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2011 BAR COVERAGE FOR TAXATIONI. General Principles of Taxation

A. Definition and Concept of TaxationTaxationIs the 1) necessary power of the 2) sovereign 3) to raise revenue through 4)enactment of laws that 5) impose charges 6) upon persons, property and activity, under its 7)

jurisdiction in order to 8) defray - pay for the expenses of government

Essential elements1. based on necessity without taxes, state cannot maintain its very existence (lifeblood

theory); courts may not enjoin collection of taxes; except: CTA feels it will jeopardizeinterest of government and taxpayers suspension (deposit or file surety bond not morethan twice the amount); strictly construed against taxpayers and liberally construedagainst the government;

Tax exemptions: deductions from gross income are measures that will decrease paymentsto government (exemptions); strictly construed

Tax amnesty: a forgetting the collection of taxes; condoning taxes

Exceptions: law granting awards for tax informers liberally construed

Tax assessments are presumed correct burden of taxpayer to prove he is not liable andassessments are wrong and taxpayers position is correct

Equitable recoupment not applicable in the Philippines; payment of money out ofgovernment without appropriation made by law

Taxes are not subject to compensation and set-off; reason: payment of money out ofgovernment without appropriation made by law: exception: when obligation of govt.

already subject of appropriation;

Public funds are not subject to execution; this does not mean that the government is notobliged to pay; it simply means that payment must be worked out through the budget

process, namely appropriation made by law.

Govt cannot be estopped by the errors of admin officers; The errors of certain adminofficers should not be allowed to jeopardize the governments financial position.

Tax law cannot be interpreted in such a way that the tax would be payable only when itwould please the taxpayer; if that were so, the tax would not be a compulsory burden.

Mere retroactivity will not invalidate taxing statute; only when it is oppressive and harshin its retroactive application

2. inherent in and an attribute of sovereignty it is the very nature of the sovereign thepower to its subjects

a sovereign state has the power of taxation even if there is no provision in the constitutionexplicating authorizing its exercise

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Distinguish Taxes from License FeesTaxes License Fees

Source Taxing power Police powerPurpose Raise revenues Regulate acts

Amount Unlimited Limited to reasonable costLegality of objects Impossible on legal and illegal

acts

Only in legal acts

Relation to impairment clause Inferior to clause Superior to clause

Distinguish taxes from debtsTaxes Debts

Source Taxing power contractSusceptibility to set-off Not subject subjectInterest upon delinquency None, unless Limited to reasonable costImprisonment as penalty Imposable but not poll tax Not imposablePrescription Governed by tax law itself Governed by civil code

When are taxes treated as debts?a. As to enforcements: both can be enforced by judicial action upon defaultb. When secured by bond: statute of limitations on contracts is applicable to collectionc. Deductibility of interest from gross income: both deductible from gross income,

provided they are business related

Distinguish taxes from special assessments?Taxes Special assessments

Property tax All kinds Only on landNature of liability Personal to one assessed Not personalBasis Need to raise revenues On benefits received onlyRegularity May be imposed repeatedly Exceptional as to time and

locality once only to aparticular place and time

Taxes from penaltiesTaxes: raise revenue

Penalties : punish and deter illegal act

Taxes from tollsTolls: compensate the owner for the use of property

Taxes from customs dutiesNature customs are taxesPurpose: customs duties imposts are levies on importation or exportation of goods

Classification of TaxesAs to Subject matter1. Personal capitation or poll tax - individual2. Property property owner; because of what he owns

3. Excise exercise an act; activities and professions and other acts state considerssubject of its taxing power

As to Purpose1. Generalfor the general purpose of govt.; ex: income tax

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2. Specific placed in a trust fund and government is imposed to use money collectedonly for the purpose that has been stated in that law

Incidence1. Direct fall on the person who is intended to pay the tax; income and estate2. Indirect fall on one person but expected to pass on burden to the on intended to be

taxed; VAT

As to nature of the tax base1. Ad valorem based on the value of the article2. Specific based on specifications; such as weight and value capacity or any other

physical unit of measurement

As to the Structure of the tax rate1. Progressive as rate increases as tax base increases; ex: income tax2. Regressive rate decreases as base increases; ex: wholesale tax

3. Proportionate no rate change; fixed proportion to the tax base; ex: VATHow taxes are exacted (aspects of taxation)a. Levy the imposition, decided upon by congress and approved by the president of the

obligation on subjects to pay for the expenses of govt; term levy also used in taxcollection the collection of the tax on the property itself

b. Assessment and collection the administrative implementation (assessment-determining amount to be paid) and enforcement of said obligation (collection),

particularly in cases where those who were made liable refuse to pay the legislatedimposition; in tax remedies computation and notification of taxpayers obligation

Purpose for taxes collectedPrimary purpose raise revenue to defray expenses of government (Benefits protectiontheory: taxes are what we pay to live in a civilized society

Secondary purposea. To assist regulating certain activities; sin taxes (regulate smoking)b. Achieve certain social goals: luxury tax (equitable distribution of wealth)c. To attain particular economic objectives; encourage investments tax incentives are

provided

4. intended to raise revenue5. effected by imposition of forced charges (taxes) 6. persons,7. purpose is to defray

B. Nature of TaxationC. Characteristics of TaxationD. Power of Taxation Compared With Other Powers1. Police Power2. Power of Eminent Domain

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2) Exceptionc. Tax rules and regulations1) General rule onlyd. Penal provisions of tax lawse. Non-retroactive application to taxpayers1) Exceptions

II. Scope and Limitation of TaxationLimitations classified1. Inherent Limitations those that arise from the very nature of taxation itself2. Constitutional those imposed by constiInherent Limitations1. Situs taxes may be imposed only on person, property or activity within the jurisdiction of

the taxing authority; a state is limited to the area only on those within its jurisdiction

If tax is:

a. Personal, poll or capitation the residence tax residence of taxpayer or citizenship oftaxpayerb. An excise tax: the state where the right is exercised or the activity is conductedc. A real property tax only the state where the real property is locatedd. Tax on tangible personal property same as real propertye. A tax on intangible personal property they may be imposed by the state where the

intangible personal property is exercised (business situs)

Explain how public purpose is a limitation?Public purpose is an inherent limitation

International comity?

Courtesy the state is expected to show other states; ex: obligation to follow a treaty exempting nationals internal law cannot be passed in the phils that contradicts thatinternational law

Non-delegation?Taxation inherently legislative; non-delegation a limitation because it limits restricts the

persons or entities that are authorize to exercise it

Government exempt from taxes?General rule: Yes; however where the taxpayer is a LGU and taxing authority is nationalgovernment vice-versa provided that the national government consents to the tax forbudgetary reasons

Double taxation prohibited? DT that a person is taxed twice by the same authority; alsomeans two jurisdictions taxed the same person or activity; when prohibited: directduplicate taxation taxing the same person twice for the same reason in violation of some

provision in the consti usually the rule on equal protection; also prohibited is imposing atax activity that is merely incidental to a business or activity which has already been taxed

2. Public purpose tax must be intended to raise revenue to defray public expenditure3. International comity international courtesy

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4. Non-delegation 5. Exemption of government state cannot tax itselfa. Public Purpose

b. Inherently Legislative

1) General Rule2) Exceptionsa) Delegation to local governments

b) Delegation to the Presidentc) Delegation to administrative agencies

c. Territorial1) Situs of Taxationa) Meaning

b) Situs of Income Tax1) From sources within the Philippines2) From sources without the Philippines

3) Income partly within and partly without the Philippinesc) Situs of Property Taxes(1) Taxes on Real Property(2) Taxes on Personal Property

d) Situs of Excise Tax(1) Estate Tax(2) Donors Tax

e) Situs of Business Tax(1) Sale of Real Property(2) Sale of Personal Property

(3) VATd. International Comitye. Exemption of Government Entities, Agencies, and Instrumentalities

Constitutional Limitationsa. Provisions Directly Affecting Taxation1. Prohibition against imprisonment for non-payment of poll tax2. Uniformity and equality of taxation applied uniformly to subjects of taxation similarly

situated; fair (equitable) when its burden falls on those who are able to pay it (those whohave more in life should shoulder more expenses under the law)

3. Grant by Congress of authority to the President to impose tariff rates authority toCongress to delegate to President the fixing of customs and tariff duties; not a blanketauthority; only by law; only within specified limits; limitations within the framework ofnational development; customs/tariff dues dealing with countries in foreign relationsand political sense;

4. Prohibition against taxation of religious, charitable entities, and educational entitiesexemptions of charitable institutions favored because of their nature; performing

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functions which the government itself should perform; only on their properties actually,directly and exclusively used for religious, charitable and educational purposes;

5. Prohibition against taxation of non-stock, non-profit institutions schools; favoring schoolsgoes beyond property revenues all kinds of taxes and duties (books imported ordonations from abroad); cessation properties shall be disposed in the manner provided

by law

Exempts donations made to school on the donor;Budgetary priority to education

6. Majority vote of Congress for grant of tax exemption vote requirement for tax exemptions;majority of all the members of Congress

7. Prohibition on use of tax levied for special purpose -Rule on Taxes for special purposes allmoney collected on any tax levied for a special purpose shall be treated as a special fundand paid out for such purpose only; balance or remainder transferred to the general fundsof government

8. Presidents veto power on appropriation, revenue, tariffbills but the veto shall not affectthe item or items to which he does not object; encroach a bit on law-making;

9. Non-impairment of jurisdiction of the Supreme Court power of judicial review; review,revise, reverse, modify or affirm on appeal or certiorari, final judgments or order in casesinvolving the legality of any tax, impost, assessment, or toll, or any penalty imposed inrelation thereto.

10.Grant of power to the local government units to create its own sources of revenue subjectto such guidelines and limitations as the Congress may provide, consistent with the policyof local autonomy; accrue exclusively to the LGU (fees, taxes and charges)

Share of LGs in national taxes just share as determined by law, in the national taxeswhich shall be automatically released to them.

Taxing power of Autonomous Regions within its territorial jurisdiction

11. Flexible tariff clause12.Exemption from real property taxes - charitable institutions13.No appropriation or use of public money for religious purposes -

Excessive fines shall not be imposed no reasonable proportion as to the amount beingcollected and offense committed

Requirement on progressive system the Congress shall evolve a progressive system oftaxation; progressive when the effective rate of taxation goes up depending upon theresources of the person affected. The tax rate goes up as the tax base increases; Ifregressive not a standard that invalidates a law; only a moral incentive and not amorally enforceable rights

Requirement for an appropriation no money shall be paid out of the treasury except inpursuance of an appropriation made by law

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Tax bills to originate in the HOR all appropriation, revenue or tariff bills authorizingincrease of public debt shall originate exclusively in the HOR, but Senate may propose orconcur with amendments; more sensitive to the local needs of constituents; may undergoextensive stages or be entirely different from what came from the house;

Duty of the President to submit budget within 30 days from the opening of every regularsession, as basis of the general appropriations bill, a budget of expenditures and sources of

financing, including receipts from existing and proposed revenue measures.

Presidential pardoning power

b.Provisions Indirectly Affecting Taxation1. Due process restricts the deprivation of property without due process of law

Procedure required; what is required in order to pass a valid law: what is prohibited bydue process clause arbitrary and discriminatory; ex: when taxation amounts toconfiscation of property; tax is confiscatory the fact of a tax being confiscatory isestablished by competent evidence

2. Equal protection it does not demand that everyone pay the same amount of tax wherethere are differences in the amount, the differences should be based on reasonablegrounds; clause does not preclude classification; what is reasonable for purposes oftaxation? A)be based on substantial distinctions; b) be germane or materially related tothe purpose of the law; 3) classification must be applicable to present and future conditionsuntil law is repealed; d) applicable to all members of the class (uniformity of taxation)

3. Religious freedom not subjected to hindrances and unreasonable restrictions;4. Non-impairment of obligations of contracts -prohibits the passing of a law that impairs

the obligation of contracts; when tax exemption has been granted for a valid consideration

for a valid consideration, the contract clause prohibits the state from passing a lawimpairing that exemption

Construction of Tax rules1. general rule: must be interpreted fairly2. doubtful tax laws strictly against the government; liberally in favor of the taxpayers; if

there is clear intention of the law that there should be taxing burden of proof shifts ontaxpayer

Tax exemptions construed liberally a) law expressly provides (ex: retirement or incentivetaxes); b)the exemption is in favor of religious and charitable institutions; c) where theexemption is in favor of government, pol subdv or instrumentality; d) retirement (ex:terminal leave not subject to withholding tax; preferential tax rate and exemption)

Tax amnesty general pardon; how interpreted strictly against the taxpayer;

Partial refund? Not granted unless granted in the most explicit and categorical language

J. Stages of Taxation1. Levy2. Assessment and Collection

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3. Payment4. Refund

K. Definition, Nature, and Characteristics of Taxes

L. Requisites of a valid tax

M.Tax as distinguished from other forms of exactions1. Tariff2. Toll3. License fee4. Special assessment5. Debt

N. Kinds of Taxes1. As to objecta. Personal, capitation, or poll tax

b. Property tax

c. Privilege tax2. As to burden or incidencea. Direct

b. Indirect3. As to tax ratesa. Specific

b. Ad valoremc. Mixed4. As to purposesa. General or fiscal

b. Special, regulatory, or sumptuary5. As to scope or authority to impose

a. National internal revenue taxesb. Local real property tax, municipal tax6. As to graduationa. Progressive

b. Regressivec. Proportionate

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

A. Income Taxation

What is income all wealth which flows into the taxpayer other than as a mere return ofcapital (gains and profits; gains derived from gains and disposition of capital assets)

Capital is a fund; income is flow of that fund; C is wealth, I is the source of wealthProperty is a tree, tree is the fruit; labor is a tree, income is fruit of labor, capital is tree,income is fruit

When is income subject to tax (Realization Principle)? Only when it has become realized; onlywhen it has become real or having an identity that is separate and distinct from its source;mere increase in the market value of ones property is not yet income; but when the property is

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sold at a price higher than its cost, the amount received above the cost is income that is subjectto tax, and part of the price that corresponds to the cost is not subject to income tax because itis mere return of capital

Tests that are applied to determine if income is realized or nota. severance test: when income can be separated from the capitalb. control test: when the recipient can use the income for his own benefitc. proprietary interest test: when recipients rights over the income are substantially those of

its ownerd. actual receipt test: when a cash basis taxpayer takes actual or constructive possession of

the incomee. equivalent of cash doctrine: when what is received, though not cash, can be exchanged or is

like cash (cancellation of debt increase in his net worth)f. claim of right doctrine: when recipient makes a claim, rightfully or not, of complete

ownership over the income; ex: a thiefs claim over the stolen property; sequestrationg. test of involuntary conversion when property is involuntarily converted, there is no

realization of income if proceeds are used to acquire property of a like kind

Are all realized income recognized as taxable income? NO; In order to be recognized astaxable, realized income must have three requisites:a. there must be a closed and completed transaction

b. gain or profit is derived therefromc. no law excludes the income from taxationex: sale of mutual fund law excludes it from taxation although first two are present

How is income Tax structured?a. Subject individuals (trusts and estates); corporations (including partnerships)b. Object incomec. Tax base - taxable incomed.

Tax rate variable progressive tax rate depending on the nature of the subject and onthe nature of income

e. Length of accounting period generally: 12 months; exceptions 1) change of accountingperiod- with the permission of the BIR; 2) final return of a decedent; 3) first return of anestate; 4) newly organize corporations; 5) dissolving corporations

f. Kinds of taxable years 1) calendar jan 1 end of dec; 2) fiscal; (individuals, estates andtrusts are required to follow the calendar year)

g. Methods of accounting1) cash receipts and disbursement method report when you earn the cash and pay when

you disburse (claiming deductions);2) accrual method the income or liability is recognized even if the cash is not received;

3) installment method reports income at the time the installments are paid;4) percentage of completion method like installment method but adopted by

construction companies in accordance with the percentage of work accomplished;5) crop year basis used in agricultural; tax during harvest;

h. Manner of determining tax liability self-assessment (the person liable files a tax returnthat shows tax due)

Is income tax collected by the government taxed at the same time that the income flows to thetaxpayer? No, the tax income is imposed only on the net result of the taxpayers transactionswithin a certain period called accounting period; exceptions:1) final taxes are either

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withheld by the payor or remits it to the government when the transaction occurs, 2) sometaxes that are paid by the taxpayer gradually in advance of the regular income tax (ex: tax ongains on the share of unlisted stocks).

Pay as you go rulea. When interest is paid on bank deposits

b. When cash property dividends are declared by corporations and paid to stockholdersc. When real property that is a capital asset paid within 30 days after the saled. When royalties, other than tax free royalties for books, literary works, and musical

compositions, are receivede. When winnings other than tax free lotto and sweepstakes prices are receivedWhen is the income tax for the taxable year paid? When the return is filed after the end of thetaxable year pay as you file; on or before 15th day of april of each year; Exceptions: 1) finaltax on sale of stocks not traded through the local exchange within 30 days after each sale andconsolidated on april 15 the following year; 2) final tax on sale of real property that is acapital asset is paid within 30 days from date of sale

Tax Retrun a document filed by the taxpayer that sets out, in addition to basic data abouthimself, the amount of tax that he calculates is what he should pay based on his owndeclaration of what goes into his tax base and his application thereto of the tax rate. It isusually filed at the time the tax is to be paid.

2. Income Tax Systemsa. Global (or unitary) Tax System all types of income derived from whatever and

wherever sources are treated in exactly the same wayb. Schedular Tax System income is divided into different groups (schedules) and each

schedule is given a separate treatment, usually in terms of the tax ratec. Semi-schedular or semi-global tax system Philippines; since only some and not all

types were segregated; ex: interest from bank deposits, capital gains from sale of real

property were segregated and subjected to preferential rates. Those not segregatedwere subjected to the regular rates

3. Features of the Philippine Income Tax Lawa. Direct tax imposed on the income earner who is expected to bear the economic burden

b. General tax applicable to the majority if not all of the populationc. Progressive progressive; the rate increases as the base enlargesd. Comprehensivee. Semi-schedular or semi-global tax system some types of income are categorized for

different treatments; the rest uniformity

f. Criteria in Imposing Philippine Income Tax: What Situs justifies a states subjecting aperson to income tax? A state may impose an income tax by reason of:a. Citizenship Principle

b. Residence Principlec. Source Principled. Location of the property that produces the incomee. Place where the business that produces the income is conducted

4. Types of Philippine Income Tax

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5. Taxable Perioda. Calendar Period

b. Fiscal Periodc. Short Period

6. Kinds of Taxpayers

Citizens Tax BaseResident global and schedular All income derived from sources within and

without (or outside) the PhilippinesNon-resident (including overseas contract workers) Only income derived from sources within the

PhilippinesAliens Tax Base

Resident or non-resident Only income derived from sources within thePhilippines

What are income considered to be derived from sources within the Philippines?1. Interests when they are derived from sources within the Philippines and when they are

paid on indebtedness of residents2. Dividends a) when paid by domestic corporations; b) when paid by foreign corporations

50% or more of whose gross income for the last 3 years come from the Philippines3. Fee on services when services rendered in Philippines4. Rentals and royalties when the property rented or the right for which royalties are paid

in the Philippines5. Gains on sale of real property when located in the PhilippinesIncome taxes on citizens and resident aliens1. on passive income, namely interests, royalties, prizes and other winnings, cash and

property dividends from domestic sources final tax (no need to declare on any otherreturns) of different tax rates

2. on capital gains, from sale of shares of stock not traded in the PSE final tax of 5% on first100K and 10% on excess (30 days from the date of sale)

3. on capital gains, from sale of real property in the Phils final tax of 6% based on grossselling price

4. on all other income progressive tax rate from 5% to 32%What are the income taxes on passive income received by a Philippine resident from domesticsources?1. On interest from banks generally 20%2. Except:

a. From EFCDUs (expanded foreign currency deposit units) 7.5%b. From long term (5 yrs) deposits or investments tax free, but if pre-terminated, taxed

at diminishing rate based on holding period from 20% if remaining term is 3 or moreyears to only 5% if remainder is 1 year or less

3. Royalties generally 20% except for books and other literary works at 10%4. Prizes 20%, except from the sweepstakes and lotto which are tax free, and those less than

10K which shall be part of other income5. Cash and property dividends from domestic corp (including share in distributable net

income after tax of partnerships, other than general professional partnership) 10%

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How are gains from sale by a resident of domestic shares of stock (capital assets) taxed?1. gains from the sale of shares listed and traded in the local stock exchange is not subject to

the income tax. Instead, the sale is subject to a transaction tax of of 1% of gross sellingprice

2. gains from sales, during the taxable year, of shares of stock not so listed is taxed at 5% onthe first 100K of net capital gain and 10% on excess

Gains on real property (capital asset) 6% on gross selling price or current fair market value(zonal value) whichever is higher, is imposed on the presumed capital gains from the sale;

Exceptions:1. sales to the government may be taxed at final tax of 6% or as part of other income of the

seller, at his option2. if the sale is of a principal residence, and proceeds are reinvested in a new principal

residence (within 18 months), no tax imposed if not done more than every ten years

How is the rest of the individuals income subjectto tax? put in one category and subjected tothe progressive tax rate that starts at 5% for income not higher than 10K peaks at 32% for anyincome above 500K

How is the taxable income of individuals, other than those subject to the final taxes computed?All pertinent items of gross income, less all deductions permitted by law for such types ofincome, and less also personal and additional exemptions, constitute a resident individualstaxable income

Gross income1. Compensation for services (salaries, commissions2. Income derived from the conduct of trade or business or exercise of a profession

3. Gains derived from dealings in property, other than those subject to final tax4. Interests

5. Rents6.

Royalties not subject to final tax7. Dividends not subject to final tax

8. Annuities9. Prizes and winning not exempt10.Pensions not exempt11.Partners distributive share from the net income of the general professional partnership

Exclusions1. Return of premiums on life insurance policies paid to the insured, which are really a return

on capital2. Income exempt under treaty (public policy reason)

Exclusions not part of Gross income1. Proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured

(return of capital);2. Amount received by the insured as a return of premium paid by him under life insurance,

endowment or annuity contracts3. Gifts (donors tax), bequests, devises, inheritance (inheritance tax). But, if the donated or

inherited property earns interest, the interest is part of gross income (have already totransfers taxes).

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4. Amounts received through accident or health insurance or under workmens compensationact, as compensation for personal injury or sickness, plus damages paid therefor

5. Income of any kind to the extent required by any treaty obligation binding upon thegovernment of the Philippines

6. Retirement benefits pursuant to the retirement law7. Retirement benefits under a qualified private retirement plan8. Any amount received by an official or employee or by his heirs from the employer as a

consequence of separation from the service because of death, sickness or other physicaldisability or for cause beyond the control of said official or employee

9. SS benefits, retirement gratuities, pensions and other similar benefits (resident or non-resident or aliens)

10.Payments to residents by the USVA11.Benefits received from the SSS, GSIS12.Miscellaneous items

a. Income derived from foreign governmentb. Income derived by the govt and its political subdivisionsc. Prizes and awards in recognition of religious, charitable, scientific, educ, artistic or

literary or civic achievement

d. Prizes and awards in sports competitionse. 13th month pay and other benefits not exceeding 30Kf. GSIS, SSS, medicare contributionsg. Gains from sale of bonds, debentures and other certificates of indebtednessh. Gains from the redemption of shares in mutual funds

Fringe benefits Tax? A final tax of 32% on the grossed-up monetary value furnished or grantedto the employee (except rank and file), unless the fringe benefit is required by the nature of ornecessary to the trade (ex: keeper/guard of a hacienda), business or profession of theemployer or when the fringe benefit is for the convenience or advantage of the employer; 32%is paid by the corporation ; liable are the managerial or supervisory

What items are part of the base of the fringe benefits?1. Housing2. Expense account

3. Vehicle of any kind4. Household personnel

5. Interest on loans to the extent less than market rates6. Membership fees and dues in social and athletic clubs or similar organizations7. Expenses for foreign travel8. Holiday and vacation expenses9. Educational assistance to the employee or hid dependents10.Life on health insurance and other non-life insurance premiums or similar amounts in

excess of what the law allows, such as contributions to the SSS, GSIS, group insurance,similar contributions

What are the fringe benefits are not subject to FBT?1. Exempted by the code2. Contributions of employer to retirement, insurance or hospitalization benefit plans

3. Benefits to rank and file4. De minimis benefits (ex: 1 sack of rice, meal allowance)

5. When necessary for the business of employer6. When for the convenience of the employer

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Deductions items allowed to deduct to arrive at taxable income; reasons: 1) akin to capital;2) public policy ex: charitable contributions

Exclusions not part of tax base

Deductions only income is compensation for services1. Premiums not exceeding 2400 per family for health or hospitalization insurance taken by

the taxpayer; gross income of more than 250K; married only spouse claiming dependentsentitled to deductions

Individual taxpayer other than compensation in addition to premium payments onhealth/hospitalization insurance1. Optional standard deduction of 40% of gross income2. Itemized deductions that he can prove he is entitled to

a. Ordinary and necessary to trade, business or professional expensesb. Interest on indebtedness incurred in connection with business and, if used to purchase

assets, not treated as part of the cost

3. Taxes in connection with business, except the Phil income tax, provided foreign income taxare not claimed as a tax credit, estate and donors taxes, and taxes assessed against localbenefits (special assessments)

4. Losses not compensated for by insurance or otherwise, such as those 1) incurred inconnection with business; 2) casualty losses; 3) NOLCO (net operating loss carry over)which is carried over for more than 3 years; 4) short term capital loss; 5) securitiesbecoming worthless; 6) wash sales; 7) wagering losses; 8) abandonment losses

5. Bad debts ascertained to be worthless and charged off during the year6. Depreciation allowance for ordinary wear and tear, including obsolescence, computed

through a) straight line method; b) declining balance method; c) sum of the years digitsmethods; d) any other method approved by the Sec. of Finance

7. Depletion of oil, gas wells and mines8.

Charitable institutions a. 100% if donations are to: a) government or its subdivisions for priority activities in

education, health, youth and sports development; b) foreign governments made fullydeductible by agreements or treaties; c) accredited NGOs

b. 10% in case of individuals and 5% of corporations of taxable income from business ascomputed without benefit of the deduction

9. Research and development expenses treated as deferred expenses10.Contributions to qualified pension trusts up to 100% if in payment for liability accruing

during the year or 10% annually , for the next 10 years, if in excess of such current liability

What items are not deductible from gross income?1. Personal, living and family expenses2. Amounts paid out for new building or for permanent improvements, or betterments made

to increase the value of any property or estate3. Amount expended in restoring property or in making good the exhaustion thereof for

which an allowance is or has been made4. Premiums paid for a life insurance policy covering the life of an officer or employee or any

person interested in the business of the taxpayer, when the taxpayer is directly orindirectly the beneficiary under such policy

5. Losses from sales or exchanges of property among certain related persons

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What expenses are considered ordinary and necessary1. Compensation for services, including gross-up value of fringe benefits2. Travel expenses (in pursuit of trade or business and profession)

3. Business rentals4. Entertainment, amusement and recreation expenses

Kickbacks or bribes NO, by expressed provision of the tax code; reasons of public policy

What are the requisites in order to be able to deduct interest on indebtedness from grossincome?1. There must be an indebtedness2. The interest is paid or incurred during the taxable year on that indebtedness

3. The indebtedness of that of the taxpayer4. The indebtedness is connectedwith taxpayers business

5. The interest must be legally dueTax arbitrage rule means a transaction that is entered into for the purpose of takingadvantage resulting from different tax treatments of two legs of the transaction; the law

reduces the amount that is to be deducted from interest paid by 33%; example: a taxpayerpurports to get a loan (in order to deduct the entire interest from his ordinary income that istax on net at 30% and then depositing proceeds with a bank in a time deposit certificate whoseinterest is taxed only at 20%. By so doing he seeks to gain 10%

How does the law favor those who invest property used in business? Borrower is given theoption of either claiming the entire capital as an expense (thereby reducing the tax on his netincome when he has taxable income) or treating the interest as part of the cost of the propertyacquired, called capitalizing, if he cannot benefit from the deduction because he does not haveenough taxable income to reduce

Are all taxes paid in connection with business deductible from gross income? Generally yes:

except:1. Philippine income taxes2. Foreign income taxes that are not claimed as tax credit

3. Estate and donors taxes4. Taxes assessed against local benefits of a kind tending to increase the value of property

assessed special assessments

Tax Benefit Rule reporting of tax refund as income only if the tax refund previouslybenefitted a tax payer

What losses are deductible from gross income?1. Loss must be actual2. Sustained in a closed and completed transaction

3. Must not be compensated for by insurance or otherwise4. Loss must be liquidated and fully charged off during the taxable year

5. Not claimed as deduction from gross estate (estate tax return)6. If due to casualty, must be reported to BIR within 45 days from discovery of loss

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What losses are not deductible from gross income by reason of relationship of the parties? Thefollowing losses from the sale or exchange of property may not be deducted when:1. Between members of a family, spouse, brothers and sisters, ancestors and lineal

descendants2. Between an individual and a corporation more than 50% of which capital is owned by the

taxpayer, except in case of distribution in liquidation

3. Between 2 corporations more than 50% of whose capital is owned by the same individual,if either one is personal holding company; exception: liquidation

4. Between grantor and fiduciary of a trust5. Between the fiduciaries of two trusts, if the grantor of the two trusts is the same6. Between a fiduciary of a trust and a beneficiary of such trustWhat are losses that are not deductible from gross income by reason of public policy?1. Losses sustained in illegal transactions2. Casualty losses only when they are not compensated for by insurance

3. Wagering(gambler) losses are deductible only from wagering gains (report wageringgains)

4. Losses on the wash sale of securities cost of purchase price that caused the disallowance;property when acquired; loss incurred; property re-acquired

5. Capital losses are deductible only from capital gains6. Losses in sale or exchange by a taxpayer other than a corporation of a long term capital

asset are deductible only to the extent of 50% of said loss

What are capital assets? Any asset or property whether or not connected with business, but isproperty that is not1. Stock in trade or property in inventory2. Property held primarily for sale in the ordinary course of business

3. Property used in business and subject to depreciation allowance4. Real property used in the business of taxpayerWhy are capital assets given special treatment? CA are held by taxpayer for long periods oftime; their value are values that accrue from year to year; they contribute to the wealth oftaxpayer as capital; special treatment given by the law is in recognition to the contribution ofassets held as capital make towards the stability and growth of the economy as a whole.

Are all gains from sale or exchange of property subject to the regular income tax?No, some gains by way of exception, are not subject to income tax; examples:1. The presumed gains from sale of real property that is a capital asset is subject to the final

tax of 6% on the gross selling price;2. The gain from trading stocks listed in the stock exchange is exempt from income tax

Transactions tax3. Gains realized from the sale of bonds, debentures, or other certificates of indebtedness with

a maturity of more than 5 years are exclusions from gross income4. Gains realized by the investor upon redemption of shares of stock in a mutual fund

company are exclusions from gross income.

Are exchanges of property where no gain or loss recognized? No gain or loss is recognizedwhen:1. Pursuant to a merger or consolidation, the parties exchange their stock or security for new

corporation under certain conditions

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2. Property is transferred to a corporation by a person in exchange for stock in such corp ofwhich as a result such person, alone or together with not more than 4 persons gainscontrol of the corp

Names instances where there are gains recognized but not losses?1. Gains from illegal transactions are recognized but not the losses2. Gains from related taxpayers are recognized but not the loss

3. Gains from exchanges of property for stock in a corp in pursuance of a merger orconsolidation where taxpayer receives, in addition, money or property also are recognizedto the extent of the cash or fair market value of the property but not the loss

When are bad debts deductible from gross income?; also applies to tax benefit rule1. Debt must be valid and subsisting2. Connected with taxpayers business

3. Must be ascertained to be worthless4. Must be fully charged off during the year

Depreciation allowance deduction to enable the taxpayer to recover the cost of the gradual

diminution in the value of his business asset resulting from its ordinary wear and tear; ex:buildings but not land, intangible rights with limited duration

Methods used to compute possible depreciation1. Straight line method get life time of property deduct in equal parts2. Declining balance method

3. Sum of the years digits -4. Any other method prescribed the Sec of finance upon recommendation of BIR

Commissioner

What is the purpose of permitting the deduction of a depletion allowance to recover thecapital he had in invested in wasting assets (happens suddenly), like mines and oil and gas

wells, depleted over time on account of their being extracted from the earth.

When are charitable contributions deductible from gross income?1. Contribution of gift must be actually paid2. Donee is a charitable organization must be of the kind specified in tax code

3. No part of net income of the done charitable org inures to the benefit of any privatestockholder or individual

How much must be deducted? All of what is given (or in full) is given to (100% ):1. The government to be used exclusively in undertaking priority activities in education,

health, youth and sports development, human settlement, science and culture andeconomic development

2. Foreign institutions/international orgs in compliance with treaties and other intlagreements or commitments

3. NGOs that are accredited (donation is used not later than the 15th day of the 3rdmonthfollowing the close of the donees taxable year); donees administrative expenses should notexceed 30% of total expenses; assets must be distributed to another non-profit domesticcorp or to the state

4. The assets of the done must be distributed to another non-profit domestic corporation or tothe state;

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In part if given to other donees to the extent of only 10% of net income of individuals; 5%of the net income of the corporate donor from business, without benefit of the deduction ofthe donations allowed in full and of those subject to this limitation.

What are options of the taxpayer in order to recover expenditures for research anddevelopment? A taxpayer may treat amount spent for R&D either:

1. Treat them as ordinary and necessary expenses and deduct them in full from gross income2. As deferred expenses an deduct them ratably over a period of not less than sixty monthsWhat are the requisites for treating amounts spent for R&D as deferred expenses?1. Amount must be paid or incurred in connection with taxpayers business2. Amount must not have been treated as ordinary and necessary expense

3. Amount is chargeable to a capital account but not of a character which is subject todepreciation or depletion.

What R & D expenditures may not be amortized by the taxpapyer?1. Expenditures for the acquisition or improvement of land o property subject to depreciation

or depletion

2. Expenditures for the purpose of ascertaining the existence location, quality of ore or othermineral, including oil and gas (exploration expenses)How are contributions to employee benefit trusts to be deducted by the employer?1. Contributions covering pension liability accruing during the taxable year are deductible in

full2. Any contribution in excess of that may be deducted over a period of 10 years to the extent

of 1/10th of the amount per year

Taxpayer must be able to show that the withholding tax required by law to be deducted by thepayor was in fact withheld and remitted to the BIR.

Reducing the net taxable income for individuals: After deducting the optional or itemizeddeductions, further deductions: Personal exemptions 50K plus 25K for each dependent notexceeding 4 to be claimed by only one of the spouses

Personal Exemptions amounts which state permits a resident individual to further deductfrom the regular income tax base, to answer for the individuals and his familys necessaryexpenses

How do married individuals compute their income tax liability?1. H and W shall file one return but shall compute their respective income tax liabilities

separately. This avoids the marriage tax2. Only one of the spouses may claim the dependents. If spouses are legally separated,

only one who has custody of the dependent may claim that amount.

SUMMARIZE FORMULA FOR TAXABLE INCOME OF RESIDENT INDIVIDUALS

Everything received other than mere return of capital (all income)Less: exclusionsGROSS INCOME

Less: allowable deductionsNET INCOME

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Less Personal ExemptionsNET TAXABLE INCOME

a. Individual Taxpayers1) Citizensa) Resident citizens

b) Non-resident citizens

2) Aliensa) Resident aliens

b) Non-resident aliens(1) Engaged in trade or business shall come to the Philippines and stay therein for an

aggregate period more than 180 days during any calendar; taxed in the same manneras a resident alien; 20% on all income deducted by the payor

(2)Not engaged in trade or business 25% on gross incomeNon-resident aliens who enjoy preferential tax treatment1. those employed by regional or area headquarters or multinational companies 15%2. those employed by offshore banking units 15%3. those employed by foreign service contractors or subcontractors engaged in petroleum

operations in the Philippines 15%

Entities taxed in the same way as individuals?a. estates of deceased persons which are under judicial settlementb. trusts which are irrevocable

What rules specifically apply to estates?1. Under judicial settlement2. Estates can also claim a personal exemption of 20K

3. Additional deduction for income currently distributed to heirs who must report what theyreceived as part of their respective gross income in the form of support (itemizeddeductions also)

What kind of trusts are taxed like individuals? only irrevocable trust; depending of howincome is distributed, they are: a) accumulation trusts; b) current distribution trusts; c)discretionary trusts; they can claim as deductions current distributions of income beneficiarieswho must report them in their own returns; personal exemption of 20K.

Trusts not treated like individuals? - Revocable trusts and grantor trusts (grantor is also abeneficiary); incomes are included in the gross incomes of the trustors

When individuals and trusts and estates file income tax returns:General rule: annually on or before 15th day of april of each year covering income for the

preceding taxable years;Exceptions:

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1. Sale of unlisted shares 30 days from each transaction and a consolidated return on orbefore 15th day of april

2. Sale of real property that is a capital asset within 30 days from ach sale or dispositionIndividuals Need not file tax returns:1. Gross income is not from business or profession and does not exceed his total personal and

additional exemptions2. Income is compensation from only one employer, correctly withheld by employer and does

not exceed 60K3. Sole income has been subjected to final withholding tax4. Exempt from income tax pursuant to tax code and other special laws

3) Special Class of Individual Employeesa) Minimum wage earner

c. Corporations Purposive test (business motive test; engage in business or intended togenerate profits corporation within the meaning of the Income Tax LawCo-ownership parties find themselves together in no intention to pursue a commonventure (inherit from a common ancestor), or contribute property to share the incomeamongst themselves

1) Domestic corporations tax base: net income derived from sources within and without (oroutside) the Phils

How are domestic corporations taxed?Passive income of DC are taxed like the passive income of individuals, except:

a.

No preferential tax rate for interests from LTCDsb. Tax in interest from EFCDUs is 10%c. No tax on domestic intra-corporate dividends

Gains from sale of shares of stock are taxed like individualsGains from sale of real property are taxed like individualsThe rest is all taxable income (computed as gross income less allowable deductions) andthe tax is the higher of 2% MCIT or 30% on Net Taxable Income (Normal Income Tax)

If MCIT is bigger than the NIT excess is creditable v NIT for the next 3 years

Personal Exemptions in Corporations NO.

Deductions allowed to I but not to Corporations premiums for health/hospitalizationinsurance

Minimum Corprate Income Tax 2% on the gross income starting from the 4th year followingthe commencement of the operations of the company; discourage of corp of recording very lownet income and remaining to be in existence; corp incurring net losses required to pay MCIT,may carry forward and credit against the normal IT due for the next 3 years following theexcess of the MCIT over the normal IT

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When and whom may suspend MCIT? Sec of Finance1. Prolonged labor dispute2. Force majeure

3. Legitimate business reversesImproperly Accumulated Earnings Tax (IAET) 10% intended to punish corp which do notdeclare dividends for the purpose of avoiding the tax on its shareholders

Corporations/ associations not subject to IAET?1. Publicly held corp2. Banks and other non-bank financial intermediaries

3. Insurance companies4. Taxable partnerships

5. General professional partnerships earnings whether distributed or not are taxed onindividual members

6. Non-taxable joint ventures7. PEZA, CDA and SBMA set-up on invitation by government to invite capitalWhen corp file their ITR? Except foreign corp., on a quarterly basis within 60 days followingthe end of the first three quarters and a final adjustment return covering the entire year on the15th day of the 4th month following the close of the taxable year.

Resident Corp subjected to flat rate 30% - distribute the fruits of their work to stockholders subjected to tax again to individuals

Branch Profits remittance Tax tax of 15% imposed on total profits applied or earmarked by aforeign company doing business in the Phils through a branch or remittance to its head office;

2)Foreign corporations (W/N engaged in trade or business) sourced within the Philippines

(1) Resident foreign corporations(2)Non-resident foreign corporations

c. Partnerships

4. General Professional Partnerships incomes are computed like corporations but partnerseach report in their own returns their respective shares in the net income, whetherdistributed or not, as part of their business income

Other partnerships for business or trade are taxed exactly like corporations; theirdistributions of net income are taxed like dividends.

e. Estates and Trusts

f. Co-ownerships7. Income Taxationa. Definition

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b. Naturec. General principles8. Incomea. Definition

b. Nature6

c. When income is taxable1) Existence of income2) Realization of incomea) Tests of Realization

b) Actual vis--vis Constructive receipt3) Recognition of income4) Methods of accountinga) Cash method vis--vis Accrual method

b) Installment payment vis--vis Deferred payment vis-visPercentage completion (in long term contracts)d. Tests in determining whether income is earned for tax purposes1) Realization test

2) Claim of right doctrine or Doctrine of ownership, command, or control3) Economic benefit test, Doctrine of proprietary interest4) Severance test9. Gross Incomea. Definition

b. Concept of income from whatever source derivedc. Gross Income vis--vis Net Income vis--vis Taxable Incomed. Classification of Income as to Source1) Gross income and taxable income from sources within the Philippines2) Gross income and taxable income from sources without thePhilippines3) Income partly within or partly without the Philippinesd. Sources of income subject to tax

1) Compensation Income2) Fringe Benefitsa) Special treatment of fringe benefits

b) Definitionc) Taxable and non-taxable fringe benefits3) Professional Income4) Income from Business5) Income from Dealings in Propertya) Types of Properties(1) Ordinary assets(2) Capital assets

b) Types of Gains from dealings in property(1) Ordinary income vis--vis Capital gain(2) Actual gain vis--vis Presumed gain(3) Long term capital gain vis--vis Short term capitalgain7(4) Net capital gain, Net capital loss(5) Computation of the amount of gain or loss(a) Cost or basis of the property sold(b) Cost or basis of the property exchanged in corporate readjustment

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[1] Merger[2] Consolidation[3] Transfer to a controlled corporation (tax-freeexchanges)(c) Recognition of gain or loss in exchange ofproperty

[1] General rule[a] Where no gain or loss shall be recognized[2] Exceptions[a] Meaning of merger, consolidation, controlsecurities[b] Transfer of a controlled corporation(6) Income tax treatment of capital loss(a) Capital loss limitation rule (applicable to bothcorporations and individuals)(b) Net loss carry-over rule (applicable only toindividuals)(7) Dealings in real property situated in the Philippines

(8) Dealings in shares of stock of Philippinecorporations(a) Shares listed and traded in the stock exchange(b) Shares not listed and traded in the stock exchange(9) Sale of principal residence6) Passive Investment Incomea) Interest Income

b) Dividend Income(1) Cash dividend(2) Stock dividend(3) Property dividend(4) Liquidating dividend

c) Royalty Incomed) Rental Income(1) Lease of personal property(2) Lease of real property(3) Tax treatment of(a) Leasehold improvements by lessee(b) VAT added to rental/paid by the lessee(c) Advance rental/long term lease7) Annuities, Proceeds from life insurance or other types ofinsurance88) Prizes and awards9) Pensions, retirement benefit, or separation pay10) Income from any source whatevera) Forgiveness of indebtedness

b) Recovery of accounts previously written offc) Receipt of tax refunds or creditd) Income from any source whatevere. Source rules in determining income from within and without1) Interests2) Dividends

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3) Services4) Rentals5) Royalties6) Sale of real property7) Sale of personal property8) Shares of stock of domestic corporation

f. Situs of Income Taxation (See page 2 under InherentLimitations, Territorial)g. Exclusions from Gross Income1) Rationale for the exclusions2) Taxpayers who may avail of the exclusions3) Exclusions distinguished from deductions and tax credit4) Under the Constitutiona) Income derived by the government or its politicalsubdivisions from the exercise of any essentialgovernmental function5) Under the Tax Codea) Proceeds of life insurance policies

b) Return of premium paidc) Amounts received under life insurance, endowment orannuity contractsd) Value of property acquired by gift, bequest, devise ordescente) Amount received through accident or health insurancef) Income exempt under tax treatyg) Retirement benefits, pensions, gratuities, etc.h) Winnings, prizes, and awards, including those in sportscompetition6) Under a Tax Treaty7) Under Special Laws

h. Deductions from Gross Income1) General rulesa) Deductions must be paid or incurred in connection withthe taxpayers trade, business or profession

b) Deductions must be supported by adequate receipts or invoices (except standard deduction)2) Return of capital (cost of sales or services)a) Sale of inventory of goods by manufacturers and dealers of properties

b) Sale of stock in trade by a real estate dealer and dealer in securitiesc) Sale of services3) Itemized deductionsa) Expenses(1) Requisites for deductibility(a) Nature: Ordinary and necessary(b) Paid and incurred during taxable year(2) Salaries, wages and other forms of compensation for personal services actually rendered,including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax

which tax should havebeen paid(3) Traveling/Transportation expenses(4) Cost of materials(5) Rentals and/or other payments for use or possessionof property

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(6) Repairs and maintenance(7) Expenses under lease agreements(8) Expenses for professionals(9) Entertainment expenses(10) Political campaign expenses(11) Training expenses

b) Interest(1) Requisites for deductibility(2) Non-deductible interest expense(3) Interest subject to special rules(a) Interest paid in advance(b) Interest periodically amortized(c) Interest expense incurred to acquire property for use in trade/business/professionc) Taxes(1) Requisites for deductibility(2) Non-deductible taxes(3) Treatments of surcharges/interests/fines fordelinquency

(4) Treatment of special assessment(5) Tax credit vis--vis deductiond) Losses(1) Requisites for deductibility10(2) Other types of losses(a) Capital losses(b) Securities becoming worthless(c) Losses on wash sales of stocks or securities(d) Wagering losses(e) NOLCOe) Bad debts

(1) Requisites for deductibilityf) Depreciation(1) Requisites for deductibility(2) Methods of computing depreciation allowance(a) Straight-line method(b) Declining-balance method(c) Sum-of-the-years-digit methodg) Charitable and other contributions(1) Requisites for deductibility(2) Amount that may be deductedh) Contributions to pension trusts(1) Requisites for deductibility4) Optional standard deductiona) Individuals, except non-resident aliens

b) Corporations, except non-resident foreign corporations5) Personal and additional exemption (Republic Act 9504Minimum Wage Earner Law)a) Basic personal exemptions

b) Additional exemptions for taxpayer with dependentsc) Status-at-the-end-of-the-year rule6) Items not deductible

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a) General rulesb) Personal, living or family expensesc) Amount paid for new buildings or for permanentimprovements (capital expenditures)d) Amount expended in restoring property (major repairs)e) Premiums paid on life insurance policy covering life or

any other officer or employee financially interestedf) Interest expense, bad debts, and losses from sales ofproperty between related partiesg) Losses from sales or exchange or propertyh) Non-deductible interesti) Non deductible taxes

j) Non-deductible lossesk) Losses from wash sales of stock or securitiesi.Exempt Corporations1110. Taxation of Resident Citizens, Non-resident Citizens, andResident Aliens

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

b. Taxation on Compensation Income1) Inclusionsa) Monetary compensation(1) Regular salary/wage(2) Separation pay/retirement benefit not otherwiseexempt(3) Bonuses, 13th month pay, and other benefits notexempt(4) Directors fees

b) Non-monetary compensation

(1) Fringe benefit not subject tax2) Exclusionsa) Fringe benefit subject to tax

b) De minimis benefitsc) 13th month pay and other benefits and paymentsspecifically excluded from taxable compensation income3) Deductionsa) Personal exemptions and additional exemptions

b) Health and hospitalization insurancec) Taxation of compensation income of a minimum wageearner(1) Definition of Statutory Minimum Wage(2) Definition of Minimum Wage Earner(3) Income also subject to tax exemption: holiday pay,overtime pay, night shift differential, and hazard payc. Taxation of Business Income/Income from Practice ofProfessiond. Taxation of Passive Income1) Passive income subject to final taxa) Interest income

b) Royalties

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c) Dividends from domestic corporationd) Prizes and other winnings2) Passive income not subject to final taxe. Taxation of capital gains1) Income from sale of shares of stock of a Philippinecorporation

a) Shares traded and listed in the stock exchangeb) Shares not listed and traded in the stock exchange2) Income from the sale of real property situated in thePhilippines123) Income from the sale, exchange, or other disposition ofother capital assets11. Taxation of Non-resident Aliens Engaged in Trade or Businessa. General rules

b. Cash and/or property dividendsc. Capital gains12. Exclude Non-resident Aliens Not Engaged in Trade or Business

13. Individual Taxpayers Exempt from Income Taxa. Senior citizens

b. Exemptions granted under international agreements14. Taxation of Domestic Corporationsa. Tax payable1) Regular tax2) Minimum corporate income tax (MCIT)a) Imposition of MCIT

b) Carry forward of excess minimum taxc) Relief from the MCIT under certain conditionsd) Corporations exempt from the MCITe) Applicability of the MCIT where a corporation is

governed both under the regular tax system and aspecial income tax systemb. Allowable deductions1) Itemized deductions2) Optional standard deductionc. Taxation of Passive Income1) Passive income subject to taxa) Interest from deposits and yield or any other monetary

benefit from deposit substitutes and from trust fundsand similar arrangements and royalties

b) Capital gains from the sale of shares of stock not tradedin the stock exchangec) Income derived under the expanded foreign currencydeposit systemd) Intercorporate dividendse) Capital gains realized from the sale, exchange, ordisposition of lands and/or buildings2) Passive income not subject to taxd. Taxation of Capital Gains1) Income from sale of shares of stock2) Income from the sale of real property situated in the

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Philippine133) Income from the sale, exchange, or other disposition ofother capital assetse. Tax on proprietary educational institutions and hospitalsf. Tax on government-owned or controlled corporations,

agencies or instrumentalities15. Taxation of Resident Foreign Corporationsa. General rule

b. With respect to their income from sources within thePhilippinesc. Minimum corporate income taxd. Tax on certain income(1) Interest from deposits and yield or any other monetary

benefit from deposit substitutes, trust funds and similararrangements and royalties(2)Income derived under the expanded foreign currencydeposit system

(3) Capital gain from sale of shares of stock not traded in thestock exchange(4) Intercorporate dividendse. Exclude:(1) International carrier(2) Offshore banking units(3) Branch profits remittances(4) Regional or area headquarters and Regional operatingheadquarters of multinational companies16. Taxation of Non-resident Foreign Corporationsa. General rule

b. Tax on certain income

(1) Interest on foreign loans(2) Intercorporate dividends(3) Capital gains from sale of shares of stock not traded in thestock exchangec. Exclude:(1)Non-resident cinematographic film owner, lessor ordistributor(2)Non-resident owner or lessor of vessels chartered byPhilippine nationals(3)Non-resident owner or lessor of aircraft machineries andother equipment17.Improperly Accumulated Earnings of Corporations18. Exemption from tax on corporations19. Taxation of Partnerships1420. Taxation of General Professional Partnerships21. Taxation on Estates and Trustsa) Application

b) Exceptionc) Determination of tax1) Consolidation of income of two or more trusts

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2) Taxable income3) Revocable trusts4) Income for benefit of grantor5) Meaning of in the discretion of the grantor 22. Withholding taxa. Concept

b. Kinds1) Withholding of final tax o certain incomes2) Withholding of creditable tax at sourcec. Withholding on wages1) Requirement for withholding2) Tax paid by recipient3) Refunds or credits4) Year-end adjustment5) Liability for taxd. Withholding of VATe. Filing of return and payment of taxes withheld1) Return and payment in case of government employees

2) Statements and returnsf.Final withholding tax at sourceg. Creditable withholding tax1) Expanded withholding tax2) Withholding tax on compensationh. Fringe benefit taxB. Estate Tax1. Basic principles2. Definition3. Nature4. Purpose or object5. Time and transfer of properties

6. Classification of decedent7. Gross estate vis--vis Net estate8. Determination of gross estate and net estate9. Composition of gross estate10.Items to be included in gross estate11.Deductions from estate12.Exclusions from estate1513.Tax credit for estate taxes paid in a foreign country14.Exemption of certain acquisitions and transmissions15.Filing of notice of death16.Estate tax return

C. Donors Tax1. Basic principles2. Definition3. Nature4. Purpose or object5. Requisites of valid donation6. Transfers which may be constituted as donationa. Sale/exchange/transfer of property for insufficient

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considerationb. Condonation/remission of debt7. Transfer for less than adequate and full consideration8. Classification of donor9. Determination of gross gift10.Composition of gross gift

11.Valuation of gifts made in property12.Tax credit for donors taxes paid in a foreign country13. Exemptions of gifts from donors tax14. Person liable15. Tax basis

D. Value-Added Tax (VAT)1. Concept2. Characteristics3. Impact of tax4. Incidence of tax5. Tax credit method

6. Destination principle7. Persons liable8. VAT on sale of goods or propertiesa. Requisites of taxability of sale of goods or properties9. Zero-rated sales of goods or properties, and effectively zeroratedsales of goods or properties10.Transactions deemed salea. Transfer, use or consumption not in the course of business ofgoods/properties originally intended for sale or use in thecourse of business

b. Distribution or transfer to shareholders, investors or creditorsc. Consignment of goods if actual sale not made within 60 days

from date of consignment16d. Retirement from or cessation of business with respect toinventories on hand11.Change or cessation of status as VAT-registered persona. Subject to VAT1) Change of business activity from VAT taxable status to

VAT-exempt status2) Approval of request for cancellation of a registration due toreversion to exempt status3) Approval of request for cancellation of registration due todesire to revert to exempt status after lapse of 3 consecutive

yearsb. Not subject to VAT1) Change of control of a corporation2) Change in the trade or corporate name3) Merger or consolidation of corporations12.VAT on importation of goodsa. Transfer of goods by tax exempt persons13.VAT on sale of service and use or lease of propertiesa. Requisites for taxability

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14.Zero-rated sale of services15.VAT exempt transactionsa. VAT exempt transactions, in general

b. Exempt transaction, enumerated16.Input tax and output tax, defined17.Sources of input tax

a. Purchase or importation of goodsb. Purchase of real properties for which a VAT has actually beenpaidc. Purchase of services in which VAT has actually been paidd. Transactions deemed salee. Transitional input taxf. Presumptive input taxg. Transitional input tax credits allowed under the transitoryand other provisions of the regulations18.Persons who can avail of input tax credit19.Determination of output/input tax; VAT payable; Excess inputtax credits

a. Determination of output taxb. Determination of input tax creditablec. Allocation of input tax on mixed transactionsd. Determination of the output tax and VAT payable andcomputation of VAT payable or excess tax credits20.Substantiation of input tax credits21.Refund or tax credit of excess input tax17a. Who may claim for refund/apply for issuance of tax creditcertificate (TCC)

b. Period to file claim/apply for issuance of TCCc. Manner of giving refund

d. Destination principle or Cross-border doctrine22.Invoicing requirementsa. Invoicing requirements in general

b. Invoicing and recording deemed sale transactionsc. Consequences of issuing erroneous VAT invoice or VATofficial receipt23.Filing of return and payment24.Withholding of final VAT on sales to government

E. Compliance Requirements (Internal Revenue Taxes)1. Administrative requirementsa. Registration requirements1) Annual registration fee2) Registration of each type of internal revenue tax3) Transfer of registration4) Other updates5) Cancellation of registration6) Power of the Commissioner to suspend the businessoperations of any person who fails to register

b. Persons required to register for VAT1) Optional registration for VAT of exempt person

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2) Cancellation of VAT registration3) Changes in or cessation of status of a VAT-registeredpersonc. Supplying taxpayer identification number (TIN)d. Issuance of receipts or sales or commercial invoices1) Printing of receipts or sales or commercial invoices

2) Invoicing requirements for VATa) Information contained in the VAT invoice or VATofficial receipt

b) Consequences of issuing erroneous VAT invoice orofficial receiptse. Exhibition of certificate of payment at place of businessf.Continuation of business of deceased persong. Removal of business to other location2. Tax returnsa. Income Tax Returns1) Individual Tax Returnsa) Filing of individual tax returns

(1) Who are required to file(a) Return of husband and wife18(b) Return of parent to include income of children(c) Return of persons under disability(2)Who are not required to file

b) Where to filec) When to file2) Corporate Returnsa) Requirement for filing returns(1) Declaration of quarterly corporate income tax(a) Place of filing

(b)Time of fling(2) Final adjustment return(a) Place of filing(b)Time of filing(3) Taxable year of corporations(4)Extension of time to file return

b) Return of corporation contemplating dissolution orreorganizationc) Return on capital gains realized from sale of shares ofstock not traded in the local stock exchange3) Returns of receivers, trustees in bankruptcy or assignees4) Returns of general partnerships5) Fiduciary returns

b. Estate Tax Returns1) Notice of death to be filed2) Estate tax returnsa) Requirements

b) Time of filing and extension of timec) Place of filing3) Discharge of executor or administrator from personalliability

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a) Definition of deficiencyc. Donors Tax Returns1) Requirements2) Time and place of filingd. VAT Returns1) In general

2) Where to file the returne. Withholding Tax Returns1) Quarterly returns and payments of taxes withheld2) Annual information return3. Tax paymentsa. Income Taxes1) Payment, in general; time of payment2) Installment payment3) Payment of capital gains tax19

b. Estate Taxes1) Time of payment

a) Extension of time2) Liability for paymenta) Discharge of executor or administrator from personalliability

b) Definition of deficiency3) Payment before delivery by executor or administratora) Payment of tax antecedent to the transfer of shares,

bonds or rights4) Duties of certain officers and debtors5) Restitution of tax upon satisfaction of outstandingobligationsc. Donors Taxes

1) Time and place of paymentd. VAT1) Payment of VAT2) Where to pay the VAT

F. Tax Remedies under the NIRC1. Taxpayers Remediesa. Assessment1) Concept of assessmenta) Requisites for valid assessment

b) Constructive methods of income determinationc) Inventory method for income determinationd) Jeopardy assessmente) Tax delinquency and tax deficiency2) Power of the Commissioner to make assessments andprescribe additional requirements for tax administrationand enforcementa) Power of the Commissioner to obtain information, andto summon/examine, and take testimony of persons3) When assessment is madea) Prescriptive period for assessment

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(1) False, fraudulent, and non-filing of returnsb) Suspension of running of statute of limitations4) General provisions on additions to the taxa) Civil penalties

b) Interest5) Assessment process

a) Tax auditb) Notice of informal conferencec) Issuance of preliminary assessment notice (PAN)d) Notice of informal conference20e) Issuance of preliminary assessment notice (PAN)f) Exceptions to Issuance of PANg) Reply to PANh) Issuance of formal letter of demand and assessmentnotice/final assessment noticei) Disputed assessment

j) Administrative decision on a disputed assessment

6) Protesting assessmenta) Protest of assessment by taxpayer(1) Protested assessment(2) When to file a protest(3) Forms of protest

b) Submission of documents within 60 days from filing ofprotestc) Effect of failure to protest7) Rendition of decision by Commissionera) Denial of protest(1) CIRs actions equivalent to denial of protest(a) Filing of criminal action against taxpayer

(b) Issuing a warrant of distraint and levy(2)Inaction by Commissioner8) Remedies of taxpayer to action by Commissionera) In case of denial of protest

b) In case of inaction by Commissioner within 180 daysfrom submission of documentsc) Effect of failure to appeal

b. Collection1) Requisites2) Prescriptive periods3) Distraint of personal property including garnishmenta) Summary remedy of distraint of personal property(1) Procedure for distraint and garnishment(2) Sale of property distrained and disposition ofproceeds(a) Release of distrained property upon paymentprior to sale(3)Purchase by the government at sale upon distraint(4) Report of sale to BIR(5) Constructive distraint to protect the interest of thegovernment

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4) Summary remedy of levy on real propertya) Advertisement and sale

b) Redemption of property soldc) Final deed of purchaser5) Forfeiture to government for want of biddera) Remedy of enforcement of forfeitures

(1)Action to contest forfeiture of chattelb) Resale of real estate taken for taxesc) When property to be sold or destroyedd) Disposition of funds recovered in legal proceedings or obtained from forfeiture6) Further distraint or levy7) Tax lien8) Compromisea) Authority of the Commissioner to compromise andabate taxes9) Civil and criminal actionsa) Suit to recover tax based on false or fraudulent returnsc. Refund

1) Grounds and requisites for refund2) Requirements for refund as laid down by casesa) Necessity of written claim for refund

b) Claim containing a categorical demand for reimbursementc) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2

years from date of payment regardless of any supervening cause3) Legal basis of tax refunds4) Statutory basis for tax refund under the Tax Codea) Scope of claims for refund

b) Necessity of proof for claim or refundc) Burden of proof for claim of refundd) Nature of erroneously paid tax/illegally assessed collected

e) Tax refund vis--vis tax creditf) Essential requisites for claim of refund5) Who may claim/apply for tax refund/tax credita) Taxpayer/withholding agents of non-resident foreign corporation6) Prescriptive period for recovery of tax erroneously or illegally collected7) Other consideration affecting tax refunds2. Government Remedies

a.Administrative remedies1) Tax lien2) Levy and sale of real property3) Forfeiture of real property to the government for want of bidder4) Further distraint and levy5) Suspension of business operation6) Non-availability of injunction to restrain collection of tax

b. Judicial remediesThe CIR may pursue, either one or simultaneously, administrative and/or civil or criminalaction. There is no need to first distraint personal property and levy on real property before

filing a civil action for collection in court or filing a criminal complaint before the DOJ.

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If the basic tax to be collected is less than 1M, the civil case must be filed in the RTC. From RTC,appeal is to CTA.

If the basic tax to be collected 1M or more, case must be filed with the CTA invoking its originaljurisdiction.

Judgment in a criminal case must include, along with the imposition of the criminal penalty,an order to pay the taxes and penalties due (to avoid duplicity of suits).

3. Statutory Offenses and Penaltiesa. Civil penalties1) Surcharge2) Interesta) In General

b) Deficiency interestc) Delinquency interest

d) Interest on extended payment4. Compromise and Abatement of taxesa. Compromise

b. AbatementG. Organization and Function of the Bureau of Internal Revenue1. Rule-making authority of the Secretary of Financea. Authority of secretary of finance to promulgate rules andregulations

b. Specific provisions to be contained in rules and regulationsc. Non-retroactivity of rulings2. Power of the Commissioner to suspend the business operation ofa taxpayer

III. Local Government Code of 1991, as amendedA. Local Government Taxation1. Fundamental principles2. Nature and source of taxing powera. Grant of local taxing power under the Local Government Code

b. Authority to prescribe penalties for tax violationsc. Authority to grant local tax exemptionsd. Withdrawal of exemptionse. Authority to adjust local tax ratesf. Residual taxing power of local governmentsg. Authority to issue local tax ordinances3. Local taxing authoritya. Power to create revenues exercised thru LGUs

b. Procedure for approval and effectivity of tax ordinances4. Scope of taxing power5. Specific taxing power of local government unit (LGUs)a. Taxing powers of provinces1) Tax on transfer of real property ownership2) Tax on business of printing and publication

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3) Franchise tax4) Tax on sand, gravel and other quarry services5) Professional tax6) Amusement tax7) Tax on delivery truck/van

b. Taxing powers of cities

c. Taxing powers of municipalities1) Tax on various types of businesses2) Ceiling on business tax impossible on municipalities within Metro Manila3) Tax on retirement on business4) Rules on payment of business tax5) Fees and charges for regulation & licensing6) Situs of tax collectedd. Taxing powers of barangayse. Common revenue raising powers1) Service fees and charges2) Public utility charges3) Toll fess or charges

f. Community tax6. Common limitations on the taxing powers of LGUs7. Collection of business taxa. Tax period and manner of payment

b. Accrual of taxc. Time of paymentd. Penalties on unpaid taxes, fees or chargese. Authority of treasurer in collection and inspection of books

8. Taxpayers remedies

Remedies under the Local Government Code (Administrative Level Business Taxes)1. When the local treasurer finds that the correct taxes have not been paid, he issues a notice

of assessment stating nature of the tax, and amount of deficiency, interest and penalties2. The taxpayer has 60 days from receipt to file a written protest, otherwise the assessment

becomes final3. The local treasurer must decide within 60 days from the filing of protest4. If the treasurer finds the protest meritorious, he issues a notice of cancellation of the

assessment. If he finds it otherwise, he issues a denial with notice to the taxpayer5. The taxpayer has 30 days from receipt of denial or lapse of the 60 day period to appeal to

the regular courts

What is the procedure for claiming a refund of, or credit for local taxes? Remedies of taxpayerafter payment1. The taxpayer must file a written claim with the local treasurer within 2 years from date of

payment

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2. If the claim is found meritorious, the taxpayer is granted a tax credit. No cash is refundedunless the taxpayer is terminating his operation

3. No case may be filed in court after the expiration of the 2 years from the date of paymentor from the date the taxpayer is entitled thereto

What are the remedies of LGs to ensure collection of real property taxes?

1. The basic real property tax and any other tax levied on real property constitutes a lien onthe property subject to tax, superior to all liens and charges or encumbrances in favor ofany person, irrespective of who the current owner or possessor of the property,enforceable by administrative or judicial action, and may only be extinguished upon

payment of the tax and the related interests and expenses2. To induce taxpayers to pay real property taxes, LG may grant a discount not exceeding

20% of the annual tax due.3. When the tax becomes delinquent, the local treasurer immediately causes a notice of

delinquency to be posted at the main hall and in a publicly accessible and conspicuousplace in each barangay of the LGU concerned. The notice shall also be published once aweek for 2 consecutive weeks in a newspaper of general circulation in the province, city ormunicipality

4. Non-payment subjects the taxpayer to interest at the rate of 2 % per month until paid butin no case shall the total exceed 36 months5. To enforce its lien, the LG may distraint personal property or levy on the property6. Levy is effected by selling the delinquent real property at public auction. The title to the

property will be vested in the purchaser, subject however to the right of the delinquentowners right of redemption within one year from the date of sale.

What are the remedies of the taxpayer against collection of RPT?1. The taxpayer may pay under protest in writing filed within 30 days to the local treasurer

who must decide the protest within 60 days from receipt2. If protest is denied, the 60 day period lapses without a decision, the taxpayer may appeal

to the regular courts

a. Periods of assessment and collection of local taxes, fees or chargesb. Protest of assessmentc. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge

9. Civil remedies by the LGU for collection of revenuesa. Local governments lien for delinquent taxes, fees or charges

b. Civil remedies, in general1) Administrative action2) Judicial action

c. Procedure for administrative action1) Distraint of personal property2) Levy of real property, procedure3) Further distraint or levy4) Exemption of personal property from distraint or levy5) Penalty on local treasurer for failure to issue and execute warrant of distraint or levy

d. Procedure for judicial action

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Either of a) the administrative action through distraint of personal property and levy uponreal property and B) judicial action may be pursued concurrently or simultaneously at thediscretion of the LGU.

Judicial civil action is in the form of a claim for a sum of money before the regular court.

No provision for criminal action.

Remedies of the taxpayer under the Local Tax Code vs a tax ordinance1. before the effectivity of ordinance: attend the public hearing and oppose2. after effectivity

a. within 30 days: appeal to Sec of Justiceb. Sec of Justice must decide within 60 daysc. Appeal to appropriate court: regular or CTA

B. Real Property TaxationFundamental principles

1. Real property shall be appraised at its current and fair market value2. Real property shall be classified for assessment purposes on the bases of its actual use3. Real property shall be assessed on the basis of a uniform classification within each

government unit4. The appraisal, assessment, levy and collection of real property tax shall not be let

to/delegated any private person; and5. The appraisal and assessment shall be equitableWhat are the steps in determining the amount of real property tax due?1. Step 1: appraisal: determination of the current and fair market value of the real property

where it is located2. Step 2:assessment: determination of the tax base in accordance with the classification of

the property and imposition of the appropriate assessment3. Step 3:Imposition of the tax and collectionHow is current and fair market value of the real property determined?

The owner makes a sworn statement and files it with the assessor within 60 days fromacquisition and once every 3 years from January to june 30 starting 1992

The local assessor shall make himself make an appraisal according to an assessment rollwhich contains a Schedule of Fair Market Values of all real property within his jurisdiction(not the same as zonal value- arrived at by the Commissioner himself-for natl taxation;but most of the time they are the same)

How is the appraisal made sure to be current and fair market value?

1.

All declarations are required to be kept in a uniform classification system known as theReal Property Identification System2. All transferors of real property are required to notify the local assessor of the mode of

transfer within 60 days from disposition3. The Register of Deeds is required to give the local assessor an abstract or digest of his

registry within 6 months from effectivity of RPC and yearly thereafter

What is meant by assessment level?

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Means that percentage of the current and FMV of real property that is made the tax base (apercentage of the CFMV) of the real property tax

Real property shall be classified, valued and assessed on the basis of actual use whereverlocated, whoever owns it, and whoever uses it

CLASS ASSESSMENT LEVEL

Residential and Timberland 20%Agricultural 40%Commercial 50%

Industrial 50%Mineral 50%

Other than land, what other properties are subject to the real property tax?1. Building and other structures2. MachineriesWhat are included in the special classes of properties and assessment levels

ACTUAL USE Assessment LevelsAgricultural 15%Scientific 15%Hospital 15%Local water districts 10%OGCCs, engaged in water or power 10%

When does an assess