While taxes are the lifeblood of the Government and should be collected without unnecessary hindrance, such collection must nevertheless be made in accordance with law as any arbitrariness will negate the very reason or the Government itself. (SLU Reviewer, 2012)

CLASSIFICATION (OVERVIEW) 1. 2.

Remedies available to the taxpayer Remedies available to the government

1.

Where there is estoppel on the part of the party invoking the doctrine (in taxation, the government)  E.g.: when the taxpayer has been made to believe that the notice/act made is already the final decision of the BIR. 2. Where the challenged administrative act is patently illegal, amounting to lack of jurisdiction; 3. Where there is unreasonable delay or official inaction that will irretrievably prejudice the complainant; 4. Where the amount involved is relatively small so as to make the rule impractical and oppressive; 5. Where the question involved is purely legal and will ultimately have to be decided by the courts of justice; 6. Where judicial intervention is urgent; 7. When its application may cause great and irreparable damage; 8. Where the controverted acts violate due process; 9. When the issue of non-exhaustion of administrative remedies has been rendered moot; 10. When there is no other plain, speedy and adequate remedy; 11. When strong public interest is involved; 12. In quo warranto proceedings

(SLU Reviewer; this was not discussed but this is more detailed) Remedies in favor of the taxpayer A. Administrative (1) Before Payment a. Filing of a petition or request for reconsideration or reinvestigation (Administrative Protest); b. Entering into compromise

REMEDIES AVAILABLE TO TAXPAYERS

1.

(2) After Payment a. Filing of claim for tax refund; and b. Filing of claim for tax credit B.

Judicial

(1)

Civil action a. Appeal to the Court of Tax Appeals b. Action to contest forfeiture of chattel; and c. Action for Damages

(2)

Criminal Action  Filing of complaint against erring Bureau of Internal Revenue officials and employees

2.

Remedies available to the government

APPLICABILITY OF THE DOCTRINE EXHAUSTION OF ADMINISTRATIVE REMEDIES No civil or criminal action for the recovery of taxes shall be filed in court without the approval of the Commissioner. (Sec. 220, NIRC) General Rule: It is required that a taxpayer file a PROTEST first to the CIR before going to the CTA. Exceptions to the applicability of Doctrine of Exhaustion of Administrative Remedies (NOTE: this was not discussed in class)

A.

BEFORE PAYMENT

1.

Protest

Protest is a vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the official actuation of the CIR. This is equivalent to a pleading. (Section 228, NIRC) Requirements of a Valid Protest (Revenue Regulation 12-85) 1. In writing; 2. Addressed to the CIR; 3. Must be accompanied by a waiver of the Statute of Limitations in favor of the government; 4. States the Facts, applicable law rules and regulations and jurisprudence on which his protest is based; otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted; 5. Contains the following: a. Name of the taxpayer and address for the immediate past three taxable years; b. Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence that he intends to present it is a request for reinvestigation; c. Taxable periods covered by the assessment; d. Amounts and kind/s of tax involved, and Assessment Notice Number; e. Date of receipt of assessment notice or letter of demand; f. Itemized statement of the findings to which the taxpayer agrees, if any, as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first; g. Itemized schedule of the adjustments with which the taxpayer does not agree; h. Statement of facts and/or law in support of the protest; and i. Documentary evidence as it may deem necessary and relevant to support its protest to be submitted within sixty (60) days from the filing of the protest. If the taxpayer fails to

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TAXATION LAW comply with this requirement, the assessment shall become final. (Revenue Regulation No. 12-85, dated Nov. 27, 1985.)

How would you know if it is for reconsideration or reinvestigation?  If the documents before the filing of protest and after the protest were different, then the request is for reinvestigation.

Pertinent Requirements, as discussed by Ma’am Sec 6: Specific information about the name of taxpayer, and address of taxpayer Sec 7: Protest must indicate the date of filing to determine whether such was filed within the 30 day period 

Must be filed in the regional or national office



If these requirements are not complied with by taxpayer: protest is void and CIR has option not to entertain the protest

Effect of Failure to file Protest Failure to make a protest within 30 days from receipt of FAN and Formal Notice of Demand, will make the assessment FINAL and EXECUTORY.

Kinds of Protest

CIR vs. Hon. Gonzales; 13 October 2010

1. Request for reconsideration A plea for the re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve a question of fact or law or both.

Tax assessments are presumed correct and made in good faith

2. Request for reinvestigation A plea for reinvestigation of an assessment on the basis of newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve question of fact or law or both.

The assessment was rendered final and executory Any failure to file a petition for review before the CTA will render the disputed assessment final and executory and thereby precludes the taxpayer from interposing the defenses of the legality or validity of the assessment

CIR v. Philippine Global Communication, Oct. 31, 2006 Presumption of issuance of assessment when the CIR’s claim is undisputed The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIRs claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax A request for reinvestigation, and not a request for reconsideration, interrupts the running of the statute of limitations on the collection of the assessed tax A reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. The separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for reconsideration. The CIR’s allegation that there was a request for reinvestigation is inconceivable since respondent consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. Lecture Notes:

The assessment notice was duly served on October 1 2002. However the taxpayer did not file any protest or petition for review before the CTA.

What should be Protested  

It is the Final Assessment Notice (FAN) that is protested NOT Pre-Assessment Notice (PAN) Allied Banking Corp v. CIR, Feb. 5, 2010

The BIR issued a Formal Letter of Demand which stated “The opinions promulgated by the Secretary of Justice are advisory in nature…and any aggrieved party has the court for recourse.” The taxpayer is justified for not protesting the assessment and immediately filing for a Petition for Review with the CTA on the ground of Estoppel. Estoppel is an exception to the doctrine of exhaustion of administrative remedies as when the wording of the Formal Letter of Demand with Assessment Notices led the taxpayer to believe that it was in fact a final decision of the CIR. The statement of the BIR led the taxpayer to believe that only a final judicial ruling in its favor would be accepted by the CIR This case is an exception to the doctrine of exhaustion of administrative remedies. (i.e. estoppel on the part of the administrative agency concerned) Records show that petitioner disputed the PAN but not the Formal Letter of Demand with Assessment Notices.

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TAXATION LAW Nevertheless, we cannot blame petitioner for not filing a protest against the Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter indicate that it is the final decision of the respondent on the matter. Lecture Notes  The statement in fan has made this case AN EXCEPTION TO THE RULE  APPLY THIS ONLY IF THE FAN LIKEWISE CONTAIN THE SAME STATEMENT  If the facts are different, the CTA would have no jurisdiction since CIR has not yet decided on the disputed assessment. CTA can only review decisions of CIR. If no decision yet, CTA has no jurisdiction to decide.

When will you resume counting the prescriptive period when there was suspension as in this case? When the CIR issued the FAN after the reinvestigation. Here, FAN was issued and served on March 12 1980. Hence only about four (4) months of the five-year prescriptive period was used. This warrant of distraint or levy has been filed on time and was not barred by prescription.

In this case, the FAN was already considered final decision and therefore appealable to the CTA.

CIR v. Wyeth Suaco Laboratories, Sept. 30, 1991 12/16/74 CIR issued Notice of Assessment (NOA) 12/11/74: Taxpayer’s receipt of NOA 1/17/75: Protest 2/8/75: Protest Then, BIR ordered its manufacturing division to review the assessment based on new document. 12/10/79: Final Decision on Assessment was issued 1/2/80: FAN was received 03/12/80 – Warrant of Distraint or Levy issued The protest letters of Wyeth are considered as Request for Reinvestigation After the two protests, the BIR ordered its manufacturing division to review the assessment based on new document. This implies that the letters are requests for reinvestigation and that such were granted by the BIR since it ordered its division to review the new documents. As requests for reinvestigation, the letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to collect the deficiency taxes. The Bureau of Internal Revenue, after having reviewed the record of Wyeth Suaco, in accordance with its request for reinvestigation, rendered a final assessment. This final assessment was dated December 10, 1979 and received by private respondent on January 2, 1980. It was only upon receipt by Wyeth Suaco of this final assessment that the five-year prescriptive period started to run AGAIN. Verily, the original assessments dated December 16 and 17, 1974 were both received by Wyeth Suaco on December 19, 1974. However, when Wyeth Suaco protested the assessments and sought its reconsideration in two (2) letters received by the Bureau of Internal Revenue on January 20 and February 10, 1975, the prescriptive period was interrupted. This period started to run again when the Bureau of Internal Revenue served the final assessment to Wyeth Suaco on January 2, 1980. Since the warrants of distraint and levy were served on Wyeth Suaco on March 12, 1980, then, only about four (4) months of the five-year prescriptive period was used. Lecture Notes: One material date is the receipt of warrant of distraint or levy. There can be no valid warrant of distraint without issuance and service to the taxpayer. The protests made on 1/17/75 and 2/8/75 suspended the running of the prescriptive period.

Failure to act within 180 day period by BIR Effect: inaction can be treated as denial.  After lapse of the period, taxpayer can immediately appeal However, under Sec 228, the law does not limit the taxpayer to a single remedy. The taxpayer has two options: 1. Treat the inaction as denial, and immediately appeal to CTA Division within 30 days; or 2. Wait for the decision of the BIR, and then appeal the decision to the CTA Division within 30 days from the receipt of the decision. If a taxpayer opted for the 1st option but filed the petition for review with the CTA out of time, can he wait for the final decision of the CIR and then appeal the same to the CTA?  NO.  After availing of the first option (filing of the petition for review) which was however filed out of time, a taxpayer cannot successfully resort to the second option (await final decision and appeal the same to the CTA) on the pretext that there is yet no final decision on the disputed assessment because of the CIR’s inaction. RCBC vs. CIR July 5 2001- Date of receipt of formal letter of demand, dated May 25 2001 July 20 2001- Taxpayer filed a protest April 30 2002- Taxpayer filed petition for review before CTA CTA dismissed on the ground that the petition for review was filed beyond the prescriptive period. BIR’s assessment has become final and unappealable. Thus, taxpayer cannot question it anymore. Issue: Has the assessment attained finality? Yes First question: was there decision made by CIR?  None. The taxpayer can treat this as denial.

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TAXATION LAW Remedies of the Taxpayer on the event of inaction of CIR: 1. File appeal within 30 days after lapse of 180 days. 2. Wait for the decision, then file appeal within 30 days after receipt of decision; or

1999 on March 12, 1999, the appeal was timely made as it was filed within 30 days after receipt of the copy of the decision

Administrative Actions Taken During the 180-day Period

In this case, there was no decision by CIR. Notwithstanding the inaction, he filed for petition for review. Hence taxpayer chose the first remedy. Here, petition to review was filed in May 30 2002. RCBC chose to file a petition within 30 days after lapse of the 180-day period.. Since taxpayer opted to choose this remedy, he should have filed within the 30-day prescriptive period. Since it filed beyond, the CIR assessment became final and executory. As such, there is no more disputed assessment to speak of. CTA cannot acquire jurisdiction over the petition for review. Second Question: Can taxpayer raise the defense that since the protest has not been acted upon, there is no decision to speak of?  No. The law already deems the inaction as denial. While the taxpayer has two options, these options are mutually exclusive. The choice of one precludes the application of the other.

Lascona vs. CIR, January 4 2000 March 27 98: Assessment notice April 20 98: Protest CIR denied the protest on March 3 99 March 12 99: Taxpayer received the denial April 12 99:Taxpayer filed for a petition for review The protest was filed within the prescriptive period. Protest should have been filed until April 26 98. Taxpayer filed it on April 20 1998 so it was within the period. The taxpayer decided to await for the decision of the CIR (remedy no.2). He received the denial of protest on March 12 99. He has until April 11 to file appeal to CTA. When it filed appeal on April 12, it was timely filed. (If you are going to be technical about the prescriptive period, it was filed out of time. It was one day delayed. However, this delay was not assailed by the parties) SC Discussion: In case of the inaction of the CIR on the protested assessment, while we reiterate − the taxpayer has two options, either: (1) file a petition for review with the CTA within 30 days after the expiration of the 180-day period; or (2) await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within 30 days after the receipt of a copy of such decision, these options are MUTUALLY EXCLUSIVE and resort to one bars the application of the other. Accordingly, considering that Lascona opted to await the final decision of the Commissioner on the protested assessment, it then has the right to appeal such final decision to the Court by filing a petition for review within thirty days after receipt of a copy of such decision or ruling, even after the expiration of the 180-day period fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. Thus, Lascona, when it filed an appeal on April 12, 1999 before the CTA, after its receipt of the Letter dated March 3,

CIR vs. Union Shipping, May 21 1990 Letter dated 12/27/74: Letter of assessment 01/04/75: Receipt of assessment 01/13/75: Cir received protest 11/25/76: Taxpayer received warrant of distraint or levy 11/27/76: Date of letter requesting investigation 11/29/76: Receipt of letter by BIR Collection suit was filed by BIR, without acting on the letter for reinvestigation 12/28/78: Summons served upon the taxpayer 01/10/79: Petition for review was filed by the taxpayer before CTA CIR argument: petition for review must be dismissed being filed beyond 30 days period from the decision of CIR. 30 day should be reckoned from 11/25/76 which is receipt by taxpayer of distraint or levy. The act of CIR of issuing the warrant shall be deemed a denial of the request for protest of the taxpayer. Under the rules, appeal can be taken upon the decision of CIR. Without this decision, there is nothing to review. CTA only acquires jurisdiction when there is decision to speak of. Issue: Is the issuance of warrant of distraint and service thereof to the taxpayer treated as decision? NO. CIR shall always indicate to the taxpayer in a clear and unequivocal language what constitutes final determination of the disputed assessment. In this case, taxpayer does not know what constitutes decision. This is why it reiterated its request for reinvestigation. The warrant was not clear if it constitutes as final decision of CIR. The filing of the collection suit is deemed to be the final decision of CIR. Since summons was received, appeal must be reckoned from the date the summons was received by taxpayer. Appeal here was filed within the 30 day period. SC Discussion: Under the circumstances, the Commissioner of Internal Revenue, not having clearly signified his final action on the disputed assessment, legally the period to appeal has not commenced to run. Thus, it was only when private respondent received the summons on the civil suit for collection of deficiency income on December 28, 1978 that the period to appeal commenced to run. The request for reinvestigation and reconsideration was in effect considered denied by petitioner when the latter filed a civil suit for collection of deficiency income. So. that on January 10, 1979 when private respondent filed the appeal with the Court of Tax Appeals, it consumed a total of only thirteen (13) days well within the thirty day period to appeal.

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TAXATION LAW CIR v. Isabela Cultural Corporation, July 11, 2001 02/ 23/90: Assessment received by Taxpayer, dated February 9 90 03/22/90: Date of protest by taxpayer 04/18/90: Taxpayer submitted relevant documents 02/9/95: Final notice before seizure was received by the taxpayer 03/9/95 Petition for review was filed by taxpayer before CTA Was the protest filed within 30 day period? YES. Can you treat the final notice before seizure as the decision of CIR? Ordinarily, it is not a final decision on disputed assessment. However, in this case, the final notice says: “We are giving you the last opportunity to settle the adverted assessment. Otherwise, we will be constrained to enforce collection by summary remedy.” By considering this statement, it is treated as a final decision of CIR,

When should the period be reckoned?  Date when the taxpayer received the assessment notice (12/10/87) If what is being asked is the reckoning period to collect the tax: consider the date when the CIR has sent the notice If what is being asked is the reckoning period for the remedy of taxpayer: consider the date when the taxpayer received the assessment notice Taxpayer received the assessment notice on 12/10/87 Protest was filed on 1/12/88 33 days had lapsed from date of receipt of assessment notice. Effect: assessment becomes final and unappealable. Since assessment becomes final and unappealable, taxpayer can no longer dispute the correctness of assessment. CTA cannot acquire jurisdiction since there is no disputed assessment to speak of. Was there receipt of notice of deficiency for 1985 by the taxpayer? Since the letter /notice is properly addressed and postage is properly paid, there is presumption that the assessment was properly served to the taxpayer.

Since the final notice before seizure was the only respondent received by taxpayer and the content and tenor of letter is that it is the CIR’s final act on the disputed assessment, the taxpayer can treat it as the CIR decision disposing of the request for reconsideration. SC discussion: Not only was the Notice the only response received; its content and tenor supported the theory that it was the CIR's final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that respondent was being given "this LAST OPPORTUNITY" to pay; otherwise, its properties would be subjected to distraint and levy” Union Shipping compared with Isabela Cultural  In Union Shipping: the warrant does not indicate that it is the final act of the CIR on the matter.  In Isabela: the tenor and content of the final notice communicates to the taxpayer that it is the CIR’s final act regarding the matter. Important Tenet  The taxpayer shall treat the final notice as the decision. In Isabela, the taxpayer himself treated the notice as the CIR’s decision. This was not present in the case of Union Shipping.

Effect of Protest Filed out of Time 

Remedies from Denial of Protest Recall: flowchart CIR’s Action or Inaction Taxpayer files appeal before CTA division within 30 days Motion for New Trial or Motion for Reconsideration to CTA Division within 15 days. Petition for Review before CTA En Banc Motion for Reconsideration before CTA En Banc Petition for Review (Rule 45) to SC

Assessment becomes final and unappealable Protector's Services v. CA, April 12, 2000

Is the filing for motion for reconsideration or motion for new trial mandatory? Commission of Customs vs. Marina Sales Inc; November 22 2010

12/7/87: Assessment notice sent by CIR 12/10/87: Assessment notices for taxable period 1983 and 1984 were received by taxpayer 1/12/88: Taxpayer filed protest for taxable years 1983 and 1984

The filing for motion for reconsideration or motion for new trial is mandatory.

Was the protest filed within the period?  NO.

Effect of non-filing: Petition for review shall be dismissed. It is mandatory under Revised Rules of CTA.

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TAXATION LAW Fishwealth Canning vs CIR; January 21 2010 5/16/2000: CIR has written a letter of assessment for taxable year 1999 8/25/2000: Taxpayer sent request for reinvestigation 8/30/2000: Taxpayer settled obligation based on the reinvestigation. Cir issued subpoena for taxpayer to submit relevant documents. Petitioner did not heed to the subpoena issued by the CIR after the settlement of obligation. 8/6/2003: CIR issued formal assessment notice 9/23/2003: Taxpayer filed protest 8/2/2005: CIR issued final decision on disputed assessment 8/4/2005: Taxpayer received this final decision 9/1/2005: Taxpayer filed a letter of reconsideration 9/6/2005: Preliminary collection letter issued by CIR 10/20/2005: Taxpayer filed petition for review before CTA After receipt of final decision of CIR. the next step should be to file an appeal to the CTA division. However taxpayer filed a letter of reconsideration. After the preliminary collection letter by CIR, it is only when the taxpayer filed petition before CTA.

1.

Refund

Section 229: Refund of overpayment, illegal payment, erroneous payment, or payment of penalties not authorized by law Prescriptive Period: 2 years from the date of payment, regardless of any supervening event. “Regardless of any supervening event”  It could be possible that taxpayer, upon filing of original income tax return, paid his taxes (for example, 150k). After such filing, the return was amended and the taxpayer paid additional taxes (e.g. 40k) In this case of amendment, when should you reckon prescriptive period?  From the original filing of return, as to those taxes paid at that time (150k) The amendment of the return will not matter as to those taxes paid at that time of filing. 

From the filing of the amended return, as to those taxes paid at that time (40k).

If the return was amended so as to effect another “payment,” each payment made for each of the return will have its own prescriptive period from the date of the respective payment.

When should you reckon the period of filing appeal? Filing of motion for reconsideration before the CIR will not toll the running the 30 day period to appeal the case to the CTA. Hence, the taxpayer has 30 days from August 4 2005 to file the petition for review before the CTA. Fishwealth compared to Commissioner Customs  Commissioner Customs: Motion for Reconsideration before the CTA division is mandatory  Fishwealth: Motion for Reconsideration before CIR is not mandatory. Filing of such would not toll the filing of the prescriptive period. NOTE: Read PAGCOR VS BIR JANUARY 27 2016  Revenue Regulation 18-2013 o Requirement: the final decision shall indicate the law, facts jurisprudence from which the decision is made Note: In the case of Isabela: the final notice before seizure contained no law and facts from which the notice was made. Hence, the Supreme may declare this as a void demand. o

Administrative appeal: if the protest has been decided by a duly authorized representative of the CIR (Regional Director), the decision may still be appealed to the CIR within 30 days.

o

Judicial appeal: Another remedy is to appeal directly the decision of regional director to the CTA Division

B. AFTER PAYMENT

Nature of Refund  

Similar to tax exemptions. Apply the principle of strictissimi juris: any ambiguity shall be construed strictly against the taxpayer.

Review of Income taxation on administrative requirements  For individual taxpayers earning income from business, trade and profession  Quarterly returns 1st: due on April 15 2nd: due on August 15 3rd: due on November 15 No 4th quarter return for income tax purposes (unlike in VAT). This will be reflected in the annual tax return  For corporate taxpayers  Quarterly return 1st Q: due on 60 days from end of 1st quarter (from March31) 2nd Q: due on 60 days from end of 2nd quarter (from June30) 3rd Q: due on 60 days from end of 3rd quarter (from September 30) 

For individuals earning Rental Income

Income is subject to 5% withholding tax withheld by lessee and remitted to the Government. If the lessee did not withhold, he can be held personally liable being a withholding agent. Also, he cannot deduct rental expenses.

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TAXATION LAW Under Sec 34 of NIRC, if expense is subject to withholding tax, the taxpayer should withhold the same and remit to the government. If the lessee deducted 500 per month, (6k for 1yr), this is reflected in the quarterly returns of the lessor. These payments are considered as advance payments of the lessor to his annual taxes. Lessor may deduct this from his income tax since it is an advance payment . Illustration: The taxpayer has 5 qualified dependents. He acquires 120k worth of rental income per year. He can deduct 40% optional standard deduction (equal to 48k). There could also be other deductions. In the end, his tax liability becomes zero because of the deductions. Aside from these deductions, he can also deduct the creditable withholding tax of 6k as he already made advance payment. This 6k is an overpayment.

in the commissioner of internal revenue by the NIRC which requires the commissioner to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return. Grant of a refund is founded on the assumption that the tax return is valid In San Carlos Milling Co., Inc. vs. Commissioner of Internal Revenue, the Court held that the internal revenue branch of government must investigate and confirm the claims for tax refund or credit before taxpayers may avail themselves of this option. The grant of a refund is founded on the assumption that the tax return is valid; that is, the facts stated therein are true and correct. In fact, even without petitioner's tax claim, the commissioner can proceed to examine the books, records of the petitioner-bank, or any data which may be relevant or material in accordance with Section 16 of the present NIRC

Grounds for Filing a Claim for Refund (Not discussed in class)

This can be carried over for the succeeding period; or he may file for application for refund of this amount.

1. 2.

Two options: 1. Tax refund  Application of tax refund, or  Application for issuance of tax credit certificate

3.

2.

Tax Credit  Carry over of overpayment for the succeeding taxable periods Citibank NA vs. CA; October 10 1997

Is the lessor entitled to a refund of such withheld amount after it is determined that the lessor is not liable for income tax?  Yes

The tax was illegally collected – There is no law that authorizes the collection of the tax The tax was excessively collected – There is a law that authorizes the collection but the tax collected was more than what the law allows The tax was paid through a mistaken belief that the taxpayer should pay the tax – This is a case of solutio indebiti

Procedure in Filing a Claim for Refund Filing of written claim for refund  Required to be filed before the CIR  Exception: 204c of NIRC A written claim for refund must be filed before commissioner except if the overpayment or erroneous payment clearly appears on the face of the return.  In this case, the written claim for refund is no longer necessary.

When is the reckoning date?  From date of filing of the final adjusted return.  NOT from the date of remittance

CIR v. ACOSTA, Aug. 3, 2007 Taxpayer paid taxes for taxable year 1996. She filed an annual tax return in 1997. Judicial claim for refund in 1998.

The taxes withheld are merely provisional in nature. The final determination of tax liability is at the time of filing of the final adjusted return which is the annual income tax return (April 15)

The CTA dismissed the petition on the ground that no written claim for refund was filed, which is a condition sine qua non for filing judicial claim for refund.

Claimant has burden of proof to establish factual basis for refund because tax refunds are like tax exemptions.

Requirements for filing for refund:

In general, there is no disagreement that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. Proof of inclusion of payments; detailed proof not required A refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding taxes and the fact of withholding. However, detailed proof of the truthfulness of each and every item in the income tax return is not required. That function is lodged

1. A written claim for refund or tax credit must be filed by the taxpayer with the Commissioner; 2. The claim for refund must be a categorical demand for reimbursement; 3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in court within two (2) years from date of payment of the tax or penalty regardless of any supervening cause -------------------------------------------------------------------------------------------------------------------------------Lecture Notes: If the ITR clearly shows the overpayment, is the filing of written claim for refund required?

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TAXATION LAW  

No, if under the effectivity of RA 8424. Yes, if before the effectivity of RA 8424.

RA 8424 was effective on January 1 1998. It was not applicable in this case since the return was filed in 1997. The Supreme Court in this case applied the Old Tax Code, under which there exists no exception as to the requirement of filing for a written claim for refund. Is it proper for CTA to dismiss the judicial claim for refund?  Yes. Other notes:  The 2-year period in Section 229 applies to both administrative claim for refund and judicial claim for refund.  Can the taxpayer file the administrative claim for refund and the judicial claim simultaneously?  Yes. There is no need to wait for the decision of CIR before the judicial claim can be filed.  Section 229 requires that no proceeding in court shall be filed beyond the prescriptive period. Hence, there is no requirement to wait first for CIR to decide because the judicial claim must be filed within the prescriptive period.

Period within which to File a Claim for Refund

The rationale in computing the two-year prescriptive period with respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its business operations. The "date of payment", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final adjustment return. What if the transaction falls under installment transactions? When will we reckon the prescriptive period?  From the date of last payment or installment Other notes:  In VAT, there is no final adjusted return, only quarterly returns. What if there was overpayment of tax? When should you reckon the prescriptive period under Sec 229?  If he filed a quarter return, it is considered the final adjusted return. Note that in VAT, what you reflect in a quarter return are your information in that quarter alone. The quarterly returns in VAT are not cumulative. You don’t add your first and second quarterly taxes to reflect on your 2nd quarterly return and so on. THUS, the quarter returns are already considered as final adjusted return. In income taxes, on the other hand, your quarterly returns are cumulative in nature. What you reflect in your first quarter will also be reflected in your second quarter, and so on. The quarterly returns here are not considered as final adjusted return, hence the need to file an annual income tax return. 

i.)

General Rule: 2 years from the date of payment CIR vs. TMX Sales; January 15 1992

So 2 year prescriptive period for refund shall reckon from the date of payment of first quarter tax, second quarter tax, and so on.

What if no indication of tax of payment, but only the date of filing?  Date of filing is deemed as the date of payment, under the pay-as-you-file system.

Taxpayer paid taxes on a quarterly basis. When to count prescriptive period?  From date of filing of the final adjusted return  Not from date of filing of the quarter returns.



For income taxes, the taxpayer must file an annual income tax return.  The prescriptive period is reckoned from the date of filing the annual adjusted return/annual income tax return,

Taxes paid on quarterly basis are mere installment payment of taxes and are therefore mere provisional in nature. The final determination of tax liability is at the time of filing of the final adjusted return.



For donor’s taxes  The prescriptive period is reckoned from date of filing of donors tax return

ACCRA Investments Corporation vs. Court of Appeals; December 20 1991 “From the date of payment of tax”, defined From the end of the taxable year when petitioner Corporation was deemed to have paid its tax liabilities under the withholding tax system. But since there is a need to file for a claim first, the 2yr prescriptive period is not counted from the end of taxable year but from the date of filing of the final adjusted return. It is the only time that taxpayer may ascertain whether it gained profits or incurred losses. Discussion by SC:

For estate taxes  Date of filing of estate tax return  Extension is possible, depending on whether the estate is under judicial or extrajudicial settlement Judicial: 5yrs Extrajudicial: 2yrs  If the estate tax return was erroneous: 2yr prescriptive period is reckoned from date of final or last payment 

ii.) In case of Amended Returns  If the return was amended, the running of the prescriptive period still starts from the date of the original filing because supervening events are immaterial.  BUT if the return was amended so as to effect another “payment,” each payment made for each of the return will have its own prescriptive period from the date of the respective payment. Recall previous discussion:

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TAXATION LAW It could be possible that taxpayer, upon filing of original income tax return, paid his taxes (150k). After such filing, the return was amended and the taxpayer paid additional taxes (e.g. 40k) In this case of amendment, the prescriptive period should be reckoned:  From the original filing of return, as to those taxes paid at that time (150k) The amendment of the return will not matter as to those taxes paid at that time of filing. 

From the filing of the amended return, as to those taxes paid at that time (40k). CIR v. Primetown, August 28, 2007

In the strict legal viewpoint, therefore, PNB’s claim for tax credit did not proceed from, or is a consequence of overpayment of tax erroneously or illegally collected. It is beyond cavil that respondent PNB issued to the BIR the check for P180 Million in the concept of tax payment in advance, thus eschewing the notion that there was error or illegality in the payment. The suspension of the two (2)-year prescriptive period is warranted not solely by the objective or purpose pursuant to which respondent PNB made the advance income tax payment in 1991. Prescriptive period applicable 10 years from the date of the agreement, based on the New Civil Code, that is from the time the advance payment was made.

1yr: 12 calendar months In 1987, EO 292 or the Administrative Code of 1987 was enacted. Section 31, Chapter VIII, Book I thereof provides: Sec. 31. Legal Periods. — “Year” shall be understood to be twelve calendar months; “month” of thirty days, unless it refers to a specific calendar month in which case it shall be computed according to the number of days the specific month contains; “day”, to a day of twenty-four hours and; “night” from sunrise to sunset. A calendar month is “a month designated in the calendar without regard to the number of days it may contain.” It is the “period of time running from the beginning of a certain numbered day up to, but not including, the corresponding numbered day of the next month, and if there is not a sufficient number of days in the next month, then up to and including the last day of that month.” To illustrate, one calendar month from December 31, 2007 will be from January 1, 2008 to January 31, 2008; one calendar month from January 31, 2008 will be from February 1, 2008 until February 29, 2008. Final adjusted return on April 14, 1998: Respondent's petition (filed on April 14, 2000) was filed on the last day of the 24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the reglementary period

CIR v. PNB, October 25, 2005 PNB made advance payment of tax. PNB claimed for refund after more than 2 years. CIR denied the claim for refund because it was filed beyond the prescriptive period. Is the 2 year prescriptive period applicable in this case?  No.  What is present in this case is not payment of taxes that had already accrued but the payment of future tax liabilities.  Apply the Civil Code provision for written contracts: prescriptive period is 10 years. Exception to the two-year period  Special circumstance and equity. The advance payment made by PNB was made in order to help alleviate the economic situation of the country at the time of the Aquino Administration, in response to Cory Aquino’s call.

CIR v. Philam Life, May 29, 1995 Tax credits for reasons other than overpayment, erroneous, illegal and penalties not authorized shall have prescriptive period of 10 years, not 2 years. Other SC discussions: Although quarterly taxes due are required to be paid within sixty days from the close of each quarter, the fact that the amount shall be deducted from the tax due for the succeeding quarter shows that until a final adjustment return shall have been filed, the taxes paid in the preceding quarters are merely partial taxes due from a corporation. Neither amount can serve as the final figure to quantity what is due the government nor what should be refunded to the corporation. This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides that the refundable amount, in case a refund is due a corporation, is that amount which is shown on its final adjustment return and not on its quarterly returns. Therefore, when private respondent paid P3,246,141.00 on May 30, 1983, it would not have been able to ascertain on that date, that the said amount was refundable. The same applies with cogency to the payment of P396,874.00 on August 29, 1983. The prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. The record shows that the claim for refund was filed on December 10, 1985 and the petition for review was brought before the CTA on January 2, 1986. Both dates are within the two-year reglementary period. Private respondent being a corporation, Section 292 (now Section 230) cannot serve as the sole basis for determining the two-year prescriptive period for refunds. As we have earlier said in the TMX Sales case, Sections 68, 69, and 70 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it. Can the Supreme Court suspend the 2-year prescriptive period?  Yes.  For reasons of equity or other special circumstances. iii.)

Corporations Contemplating Dissolution

Section 52c of the Tax Code Corporations contemplating dissolution must file an information return within 30 days

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TAXATION LAW  

After adoption of plan of dissolution; or From notice of dissolution in case of voluntary dissolution

The petition for review was filed on December 29 1987. Hence it was filed beyond the prescriptive period.

Review: For ordinary taxpayers Section 229 of Tax Code: prescriptive period of 2 years from date of payment/date of filing a final adjusted return  If return is filed after the last day prescribed by law, (e.g. on April 30 2016), the repercussion is that taxpayer is liable for payment of interest, surcharge or compromise penalty  The 2 year prescriptive period is reckoned from the actual filing of the final adjusted return.  In case of business with corporate existence, apply this rule: count the prescriptive period from actual date of filing Would you apply the same rule with corporate taxpayers contemplating dissolution?  NO.

What if the date of adoption of articles of merger and the approval of the same were on different dates?  Refer to the date of adoption of the merger and not on the approval of the same, When shall an article of merger be effective?  Corporation Code: Upon execution of the merger plan What is the purpose of submission of this plan to the SEC?  to be binding upon 3rd persons  Section 52C of Tax Code: From adoption of the plan of dissolution If the corporation plans to dissolve its operation, the SEC will not act on the plan of dissolution unless all documentary requirements have been submitted to the SEC. One of these documents is tax clearance certificate by CIR. This is not issued by CIR unless the corporation has filed an information return under Section 52 c

BPI vs. CIR Taxpayer BPI merged with FBTC. The plan of merger and AOI of merger were approved by SEC on the same date: July 1 1985 FBTC’s business operation had ceased on June 30 1985. The surviving corporation is BPI During the same year, FBTC suffered financial losses but had paid taxes through creditable withholding tax. FBTC also had prior years excess credits. On April 15 1986, BPI filed the final adjusted return of FBTC. Because of the excess credits from operation of FBTC, BPI claimed for refund. CIR granted the refund partially BPI filed a petition for review before CTA on December 29 1987. CTA dismissed the petition on the ground that it was filed beyond the prescriptive period. The dismissal of the petition is proper Apply a different rule regarding the reckoning of the prescriptive period on corporations contemplating dissolution or corporations already dissolved. The 2-year rule from actual filing of return is only applicable if the corporation has continued its business in the taxable year. For dissolved corporations, apply Section 52C of the Tax Code  

Corporation must file an information return 2-year period is not counted from filing of final adjusted return but from the last day prescribed by law for filing of the return , which is 30 days from the adoption of plan of dissolution

The plan of merger was adopted on July 1 1985. Taxpayer has until July 31 1985 to file an information return. This is the “last day prescribed by law for filing of the return”, from which the 2-year prescriptive period will be reckoned. From here, taxpayer has until July 30 1987 to file for a petition for review before the CTA. (Note that CIR vs. Primetown was not yet applicable in this case)

Notes for exam or quiz:  If corporation is continuing business, count 2-years from date of payment, which is date of filing a final adjusted return  If corporation is contemplating dissolution, count the 2-years from the last day prescribed by law for filing a return Section 56A: Pay-as-you-file system  Tax must be paid at the time the return is filed Engtek Phils vs. CIR January 26 2005 Corporation declared dividend income in favor of stockholders The corporation decided to withdraw the declaration but prior to this withdrawal, the corporation (as withholding agent) had already remitted the corresponding taxes to the BIR Can NTEC claim for refund for such taxes paid to CIR? No. Apply the provision on Refund under Section 229 if subject matter is overpaid tax, illegally collected tax, excessive tax, or payment of penalties not authorized by law. At the time of remittance of tax, there appears to be a legal basis for such remittance. The declaration of dividends has not yet been withdrawn. Hence, it cannot be classified under those payments covered by Section 229.

Personality to File for a Claim for Refund Two individuals who can file for claim of refund 1. Statutory taxpayer having a direct interest over the overpayment of tax 2. Withholding agent

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TAXATION LAW CIR v. Smart Communications, August 25, 2010 A withholding agent can file a claim for refund Reasons: 1. He is considered a taxpayer under the Tax Code as he is directly and personally liable for the withholding tax as well as for deficiency assessments, surcharges, and penalties, should the amount withheld be finally found to be less than the amount that should have been withheld 2. As an agent of the taxpayer, his authority to file the income tax return and remit the tax withheld to the government includes the authority to file a claim for refund and to bring an action for recovery of such claim. Silkair v. CIR, Nov. 14, 2008 Silkair bought petroleum products from Petron, wherein it paid for indirect tax. Petron remitted this tax paid by Silkair. Realizing that the transaction should have been exempt from tax, Silkair claimed for refund.

Options of the taxpayer:  If tax due is greater than tax paid: pay the remaining balance  If tax due is less than tax paid: Paragraph (b): Carry over of excess credit  Reflect the excess credit for succeeding taxable returns Paragraph (c ): To be credited or refunded of excess amount  Application for refund or  Application for tax certificate If the term used is “tax credit”: it refers to the carry over principle If the term used is “tax refund”: it refers to the option to be credited or refunded of excessively paid tax

Irrevocability Rule Once the option to carry over and apply the excess quarterly income tax against the tax due has been made, such option shall be considered irrevocable for that taxable period and no cash refund or issuance of tax credit certificate shall be allowed.

Silkair is neither the statutory taxpayer nor a withholding agent. The statutory taxpayer is the proper party to seek refund of indirect tax. Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.

Is setting off of taxes against a pending claim for refund allowed? 

No. Set-off is not allowed

Rationale: The government and the taxpayer are not creditors and debtors of each other.

Calamba Steel v. CIR, April 28, 2005 Corporation reported that it has excess credits in the year 1995 In 1996, the excess credits were not utilized In 1997, the taxpayer claimed for a refund of the excess credits acquired in 1995 Would the claim for refund be allowed? Sec 76: Irrevocability Rule Taxable period: what does it refer to? o Where the credit was acquired?; or o Where the option has been made? Taxable period refers to the period when the excess credits have already been acquired.

There is a material distinction between a tax and debt.  Debts are due to the Government in its corporate capacity  Taxes are due to the Government in its sovereign capacity

Can Calamba still ask for a refund for excess credits acquired in 1995? If the Present Tax Code is applied: Calamba can no longer claim for a refund. The option has already been made with respect to the excess credits acquired in 1995. If the taxpayer already made the option to carry over, it cannot seek for a refund. The only remedy is to carry the excess credits over the succeeding taxable years until the credits are fully utilized.

Equitable recoupment  a claim for refund already barred by prescription can be set off by the tax arising from the same transaction  The doctrine of equitable recoupment is not applicable in the Philippine setting

However, the Supreme Court in this case held that the Calamba can still claim for a refund. This case was decided prior to RA 8424, which was effective on January 1 1988

Is automatic application of excess tax credits allowed? Section 76, NIRC  Applicable for Corporate Taxpayers Requirement: Filing of final adjusted return  Involves a situation when the amount of tax due is not equal to tax paid.

Old Tax Code No irrevocability rule Taxpayer can carry over excess credits for the next succeeding taxable year (singular)

RA 8424 Contains an irrevocability rule Option to carry over can be made for the next succeeding taxable yearssssssss (plural)

The two rules cannot concur. If the two rules would concur (e.g. if the option is irrevocable [RA 9424] and the taxpayer can only carry over the excess credits for the next singular year [Old Tax

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TAXATION LAW Code]) it will be tantamount to a forfeiture of the excess credits by the Government. It will be repugnant to the constitution as it would constitute confiscation of private property of the taxpayer. CIR v. BPI, July 7, 2009

Systra Philippines v. CIR, Sept. 21, 2007 April 16 2001: Taxpayer filed income tax return for taxable year 2000 In the return filed, an option has been made that the excess credits will be carried over to taxable year 2001 April 12 2002: income tax return for 2001 was filed In the income tax return, it was reflected that the option of the taxpayer is to be issued a tax credit certificate Can this be legally done?  Yes, as to those credits incurred for taxable year 2001. Taxable period, defined  Year when excess credits were acquired In here, there are two tax credits acquired: for taxable years 2000 and 2001 As to taxable year 2000, there was already an option made. An option has been made that the excess credits will be carried over to taxable year 2001. Hence, this cannot be revoked anymore

April 15 1999: BPI filed ITR for year 1998 In this ITR, BPI reflected o its quarterly payment, o withholding taxes remitted by BPI’s withholding agent, o foreign tax credits and o prior years excess credits for year 1997 BPI opted to carry over its 1998 excess credits In 1999: BPI incurred losses in operations In 2000: BPI again suffered losses but failed to indicate its option whether tax credit or application for refund or issuance of tax credit certificate April 3 2001: BPI filed application for claim for refund If the claim for refund includes excess credits for year 1998, will the refund prosper?  No.  Apply the irrevocability rule There can no longer be a refund of the tax credits acquired in 1998 In the ITR, BPI indicated its option to carry over its 1998 excess credit. The only remedy of BPI is to carry over these excess credit until it is fully utilized. Failure to indicate option in the 2000 ITR Since BPI had failed to indicate in its return (2000 ITR) its option to carry over or refund, such failure does not automatically mean that BPI had opted for a tax credit/carry over.

Options are mutually exclusive. Once option has been made, it cannot be revoked anymore for that taxable period. One option precludes the application of the other. As to taxable year 2001, the Corporation can still exercise an option different from that which was made for year 2000. Other SC Discussion: A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. Note for Bar Exam If the exam indicates “2001 ITR”, it is pertaining to the income tax return for the taxable year 2001, which is filed on the next year (April 15, 2002)  It does not pertain to the ITR filed IN 2001, because that would involve a return for the taxable year 2000. Rather, it pertains to the ITR filed FOR the year 2001.

Philam Asset Management v. CIR, Dec. 14, 2005 April 3 1998: ITR for 1997 has been filed In this ITR, the taxpayer failed to indicate its choice whether to apply for refund or to carry over the excess credits September 11 1998: administrative claim for refund was filed. Can the excess credits acquired in 1997 be a subject of a refund?  YES. The intention of the taxpayer is to apply for refund. Despite failure to indicate option, the act of filing its written claim for refund serves as an expression of its choice. Therefore, the application for tax refund can be allowed. Also Failure to indicate the option is not a ground for denial of the refund Excess credits acquired in 1998 In the tax return filed for year 1999, the prior years excess credits had been filled out by taxpayer. 1999 ITR reflected these excess credits acquired in 1998 Taxpayer did not make markings as to its option, whether to carry over or refund

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TAXATION LAW Taxpayer then filed for application of refund for these excess credits acquired in 1998 Can it be subject of refund considering that it did not indicate its choice in filing of the return?  NO.

The governing law shall be the law effective at the time the taxpayer had made known its preference to the BIR April 15:1988 Apply RA 8424

The intent of the taxpayer can be gleaned from its subsequent act, which is the filing of ITR indicating the excess credits. Hence, it is deemed that the option of the taxpayer was to carry over these excess credits.

Is McGeorge still allowed to claim for refund?  NO.

The taxpayer cannot claim for refund for the excess credits acquired in 1998 because of the irrevocability rule.

There is already irrevocability rule. At the time of filing of ITR 1997, the taxpayer already made the option to carry over the excess credits. Hence, it cannot anymore ask for refund.

Summary of Rules: 1. 2.

Before the irrevocability rule could be applied, the controlling factor is the fact that the taxpayer must have made an option and the option can be gleaned from the final adjusted return If no option was made, the subsequent acts of the taxpayer can dictate the choice of the taxpayer Asiaworld Properties v. CIR, July 29, 2010

April 5 2002: Taxpayer filed ITR for taxable year 2001. In the ITR filed, the taxpayer reflected overpayment April 9 2002: taxpayer filed a request for refund of the excess credits for year 2001 If the 2001 ITR reflects excess credits acquired in year 1999, can the 1999 excess credits be subject of request for refund filed in 2002?  NO. The mere fact that the excess credit was included in the 2001 ITR shows that the taxpayer opted to carry over the excess credits acquired in 1999. Therefore, once such option has been made, it is irrevocable. Remedy of taxpayer: carry it over for the next succeeding taxable years until fully utilized CIR v. McGeorge Food Industries, October 20, 2010 April 15 1998: ITR for 1997 was filed The return indicated an overpayment. The taxpayer chose to carry over these excess payments.

CIR v. Mirant, June 15, 2011 Options under Section 76 are alternative in nature. The choice of one option precludes the application of the other.

Winebrenner & Inigo v. CIR, January 28 2015 In case a taxpayer opts to file a claim for refund, is it required to show the quarterly ITRs of the next taxable period to prove that it did not avail itself of the crediting mechanism?  NO. Proving that no carry-over has been made does not absolutely require the presentation of the quarterly ITRs. A taxpayer who seeks a refund of excess and unutilized creditable withholding tax must: 1) File the claim with the CIR within the two year period from the date of payment of the tax; 2) Show on the return that the income received was declared as part of the gross income; and 3) Establish the fact of withholding by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld. Any document, other than quarterly ITRs may be used to establish that indeed the non-carry over clause has been complied with, provided that such is competent, relevant and part of the records. In Philam, the Court ruled that the presentation of the quarterly ITRs was not necessary:

April 15 1999: Taxpayer filed ITR for 1998 Prior years excess credits were not utilized by the taxpayer. April 14 2001: Taxpayer filed administrative claim for refund and judicial claim for refund for payment made in 1997 Issue: The excess credits were acquired in 1997, prior to the effectivity of RA 8424. However, the filing of the return reflecting such excess credits was made in 1998, upon effectivity of RA 8414. What law shall govern?

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis in law and jurisprudence. First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the preceding – not the succeeding – taxable year. Indeed, any refundable amount indicated in the FAR of the preceding taxable year may be credited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year. However, nowhere is there even a tinge of a hint in any provisions of the [NIRC] that the FAR of the taxable year following the period to which the tax credits are originally being applied should also be presented to the BIR.

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TAXATION LAW Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for refund of income taxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the ITR that the income payment received is being declared part of the taxpayer’s gross income; and (2) when the fact of withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the amount paid and the income tax withheld from that amount. It appears that there is misunderstanding in the ruling of the Court in Philam. That factual distinction does not negate the proposition that subsequent quarterly ITRs are not indispensable. The logic in not requiring quarterly ITRs of the succeeding taxable years to be presented remains true to this day. What Section 76 requires, just like in all civil cases, is to prove the prima facie entitlement to a claim, including the fact of not having carried over the excess credits to the subsequent quarters or taxable year. It does not say that to prove such a fact, succeeding quarterly ITRs are absolutely needed. This simply underscores the rule that any document, other than quarterly ITRs may be used to establish that indeed the non-carry over clause has been complied with, provided that such is competent, relevant and part of the records. The Court is thus not prepared to make a pronouncement as to the indispensability of the quarterly ITRs in a claim for refund for no court can limit a party to the means of proving a fact for as long as they are consistent with the rules of evidence and fair play. The means of ascertainment of a fact is best left to the party that alleges the same.

in proving that prior year’s excess credits were not utilized for the taxable year in order to make a final determination of the total tax due. Stateland and Mirant are equally challenged. In all these cases however, the factual distinctions only serve to bolster the proposition that succeeding quarterly ITRs are not indispensable. Implicit from all these cases is the Court’s recognition that proving carry-over is an evidentiary matter and that the submission of quarterly ITRs is but a means to prove the fact of one’s entitlement to a refund and not a condition sine qua non for the success of refund. True, it would have been better, easier and more efficient for the CTA and the CIR to have as basis the quarterly ITRs, but it is not the only way considering further that in this case, the Annual ITR for 2004 is sufficient. Courts are here to painstakingly weigh evidence so that justice and equity in the end will prevail. The CIR must then be reminded that in Philam, the CIR’s “failure to present the quarterly ITRs and Annual Returns to support its contention against the grant of a tax refund to a claimant is certainly fatal.” The PERF Case (CIR vs. PERF) reinforces this with a sweeping statement holding that the verification process is not incumbent on PERF or any claimant for that matter; but is the duty of the CIR to verify whether xxx excess income taxes have been carried over. And should there be a possibility that a claimant may have violated the irrevocability rule and thereafter claim twice from its credits, no one is to be blamed but the CIR for not discharging its burden of evidence to destroy a claimant’s right to a refund. At any rate, a claimant who defrauds the government cannot escape liability be it criminal or civil in nature. NOTE: Ma’am Tin assigned this case for reading. It may be asked in the exam so just read the full case

In the present case, while petitioner did offer its Annual ITR/Final Adjustment Return for taxable year 2004, it appears that petitioner miserably failed to submit and offer as part of its evidence the first, second, and third Quarterly ITRs for the year 2004. Consequently, petitioner was not able to prove that it did not exercise its option to carry-over its excess CWT. Indeed, an annual ITR contains the total taxable income earned for the four (4) quarters of a taxable year, as well as deductions and tax credits previously reported or carried over in the quarterly income tax returns for the subject period. The annual ITR (including any other proof that may be sufficient to the Court) can sufficiently reveal whether carry over has been made in subsequent quarters even if the petitioner has chosen the option of tax credit or refund in the immediately 2003 annual ITR. Section 76 of the NIRC requires a corporation to file a Final Adjustment Return (or Annual ITR) covering the total taxable income for the preceding calendar or fiscal year. The total taxable income contains the combined income for the four quarters of the taxable year, as well as the deductions and excess tax credits carried over in the quarterly income tax returns for the same period. If the excess tax credits of the preceding year were deducted, whether in whole or in part, from the estimated income tax liabilities of any of the taxable quarters of the succeeding taxable year, the total amount of the tax credits deducted for the entire taxable year should appear in the Annual ITR under the item “Prior Year’s Excess Credits.” Otherwise, or if the tax credits were carried over to the succeeding quarters and the corporation did not report it in the annual ITR, there would be a discrepancy in the amounts of combined income and tax credits carried over for all quarters and the corporation would end up shouldering a bigger tax payable. It must be remembered that taxes computed in the quarterly returns are mere estimates. It is the annual ITR which shows the aggregate amounts of income, deductions, and credits for all quarters of the taxable year. It is the final adjustment return which shows whether a corporation incurred a loss or gained a profit during the taxable quarter. Thus, the presentation of the annual ITR would suffice

Effect of Existing Tax Liability on a Pending Claim for Refund CIR v. CA and Citytrust 1994 August 26 1986: Citytrust filed administrativ claim for refund for year 1984. Two days after, Citytrust filed a judicial claim for refund. CTA granted this refund. The CIR questioned the grant on the ground that Citytrust was not able to substantiate the claim and the findings of deficiency taxes bars the payment of refund. Since application of refund refers to 1984 and there is pending deficiency assessment in that same year, the tax court should not have granted the refund. The grant of refund is founded on the assumption that the tax return is valid. The facts stated in the return are correct and accurate. However, the deficiency assessment although not yet final created a doubt and constitutes a challenge against the facts stated in the return. Therefore, the return cannot be a basis for the grant of refund. The case has to be remanded to the CTA. The issue on the pending assessment and refund must be decided simultaneously in order to avoid multiplicity of suits. SC discussion To avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.

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TAXATION LAW If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved 2006 CTA conducted proceedings with respect to refund and pending assessment. Lawyer of Citytrust paid the assessment since the assessment is lower than the amount claimed for refund. CTA granted the refund for the year 1984. CIR questioned the grant of refund on the ground that there is pending assessment for year 1985 CTA correctly granted for refund. The pending assessment does not refer to taxable year 1984 which is the subject of the refund.

Pilipinas Shell Petroleum Corporation v. CIR, December 21, 2007 Tax credit certificates (TCCs) were acquired by Pilipinas Shell from BOI Registered companies Pilipinas Shall used tax credit certificates for payment of excise tax liabilities. CIR issued assessment notices. It argued that Pilipinas Shell is not a qualified transferee. Hence it cannot use the tax credit certificates as payment of its excise tax liabilities. Arguments of CIR 1. Tax credit certificates are not immediately valid and effective. There exists a suspensive condition that the TCCs must pass post-audit. If Pilipinas Shell does not comply with the requirements in post-audit, the TCCs are not valid and effective. 2.

Pilipinas Shell acquired TCCs fraudulently. It cannot acquire any right over the TCCs fraudulently issued.

Article 1181 of the Civil code governing suspensive conditions does not apply because the taxpayers (BOI- registered Corps) and government did not agree to a suspensive condition. The special laws governing the issuance of the tax credit certificates do not provide for a condition before the TCCs shall become valid and effective. There being no suspensive conditions provided under the special laws, the tax credit certificates are immediately valid and effective upon their issuance.

Period of Validity of a Tax Refund Section 230, NIRC Forfeiture of Cash Refund and of Tax Credit. – (A) Forfeiture of Refund. - A refund check or warrant issued in accordance with the pertinent provisions of this Code, which shall remain unclaimed or uncashed within five (5) years from the date the said warrant or check was mailed or delivered, shall be forfeited in favor of the Government and the amount thereof shall revert to the general fund. (B) Forfeiture of Tax Credit. - A tax credit certificate issued in accordance with the pertinent provisions of this Code, which shall remain unutilized after five (5) years from the date of issue, shall, unless revalidated, be considered invalid, and shall not be allowed as payment for internal revenue tax liabilities of the taxpayer, and the amount covered by the certificate shall revert to the general fund. Aguilar v. CIR, March 30, 1990 Returns are not actionable documents for purposes of the rules on civil procedure and evidence Income tax returns are not actionable documents because the action is not based on the income tax returns but on the entitlement of the taxpayer to tax refund. Therefore, his claim for refund must be supported by proof.

Nature of Tax Credit Certificate

Tip for exam/quiz: If you are faced with a similar problem, check if the taxpayer and government had agreed on a suspensive condition. If there are, TCCs are not immediately valid and effective. If the problem is under similar facts with the case of Pilipinas, then the ruling shall be the same: Under special laws, there exists no suspensive condition for issuance of tax credit certificates Tax Credit Certificates, defined Certification named under the taxpayer and issued by the government acknowledging the overpayment made by the taxpayer. The TCCs are in the nature of an undertaking that must be respected by government. Hence, they are transferrable in nature because they are proprietary rights. There is no evidence that Pilipinas is a party to a fraduluent issuance of the TCCs. Being a transferee in good faith and for value, its rights must not be prejudiced. Any reassessment or determination that TCCs are fraudulently issued shall not prejudice the rights of a transferee in good faith. Since Pilipinas had already utilized the TCCs in payment of its tax liabilities, these TCCs can no longer be cancelled to protect that interest of a transferee in good faith and for value. --------------------------------------------------------------------------------------------------------------------------------Full Supreme Court discussion: Tax Credit Certificate, defined a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the

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TAXATION LAW prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations. From the above definitions, it is clear that a TCC is an undertaking by the government through the BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount of tax credit from either an overpayment of income taxes, a direct benefit granted by law or other sources and instances granted by law such as on specific unused input taxes and excise taxes on certain goods. As such, tax credit is transferable in accordance with pertinent laws, rules, and regulations. Therefore, the TCCs are immediately valid and effective after their issuance. Second, the only conditions the TCCs are subjected to are those found on its face. And these are: 1. 2. 3.

Post-audit and subsequent adjustment in the event of computational discrepancy; A reduction for any outstanding account/obligation of herein claimant with the BIR and/or BOC; and Revalidation with the Center in case the TCC is not utilized or applied within one (1) year from date of issuance/date of last utilization.

The above conditions clearly show that the post-audit contemplated in the TCCs does not pertain to their genuineness or validity, but on computational discrepancies that may have resulted from the transfer and utilization of the TCC.

Under old tax code: written claim for refund must be filed Under new tax code: written claim for refund must be made except when overpayment appears in the face of the return 

Whether in the old or new tax code, there must be administrative claim for refund. The filing of an administrative claim for refund is no longer necessary.

This case does not involve a plain application for refund but a disputed assessment. The payment of 438k surcharges was covered by the assessment notice issued by the CIR. The filing of administrative claim for refund will be a useless formality. A portion of the 438k must be refunded since CIR has excessively computed the amount of surcharges and interests. --------------------------------------------------------------------------------------------------------------------------------If in the exam, you are faced with a similar problem: apply this case only if the refund sought for is covered by an assessment notice. If no assessment notice is issued and disputed by the taxpayer, the taxpayer is required to file an administrative claim for refund. This is a special circumstance because payment of surcharges is covered by notice of assessment. Hence it involves disputed assessment, in which case the filing of administrative claim for refund is not necessary and is already a useless formality. Query in class: What if the payment of the surcharge here was not made under protest? (The taxpayer simply paid the surcharge, without filing for a protest)

Refund and Protest are mutually exclusive remedies

A; The petition for review must be dismissed, not because of the lack of administrative claim for refund, but because there is no disputed assessment to speak of. The payment was not made under protest. If no protest is filed after an assessment is made by the CIR, that assessment becomes final and executory. Hence, the petition for review will not prosper.

Vda. De San Agustin v. CIR, September 10, 2001 Decedent died. In his holographic will, he named his wife as sole heir and Jose feria as executor. Feria requested for extension of 2-year for payment of the estate tax. The CIR granted extension only for 6 months. The estate paid the tax within the 6 months period On October 11991: CIR issued preliminary assessment notice indicating the deficiency estate tax On October 4 1991: CIR reiterated its demand to pay the deficient estate tax liabilities on its assessment notice On October 31 1991: Taxpayer filed a request for reconsideration only with respect to the surcharges imposed by the CIR. Taxpayer manifested willingness to pay tax except to surcharge December 18 1991: CIR’s acceptance of payment of liability January 25 1993: Taxpayer paid surcharge under protest February 18 1993: Taxpayer filed for a petition for review before the CTA. CIR’s argument: Since taxpayer did not file administrative claim for refund before Cir, the judicial claim for refund must be dismissed. Under Tax Code, administrative claim must be filed first before judicial claim for refund shall prosper.

Is taxpayer entitled to claim interest for refunded taxes? Section 79 (c) (2), NIRC (2) Employees. -The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made Summary on overly withheld taxes from salaries or wages of an employee  Excess taxes withheld from income of employee must be refunded within 3 months from April 15. If not, there shall be accrual of interest at the rate of 6% per annum.

Review:

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TAXATION LAW 

The employer refunds the overly withheld taxes to the employee. If he fails to do so within 3 months after April 15, he is liable for interest

C. OTHER REMEDIES 1. 

Action to contest forfeiture of chattel Can be done:  before sale or  after sale If filed after sale, it must be within 6 months after such sale When the action is filed after sale, the movable property will no longer be vested upon taxpayer if such is transferred to a purchaser in good faith. In this case, the proceeds from the sale shall be given to the taxpayer. 2. 

Redemption of property sold If real property is sold to satisfy tax, taxpayer can redeem such property within 1 year from date of sale

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TAXATION LAW Remedies Available To The Government No Injunction to Restrain Collection of Taxes Section 218, NIRC: Injunction not Available to Restrain Collection of Tax. No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code.  This rule applies only to internal revenue taxes AND NOT to local taxes. CIR vs. Angeles University Local government Code does not contain similar provision involving the Rule under section 218 of the tax code. Hence collection of local taxes can be restrained.

CTA properly acquired jurisdiction over case notwithstanding the fact that assessment had attained finality. The CTA can acquire jurisdiction over other matters arising out of NIRC and other special laws administered by the BIR. The issue on prescription of the BIR right to collect the tax is covered by “other matters”. Further, the term disputed assessments and other matters are independent and separate from each other. It is not necessary that the phrase other matters must involve disputed assessments. It may involve final and undisputable assessments. The BIR’s right to collect the tax has been barred by prescription.

Overview of Remedies (Section 205) Section 205, NIRC: Remedies for the Collection of Delinquent Taxes. –

Can the collection of tax be suspended by filing of a protest or a petition for review?  No.  Under RA 9282, the filing of a protest or petition before CTA will not suspend the collection of the tax  Exception, where the collection of tax may be suspended: If the CTA ordered the suspension of the collection of the tax in order to protect the interest of the government and taxpayer Requirement: taxpayer must post a bond.

Period within which the Government could collect Determination of Prescription of Collection CIR v. Hambrecht and Quist Philippines, November 27, 2010 February 18 1993: BIR received a letter for change of business address of the taxpayer November 4 1993: Taxpayer received a letter demanding for payment of deficiency taxes January 8 1993: assessment notice has been sent through mail December 3 1994: Taxpayer filed a protest November 7 2001: Taxpayer’s auditor received letter from BIR denying the protest because it was filed beyond the 30-day prescriptive period. December 6 2001: Petition for review was filed before the CTA CTA ruling: since the assessment notice was sent by mail on January 8 1993, it will be presumed as having been duly served upon the taxpayer. Therefore, the CTA upheld the argument of CIR that the protest was already filed beyond the 30- day period. Also, notwithstanding the fact that assessment final and unappealable, CIR cannot collect the taxes since collection is already barred by prescription. Hence CTA ordered cancellation and withdrawal of the assessment notices. CIR’s argument: since CTA ruled that assessment is final, it should likewise concluded that it had not acquired jurisdiction

The civil remedies for the collection of internal revenue taxes, fees or charges, and any increment thereto resulting from delinquency shall be: (a) By distraint of 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, and by levy upon real property and interest in rights to real property; and (b) By civil or criminal action. Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes: Provided, however, That the remedies of distraint and levy shall not be availed of where the amount of tax involve is not more than One hundred pesos (P100). The judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. The Bureau of Internal Revenue shall advance the amounts needed to defray costs of collection by means of civil or criminal action, including the preservation or transportation of personal property distrained and the advertisement and sale thereof, as well as of real property and improvements thereon. 1. Tax Lien Section 219, NIRC: unpaid taxes shall constitute a tax lien over the properties of the taxpayer. CIR v. NLRC, November 9, 1994 CIR sent two demand letters on January 12 1984. Taxpayer did not file any protest. Hence, assessment became final and unappealable CIR issued warrant of distraint, served on January 28 1985 April 16 1985: receipt for goods was executed pursuant to tax code involving distraint of personal property. The receipt enumerated the property of taxpayer that are subject of the distraint.  Deemed a constructive distraint

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TAXATION LAW 

The execution of the receipt will be tantamount to the actual seizure of properties but the CIR does not have physical possession of these properties

CIR discovered that 4 barges were already subject of execution for nonpayment of wages to employees. The execution was made on July 20 1985. The barges were sold on August 12 1985

intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property or to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him.

When CIR learned of the same, it wrote letter to Labor Arbiter requesting for cancellation of sale or turnover of the proceeds of the sale to the BIR.

The constructive distraint of personal property shall be affected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same ;in any manner whatever, without the express authority of the Commissioner.

Labor Arbiter did not grant the request of CIR. The Labor Arbiter ruled that there was no valid distraint because the receipt was not signed by the taxpayer. Also, it cited Article 110 of the Labor Code, the claims of the employees take preference over other claims, including the claim of government for unpaid taxes.

In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnessed, leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint.

The claim of the government is predicated on a tax lien superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the distraint or levy but from the time the tax became due and payable. Regardless of this fact, whose right came first? Government: warrant of distraint or levy was served on January 28 1985. Employees: execution of the barges was made on July 20 1985.  The government’s right came first. Since the warrant or distraint or levy is already served prior to the execution by the trial court to enforce the unpaid wages and benefits of the employees, then the property subject of the execution is no longer the properties of Maritime Company. Upon service of distraint, these barges are already properties of the government. They are already subject of constructive distraint. The company is no longer owners of the properties. The courts cannot execute a judgment through properties not belonging to the debtor. Article 110 on the preference of unpaid wages will only apply in cases of bankruptcy. Maritime did not apply for bankruptcy so Article 110 will not apply. The tax lien shall be constituted upon all the properties of the insolvent taxpayer whether movable or immovable, (not only properties upon which the tax is due.) 2. 3. 4. 5. 6. 7. 8.

Compromise Distraint or Levy Civil Action Criminal Action Forfeiture Suspension of business operations Enforcement of administrative funds

Administrative Remedies in Detail (Sections 206-217 NIRC) Note: Read the provisions! Section 206. Constructive Distraint of the Property of A Taxpayer. - To safeguard the interest of the Government, the Commissioner may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or is

Section 207. Summary Remedies. – (A) Distraint of Personal Property. - Upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required, the Commissioner or his duly authorized representative, if the amount involved is in excess of One million pesos (P1,000,000), or the Revenue District Officer, if the amount involved is One million pesos (P1,000,000) or less, shall seize and distraint any goods, chattels or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property of such persons ;in sufficient quantity to satisfy the tax, or charge, together with any increment thereto incident to delinquency, and the expenses of the distraint and the cost of the subsequent sale. A report on the distraint shall, within ten (10) days from receipt of the warrant, be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director: Provided, That the Commissioner or his duly authorized representative shall, subject to rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, have the power to lift such order of distraint: Provided, further, That a consolidated report by the Revenue Regional Director may be required by the Commissioner as often as necessary. (B) Levy on Real Property. - After the expiration of the time required to pay the delinquent tax or delinquent revenue as prescribed in this Section, real property may be levied upon, before simultaneously or after the distraint of personal property belonging to the delinquent. To this end, any internal revenue officer designated by the Commissioner or his duly authorized representative shall prepare a duly authenticated certificate showing the name of the taxpayer and the amounts of the tax and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. Levy shall be affected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds for the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question. In case the warrant of levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his tax delinquency, the Commissioner or his duly authorized representative shall, within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer's real property. Within ten (10) days after receipt of the warrant, a report on any levy shall be submitted by the levying officer to the Commissioner or his duly authorized representative: Provided, however, That a consolidated report by the Revenue Regional Director may be required by the Commissioner as often as necessary: Provided, further, That the Commissioner or his duly authorized representative, subject to rules and regulations promulgated by the Secretary of Finance, upon

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TAXATION LAW recommendation of the Commissioner, shall have the authority to lift warrants of levy issued in accordance with the provisions hereof. Section 208. Procedure for Distraint and Garnishment. - The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, a copy of which, signed by himself, shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale. Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the corporation, company or association, which issued the said stocks or securities. Debts and credits shall be distrained by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The warrant of distraint shall be sufficient authority to the person owning the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits. Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall tun over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. Section 209. Sale of Property Distrained and Disposition of Proceeds. - The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is made, specifying; the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained. At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges. In the case of Stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities. Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending ;the sale, and no charge shall be imposed for the services of the local internal revenue officer or his deputy. Section 210. Release of Distrained Property Upon Payment Prior to Sale. - If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. Section 211. Report of Sale to Bureau of Internal Revenue. - Within two (2) days after the sale, the officer making the same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record.

Section 212. Purchase by Government at Sale Upon Distraint. - When the amount bid for the property under distraint is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the national Government for the amount of taxes, penalties and costs due thereon. Property so purchased may be resold by the Commissioner or his deputy, subject to the rules and regulations prescribed by the Secretary of Finance, the net proceeds therefrom shall be remitted to the National Treasury and accounted for as internal revenue. Section 213. Advertisement and Sale. - Within twenty (20) days after levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of a least thirty (30) days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in public and conspicuous place in the barrio or district in which the real estate lies and ;by publication once a week for three (3) weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain a statement of the amount of taxes and penalties so due and the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties and interest. If he does not do so, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify. Within five (5) days after the sale, a return by the distraining or levying officer of the proceedings shall be entered upon the records of the Revenue Collection Officer, the Revenue District officer and the Revenue Regional Director. The Revenue Collection Officer, in consultation with the Revenue district Officer, shall then make out and deliver to the purchaser a certificate from his records, showing the proceedings of the sale, describing the property sold stating the name of the purchaser and setting out the exact amount of all taxes, penalties and interest: Provided, however, That in case the proceeds of the sale exceeds the claim and cost of sale, the excess shall be turned over to the owner of the property. The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his collection, advance an amount sufficient to defray the costs of collection by means of the summary remedies provided for in this Code, including ;the preservation or transportation in case of personal property, and the advertisement and subsequent sale, both in cases of personal and real property including improvements found on the latter. In his monthly collection reports, such advances shall be reflected and supported by receipts. Section 214. Redemption of Property Sold. - Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum f rom the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issued to the purchaser and a certificate from the said Revenue District Officer that he has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the purchaser the amount by which such property has thus been redeemed, and said property thereafter shall be free from the lien of such taxes and penalties. The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. Section 215. Forfeiture to Government for Want of Bidder. - In case there is no bidder for real property exposed for sale as herein above provided or if the highest bid is for an amount insufficient to pay the taxes, penalties and costs, the Internal Revenue Officer conducting the sale shall declare the property forfeited to the Government in satisfaction of the claim in question and within two (2) days thereafter, shall make a return of his proceedings and the forfeiture which shall be spread upon

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TAXATION LAW the records of his office. It shall be the duty of the Register of Deeds concerned, upon registration with his office of any such declaration of forfeiture, to transfer the title of the property forfeited to the Government without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer, or any one for him may redeem said property by paying to the Commissioner or the latter's Revenue Collection Officer the full amount of the taxes and penalties, together with interest thereon and the costs of sale, but if the property be not thus redeemed, the forfeiture shall become absolute. Section 216. Resale of Real Estate Taken for Taxes. - The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days notice, sell and dispose of the same of public auction or with prior approval of the Secretary of Finance, dispose of the same at private sale. In either case, the proceeds of the sale shall be deposited with the National Treasury, and an accounting of the same shall rendered to the Chairman of the Commission on Audit.

or the highest bid is not sufficient to pay the taxes, penalties and costs. Taxpayer was not given the right of Taxpayer can redeem properties redemption levied upon and sold/forfeited to the government. Both are summary remedies for collection of taxes. 3. Garnishment The taking of personal properties usually cash or sums of money owned by the delinquent taxpayer which is in the possession of a third party.  Discussion: This usually involves intangible properties

Section 217. 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. 1. Distraint Seizure by the government of personal property, tangible or intangible, to enforce the payment of faces, to be followed by its public sale, if the taxes are not voluntarily paid. Kinds: a. Actual – There is taking of possession of personal property out of the taxpayer into that of the government. In case of intangible property, taxpayer is also diverted of the power of control over the property. b. Constructive – There is execution of receipt covering the properties subject of constructive distraint. If a property is already covered by a receipt, taxpayer is prohibited from disposing of these properties Difference between Actual and Constructive Distraint (SLU Reviewer) Actual Constructive Made on the property only of a May be made on the property of delinquent taxpayer. any taxpayer whether delinquent or not There is actual taking or possession Taxpayer is merely prohibited of the property. from disposing of his property. Effected by having a list of the Effected by requiring the taxpayer distraint property or by service or to sign a receipt of the property or warrant of distraint or garnishment. by leaving a list of same An immediate step for collection of Such immediate step is not taxes where amount due is definite. necessary; tax due may not be definite or it is being questioned. 2. Levy An act of seizure of real property in order to enforce the payment of taxes. The property may be sold at public sale, if after seizure, the taxes are not voluntarily paid. Difference between Distraint and Levy (SLU reviewer) Distraint Levy Personal property Real property Forfeiture by government is not Forfeiture by government is provided authorized where there is no bidder

Judicial Remedies in Detail a.

Period within which action may be filed

Civil case: Apply Sec 203 and 222 of Tax Code

Tax assessed Regular Period (Section 203) No tax assessed False/fraudulent return or Failure to file (Section 222)

Tax assessed No tax assessed

SUMMARY Assessment 3 years from last day prescribed for filing of return (Proceeding in court without assessment) 10 years (proceeding in court) Agreed period

Tax assessed pursuant to waiver

Collection 3 years from assessment 3 years from filing of return 5 years from assessment 10 years from discovery of the fraud Agreed period If no agreed period: 5 years from date of assessment

Criminal case Must be filed within 5 years from commission of violation or from the discovery thereof. Section 281: Such 5 year period may be interrupted when proceedings are instituted against the guilty persons and will begin to run again if the proceeding is dismissed for reasons other than double jeopardy. The period shall not run when the offender is absent from the Philippines. Lim v. CA, October 18, 1990

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TAXATION LAW In criminal tax cases, there is no right to reserve civil action. Doctrine: The discovery of the offense is not the only determining factor for the period to run. The institution of judicial proceedings is necessary so that the period will begin to run. CIR discovered the filing of fraudulent returns by the taxpayer on October 15 1964 Affidavit complaint was filed on September 1 1969. The information filed in court was made beyond the 5-year period if it will be counted form the date of discovery CIR’s argument: The 5 year period is not counted from October 15 1964 but on date of filing of the affidavit complaint before the Office of Prosecutor The five year period shall run from September 1 1969, the date when the affidavit complaint was filed. The tax code does not merely provide for the discovery of the offense or commission, but likewise includes the institution of judicial proceeding before the period will begin to run. Institution of judicial proceeding: refers to filing of complaint before of the office of prosecutor. Tax cases are practically imprescriptible for as long as the period from the discovery and institution of judicial proceedings up to the filing of the information in court does not exceed a period of 5-years. b.

Where should the cases be filed?

Criminal Cases Municipal Trial Court Regional Trial Court Court of Tax Appeals

Penalty of imprisonment for 6 years and below Penalty of imprisonment for more than 6 years If the basic tax due is 1 million pesos and above, exclusive of interests and surcharges  Inclusive ONLY of basic tax due

Note: RTC and MTC will only acquire jurisdiction (depending on the length of imprisonment) if:  the basic tax due is below 1M pesos; or  the basic tax due is unspecified Civil cases Municipal Trial Court Regional Trial Court Court of Tax Appeals

Outside Metro Manila Claim is P300k and below Within Metro Manila Claim is P400k and below Outside Metro Manila Claim is more than 300k Within Metro Manila Claim is more than 400k 1.If the basic tax due is 1 million pesos and above, exclusive of interests and surcharges Inclusive ONLY of basic tax due 2. If collection of tax liability pertains to assessments that had become final and unappealable



Approval of Filing of Civil and Criminal Actions Republic v. Hizon, December 13, 1999 Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR's Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law Participation of the Office of Solicitor General CIR v. La Suerte Cigar, July 4, 2002 Can legal officer of BIR appeal a tax case? Action was instituted by the BIR’s legal officer. On appeal, he also represented the BIR. Sec 220 of Tax Code which provides for the legal officer’s primary responsibility to conduct civil or criminal action pertains only to the institution or commencement of action. If it pertains to appeal of the case, only the Solicitor General can appear for and represent the State. Solicitor General was directed to make his appearance before the CA. Supreme Court’s Discussion: The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which "shall be conducted by legal officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of the Tax Reform Act must not be understood as overturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings Marcos II v. CA, June 5, 1997 The approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected. On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax

Right to Reserve Civil Action

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TAXATION LAW Judy Anne Santos v. People, August 26, 2008 Denial of motion to quash was filed by Judy Anne before the CTA division. CTA division denied motion to quash. Judy Anne Santos filed extension to file for petition review before CTA En Banc but this was denied. CTA En Banc held that it does not take cognizance of petition for review on denial of motion to quash. Can CTA En Banc acquire jurisdiction over an interlocutory order of the CTA Division? Important note: Denial of motion to quash is merely an interlocutory order. If we will look into RA 9282, a denial of a motion to quash can be reviewed by the CTA En Banc. RA 9282 expanded the jurisdiction of CTA En Banc, wherein it can take cognizance of any resolution, decision or order of CTA Division. Hence, CTA has an expanded jurisdiction. However, it is a basic rule in Remedial Law that an interlocutory order is not appealable. Will an interlocutory order, such as the denial of a motion to quash be considered as a proper subject of special civil action of certiorari under Rule 65?

Penalty: 25% of the amount due, in addition to the tax required to be paid Grounds: 1. Failure to file any return and to pay the tax due thereon as required by the NIRC or rules. 2. Filing a return with an internal revenue officer other than those with whom the return is required to be fired. (Not authorized officer) 3. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. 4. Failure to pay the full or part of the amount of tax shown on any return, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. B.

FRAUD PENALTY (SEC. 248B, NIRC)

Penalty: 50% of the amount due, in addition to the tax required to be paid Grounds: 1. In case of willful neglect to file the return within the period prescribed by the NIRC or rule. 2. In case a false or fraudulent return is willfully made.

NO. The denial of a motion to quash is not a proper subject of an appeal and not a proper subject for a special civil action of certiorari ground for certiorari Remedy of the Accused  to go to trial and raise the issue of denial of motion to quash as a special defense. Exception, where CTA En Banc may acquire jurisdiction over an interlocutory order:  if it deals with exceptional circumstances, such that it is for the enlightenment and substantial interest of justice Judy Anne in this case did not prove exceptional circumstance for the CTA to take jurisdiction over the denial of the motion to quash either through appeal or a special civil action for certiorari.

CIR vs. Javier, July 31, 1991 There was no actual intentional fraud in filing the return. Private respondent’s notation on the tax return was at most an error or mistake of fact or law not constituting fraud, an invitation for investigation and private respondent had literally laid his cards on the table. The fact that taxpayer has reported the excess income in the return even if not included in the gross sales or receipts will negate fraud. If he had intention to evade tax, he should not have included it as a footnote.

Effects of Failure to Pay the Tax on Time Additions to the tax:  Interest—20% per annum  Surcharges – 25% of the basic tax due (one-time imposition) If involves fraud penalty: 50% of the basic tax due  Compromise penalty: depends on the tax bracket 1.

SURCHARGES

Nature: A civil penalty imposed by law as an addition to the main tax required to be paid. It is not a criminal penalty but a civil administrative sanction provided primarily as safeguard for the protection of the State revenue and to reimburse the government for the expenses of investigation and the loss resulting from the taxpayer’s fraud. A surcharge added to the main tax is subject to interest. (SLU Reviewer) A.

2.

INTEREST

This is an increment on any unpaid amount of tax assessed at the rate of 20% per annum or such higher rate as may be prescribed by the regulations from the date prescribed for payment until the amount is fully paid. Classes of interest A. Deficiency interest B. Delinquency interest C. Interest on extended payment  Deficiency interest Any deficiency in the tax due shall be subject to the interest of 20% per annum which shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

ORDINARY (SEC. 248A, NIRC)

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TAXATION LAW  Delinquency interest Delinquency interest is imposed in case of failure to pay: 1. The amount of the tax due on any return required to be filed; or 2. The amount of tax due for which no return is required; or 3. A deficiency tax or any surcharge or interest thereon on the issue date appearing in the notice and demand of the Commissioner. (SLI Reviewer)  Rate is 20% per annum until the amount is fully paid which interest shall form part of the tax.  1) 2)

Interest on Extended Payment any person who is qualified and elects to pay the tax on installment but fails to pay the tax, or any installment, or any part on or before the date prescribed; or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof,

It accrues from the date of notice and demand until it is paid. 3.   

COMPROMISE PENALTY

It is a certain amount of money which the taxpayer pays to compromise a tax violation. It is paid in lieu of a criminal prosecution. Since it is voluntary in character, the same may be collected only if the taxpayer is willing to pay them.

NOTE: This is the only addition to tax that can be legally reduced by Revenue Examiner

EFFECT OF FAILURE TO FILE CERTAIN INFORMATION RETURNS Failure to File Certain Information Returns (Sec. 250, NIRC) In the case of each failure to file:  information return;  statement or list;  keep any record; or  supply any information as required by NIRC or by the Commissioner on the date prescribed thereof. Effect: Penalty: P 1,000 for each failure o The aggregate amount for all such failure shall not exceed P 25,000 during a calendar year o Upon notice and demand by the Commissioner  Unless it is shown that such failure is due to reasonable cause and not to willful neglect.

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TAXATION LAW Local Taxation GENERAL CONCEPT

will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources, (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.” Mactan Cebu International Airport Authority vs. Marcos, September 11, 1996

Nature of the Local Taxing Power 

Constitutional Provision (Section 5, Article X)

“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.” 

A delegated power?

The taxing powers of local government units cannot extend to the levy of, inter alia, “taxes, fees and charges of any kind on the National Government, its agencies and instrumentalities, and local government units”. However, pursuant to Section 232, provinces, cities, and municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, “real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person,” as provided in item (a) of the first paragraph of Section 234.

No. The power to tax of Local Government Units (LGUs) is not a delegated power. LGU’s no longer need enabling law to levy taxes fees and charges. The limitation on the LGU’s power to tax is set forth under the Local Government Code. Is there a need for the LGUs to enact a law in order to collect the tax?  Yes, through ordinances enacted by legislative branch  Without ordinances, they cannot collect the tax on the ground of due process. Note: The Local Government Code is not a source of tax liability. It merely sets limitation of the power to tax of the LGUs. City of San Pablo Laguna vs. Reyes, March 25, 1999 The power to tax is primarily vested in Congress. However, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. The important legal effect of Section 5 is that henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will have to resolved in favor of municipal corporations. Meralco vs. Province of Laguna, May 5, 1999 Local governments do not have the inherent power to tax except to the extent that such power might be delegated to them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government units. The 1987 Constitution has a counterpart provision in the 1973 Constitution, which did come out with a similar delegation of revenue making powers to local governments. Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and selfsufficiency of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous, the legislature must still see to it that (a) the taxpayer

NAPOCOR vs. City of Cabanatuan, April 9, 2003 In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also “dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders.” The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers. 

Inherent power?

The power to tax as an inherent power pertains to such power of the State and not of the LGUs. If there is no Constitution, there must be a law that shall enable the LGUs the collect the taxes. This shows that the power to tax by the LGUs is not inherent. The power to tax of the State, on the other hand, is inherent. As long as the state exists, power to tax exists. 

Extent of the Power of Congress in Local Taxation City Govt. of Quezon City vs. Bayantel, March 6, 2006

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TAXATION LAW The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress." In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local government’s delegated power to tax under the aegis of the 1987 Constitution -------------------------------------------------------------------------------------------------------------------------------Lecture Notes: Under the Local Government Code, Government owned and controlled corporations (GOCCs) are no longer exempt from tax. Bayantel is a GOCC. Under its charter, it enjoys exemption from local taxes, including real property tax. Under effectivity of Local Government Code, its exemption was withdrawn by virtue of Section 193. Bayantel’s charter was amended after LGC where it was again granted an exemption from local taxes. Does the Congress still have the power to grant exemptions to entities? Yes. Power to tax is vested to the Congress. Along with this is its power to grant exemptions from taxes in favor of entities. Two entities may grant exemptions from taxes:  LGUs; and  Congress 

Residual Power to Tax

Preemption (133 of LGC) Subject matters already subject to taxes imposed by national government can no longer be subject to tax by the Local Government Units. 

Examples of National Taxes: VAT, Capital Gains Tax, Percentage Tax, etc

Residual Power to Tax A Local Government Unit can impose taxes not being imposed by national government and other local government units 

E.g. Municipality has power to impose business taxes. Therefore, province can no longer impose same tax.

What if municipality opted not to collect business tax.

 

The province can now collect the business tax pursuant to its residual power. However, this must be put in line with preemption. If such is already subjected to tax by national government, it cannot be taxed by LGUS.

Hanging question: Is local business tax akin to percentage tax?

Fundamental Principles on the Exercise of the Local Taxing Power Section 130, Local Government Code The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: 1. Taxation shall be uniform in each local government unit; 2. Taxes, fees, charges and other impositions shall:  be equitable and based as far as practicable on the taxpayer's ability to pay;  be levied and collected only for public purposes;  not be unjust, excessive, oppressive, or confiscatory;  not be contrary to law, public policy, national economic policy, or in restraint of trade; 3. The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; 4. The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, 5. Each local government unit shall, as far as practicable, evolve a progressive system of taxation. 

Violation of these principles would render the imposition of the tax as void.

Common limitations on the exercise of the local taxing power and the principle of preemption/exclusionary rule SEC. 133, LOCAL GOVERNMENT CODE Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein; (d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned; (e) Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise; (f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code; (k) Taxes on premiums paid by way of reinsurance or retrocession;

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TAXATION LAW (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, except as otherwise provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperatives Code of the Philippines" respectively; and (o) Taxes, fees or charges of any kind on the National Government , its agencies and instrumentalities, and local government units.

The Principle of Preemption Province of Bulacan vs. CA, November 27, 1998 A province may not levy excise taxes on articles already taxed by the National Internal Revenue Code. It is clearly apparent from Section 151 of the National Internal Revenue Code levies a tax on all quarry resources, regardless of origin, whether extracted from public or private land. Thus, a province may not ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources, as the same are already taxed under the National Internal Revenue Code. The province can, however, impose a tax on stones, sand, gravel, earth and other quarry resources extracted from public land because it is expressly empowered to do so under the Local Government Code. As to stones, sand, gravel, earth and other quarry resources extracted from private land, however, it may not do so, because of the limitation provided by Section 133 of the Code in relation to Section 151 of the National Internal Revenue Code. First Philippine Industrial Corp. vs. CA, December 9, 1998 Are pipeline concessionaires considered as common carriers?  Yes. Petitioner can no longer be taxed by the Local Government Unit. There is no doubt that petitioner is a "common carrier" and, therefore, exempt from the business tax as provided for in Section 133 (j), of the Local Government Code, to wit: "Section 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following : xxx

xxx

xxx

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code."

The legislative intent in excluding from the taxing power of the local government unit the imposition of business tax against common carriers is to prevent a duplication of the so-called "common carrier's tax." Petitioner is already paying three (3%) percent common carrier's tax on its gross sales/earnings under the National Internal Revenue Code. To tax petitioner again on its gross receipts in its transportation of petroleum business would defeat the purpose of the Local Government Code.

Palma Development Corp. vs. Municipality of Malangas, October 16, 2003 By express language of Sections 153 and 155 of RA No. 7160, local government units, through their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 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 by Section 133(e). Batangas Power Corp. vs. Batangas City, April 28 2004 Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from levying taxes on BOIcertified pioneer enterprises for a period of six years from the date of registration, applies specifically to taxes imposed by the local government, like the business tax imposed by Batangas City on BPC in the case at bar. Reliance of BPC on the provision of Executive Order No. 226 specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year tax holiday provided therein which commences from the date of commercial operation refers to income taxes imposed by the national government on BOIregistered pioneer firms. Clearly, it is the provision of the Local Government Code that should apply to the tax claim of Batangas City against the BPC. The 6-year tax exemption of BPC should thus commence from the date of BPC’s registration with the BOI on July 16, 1993 and end on July 15, 1999. As to exemption of National Power Corporation NPC is exempted from local taxes under its charter. However, because of passage of Local Government Code, the exemption of NPC was already withdrawn. After LGC, NPC is no longer exempt from local taxes, unless the charter will be amended. MIAA vs. CA and Paranaque; July 20 2006 MIAA is a government instrumentality. Section 133o: Exemption of Republic and its instrumentalities from local taxes. Since MIAA is instrumentality, it is exempt from local tax. If an entity is a government owned and controlled corporation (GOCC)  Not exempt. The exemption of GOCC from local taxes was already withdrawn in the Local Government Code. Philreca vs. DILG; June 10 2003 Sec 234 of LGC: Only cooperatives registered under CDA are exempt from local property tax. Those registered under NEA are not exempt from such taxes.

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TAXATION LAW Philreca is a cooperative registered under PD 269 (NEA). A law was passed imposing real property taxes on cooperatives registered under PD 269 Sec 234 of the Local Government Code: Enumerates properties exempt from tax, one of which are properties of duly registered cooperatives under RA 6938 (CDA)

While it is true that you will be visually engaged in a resort, it is not within the definition of amusement places, using the principle of ejusdem generis. The phrase “other amusement places” must refer to one where there is display of artistic performance. Hence, gross receipts arising from services of Pelizloy cannot be subject to Amusement Tax.

Was there a violation of Equal Protection Clause? There was no violation. There is a substantial distinction between cooperatives registered under PD 269 and RA 6938 PD 269 Members are not required to pay reasonable contributions; Only membership fee of P5.00 which is non-refundable Cooperatives must be controlled by NEA

RA 6938 25-25 rule compliance 25% of authorized contributions must be subscribed, 25% of subscribed contribution must be paid. Subsidiarity  They can act on their own without much governmental control or supervision  Still controlled by government but exercises subsidiarity

Philreca is not registered under CDA, and therefore is not exempt from local tax

Petron Corporation v. Tiangco; April 16 2008 May a Local Government Unit impose tax on sale of petroleum products? All kinds of taxes including business tax cannot be imposed upon the sale of petroleum products because they are already subject to excise taxes imposed by the National Government. Section 133h of the Local Government code also prohibits LGUs from imposing taxes on the sale of petroleum products. Pelizloy vs. Municipality of Tuba Municipality of Tuba collected amusement taxes from Pelizloy, an owner of a resort. The contention of the municipality is that the resort is an amusement place and as such is subject to amusement tax. Pelizloy questioned the ordinance before the Secretary of Justice. Are the gross receipts of Pelizloy subject to amusement tax? NO. LGUs can collect amusement tax. It is imposed upon receipts arising from cinemas, theaters, boxing, amusement cases.

The gross receipts of Pelizloy are already subjected to other percentage tax collected by the national government. LGUs cannot collect tax from them anymore. They are being collected by the government.

Specific Taxing Powers of Local Government Units Provinces 

Scope of the Taxing Power

Local Government Code Provisions Section 134: Scope of Taxing Powers. - Except as otherwise provided in this Code, the province may levy only the taxes, fees, and charges as provided in this Article. Section 186. Power to Levy Other Taxes, Fees or Charges. - Local government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose. 

Taxes that may be levied by provinces Local Government Code (Sections 135-141)

SEC. 135. Tax on Transfer of Real Property Ownership. – (a) The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property at the rate of not more than fifty percent (50% of one percent (1%) of the total consideration involved in the acquisition of the property or of the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher. The sale, transfer or other disposition of real property pursuant to R.A. No. 6657 shall be exempt from this tax. (b) For this purpose, the Register of Deeds of the province concerned shall, before registering any deed, require the presentation of the evidence of payment of this tax. The provincial assessor shall likewise make the same requirement before cancelling an old tax declaration and issuing a new one in place thereof. Notaries public shall furnish the provincial treasurer with a copy of any deed transferring ownership or title to any real property within thirty (30) days from the date of notarization. It shall be the duty of the seller, donor, transferor, executor or administrator to pay the tax herein imposed within sixty (60) days from the date of the execution of the deed or from the date of the decedent's death. SEC. 136. Tax on Business of Printing and Publication. – The province may impose a tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year. In

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TAXATION LAW the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein. The receipts from the printing and/or publishing of books or other reading materials prescribed by the Department of Education, Culture and Sports, as school texts or references shall be exempt from the tax herein imposed. SEC. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein. SEC. 138. Tax on Sand, Gravel and Other Quarry Resources. - The province may levy and collect not more than ten percent (10%) of fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction. The permit to extract sand, gravel and other quarry resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the sangguniang panlalawigan. The proceeds of the tax on sand, gravel and other quarry resources shall be distributed as follows (1) Province - Thirty percent (30%); (2) Component city or municipality where the sand, gravel, and other quarry resources are extracted - Thirty percent (30%); and (3) barangay where the sand, gravel, and other quarry resources are extracted - Forty percent (40%). SEC. 139. Professional Tax. – (a) The province may levy an annual professional tax on each person engaged in the exercise or practice of his profession requiring government examination at such amount and reasonable classification as the sangguniang panlalawigan may determine but shall in no case exceed Three hundred pesos (P=300.00). (b) Every person legally authorized to practice his profession shall pay the professional tax to the province where he practices his profession or where he maintains his principal office in case he practices his profession in several places: Provided, however, That such person who has paid the corresponding professional tax shall be entitled to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession. (c) Any individual or corporation employing a person subject to professional tax shall require payment by that person of the tax on his profession before employment and annually thereafter. (d) The professional tax shall be payable annually, on or before the thirty-first (31st) day of January. Any person first beginning to practice a profession after the month of January must, however, pay the full tax before engaging therein. A line of profession does not become exempt even if conducted with some other profession for which the tax has been paid. Professionals exclusively employed in the government shall be exempt from the payment of this tax. (e) Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports, books of account, plans and designs, surveys and maps, as the case may be, the number of the official receipt issued to him. SEC. 140. Amusement Tax. – (a) The province may levy an amusement tax to be collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees. (b) In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the provincial treasurer before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of the cinematographic films. (c) The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentations, except pop, rock, or similar concerts shall be exempt from the payment of the tax herein imposed. (d) The sangguniang panlalawigan may prescribe the time, manner, terms and conditions for the payment of tax. In case of fraud or failure to pay the tax, the sangguniang panlalawigan may impose such surcharges, interests and penalties as it may deem appropriate. (e) The proceeds from the amusement tax shall be shared equally by the province and the municipality where such amusement places are located.

SEC. 141. Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products. – (a) The province may levy an annual fixed tax for every truck, van or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of 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, whether directly or indirectly, within the province in an amount not exceeding Five hundred pesos (P500.00). (b) The manufacturers, producers, wholesalers, dealers, and retailers referred to in the immediately foregoing paragraph shall be exempt from the tax on peddlers prescribed elsewhere in this Code.

Summary of Taxes that may be Levied by Provinces (SLU Reviewer) 1.   

2.

Printing and Publication

3.    4.    

5.   6.   7.

Transfer of Real Property ownership Whether onerous or gratuitous Preemption rule is not applicable Rate: ½ of 1% of the total consideration involved in the acquisition of the property or of the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher

Franchise Tax Government franchise, whether primary or secondary, i.e. public utility companies If the franchise grants tax exemption and the same was executed prior to 1991 LGC, it is deemed revoked by reason of the law’s blanket revocation. At a rate not exceeding ½ of 1% of the Gross Amount receipt of the preceding calendar year Professional Tax Those who have passed government licensure examinations are the ones liable Amount – not exceeding Php 300.00 Imposed by the city or province where the taxpayer’s principal office is located With employer-employee relationship – liability to PTR depends on the extent of services provided. If services provided is exclusive to the employer, PTR is not necessary, otherwise, the employee is liable. Sand and Gravel Tax Imposed on extraction of sand, gravel and other quarry resources Not more than 10% of the FMV of what was extracted Amusement Tax As high as 30% Applies to theaters, cinemas, concert halls, boxing stadiums, circuses and other places of amusements. Taxes on Delivery trucks Province of Bulacan vs. Court of Appeals; November 27 1998 Sports centers are not subject to amusement tax

Are transfer taxes the same with Capital Gains Tax? If yes, province cannot impose since CGT is imposed by the national government.

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TAXATION LAW (e)



No. These two taxes are different.

CGT: in the nature of an income tax. Transfer tax: merely a tax on the privilege of transferring the property within the locality. It is imposed for administration purposes.

Municipalities 



Taxes that may be levied by Municipalities Local Government Code

SEC. 143. Tax on Business. – The municipality may impose taxes on the following businesses: (a)

On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, in accordance with the following schedule: With gross sales or receipts for the Amount of Tax preceding calendar year in the amount of:

xxx 6,500,000.00 or more at a rate not exceeding thirty-seven and a half percent (37 1/2%) of one percent (1%) (b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule: With gross sales or receipts for the Amount of Tax preceding calendar year in the amount of: Per Annum Less than P1,000.00 18.00 xxx 2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%). (c)

(d)

With gross receipts for the preceding calendar year in the amount of: Amount of Tax Per Annum Less than P= 5,000.00 27.50 xxx 2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%) (f)

On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium.

(g)

On peddlers engaged in the sale of any merchandise or article of commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler annually.

(h)

On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed herein.

Scope of Taxing Powers

Section 142: Except as otherwise provided in this Code, municipalities may levy taxes, fees, and charges not otherwise levied by provinces.

On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (1/2) of the rates prescribed under subsections (a), (b) and (d) of this Section: 1. Rice and corn; 2. Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; 3. Cooking oil and cooking gas; 4. Laundry soap, detergents, and medicine; 5. Agricultural implements, equipment and post- harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs; 6. Poultry feeds and other animal feeds; 7. School supplies; and 8. Cement. On retailers, With gross sales or receipts for the preceding calendar year of: Per annum Rate P400,000.00 or less 2% more than P400,000.00 1%

Provided, however, That barangays shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P=50,000.00) or less, in the case of cities, and Thirty thousand pesos (P=30,000.00) or less, in the case of municipalities.

On contractors and other independent contractors, in accordance with the following schedule:

SEC. 144. Rates of Tax within the Metropolitan Manila Area. – The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed in the preceding Section. SEC. 145. Retirement of Business. - A business subject to tax pursuant to the preceding sections shall, upon termination thereof, submit a sworn statement of its gross sales or receipts for the current year. If the tax paid during the year be less than the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired. SEC. 146. Payment of Business Taxes. – (a) The taxes imposed under Section 143 shall be payable for every separate or distinct establishment or place where business subject to the tax is conducted and one line of business does not become exempt by being conducted with some other business for which such tax has been paid. The tax on a business must be paid by the person conducting the same. (b) In cases where a person conducts or operates two (2) or more of the businesses mentioned in Section 143 of this Code which are subject to the same rate of tax, the tax shall be computed on the combined total gross sales or receipts of the said two (2) or more related businesses. (c) In cases where a person conducts or operates two (2) or more businesses mentioned in Section 143 of this Code which are subject to different rates of tax, the gross sales or receipts of each business shall be separately reported for the purpose of computing the tax due from each business. SEC. 147. Fees and Charges. – The municipality may impose and collect such reasonable fees and charges on business and occupation and, except as reserved to the province in Section 139 of this Code, on the practice of any profession or calling, commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling. SEC. 148. Fees for Sealing and Licensing of Weights and Measures. – (a) The municipality may levy fees for the sealing and licensing of weights and measures at such reasonable rates as shall be prescribed by the sangguniang bayan. (b) The sangguniang bayan shall prescribe the necessary regulations for the use of such weights and measures, subject to such guidelines as shall be prescribed by the Department of Science and Technology. The sanggunian concerned shall, by appropriate ordinance, penalize fraudulent practices and unlawful possession or use of instruments of weights and measures and prescribe the criminal penalty therefor in accordance with the provisions of this Code. Provided, however, That the sanggunian concerned may authorize the municipal treasurer to settle an offense not involving the commission of fraud before a case therefor is filed in court, upon payment of a compromise penalty of not less than Two hundred pesos (P=200.00). SEC. 149. Fishery Rentals, Fees and Charges-

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TAXATION LAW (a) Municipalities shall have the exclusive authority to grant fishery privileges in the municipal waters and impose rentals, fees or charges therefor in accordance with the provisions of this Section. (b) The sangguniang bayan may: (1) Grant fishery privileges to erect fish corrals, oyster, mussels or other aquatic beds or bangus fry areas, within a definite zone of the municipal waters, as determined by it: Provided, however, That duly registered organizations and cooperatives of marginal fishermen shall have the preferential right to such fishery privileges: Provided, further, That the sangguniang bayan may require a public bidding in conformity with and pursuant to an ordinance for the grant of such privileges: Provided, finally, That in the absence of such organizations and cooperatives or their failure to exercise their preferential right, other parties may participate in the public bidding in conformity with the above cited procedure. (2) Grant the privilege to gather, take or catch bangus fry, prawn fry or kawag-kawag or fry of other species and fish from the municipal waters by nets, traps or other fishing gears to marginal fishermen free of any rental, fee, charge or any other imposition whatsoever. (3) Issue licenses for the operation of fishing vessels of three (3) tons or less for which purpose the sangguniang bayan shall promulgate rules and regulations regarding the issuances of such licenses to qualified applicants under existing laws. Provided, however, That the sanggunian concerned shall, by appropriate ordinance, penalize the use of explosives, noxious or poisonous substances, electricity, muro-ami, and other deleterious methods of fishing and prescribe a criminal penalty therefor in accordance with the provisions of this Code: Provided, finally, That the sanggunian concerned shall have the authority to prosecute any violation of the provisions of applicable fishery laws.

Yamane v. BA Lepanto Condominium Corporation; October 25 2005 Are all activities subject to local business tax? No. The catch all phrase “all activities” under the law presupposes that it involves activity for profit. It must be for business activity, Are the association dues collected by the petitioner an income derived from business activity? No. It is not a profit activity. Hence income derived from such activity is not subject to local business tax. Local business tax shall be imposed only for activities conducted for profit. Ericson Telecommunications vs. City of Pasig; November 22 2007 Is the local business tax computed based on gross receipts or gross revenue?  Gross receipts  Amount receivables should not be included in the computation of local business tax. Gross receipts: income is recognized when already collected, whether actually or constructively Gross revenue: all types of income are recognized whether or not received Amount receivables are part of gross revenue since they are recognized when earned. Right over the same has already accrued eventhough it is not yet received. Amount of receivables must not be included in the computation of local business tax, since local business tax is computed based on gross receipts.

Cities SEC. 151. Scope of Taxing Powers

Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose. Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.

Barangay SEC. 152. Scope of Taxing Powers The barangays may levy taxes, fees, and charges, as provided in this Article, which shall exclusively accrue to them: (a) Taxes - On stores or retailers with fixed business establishments with gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P=50,000.00) or less, in the case of (b) cities and Thirty thousand pesos (P=30,000.00) or less, in the case of municipalities, at a rate not exceeding one percent (1%) on such gross sales or receipts. (c)

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 service facilities such as palay, copra, or tobacco dryers.

(d) Barangay Clearance - No city or municipality may issue any license or permit for any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted. For such clearance, the sangguniang barangay may impose a reasonable fee. The application for clearance shall be acted upon within seven (7) working days from the filing thereof. In the event that the clearance is not issued within the said period, the city or municipality may issue the said license or permit. (e) Other Fees and Charges - The barangay may levy reasonable fees and charges: (1) On commercial breeding of fighting cocks, cockfights and cockpits; (2) On places of recreation which charge admission fees; and (3) On billboards, signboards, neon signs, and outdoor advertisements.

Common Revenue-Raising Powers SEC. 153. Service Fees and Charges. - Local government units may impose and collect such reasonable fees and charges for services rendered. SEC. 154. Public Utility Charges. - Local government units may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction SEC. 155. Toll Fees or Charges. - The sanggunian concerned may prescribe the terms and conditions and fix the rates for the imposition of toll fees or charges for the use of any public road, pier or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the local government unit concerned: Provided, That no such toll fees or charges shall be collected from officers and enlisted men of the Armed Forces of the Philippines and members of the Philippine National Police on mission, post office personnel delivering mail, physically-handicapped, and disabled citizens who are sixty-five (65) years or older. When public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the tolls, and thereafter the said facility shall be free and open for public use.

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TAXATION LAW Once a person becomes a resident of a local government unit, he becomes liable for community tax. The amount to be collected by the LGU depends on whether the resident earns income or not.

 

Local Government Code SEC. 156. Community Tax. - Cities or municipalities may levy a community tax in accordance with the provisions of this Article. SEC. 157. Individuals Liable to Community Tax. - Every inhabitant of the Philippines eighteen (18) years of age or over who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of One thousand pesos (P=1,000.00) or more, or who is required by law to file an income tax return shall pay an annual community tax of Five pesos (P=5.00) and an annual additional tax of One peso (P=1.00) for every One thousand pesos (P=1,000.00) of income regardless of whether from business, exercise of profession or from property which in no case shall exceed Five thousand pesos (P=5,000.00). In the case of husband and wife, the additional tax herein imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. SEC. 158. Juridical Persons Liable to Community Tax. - Every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual community tax of Five hundred pesos (P=500.00) and an annual additional tax, which, in no case, shall exceed Ten thousand pesos (P=10,000.00) in accordance with the following schedule: (1) For every Five thousand pesos (P=5,000.00) worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of the real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated - Two pesos (P=2.00); and (2) For every Five thousand pesos (P=5,000.00) of gross receipts or earnings derived by it from its business in the Philippines during the preceding year - Two pesos (P=2.00). The dividends received by a corporation from another corporation however shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation. SEC. 159. Exemptions. - The following are exempt from the community tax: (1) Diplomatic and consular representatives; and (2) Transient visitors when their stay in the Philippines does not exceed three (3) months. SEC. 160. Place of Payment. - The community tax shall be paid in the place of residence of the individual, or in the place where the principal office of the juridical entity is located. SEC. 161. Time for Payment; Penalties for Delinquency. – (a) The community tax shall accrue on the first (1st) day of January of each year which shall be paid not later than the last day of February of each year. If a person reaches the age of eighteen (18) years or otherwise loses the benefit of exemption on or before the last day of June, he shall be liable for the community tax on the day he reaches such age or upon the day the exemption ends. However, if a person reaches the age of eighteen (18) years or loses the benefit of exemption on or before the last day of March, he shall have twenty (20) days to pay the community tax without becoming delinquent. Persons who come to reside in the Philippines or reach the age of eighteen (18) years on or after the first (1st) day of July of any year, or who cease to belong to an exempt class on or after the same date, shall not be subject to the community tax for that year. (b)

Corporations established and organized on or before the last day of June shall be liable for the community tax for that year. But corporations established and organized on or before the last day of March shall have twenty (20) days within which to pay the community tax without becoming delinquent. Corporations established and organized on or after the first day of July shall not be subject to the community tax for that year. If the tax is not paid within the time prescribed above, there shall be added to the unpaid amount an interest of twenty-four percent (24%) per annum from the due date until it is paid.

SEC. 162. Community Tax Certificate. - A community tax certificate shall be issued to every person or corporation upon payment of the community tax. A community tax certificate may also be issued to any person or corporation not subject to the community tax upon payment of One peso (P=1.00). SEC. 163. Presentation of Community Tax Certificate On Certain Occasions. – (a) When an individual subject to the community tax acknowledges any document before a notary public, takes the oath of office upon election or appointment to any position in the government service; receives any license, certificate, or permit from any public authority; pays any tax or fee; receives any money from any public fund; transacts other official business; or receives any salary or wage from any person or corporation, it shall be the duty of any person, officer, or corporation with whom such transaction is made or business done or from whom any salary or wage is received to require such individual to exhibit the community tax certificate. The presentation of community tax certificate shall not be required in connection with the registration of a voter. (b)

When, through its authorized officers, any corporation subject to the community tax receives any license, certificate, or permit from any public authority, pays any tax or fee, receives money from public funds, or transacts other official business, it shall be the duty of the public official with whom such transaction is made or business done, to require such corporation to exhibit the community tax certificate.

(c)

The community tax certificate required in the two preceding paragraphs shall be the one issued for the current year, except for the period from January until the fifteenth (15th) of April each year, in which case, the certificate issued for the preceding year shall suffice.

SEC. 164. Printing of Community Tax Certificates and Distribution of Proceeds. – (a) The Bureau of Internal Revenue shall cause the printing of community tax certificates and distribute the same to the cities and municipalities through the city and municipal treasurers in accordance with prescribed regulations. The proceeds of the tax shall accrue to the general funds of the cities, municipalities and barangays except a portion thereof which shall accrue to the general fund of the national government to cover the actual cost of printing and distribution of the forms and other related expenses. The city or municipal treasurer concerned shall remit to the national treasurer the said share of the national government in the proceeds of the tax within ten (10) days after the end of each quarter. (b)

The city or municipal treasurer shall deputize the barangay treasurer to collect the community tax in their respective jurisdictions: Provided, however, That said barangay treasurer shall be bonded in accordance with existing laws.

(c)

The proceeds of the community tax actually and directly collected by the city or municipal treasurer shall accrue entirely to the general fund of the city or municipality concerned. However, proceeds of the community tax collected through the barangay treasurers shall be apportioned as follows:

(1) (2)

Fifty percent (50%) shall accrue to the general fund of the city or municipality concerned; and (2) Fifty percent (50%) shall accrue to the barangay where the tax is collected.

REMEDIES IN LOCAL TAXATION Remedies of the Government Angeles City vs. Angeles City Electric Corporation; June 29 2010 Section 218 of Tax Code: No injunction shall be issued to restrain collection of tax. Can there be injunction to restrain collection of local taxes? Yes. There is no similar provision under LGUs which prohibits issuance of injunction to restrain collection to local taxes. Section 218 is only applicable to national internal revenue taxes.

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TAXATION LAW 

Extraordinary

Administrative Remedies

1. Local Governments Lien All unpaid taxes already accrued shall constitute lien over properties of the taxpayer. Section 173, Local Government Code Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exercise of privilege with respect to which the lien is imposed. The lien may only be extinguished upon full payment of the delinquent local taxes fees and charges including related surcharges and interest 2.

5 years from date of assessment

Filing of false or fraudulent return, and omission to file a return

10 years from date of discovery

5 years from date of assessment

Filing of false or fraudulent return

Suspension of Collection of taxes (Section 223) (1) When the treasurer is legally prevented from collecting the tax (2) Taxpayer files for request for reinvestigation and there was execution of waiver in writing before the expiration of the period to assess or collect. o The filing of the reinvestigation request must be accompanied with an execution of waiver (3) Taxpayer is out of country and cannot be located.

Assessment by Local Treasurer

SEC. 194, Local Government Code (a) 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: Provided, That, taxes, fees or charges which have accrued before the effectivity of this Code may be assessed within a period of three (3) years from the date they became due. (b) 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. (c) Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of said period: Provided, however, That, taxes, fees or charges assessed before the effectivity of this Code may be collected within a period of three (3) years from the date of assessment. (d) The running of the periods of prescription provided in the preceding paragraphs 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

10 years from date of discovery

3.

Distraint of Personal Properties (Section 175)

The remedy by distraint shall proceed as follows: (a) Seizure Upon failure of the person owing any local tax, fee, or charge to pay the same at the time required, the local treasurer or his deputy may, upon written notice, seize or confiscate any personal property belonging to that person or any personal property subject to the lien in sufficient quantity to satisfy the tax, fee, or charge in question, together with any increment thereto incident to delinquency and the expenses of seizure. In such case, the local treasurer or his deputy shall issue a duly authenticated certificate based upon the records of his office showing the fact of delinquencycy and the amounts of the tax, fee, or charge and penalty due. Such certificate shall serve as sufficient warrant for the distraint of personal property aforementioned, subject to the taxpayer's right to claim exemption under the provisions of existing laws. Distrained personal property shall be sold at public auction in the manner herein provided for. (b) Accounting of distrained goods

National Government Ordinary

Assessment 3 years from date of filing of return

Collection 3 years from date of assessment

Local Government Assessment 5 years from the time that the tax becomes due When local taxes accrue: first day of January

Collection 5 years from date of assessment

The officer executing the distraint shall make or cause to be made an account of the goods, chattels or effects distrained, a copy of which signed by himself shall be left either with the owner or person from whose possession the goods, chattels or effects are taken, or at the dwelling or place of business of that person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and a note of the time and place of sale. (c) Publication The officer shall forthwith cause a notification to be exhibited in not less than three (3) public and conspicuous places in the territory of the local government unit where the distraint is made, specifying the time and place of sale, and the articles distrained. The time of sale shall not be less than twenty (20) days after notice to the owner or possessor of the property as above specified and the publication or posting of the notice. One place for the posting of the notice shall be at the office of the chief executive of the local government unit in which the property is distrained.

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TAXATION LAW (d) Release of distrained property upon payment prior to sale If at any time prior to the consummation of the sale, all the proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (e) Procedure of sale At the time and place fixed in the notice, the officer conducting the sale shall sell the goods or effects so distrained at public auction to the highest bidder for cash. Within five (5) days after the sale, the local treasurer shall make a report of the proceedings in writing to the local chief executive concerned. Should the property distrained be not disposed of within one hundred and twenty (120) days from the date of distraint, the same shall be considered as sold to the local government unit concerned for the amount of the assessment made thereon by the Committee on Appraisal and to the extent of the same amount, the tax delinquencies shall be cancelled. Said Committee on Appraisal shall be composed of the city or municipal treasurer as chairman, with a representative of the Commission on Audit and the city or municipal assessor as members. (f)

Disposition of proceeds

The proceeds of the sale shall be applied to satisfy the tax, including the surcharges, interest, and other penalties incident to delinquency, and the expenses of the distraint and sale. The balance over and above what is required to pay the entire claim shall be returned to the owner of the property sold. The expenses chargeable upon the seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending the sale, and no charge shall be imposed for the services of the local officer or his deputy. Where the proceeds of the sale are insufficient to satisfy the claim, other property may, in like manner, be distrained until the full amount due, including all 4.

Personal Properties Exempt from Distraint or Levy (Section 185) Memorize! The following property shall be exempt from distraint and the levy, attachment or execution thereof for delinquency in the payment of any local tax, fee or charge, including the related surcharge and interest: (a) Tools and the implements necessarily used by the delinquent taxpayer in his trade or employment; (b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation; (c) His necessary clothing, and that of all his family; (d) Household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding Ten thousand pesos (P=10,000.00); (e) Provisions, including crops, actually provided for individual or family use sufficient for four (4) months; (f) The professional libraries of doctors, engineers, lawyers and judges; (g) One fishing boat and net, not exceeding the total value of Ten thousand pesos (P=10,000.00), by the lawful use of which a fisherman earns his livelihood; and (h) Any material or article forming part of a house or improvement of any real property.

 1.

Period within which to collect (Section 194) o within 5 years from the date of assessment by administrative or judicial action

2.

Accrual of tax (Section 166)

Levy on Real Property (Section 176)

After the expiration of the time required to pay the delinquent tax, fee, or charge, real property may be levied on before, simultaneously, or after the distraint of personal property belonging to the delinquent taxpayer. To this end, the provincial, city or municipal treasurer, as the case may be, shall prepare a duly authenticated certificate showing the name of the taxpayer and the amount of the tax, fee, or charge, and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. Levy shall be effected by writing upon said certificate the description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the assessor and the Registrar of Deeds of the province or city where the property is located who shall annotate the levy on the tax declaration and certificate of title of the property, respectively, and the delinquent taxpayer or, if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question. In case the levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his delinquency, the provincial, city or municipal treasurer, as the case may be, shall within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer's real property. A report on any levy shall, within ten (10) days after receipt of the warrant, be submitted by the levying officer to the sanggunian concerned

Judicial Remedies

General rule: All local taxes, fees, and charges shall accrue on the 1st day of January of each year. Except: Unless otherwise provided in the LGC, 

New taxes, fees or charges, or changes in the rates of the local taxes shall accrue on the 1st day of the quarter next following the effectivity of the ordinance imposing such new levies or rates

3.

Time of payment (Section 167) General Rule: All local taxes, fees and charges shall be paid within the first 20 days of January or of each subsequent quarter, as the case may be. Except: 1. 2.

4.

Unless otherwise provided by the LGC The Sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges or penalties, but only for a period not exceeding 6 months. Surcharge, Interests and Penalties

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TAXATION LAW 

Surcharge: 25% of basic tax due Interest: 2% per month of the basic tax due, not exceeding 36 months. No compromise penalty

Remedies of Taxpayer  1.

Administrative Remedies

Appeal to the Secretary of Justice Re: newly enacted tax ordinance (Sec. 187, LGC)

Any question on the constitutionality or legality of tax ordinances or revenue measures may be appealed by the taxpayer to the Secretary of Justice within 30 days from its effectivity. Secretary of Justice has period of 60 days to decide on the appeal filed by the taxpayer. 

However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty (60) day period prescribed herein within which to appeal with the court of competent jurisdiction otherwise the assessment becomes conclusive and unappealable.

When the appeal was not acted upon within 60 days by the SOJ

The rule is the same with Civil Procedure. The only difference is that in a tax ordinance, there is a requirement to appeal to the Secretary of Justice first before bringing the same case to the RTC. Proper Petition Petition for Declaratory relief, if there is no breach yet of the law committed by the petitioner. Failure to appeal the ordinance to SOJ  The petition will be dismissed for failure to exhaust administrative remedies. Relaxation of the Rule on Mandatory Appeal to SOJ

Recourse of taxpayer: treat the inaction of SOJ as tantamount to a denial. U Upon lapse of the 60day period, the taxpayer must elevate the case to a court of competent jurisdiction. Where to Elevate?  Regional Trial Court The case is incapable of pecuniary estimation. The rule is the same with Civil Procedure. The only difference is that in a tax ordinance, there is a requirement to appeal to the Secretary of Justice first before bringing the same case to the RTC.

Cagayan de Oro If it can be shown that ordinance is null and void on its face, there can relaxation of the rule under Section 187. This is merely an exception to the general rule. Procedure: Appeal to the Secretary of Justice re: newly enacted ordinance

Proper Petition Petition for Declaratory relief, if there is no breach yet of the law committed by the petitioner.

Action (or inaction) by the SOJ SOJ must decide within 60 days

Failure to appeal the ordinance to SOJ  The petition will be dismissed for failure to exhaust administrative remedies.

Appeal to RTC (30 days from action of SOJ or from the lapse of the 60day period) Appeal to CA if it involves question of fact Under Civil Procedure: if solely question of law, go to Supreme Court

Relaxation of the Rule on Mandatory Appeal to SOJ Cagayan de Oro If it can be shown that ordinance is null and void on its face, there can relaxation of the rule under Section 187. This is merely an exception to the general rule. 2.

Protest of Assessment (Section 195)

When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee or charge, the amount of deficiency, the surcharges, interests and penalties. Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory. The local treasurer shall decide the protest within sixty (60) days from the time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue a notice canceling wholly or partially the assessment.

2.

Protest of Assessment (Section 195)

When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee or charge, the amount of deficiency, the surcharges, interests and penalties. Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory. The local treasurer shall decide the protest within sixty (60) days from the time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue a notice canceling wholly or partially the assessment. However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty (60) day period prescribed herein within which to appeal with the court of competent jurisdiction otherwise the assessment becomes conclusive and unappealable.

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TAXATION LAW Where to file petition for refund? Flowchart: Assessment Protest (within 60 days) The Treasurer will decide the protest within 60 days Action or inaction by the Treasurer Inaction shall be treated denial. Elevate the matter to a court of competent jurisdiction (within 30 days) Court of competent Jurisdiction, defined RTC, because the matter is incapable of pecuniary estimation RTC acquires original jurisdiction of disputed assessment Appeal to the CTA Division (within 15 days) Motion for reconsideration or motion for new trial to the CTA Division (within 15 days) Appeal to CTA En Banc (within 15 days) Appeal to Supreme Court (within 15 days) Note: This process applies where the protest was elevated to the RTC

3.

Claim for Refund or Tax Credit (Section 196)

RTC or MTC depending on the jurisdictional amount (refer to page 76)

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If the petitioner was aggrieved, to whom shall he elevate the case? If the petition for refund is originally filed before the MTC

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Appeal to:   

RTC CTA En Banc Supreme Court

RTC here does not exercise original jurisdiction but merely appellate jurisdiction. The rule is: if RTC exercises original jurisdiction, it is required to be elevated to CTA Division. If however RTC exercises appellate jurisdiction, the case must be elevated to CTA En banc.  If the petition for refund is originally filed before the RTC Appeal to:    

CTA Division Motion for Reconsideration or Motion for New Trial before CTA Division CTA En Banc Supreme Court

4.

Remedies from a denial of the protest and refund

No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer.

No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit.

It should not only be the written claim before the treasurer that must be filed in 2 years but the taxpayer must also be able to file a case in court before the expiration of the 2 year period. There is no appellate remedy from the denial of the treasurer before the regular court but an independent and original action for refund.

Prescriptive Period: 2 years from date of payment Mandatory Requirement: written claim for refund. 

This requirement is mandatory and is not subject to any exception (unlike in NIRC)

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No specified period for the local treasurer to act No phrase of “regardless of any supervening event”, hence supervening events may be material Both the written claim and judicial claim must be filed within 2 years No specified period to appeal

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

Judicial Remedies

City of Manila vs. Hon Grecia-Cuerdo, February 4 2014 Whether or not the CTA shall acquire jurisdiction over interlocutory orders in a civil case City Treasurer issued assessment. Taxpayer filed a protest. After filing of protest, he paid the tax. After payment, the DOJ nullified the tax ordinance. Taxpayer claimed for refund before the city treasurer and RTC.

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TAXATION LAW Aggrieved by the decision of the RTC issuing an interlocutory order, the taxpayer questioned this to the CA. CA dismissed the petition on the ground of lack of jurisdiction Even if there is no categorical grant of power, the Constitution, BP 129 and inherent power to exercise appellate jurisdiction dictate that CTA Division acquires jurisdiction over interlocutory orders of RTC involving tax cases. ----------------------------------------------------------------------------------------------------------------------------------Difference with the case of Judy Anne Santos In Judy Anne Santos, CTA division’s denial of the motion to quash is elevated to CTA En Banc. The Court held that under RA 9282, the CTA En Banc has expanded jurisdiction. In this case, the appeal is made to CTA division, to review an interlocutory order issued by the regular courts (RTC in this case). There is no express grant of power to exercise jurisdiction over such but the Court looks into the spirit of the Constitution, BP 129 and inherent power of CTA \

Grant of Tax exemption 

LGUs and the Congress can both grant exemptions to entities and taxpayers.

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TAXATION LAW REAL PROPERTY TAXATION Real Property Tax, defined A direct tax on ownership of lands and buildings or other improvements thereon, payable regardless of whether the property is used or not, although the value may vary in accordance with such factor.

GOVERNING LAW

The Local Government Code covers the administration, appraisal, assessment, levy and collection of Real Property Tax, i.e. tax on land and building and other structures and improvements on it, including machineries. (Subject to the definition given by Art. 415 of the New Civil Code)

NATURE OF REAL PROPERTY TAXES It is treated as a local tax Should imposition of real property tax be supported by the enactment of local ordinance?  Yes  Local Government Code is not the source of power to tax but merely sets limitations.

Provisions of LGC are applied nationwide but rates imposed are different per LGU ordinance

FUNDAMENTAL PRINCIPLES Fundamental Principles Governing Appraisal and Assessment of Real Property (Section 198, LGC)

3. 4. 5.

Can there be collection without assessment?  No. Unlike in NIRC, where taxes can be collected without assessment if subjected to court proceeding. After notice of assessment, property is included in the assessment rolls. The rolls is submitted to city treasurer, so that he will issue a notice of collection to assess liability of taxpayer. Allied Banking Corporation vs. Quezon City, September 15 2006

Local Government Code

1. 2.

If the city assessor has already appraise a valuation, the property will be included in the assessment rolls.

Real property shall be appraised at its current and fair market value. Real property shall be classified for assessment purposes on the basis of its actual use. Real property shall be assessed on the basis of a uniform standard within each local government unit. The appraisal, assessment, and collection of real property tax shall not be let to any private person; and The appraisal and assessment of real property shall be equitable.

Appraisal vs. Assessment Appraisal: valuation of the property (by the city assessor) Assessment: computation of tax liability The owner shall declare his property to city assessor, but city assessor can also conduct inspections to determine if property is properly appraise. The assessor issues a notice of assessment to notify the owner that taxes will begin to accrue.

What is being questioned is the validity of ordinance imposing real property tax based on appraised value, where the appraised value is pegged at amount of actual consideration in the deed of sale or the zonal value of the BIR, whichever is higher. Ordinance is invalid The ordinance disregards the method of appraisal of real properties. Under LGC, there are three possible methods of appraisal: 1. Sales analysis 2. Income capitalization approach 3. Reproduction approach While city has assessor has discretion, he must not deviate from the principle that real properties must be assessed through its actual use. This ordinance proposes methods that contravene this principle. The effect of the ordinance is that the parties in the deed can manipulate the value of the properties.

PROPERTIES COVERED BY REAL PROPERTY TAX Article 415, Civil Code Art. 415. The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil; (2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; (3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; (4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; (6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included; (7) Fertilizer actually used on a piece of land; (8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant; (9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast; (10) Contracts for public works, and servitudes and other real rights over immovable property .

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TAXATION LAW Pertinent Provision in the LGC: Improvements on land are commonly taxed as realty eventhough they might be considered as personalty.

ANSWER: Yes. The underground tanks although installed by the lessee, Shell and Caltex, are considered as real property for purposes of the imposition of real property taxes. It is only for purposes of executing a final judgment that these machinery and equipment, installed by the lessee on a leased land, would not be considered as real property. But in the imposition of real property tax, the underground tanks are taxable as necessary fixtures of the gasoline station without which the gasoline station would not be operational. (Caltex v. CBAA, 114 SCRA 296).

Caltex vs. CBAA May 31 1982 Equipments: appurtenant to the gasoline station building which fixtures are necessary for the operation of the gasoline stated and which have been affixed or permanently attached to the gasoline station are taxable improvements.  They are subject to real property tax. Elements 1. Used as appurtenant to the gasoline station 2. Necessary for the operation 3. Attached or affixed permanently to the gasoline station 4. Machinery and equipment, consisting of underground tanks, elevated tanks, water tanks, gasoline pumps, computing pumps, water pumps, car washer, car and truck hoists, air compressors and similar articles, installed by Caltex (Philippines) Inc. in its gasoline stations, located on leased land, have been held to be real property subject to the tax. (real properties which have characteristics of permanency, the lease is for a long period of time) Meralco case, discussed The Meralco case is different. In that case, steel towers are merely attached to steel frames which can be unscrewed. Sta. Lucia Realty and Development Inc vs. City of Pasig Would there be a collection by an LGU of a real property tax when there is boundary dispute as to two local government units? If there is boundary dispute, authority to collect is vested in the locality where the property is situated. Therefore it is imperative to show that these properties are unquestionably within the LGU. If there is dispute, the LGU cannot collect the tax. Hence, there is a need to await for judgment involving the boundary dispute. However, Sta. Lucia shall pay through an escrow account. 2001 Bar Question QUESTION: Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, they must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil companies, such as Caltex and Shell, install underground tanks in the gasoline stations located in land leased by the oil companies from others. Are those underground tanks, which were not placed there by the owner of the land but by the lessee, considered real property for purposes of real property taxation under the LGC?

Properties exempt from tax Section 234 of LGC 1.

Real property owned by the Republic of the Philippines or any of its political subdivisions  Except: when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person Cases of MIAA and MCAA: GOCCs are not automatically exempt from real property tax, depending on its charter giving it exemption

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.

All pieces of machinery and equipment that are actually, directly, and exclusively used by local water districts, and government – owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.

4.

All real property owned by duly registered cooperatives as provided for under RA 6938, and

5.

Machinery and equipment used for pollution control and environmental protection.

Section 238, LGC Idle Lands Exempt From Tax By reason of: 1. force majeure 2. civil disturbance 3. natural calamity 4. any cause which legally/physically prevents the owner of the property or person having legal interest therein from improving, utilizing, or cultivating the same What Are Considered as Idle Lands: (Sec. 237, LGC) 1. Agricultural lands – More than 1 hectare if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. 

Not Idle Lands:  Agricultural lands planted to permanent or perennial crops with at least 50 trees to a hectare  Lands actually used for grazing purposes

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TAXATION LAW 2.

Non-Agricultural Lands – More than 1,000 sq. m. in area if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein.

Proof of Tax Exemption: Every person by or for whom real property is declared who shall claim the exemption shall file with the provincial, city or municipal assessor within 30 days from date of declaration of real property sufficient documentary evidence in support of such claim (i.e. corporate charters, title of ownership, articles of incorporation, contracts, affidavits, etc.)

wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock A government-owned or controlled corporation must be "organized as a stock or non-stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting shares. MIAA is also not a non-stock corporation because it has no members. Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled corporation.

Constitutional Exemption Section 28(3), Article VI of the 1987 Constitution Elements: 1. Lands buildings improvements 2. Actually directly, exclusively used for religious, educational or charitable purpose. 

Real property tax

MIAA v. Paranaque, July 20, 2006 Airport Lands and Buildings of the Manila International Airport Authority are exempt from the real estate tax imposed by the City of Parañaque. The Court declared void all the real estate tax assessments issued by the City of Parañaque on the Airport Lands and Buildings of the MIAA, except for the portions that the MIAA has leased to private parties. The Court based its ruling under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal relation and status of government units, agencies and offices within the entire government machinery, under which MIAA is a government instrumentality and not a government-owned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any kind" by local governments. The only exception is when MIAA leases its real property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque. Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public dominion and thus owned by the State or the Republic of the Philippines. As properties of public dominion owned by the Republic, there is no doubt that the Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government Code. Distinction between a GOCC and an Instrumentality Government-owned or controlled corporation refers to any agency organized as a stock or nonstock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either

Lung Center of the Philippines vs. Quezon City, June 29, 2004 Lung Center of the Philipines, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. However, those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. “Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "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 Constitutions and the law. Solely is synonymous with exclusively. 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. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center."

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TAXATION LAW Accordingly, the Court held that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.” LRTA vs. CBAA, October 12, 2000 Though the creation of the LRTA was impelled by public service – to provide mass transportation in MM- its operations undeniably partakes of ordinary business. .Given that it is engage in a serviceoriented commercial endeavour, its carriage ways and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a GOCC. Under its charter, LRT is not exempt from real property tax. Taxation is the rule and exemption is the exception

Doctrine of Ownership: owner is liable Doctrine of Use: property is exempt due to its use  Religious  Educational  Charitable Actual Use of Property as Basis for Assessment (Sec. 217, LGC) 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. Beneficial User May Be Liable if:  he leased property from the government  he leased property from an exempt owner  use is not exempt from real property tax In Testate Estate of Concordia Lim vs. Manila, February 21, 1990

Philippine Fisheries Development Authority vs. Court of Appeals, July 31, 2007 The Philippine Fisheries Authority is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. With respect to these properties, the Authority is liable to pay real property tax. The Authority should be classified as an instrumentality of the national government. As such, it is generally exempt from payment of real property tax, except those portions which have been leased to private entities.

POWER TO GRANT LOCAL EXEMPTIONS (Sec. 192 LGC)   

LGUs, may through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem necessary. Although powerless to grant Real Property Tax exemption, LGUs in Metro Manila can exempt the 5% ad valorem tax on idle lands. LGUs (within and outside MM) may also grant condonation which actually partake of exemption.

Who are liable for the Real Property Taxes 1. 2. 

Registered owner; or Beneficial user When is beneficial user liable? When registered owner is exempt from real property tax

Ownership vs. Use This was no longer discussed in class

1969: Lim secured a loan from GSIS, which is secured by two properties. Lim defaulted in the payment. GSIS foreclosed the properties mortgaged by Lim and for because of Lim’s failure to redeem, these properties were owned by GSIS. 1975: consolidation of title in the name of GSIS. In 1979: heirs of Lim repurchased the property. Manila sought to levy real property tax on heirs for back taxes covering 1977 and 1978. Deed of repurchase executed after end of taxable quarter of 1979. Who shall be liable for real property taxes from 1969 up to 1979? 1969: Lim was still the owner, hence Lim is liable. 1977: GSIS consolidated the title. GSIS is deemed the owner at this time. However, it is an government instrumentality and therefore exempt from taxes. In 1979: there was a repurchase by the estate of Lim. The registered owner now is the estate of Lim. The treasurer here collected the tax from 1977-1979. The assessment is not proper. During these times, the registered owner is the GSIS and not the Estate of Lim. Hence, the City Treasurer should have collected from registered owner. However, in this case, the registered owner is exempt from Tax SC Discussion: The unpaid tax attaches to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on the subsequent owner who was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. Lecture Notes:  

Only persons with legal interests have the personality to question assessment of real property tax. If one is neither the registered owner nor the beneficial owner, he has no personality to question the assessment. Hence, assessment may become final and unappealable.

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TAXATION LAW GSIS vs. City Treasurer, December 23 2009 Two properties of GSIS are involved here: Catigbac properties and Concepcion properties. Catigbac properties were leased by GSIS to MHC, a taxable entity. Concepcion property was transferred to the court by virtue of a proclamation. GSIS is exempt from real property tax prior to effectivity of LGC pursuant to its charter. After effectivity of LGC, all exemptions granted to GOCCs were withdrawn. The exemption of GSIS was restored under RA 8291, made effective in year 1997. Is GSIS liable for tax beginning 1992-1996?

The preparation of fair market values as a preliminary step in the conduct of general revision was set forth in Section 212 of R.A. 7160, to wit: (1) The city or municipal assessor shall prepare a schedule of fair market values for the different classes of real property situated in their respective Local Government Units for the enactment of an ordinance by the sanggunian concerned. (2) The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law.

You can skip these topics since these were not discussed in class. Go straight to Remedy of the Taxpayer (on Page 98) Declaration of Real Properties – whose duty?

Yes.

It shall be the responsibility of the owner, administrator or their representatives to declare, under oath, the true value of real property, taxable or exempt, within 60 days after the acquisition.

However, despite withdrawal of exemption, GSIS shall be considered as instrumentality pursuant to the case of MCIAA. The corporate setup of GSIS is the same as that of MCIAA. As an instrumentality, it is exempt from all kinds of taxes.

The sworn declaration shall be filed once every 3 years before June 30th of the year commencing 1992.

As to Catigbac Properties Since these were leased to MHC, a taxable entity, these shall be subject to tax. The city treasurer may collect by other means other than levying back the Catigbac property. The remedy is to go against the properties of MHC.

Procedure in Real Property Taxation Lopez vs. City of Manila, February 19, 1999 Steps for mandatory conduct of General Revision of Real Property assessments (pursuant to the provision of Sec. 219, of R.A. No. 7160) 1. 2.

The preparation of Schedule of Fair Market Values. The enactment of Ordinances: a. levying an annual "ad valorem" tax on real property and an additional tax accruing to the SEF. b. fixing the assessment levels to be applied to the market values of real properties; c. providing necessary appropriation to defray expenses incident to general revision of real property assessments; and d. adopting the Schedule of Fair Market Values prepared by the assessors.

The appraisal of the value of property and imposition of real property taxes must be based on an ordinance. Without this ordinance, there can be no imposition of real property tax. The city treasurer will compute based on actual use of the property. This is the assessment function of the treasurer. If assessment is made after January 1 of a year, the assessment takes effect during the succeeding year. Other SC Discussions:

The failure or refusal to make that declaration within the prescribed period would authorize the provincial or city assessor to declare the property in the name of the defaulting owner, if known, or against an unknown owner as the case may be, and to assess the property for taxation. (Secs. 201-204 LGC). a.

Owner or Administrator (Secs. 202-203, LGC)

When: once every 3 years during the period from January 1 to June 30 What: file a sworn declaration with the assessor with description of the property  IF newly acquired property file with assessor within 60 DAYS from date of transfer SWORN statement containing FMV and description of property  IF improvement on real property file w/in 60 DAYS upon completion or occupation (whichever is earlier) a SWORN statement containing FMV and description of property b.

Provincial / City / Municipal Assessor (Sec. 204)

When: only when the person under Sec 202 refuses or fails to make the declaration within the prescribed time. No oath by assessor is required  If Filing For Exemption (Sec. 206) What: person claiming exemptions must file with assessor sufficient documentary evidence to support claim When: within 30 days from the date of DECLARATION of property  IF required evidence is not submitted within 30 days, the property will be listed as taxable in the roll  IF proven to be tax-exempt, property will be dropped from the roll 

IF Property Declared for the First Time (Sec. 222)

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TAXATION LAW If declared for 1st time, real property shall be assessed for back taxes for not more than ten (10) years prior to the date of initial assessment  taxes shall be computed on the basis of applicable schedule of values in force during the corresponding periods Assessor will compare the entry on file with the Registry of Deeds and the assessment roll in his office. c. Building officials Prior to construction of building, as required in procuring building permit. Permit transmitted by building officials to Registry of Deeds. d.

Geodetic engineers - For lands surveyed

e.

Notaries Public - For document notarization, must furnish the assessors a copy

Appraisal and Valuation Of Real Property (Sec 212-214, 224-225) How to determine Fair Market Value: For Land 1. Assessor of the province/city or municipality may summon the owners of the properties to be affected and may take depositions concerning the property, its ownership amount, nature and value. (sec. 213,LGC) 2. Assessor prepares a schedule of FMV for different classes of properties. 3. Sanggunian enacts an ordinance. 4. The schedule of FMV is published in a newspaper of general circulation in the province city or municipality concerned or in the absence thereof shall be posted in the provincial capitol city or municipal hall places therein (Sec. 212, LGC)

Valuation by Assessors Assessment: 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.

Classification of Land for purposes of assessment - Sec 218, LGC 1.

Commercial – land devoted principally for the object of profit and is not classified as agricultural, industrial, mineral, timber, or residential land

2.

Agricultural – land devoted principally to the planting of trees, raising of crops, livestock and poultry, dairying, salt making, inland fishing and similar aquacultural activities, and other agricultural activities

3.

Residential – land principally devoted to habitation

4.

Mineral- lands which minerals, metallic or non-metallic, exist in sufficient quantity or grade to justify the necessary expenditures to extract and utilize such materials

All declarations shall be kept and filed under a uniform classification system to be established by the provincial, city or municipal assessor.

5.

Industrial-land devoted principally to industrial activity as capital investment and is not classified as agricultural, commercial, timber, mineral or residential land

Steps in assessment of Real Property : 1. Listing of all properties subject to the tax; and 2. The valuation of such properties.

6.

Timberland

7.

Special

Appraisal: the act or process of determining the value of property as of a specific date for a specific purpose. Listing of Real Property in the Assessment Rolls (Secs. 205, 207)  whether taxable or exempt within the jurisdiction of LGU in the assessment roll.   

Undivided real property – in the name of the estate or heirs or devisees Corporation, partnership and association – same as individuals Owned by the Republic of the Philippines, its instrumentalities, political subdivisions, beneficial use is transferred to a taxable person – in the name of the possessor

Callanta vs. Ombudsman, January 30, 1998 Whether officials and employees of the Office of the City Assessor may reduce the new assessed values of real properties upon requests of the affected property owners Forestall the practice of initially setting unreasonably high reassessment values only to eventually change them to unreasonably lower values upon "requests" of property owners, the law gives no such authority to the city assessor or his subalterns. Thus, petitioners' unauthorized reduction of the assessed values ineluctably resulted in the local government's deprivation of the corresponding revenues. Lost or reduced revenues undeniably translate into damages or injury within the contemplation of the law. The city government of Cebu, therefore, had every legal right to feel aggrieved and to institute the proceeding against petitioners. Preparation of Schedule of Fair Market Values

Classification of lands made by respective sanggunian in accordance with zoning ordinances. It is based on actual use. Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof. For Machinery 1. 2.

For Brand New machinery: FMV is acquisition cost In all other cases: FMV = Remaining economic life x Replacement cost

Determine Assessed Value (Sec. 218) Procedure 1. take the schedule of FMV (Fair Market Value) 2. Assessed value = FMV x Assessment level 3. Real Property Tax = Assessed value x Allowable Real Property Tax rate

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TAXATION LAW Enactment of a Real Property Tax Ordinance Barangays cannot impose realty taxes. Municipalities cannot fix real estate tax rates. Procedure: a. Hearing and modification of prepared schedule b. Publication c. Adoption of the schedule d. Adoption of real property ordinance with assessment levels

Assessment level – is the percentage applied to the fair market value to determine the taxable or taxation value of the property. SEC. 216. Special Classes of Real Property.–– All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural or scientific purposes, and those owned and used by local water districts, and government-owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. Provide for appropriations

Coverage / Types of Real Property Tax: 1. Basic real property tax / Annual Ad Valorem Tax For real property not specifically exempted a. Provinces – not more than 1% of assessed value; b .Cities, Municipalities in MM – not more than 2% of assessed value 2.

Special levies:

Adopt Schedule of Fair Market Values Fair Market Value and Assessed Value – What’s the difference? Fair Market Value (FMV) : price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy Assessed Value or Assessment Value (AV) :fair market value of the real property multiplied by the assessment level. It is synonymous with taxable value.

a. Special Education Fund (SEF) 1% additional real estate tax to finance the SEF (Sec.236) – within MM area only b. Additional Ad Valorem on the Lands Not exceeding 5% of the assessed value of the property (Sec. 236, LGC) c. Special Assessments/ For Public Works On lands specially benefited by public works, projects or improvements funded by the LGU May be imposed even by municipalities outside MM provided:  Special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith not apply to lands exempt from basic real property tax and the remainder of the land have been donated to the local government unit concerned for the construction of said projects. (Sec. 240, LGC).

Payment of Tax When: January 1 of every year (Sec 246) The tax shall constitute as superior lien (Sec. 246) How: a. b.

basic real prop tax in 4 equal installments (Mar 31,Jun 30,Sep 30, Dec 31) special levy - governed by ordinance

Interest for Late Payment  two percent (2%) each month on unpaid amount until the delinquent amt is paid. provided in no case shall the total interest exceed thirty-six (36) months Advance and Prompt Payment a) advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC) b) prompt payment - discount not exceeding 10% of annual tax due(Art 342 IRR)

Requirements for validity of special levy: 1. infrastructure project financed by government whereby real property owners benefit from it 2. not more than 60% of actual cost of project 3. not less than five but not more than ten years 4. thru an ordinance 5. nature of project 6. extent of project 7. cost spent 8. metes and bounds What may be done: i. levy ad valorem taxes (see above) ii. Fix Assessment levels

Collection of Tax (Sec.247, LGC) The collection of the real property tax with interest thereon and related expenses and the enforcement of the remedies provided by the LGC or any applicable laws shall be the responsibility of the city or municipal treasurer concerned. The city or municipal treasurer may deputize the barangay treasurer to collect all taxes on real property located in the barangay provided the barangay treasurer is properly bonded. Who Collects: The provincial, city, municipal or barangay treasurer

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TAXATION LAW Period Within Which To Collect (Sec 270): Within five (5) years from the date they become due within ten (10) yrs. from discovery of fraud, in case there is fraud or intent to evade

REMEDIES IN LOCAL TAXATION REMEDIES OF THE TAXPAYER

Period of prescription shall be SUSPENDED when: (Sec 270, LGC) 1. local treasurer is legally prevented to collect tax 2. the owner of prop requests for reinvestigation and writes a waiver before expiration of period to collect 3. the owner of the property is out of the country or cannot be located Contents of assessment Meralco vs. Barlis (Feb. 1, 2002) A notice of assessment as provided for in the Real Property Tax Code should effectively inform the taxpayer of the value of a specific property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. The petitioner is also correct in pointing out that the last paragraph of the said notices that inform the taxpayer that in case payment has already been made, the notices may be disregarded is an indication that it is in fact a notice of collection. It could only qualify as a notice of collection if there is an unmistakable demand for payment of back taxes.



Ty vs. Trampe, December 1 1995 Payment under protest is necessary only if it involves erroneous assessment and not illegal assessment. Erroneous assessment: one where there is a question as to the computation of the tax liability. Illegal assessment: attacks the main basis for the computation of the tax liability.  If it involves illegality of assessment, there is no need to pay under protest

Protest of the Assessment City Treasurer issues assessment Protest before the LBAA(within 60 days) Local Board of Assessment LBAA has 120 days to decide

Who is entitled to the notice of assessment Talusan vs. Tayag, (April 04, 2001) Cases involving an auction sale of land for the collection of delinquent taxes are in personam. Thus, notice by publication, though sufficient in proceedings in rem, does not as a rule satisfy the requirement of proceedings in personam. As such, mere publication of the notice of delinquency would not suffice, considering that the procedure in tax sales is in personam. It was, therefore, still incumbent upon the city treasurer to send the notice of tax delinquency directly to the taxpayer in order to protect the interests of the latter. In the present case, the notice of delinquency was sent by registered mail to the permanent address of the registered owner in Manila. In that notice, the city treasurer of Baguio City directed him to settle the charges immediately and to protect his interest in the property. Under the circumstances, we hold that the notice sent by registered mail adequately protected the rights of the taxpayer, who was the registered owner of the condominium unit. For purposes of the real property tax, the registered owner of the property is deemed the taxpayer. Hence, only the registered owner is entitled to a notice of tax delinquency and other proceedings relative to the tax sale. Not being registered owners of the property, petitioners cannot claim to have been deprived of such notice. In fact, they were not entitled to it.

Administrative Remedies



Taxpayer may opt to await the decision of the LBAA.

Elevate the case to CBAA According to Real Property Tax Code: 30 days. BUT WE WILL NOT ADOPT THIS PERIOD. Under the LGC, there is no period of appeal from LBAA to CBAA. CBAA’s Decision CTA En Banc (within 15 days) Supreme Court Take note: prior to filing of protest, there must be payment. After the payment under protest, the taxpayer can now file a protest.  This is applicable only to real property taxes, not to local taxes.  Also, it does not apply to case involving illegal assessments. Meralco vs. Barlis Assessment gives notice to the taxpayer regarding his tax liability. In which case, it must be given and addressed to the person in whose name the property is registered. The notice shall indicate what kind of property, actual use or market value, assessment level and assessment value. Likewise, it must also include the discovery, the listing and the class of property in order to determine the actual usage.

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TAXATION LAW In this case, the notice merely contains the tax liability. Is this notice deemed a notice of assessment or a notice of collection? It is a notice of collection. Since the notice does not contain the details necessary for a notice of assessment, it is not a notice of assessment but merely one of collection. Further, the notice of assessment must be issued by assessor. In this case, it was issued by treasurer. The treasurer has no authority to issue a notice of assessment.

Claims for refund Same as for local taxes: 2 years from date of payment

Remedies from Denial of Protest and Refund 

Mandamus is not a proper remedy.



The remedies from denial of protest and refund are the same with that in local taxation File written claim for refund (within 2yrs from date of payment) Treasurer must decide the refund (No period to decide) Judicial claim for refund (shall also be filed within 2yrs from date of payment)

Where to file judicial claim for refund?  Depends on the jurisdictional amount (Refer to page 76) In the previous discussion (on Tax Remedies Proper): the CTA has jurisdiction over collection of NATIONAL tax cases where the basic tax due is P1m and above. Will we apply this to cases involving collection of local taxes?  No. In collection of local tax amounting to P1M, it shall be filed before the RTC. If filed before the RTC, where to appeal? RTC CTA Division Motion for Reconsideration or Motion for New Trial before the CTA Division CTA En Banc Supreme Court

Redemption of Property Sold Property sold may be redeemed within 1 year from the date of sale

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TAXATION LAW TARIFF AND CUSTOMS LAW Classifications of modes of importation Duty free goods: no custom duties shall be imposed these goods. Dutiable: may be imposed with custom duties but subject to conditions TIP: No questions will be asked on objective matters in this topic. BUT there will definitely be questions on PROCEDURE!

CASES THAT MAY BE DECIDED BY THE BUREAU OF CUSTOMS 1. Customs Protest Cases and 2. Seizure and Forfeiture Cases

Seizure and forfeiture cases These usually involve cases where the RTC obtains possession of properties that are already subject to forfeiture cases before the Bureau of Customs. Illustration: Mr. X owns several goods that had passed through the customs. BOC discovered that these were not subjected to custom duties. BOC seized these goods.

Procedure: Protest is filed before the Bureau of Customs Appeal to CTA Division Motion for Reconsideration / Motion for New Trial before CTA Division Appeal to CTA En Banc Appeal to Supreme Court POINTERS TO REVIEW Few problems in Estate Tax, Donor’s Tax, 2-3 questions in VAT Know the basic concept of Output and Input VAT When to use Sec 112 and 229? Apply. More questions on Local Taxation; on basic principles Right of pre-emption MORE ON CASES Real Property Tax No objective questions on Customs Law, but procedure will be asked Iglesia Case (perhaps, nabanggit kasi nya) If no appeal from LBAA to CBAA, LBAA’s decision becomes final and executory (however, there is no required period to appeal LBAA’s decision to CBAA. So, basically it may not become final and executory)

Mr. Y interposed the defense that he is the owner of the goods. He filed a case before RTC. RTC ordered BOC to deliver these goods to Mr. Y Is the action of the RTC proper? NO. Bureau of Customs has exclusive and primary jurisdiction over the case. If case involves goods that have not been subjected to custom duties, only BOC can take cognizance of the case. The RTC should not have issued the order. The remedy of Mr. X: to file the necessary motion before BOC.

Procedure of Protest Cases In the previous discussions, the procedure is this: Protest is filed before the CIR Appeal to CTA Division Motion for Reconsideration / Motion for New Trial before CTA Division Appeal to CTA En Banc Appeal to Supreme Court This is the same with protest cases in Customs Law, except that the protest is filed before the BUREAU OF CUSTOMS.

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