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NIVERSITY OF THE PHILIPPINES

COLLEGE OF LAW

Bar Operations 2008

TAXATION LAW

Bar Operations Head � Arianne Reyes

Academics Head � Henry Aguda

Ryan Balisacan

Subject Head � Erwin Matib

Subject Committee � Ryan Romero, Diane Rosacia, Aimee Salamat, Maricon

Maralit, Kate Modesto

Information Management �

Committee

Chino Baybay [Head] * Simoun Salinas [Deputy] * Rania Joya

[Design & Lay-out] * Ludee Pulido [Documentations] * Linus

Madamba * Des Mayoralgo * Jillian De Dumo * Mike

Ocampo * Abel Maglanque * Edan Marri R. Cañete

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BASIC CONCEPTS TAXATION

Taxation Law 1Taxation Law 1Taxation Law 1Taxation Law 1

TABLE OF CONTENTSTABLE OF CONTENTSTABLE OF CONTENTSTABLE OF CONTENTS

I.I.I.I. Basic Concepts in Income Taxation 3

II.II.II.II. General Classification of TaxpayersGeneral Classification of TaxpayersGeneral Classification of TaxpayersGeneral Classification of Taxpayers 4444

III.III.III.III. Tax on IndividualsTax on IndividualsTax on IndividualsTax on Individuals 5555

IV.IV.IV.IV. Tax on CorporationsTax on CorporationsTax on CorporationsTax on Corporations 11111111

V.V.V.V. Taxation of Fringe BenefitsTaxation of Fringe BenefitsTaxation of Fringe BenefitsTaxation of Fringe Benefits 22221111

VI.VI.VI.VI. TTTTaxation on Partnershipsaxation on Partnershipsaxation on Partnershipsaxation on Partnerships 22223333

VII.VII.VII.VII. Taxation on Estates and TrustsTaxation on Estates and TrustsTaxation on Estates and TrustsTaxation on Estates and Trusts 22224444

VIII.VIII.VIII.VIII. Source of IncomeSource of IncomeSource of IncomeSource of Income 22225555

IX.IX.IX.IX. Gross IncomeGross IncomeGross IncomeGross Income 22228888

X.X.X.X. Exclusions from Gross IncomeExclusions from Gross IncomeExclusions from Gross IncomeExclusions from Gross Income 33330000

XI.XI.XI.XI. Allowable deductions from Gross IncomeAllowable deductions from Gross IncomeAllowable deductions from Gross IncomeAllowable deductions from Gross Income 33332222

XII.XII.XII.XII. NonNonNonNon----deductible expensesdeductible expensesdeductible expensesdeductible expenses 55552222

XIII.XIII.XIII.XIII. Capital GainCapital GainCapital GainCapital Gains and Lossess and Lossess and Lossess and Losses 55552222

XIV.XIV.XIV.XIV. Situs of TaxationSitus of TaxationSitus of TaxationSitus of Taxation 55555555

XV.XV.XV.XV. Installment BasisInstallment BasisInstallment BasisInstallment Basis 55556666

XVI.XVI.XVI.XVI. Returns and Payments of Tax/Withholding TaxesReturns and Payments of Tax/Withholding TaxesReturns and Payments of Tax/Withholding TaxesReturns and Payments of Tax/Withholding Taxes 55557777


TAXATION LAW 1

I.I.I.I. BASIC CONCEPTS IN INCOME BASIC CONCEPTS IN INCOME BASIC CONCEPTS IN INCOME BASIC CONCEPTS IN INCOME

TAXATIONTAXATIONTAXATIONTAXATION Income Tax – defined as a tax on all yearly

profits arising from property, professions, trades or offices.

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

Nature of income tax (PED) • DIRECT TAX – the tax burden is borne by

the income recipient upon whom the tax is imposed.

• PROGRESSIVE TAX – the tax base increases as the tax rate increases.

• EXCISE TAX (privilege tax) – a tax on the right to earn income

Purpose(s) of Income Tax: Fiscal/Non-Fiscal (ROM) § raise revenue to defray the expenses of the

government; § offset regressive sales and consumption

taxes; and § together with estate tax, mitigate the evils

arising from the inequalities of wealth by a progressive scheme of taxation which places the burden on those best able to pay.

Income – all wealth which flows to the taxpayer other than a mere return of capital • It is an amount of money coming to a

person/corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor. (Conwi v. Court of Tax Appeals)

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

Differentiated from Capital o Capital is a fund; income is a flow. A fund of

property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income.

o Capital is wealth, while income is the service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (Madrigal v. Rafferty)

è Increase in Property Value – A mere

increase in the value of property is NOT INCOME, but merely unrealized increase in capital. The increase in the value of

property is also known as appraisal surplus or revaluation increment.

Classification of Income According to Source 1. Income from sources within the Philippines 2. Income from sources without the Philippines 3. Income from sources partly within and

partly without the Philippines Taxability of Income, Requisites

a. there is income, gain or profit b. the income, gain or profit is received or

realized during the taxable year c. the income gain or profit is not exempt from

income tax

Tests to Determine Realization of Income for Tax Purposes • Realization Test – no taxable income until

there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.

• Claim of right doctrine – a 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 or repay that which would otherwise constitute a gain. § Principle of Constructive Receipt of Income àààà Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. The income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made.

• Economic benefit test – any economic benefit to the employee that increases his net worth is taxable.

Classifications of Income Subject to Philippine Income Tax 1. Compensation Income –derived from

rendering of services under an employer-employee relationship.

2. Professional Income – fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood (e.g. the fees of CPAs, doctors, lawyers, engineers)

3. Business Income – gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and long-term construction contracts

4. Passive Income – income in which the taxpayer merely waits for the amount to come in (e.g. interest income, royalty income, dividend income, winnings and prizes)

5. Capital Gain – gain from dealings in capital assets


TAXATION LAW 1

II. GENERAL CLASSIFICATION OF TAXPAYERSII. GENERAL CLASSIFICATION OF TAXPAYERSII. GENERAL CLASSIFICATION OF TAXPAYERSII. GENERAL CLASSIFICATION OF TAXPAYERS

Who is a taxpayer? Under Sec 22(N), a taxpayer is any person subject to [income] tax. Income taxpayers, with distinction based on the amount of income subject to tax, or the applicable tax rates, or both, are classified as follows:

Primary

Classification Sub-Classification(s)

Individuals

Citizens of the Philippines

Residents of the Philippines

Not Residents of the Philippines

Aliens

Residents of the Philippines

Not Residents of the Philippines

Engaged in Trade or Business in the Philippines

Not Engaged in Trade or Business in the Philippines

Special Classes of Individuals

Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies

Individual Employed by Offshore Banking Units

Individual Employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines

Estates and Trusts

Corporations

Domestic Corporations

Foreign Corporations

Resident Corporations

Non-resident Corporations

Special Classes of Corporations

Proprietary educational institutions and non-profit hospitals

Domestic Depositary Bank (Foreign Currency Deposit Units)

Resident international carriers

Offshore Banking Units

Resident Depositary Bank (Foreign Currency Deposit Units)

Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies

Non-resident cinematographic film owners, lessors or distributors

Non-resident owners or lessors of vessels chartered by Philippine nationals

Non-resident lessors of aircraft, machinery and other equipment


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III. TAX ON INDIVIDUALSIII. TAX ON INDIVIDUALSIII. TAX ON INDIVIDUALSIII. TAX ON INDIVIDUALS A. Classifications of Individual Taxpayers

1. Citizens RESIDENT – a citizen is deemed as a resident of the Philippines unless he qualifies as a non-resident under Sec. 22E of the NIRC; -taxable for income derived from all sources based on taxable (i.e., net) income

NON-RESIDENT – a citizen of the Philippines who: (1) establishes to the satisfaction of the

Commissioner the fact of his physical

presence abroad with a definite intention to

reside therein. (2) Leaves the Philippines during the taxable

year to reside abroad, either as an immigrant or for employment on a

permanent basis. (3) 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. (4) Has been previously considered as

nonresident citizen and who arrives in the

Philippines at any time during the taxable

year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad UNTIL the date of his arrival in the Philippines.

– taxable for income derived within the Philippines based on taxable (i.e., net) income

NOTES: An OVERSEAS CONTRACT WORKER is taxable only on income from sources within the Philippines. (Sec. 23 (c)) o NOTE FURTHER: A seaman who is a

Filipino citizen and who receives compensation for services rendered abroad as member of the complement of a vessel engaged exclusively in international trade is treated as an overseas contract worker.

• Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence abroad, however, need not be continuous. [RR1-79]

2. Alien RESIDENT – residence is within the Philippines and who is not a citizen thereof. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for income tax purposes. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. – taxable for income derived within the Philippines based on taxable (i.e., net)

income NON-RESIDENT – residence is NOT in the Philippines and who is not a citizen thereof.

§ Engaged in trade or business in the Philippines (NRAETB) - is taxable for income derived within the Philippines based on taxable (i.e., net) income

§ Engaged in trade or business in the Philippines (NRANETB) - is taxable for income derived within the Philippines based on gross income1

NOTES: What makes an alien a resident or non-resident alien is his intention with regard to the length and nature of his stay. Thus: a. One who comes to the Philippines for a

definite purpose which in its very nature may be promptly accomplished is not a resident citizen.

b. One who comes to the Philippines for a definite purpose which in its very nature would require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (Sec. 5, RR 2)

• Length of stay is indicative of intention. An alien who shall have stayed in the Philippines for more than one year by the end of the taxable year is a resident alien. NOTE FURTHER: An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred eighty days during a calendar year shall be considered a non-resident alien in

business, or in the practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the Philippines, regardless of whether he owns 1. Stock in trade of the taxpayer, or other

property of a kind which would properly be included in an inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work in Process Inventory, Office Supplies Inventory)

2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (example: Merchandise Inventory)

3. Property used in the trade or business which is subject to the allowance for depreciation (example: Office Equipment) § actually engages in trade or business

therein. (Mamalateo) B. Three Kinds of Income

Capital Gains subject to Capital Gains Tax When the asset sold was held as a capital asset, the gain or loss is called a capital gain or loss. When the asset sold was not held as a capital

1 Notwithstanding the general classification of aliens into resident and non-resident for income tax purposes, note that there is a special classification of aliens who are taxed differently. See subsection D.


TAXATION LAW 1

asset (in other words, as an ordinary asset), the gain or loss is called an ordinary gain or loss. What are capital assets? àààà those not

considered as ordinary assets! What are ordinary assets? àààà FOUR

CATEGORIES OF ORDINARY ASSETS are as follows [Sec. 39]: (RIDS)Real property used in trade or business of the taxpayer (example: Building used as a factory) -Are all sales / dispositions of capital assets subject to capital gains tax? à NO! Only two kinds of things held as capital assets are subject to the capital gains tax, as follows: 1. On sale, barter, exchange or other

disposition of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset:

On the net capital gain: Not over P100,000 = Final Tax of 5% On any amount in excess of P100,000 = plus Final Tax of 10% on the excess Key definitions

Net capital gain à selling price less cost Selling price à consideration on the sale OR

fair market value of the shares of stock at the time of the sale, whichever is HIGHER

Cost à original purchase price

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

-The capital gains tax is applied on the gross

selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain.

EXCEPTION: When sale of residence is not liable for capital gains tax?

a. There is a sale or disposition of their

principal residence by natural persons. b. The proceeds of the sale are fully

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

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

A deposit is made of the 6% capital gain tax otherwise due, in cash or manager’s check, in an interest-bearing account with an Authorized Agent Bank (AAB), under an Escrow Agreement between the taxpayer and the Bureau of Internal Revenue that the same shall be released to the taxpayer when the proceeds of the sale shall have been utilized as intended. The tax exemption can only be availed of once every 10 years

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

i.e., Unutilized amount x (higher of ) = Taxable GSP GSP or FMV portion

ALTERNATIVE TAXATION: In case of a sale or other disposition of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations, the tax shall be EITHER the year-end tax of the individual (i.e., capital gain to be included in the computation of income subject to schedular rates),

OR the capital gain tax of 6%, at the option of the taxpayer

• What is the tax implication of a sale

/ disposition of a capital asset NOT subject to capital gains tax? àààà The net capital gain or loss is included in the computation of net income subject to schedular rates (5% to 32%).

3. Passive Income subject to Final Tax

“Final tax” means tax withheld from source, and the amount received by the income earner is net of the tax already. The tax withheld by the income payor is remitted by him to the BIR. The income having been tax-paid already, it need not be included in the income tax return at the end of the year. These passive income items are as follows:

Interest Income: o on any currency bank deposit, yield or

any other monetary benefit from deposit substitutes, trust funds and similar arrangements - 20% final tax

o under the expanded foreign currency deposit system (EFCDS) - 7.5% final tax for residents, exempt if non-residents

o on long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common or individual trust funds, deposit substitutes, investment


TAXATION LAW 1

management accounts and other investments, which have maturity of 5 years or more) – exempt Ø Should LTDIC holder pre-terminate

LTDIC before the 5th year, a final tax shall be imposed on the entire income based on the remaining maturity:

4 years to less than 5 years 5%

3 years to less than 4 years 12%

less than 3 years 20%

Dividends

o cash and/or property dividends2 actually or constructively received by an individual from

§ a domestic corporation § a joint stock company § insurance or mutual fund

companies § regional operating headquarters

of multinational companies o share of an individual in the

distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner

o share of an individual member or co-venturer in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation

è Rate – 10% for residents (RC, RA) and non-resident citizens (NRC),

20% for NRAETB (non-resident aliens engaged in trade or business)

Royalties o From books, literary works, and

musical compositions – 10% o Other royalties – 20%

Winnings, except Philippine Charity sweepstakes / lotto winnings – 20%

Prizes exceeding P10,000 – 20%

o Prize, differentiated from winnings à A prize is the result of an effort made (e.g., prize in a beauty contest), while winnings are the result of a transaction where the outcome depends upon chance (e.g., betting).

2 A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. (Sec. 73B, NIRC) [In other words, stock dividends are generally not subject to tax as long as there are no options in lieu of the shares of stock. On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented.]

4. “Other Income” subject to Schedular Tax Rates3 Income which is neither capital gain with capital gain tax, nor passive income with final tax, is “other income” or residual income. It may be derived from:

1. Employer-employee relationship, which is called compensation income

2. Business or profession 3. Sale or exchange of property which

is not subject to the capital gain tax 4. Incidental sources, such as interest

or dividend, which is not subject to final tax (i.e., dividend from a foreign corporation in case of resident citizens, rent income). Ø The tax rates on NET ordinary

or other income (schedular rates)4 are as follows:

Income over

But less than

Tax Plus of Excess over

10,000 5%

10,000 30,000 500 10% 10,000

30,000 70,000 2,500 15% 30,000

70,000 140,000 8,500 20% 70,000

140,000 250,000 22,500 25% 140,000

250,000 500,000 50,000 30% 250,000

500,000 125,000 32% 500,000

Rule for Married Individuals àààà Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses. [Sec 51(D)]

1. Compute the income tax separately on their respective incomes.

2. Add the two taxes to arrive at a single income tax still due and refundable.

3. Income which is clearly joint, or which cannot be identified as exclusively of one spouse, will be divided equally. [Sec 24(A)] o EXCEPTION to the one-return rule:

Where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. [Sec 51(D)]

3 Schedular tax rates apply to all classes of individuals, with the exception of non-resident aliens not engaged in trade or business. Should NRANETB earn “other income,” such is subject to a 25% final tax. 4 Pro-forma computation of income subject to schedular tax rates: Gross Compensation Income P xxx Less: Personal Exemptions (xxx) Health Insurance (xxx) Net Compensation Income P xxx Add: Net Business Income xxx Net Professional Income xxx Other Income (capital gains, rent, etc.) xxx Net Income subject to schedular tax rates P xxx where Net Business Income and Net Professional Income are computed as follows:

Gross Business / Professional Income P xxx Less: Itemized Deductions [OR] Optional Standard Deduction (xxx) Net Business / Professional Income P xxx


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B. Deductions [from Income Subject to Schedular Tax Rates], In General

The allowable deductions from the gross income of an individual taxpayer5 are as follows:

Business Expenses and Expenses from Practice of Profession – deductible only from business gross income and professional income, respectively but not from compensation income.6 The expenses to be deducted may either be itemized deductions OR the optional standard deduction.7

Special deduction for actual premium payments for health and/or

hospitalization insurance taken by an individual taxpayer provided that the following requisites are met:

a. The taxpayer’s family gross income does not exceed P250,000 in a taxable year.

b. The amount deductible should only be limited to P2,400 per family or P200 per month.

è In the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

Personal Exemptions – are arbitrary amounts allowed by law to be deducted from income to cover personal, living, or family expenses of the taxpayer. These deductions are allowed on the theory that the minimum requirements of subsistence of a taxpayer should be free from tax.

Kinds: 1. Basic Personal Exemptions

Kind of Taxpayer Basic Personal Exemption (BPE)

Single individuals (includes widow/er)

P20,000

Married individual who are § judicially decreed as

legally separated, and

§ with no qualified dependents

P20,000

Head of Family P25,000

Each married individual * P32,000

* BUT note Sec 35(A) - In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.

5 Remember that non-resident aliens not engaged in trade or business are taxed on gross income. They may not, therefore, avail of these deductions. 6 Thus, the only deductions that may be claimed by individuals with compensation income only are personal exemptions and premium payments on health and/or hospitalization insurance. 7 See Allowable Deductions from Gross Income for the detailed discussion on itemized deductions and the optional standard deduction.

Who is a Head of the Family? [Sec 35(A), NIRC]

1. An unmarried or legally separated man or woman with dependents who may be

- one or both parents - one or more brothers or sisters, or

- one or more legitimate, illegitimate or legally adopted children

Note: Senior Citizen Law (RA 7434 as amended by 9257) provides in section 4 that senior citizens shall be treated as dependents provided for in the NIRC, as amended and as such, individual taxpayers caring for them, be they be relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned.

2. Such dependent must be living with AND

dependent upon him for chief support

- Chief support – principal or main support given regularly such that withdrawal will result in destitute life for dependent; includes situations where taxpayer is away from home on business, or dependent is away at school

→ more than one-half of the

requirements for support. Hence, if two children contribute equal amounts to the support of a parent, neither of them qualify as head of the family.

3. Such brothers or sisters or children are

→ not more than 21 years old → unmarried and → not gainfully employed

OR → regardless of age, are incapable of

self-support because of mental or physical defect.

2. Additional Exemptions (AE) – depends on the number of qualified dependent children - Amount allowed as a deduction àààà P8,000 per dependent child, but not to exceed four children - Who may claim additional exemptions?

Married Individuals à Additional exemptions are claimed by only one spouse. Generally, the spouse who is the gross compensation earner is the claimant of the additional exemptions. Where the husband and wife are both compensation income earners, the husband is the proper claimant of the additional exemptions EXCEPT if there is an express waiver by the husband in favor of his wife, as embodied in the withholding exemption certificate. When the spouses have business and/or professional income only, either may claim the additional exemptions at the end of the year. The wife claims the additional exemptions in the following instances: i. husband has no income ii. husband works abroad iii. Legally separated spouses à Additional exemptions can be claimed by the spouse with custody of the child or children (but the total amount for the spouses shall not exceed the maximum of four). [Sec 35(B), NIRC]


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Who is a dependent for purposes of additional exemptions? àààà A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer:

1. not more than 21 years old, unmarried and not gainfully employed OR 2. regardless of age, is incapable of self-support because of mental or physical defect NOTE: Only children may be considered “dependent” for purposes of additional exemptions.

Who may claim personal exemptions? à Citizens (whether resident or non-resident) and resident aliens are allowed to avail of basic personal and additional exemptions. Non-resident aliens engaged in trade or business are entitled to basic personal exemptions only by way of reciprocity, but not to additional exemptions. [Sec. 35, NIRC] • Limit of BPE Allowed to NRAETB: An

amount equal to the exemptions allowed by the non-resident alien’s country to Filipino citizens not residing therein but deriving income therefrom, but not to exceed the amount fixed by NIRC.[In other words, whichever is LOWER]

Change of Status [Sec 35(C), NIRC]

1. If taxpayer marries during taxable year, taxpayer may claim the corresponding BPE in full for such year (i.e., no need to pro-rate the exemption).

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

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

at the close of such year.

4. If during the taxable year a. spouse dies or b. any of the dependents dies or marries,

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

TIP: When it comes to change of status, the status beneficial to the taxpayer is used for purposes of claiming deductions as long as the taxpayer achieved such status at any time during the taxable period.

D. Special Classification of Individuals and Corresponding Tax Treatment [Sec 25(C), (D), (E)]

1. Alien individuals employed by: a. Regional or Area Headquarters

(RAHQ) and Regional Operating Headquarters (ROHQ) established in the Philippines by multinational companies o Multinational company, defined

à a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets

b. Offshore Banking Units established in the Philippines

2. Alien individuals who are permanent

residents of a foreign country but who are employed and assigned in the

Philippines by a foreign service contractor

or by a foreign service subcontractor

engaged in petroleum operations in the Philippines

Ø Tax Rate and Base - 15% of gross

income received as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances o The same tax treatment shall apply

to Filipinos employed and occupying the same positions as those of aliens employed by these multinational companies, offshore banking units and petroleum service contractors and subcontractors.

Ø Note that the coverage of the special

classification (and the corresponding tax rate) is limited to income received as wages. Hence, any

income earned from all other sources

within the Philippines by the alien employees shall be subject to the

pertinent income tax (example: sale of real property in the Philippines is subject to 6% capital gain tax, imposed on the gross selling price or fair market value of the property at the time of the sale, whichever is higher).


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E. Summary of Tax Bases and Tax Rates QUICK GLANCE

CATEGORY OF INCOME

RESIDENT NON-RESIDENT

CITIZEN ALIEN CITIZEN NRAETB NRANET

B

All sources Within the Philippines

Within the Philippines



1. Compensation / Business / Profession

2. Prizes of P10,000 or less 3. Proprietary, Educational /

Hospital 4. Cinematographic Film and the

like

Based on Taxable (i.e, Net) Income

Schedular Income Tax Rates (Sec. 24, NIRC) (i.e, 5% to 32%)

GIW – 25%

Not Applicable

GIW - 25%

GIW – 25%

5. Interest from any currency bank deposit , etc., Royalties (other than from books, literary works and musical compositions), Winnings / Prizes (except prizes P10,000 and below)

GIW – 20% Final Withholding Tax

6. Royalties from books, literary works, musical compositions

GIW – 10% Final Withholding Tax

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

EXEMPT; However: In case of pre-termination, with remaining

maturity of: 4 years to less than 5 years – 5% on entire

income 3 years to less than 4 years – 12% on entire

income less than 3 years – 20% on entire income

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

GIW – 10% Final Withholding Tax GIW – 20%

9. Interest (Expanded Foreign Currency Deposit System)

GIW – 7.5% Final Withholding Tax

EXEMPT

10. Winnings on Philippine Sweepstakes / Lotto

EXEMPT

11. Capital Gains on Sale of Shares (not traded in a domestic stock exchange)

Net Capital Gains within: Not Over P100,000 – 5% Final Tax

Amount in Excess of P100,000 – plus 10% Final Tax on the excess

12. Capital Gains on Sale of Real Property in the Philippines

Gross Selling Price or FMV, whichever is higher – 6% Final Tax

13. Sale of Shares (traded in a domestic stock exchange)

½ of 1% of the Selling Price (Stock Transaction Tax) Note: Stock Transaction Tax is not an income tax, but a

business (percentage) tax

Legend:

GIW – Gross Income within the Philippines FMV – Fair Market Value

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TAXATION LAW 1

IV. TAX ON CORPORATIONSIV. TAX ON CORPORATIONSIV. TAX ON CORPORATIONSIV. TAX ON CORPORATIONS

A. Coverage of the term “Corporation” [Sec 22(B)] àààà The term “corporation” includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies It does NOT include:

1. general professional partnerships (partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business)

2. joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.8

B. Classification of Corporations General Types

1. Domestic Corporation (DC) - one created or organized in the Philippines or under its laws [Sec 22(C)]

2. Foreign Corporation (FC) – one that is not domestic [Sec 22(D)] • Resident Foreign Corporation (RFC)

- a foreign corporation engaged in trade or business within the Philippines [Sec 22(H)]9

• Non-resident foreign corporation (NRFC) - a foreign corporation not engaged in trade or business within the Philippines [Sec 22(I)]

Special Types

1. Proprietary educational institutions and non-profit hospitals

2. Domestic Depository Bank (Foreign Currency Deposit Units)

3. Offshore Banking Units 4. Resident Depository Bank (Foreign

Currency Deposit Units) 5. Resident international carrier 6. Non-resident owner or lessor of vessel 7. Non-resident cinematographic film owner,

lessor or distributor 8. Non-resident lessor of aircraft, machinery

and other equipment 9. Regional/Area Headquarters & Regional

Operating Headquarters of Multinational companies

8 In this case, the joint venture [as an entity] is not subject to income tax, but each member of the joint venture shall be taxable on his/its share in the net income of the corporation. On the other hand, a joint venture constituted for purposes other than (2) above is treated as a corporation and taxable as such. 9 The qualifier “resident” in the term “resident foreign corporation” should not be equated with the nationality of the corporation. In determining nationality, the “control test” is often invoked and applied, which considers corporate nationality by the nationality of its controlling shareholders or members. (Mamalateo, citing Winship v. Philippine Trust Co., 90 Phil 744) Thus, for income tax purposes, a domestic corporation may be formed or organized by foreigners (as long as three of them are residents of the Philippines as per the Corporation Code),provided that it is organized under the laws of the Philippines.

C. Scope of Taxation

QUICK GLANCE

Type of Corporation

Sources of Taxable Income

Allowed Business

Deductions?

Domestic Corporation (DC)

Within and without the Philippines

Yes

Resident Foreign Corporation (RFC)


Yes

Non-resident Foreign Corporation (NRFC)


No*

* - Ergo, non-resident foreign corporations are taxed on GROSS INCOME.

NOTE: A good example of a resident foreign

corporation is the Philippine branch of a foreign corporation duly licensed by the Securities and Exchange Commission. The Philippine branch is merely an extension of the foreign head office (i.e., non-resident foreign corporation); hence it does not have nor issue Philippine shares of stock. There is only one single entity to speak of. However, for income tax purposes, only the

income of the Philippine branch from sources

within the Philippines is subject to income tax, and the income of the Philippine branch as well as that of the foreign head office from sources outside the Philippines are exempt from Philippine income tax. - NOTE FURTHER: Marubeni Corporation v.

Commissioner (177 SCRA 500) clarified the single entity concept. à As a GENERAL RULE, the head office of a foreign corporation is the same juridical entity as its branch in the Philippines following the “single entity concept”. The income from sources within the Philippines of the foreign head office shall thus be taxable to the

Philippine branch. BUT when the head office of a foreign corporation independently and directly invested in a domestic corporation without the funds passing through its Philippine branch, the taxpayer with respect to the tax on the dividend income would be the non-resident foreign corporation itself and the dividend income shall be subject to the tax similarly imposed on non-resident foreign corporations.

D. Tax on Domestic Corporations

Domestic corporations are subject to any or some of the following: • Capital Gain Tax • Final Tax on Passive Income • Normal Tax [OR] Minimum Corporate

Income Tax (MCIT) [OR] Gross Income Tax (GIT)

• Improperly Accumulated Earnings Tax (IAET)

1. Capital Gains subject to Capital Gains Tax

a. On sale, barter, exchange or other disposition of shares of stock of a

domestic corporation not listed and


TAXATION LAW 1

traded through a local stock exchange, held as a capital asset:

On the net capital gain: Not over P100,000 Final Tax of 5%

On any amount in excess of P100,000 plus 10% Final tax on the excess

b. On the sale, exchange or disposition of

lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets à On the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of 6%

Ø NOTE: Tax treatment is the same as that of individuals.

Ø The capital gains tax is applied on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain.

2. Passive Income Subject to Final Tax

Interest Income: o on any currency bank deposit, yield or

any other monetary benefit from deposit substitutes, trust funds and similar arrangements - 20%

o under the expanded foreign currency deposit system (EFCDS) - 7.5%

Dividends received from another domestic corporation (Intercompany Dividend) - EXEMPT

Royalties (any kind) – 20%

3. Income subject to Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT) NORMAL CORPORATE INCOME TAX RATE àààà 35% of net taxable income

Gross Income – Allowable Deductions = Taxable Income

MINIMUM CORPORATE INCOME TAX (MCIT) àààà 2% of MCIT Gross Income

Gross Sales – Sales Returns – Sales Returns & Allowances – Cost of Goods Sold = MCIT GI

What is cost of goods sold? It includes all business expenses DIRECTLY incurred to produce the merchandise to bring them to their present location and use. [Sec. 27(E)(4)]

è MCIT gross income differentiated from the

normal tax gross income à the latter would include other incidental income items, such as rent income, interest, gain on sale of assets, certain tax refunds, etc.

When is the MCIT computed? à beginning of the fourth taxable year immediately

following the year in which such corporation commenced its business operations

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

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

MCIT (P300,000 x 2%) P6,000

Normal income tax

(P100,000 x 35%) P35,000

Income Tax to be paid for the year

(whichever is higher) P35,000

Excess MCIT carry-forward

Any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the NORMAL TAX for the three (3) immediately succeeding taxable years. [Sec. 27(E)(2)] In the year to which carried forward, the normal tax should be higher than the MCIT.

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

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8

MCIT 80,000 50,000 30,000 40,000 35,000

NT 20,000 30,000 40,000 20,000 70,000

The excess MCIT over NT carry-forward is shown below:

Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000

NT 20,000 30,000 40,000 20,000 70,000

↓ ↓

NT is higher

40,000 70,000

Less: MCIT carry-fwd

(40,000)

(20,000)

(20,000)

From Year 4

From Year 5

From Year 7

Tax Due

80,000 50,000 - 40,000 30,000

-Arrow pointing downward means that the normal tax is higher so that there can be an excess MCIT carry-forward against it.

> >

>


TAXATION LAW 1

-While only P40,000 out of P60,000 excess MCIT in Year 4 was used in Year 6, the unused P20,000 cannot be used in Year 8 because Year 8 was beyond three years from Year 4.

Relief from MCIT (LLBM) à The Secretary of Finance is authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers LOSSES:

-on account of prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months and caused the temporary shutdown of operations), or -because of force majeure (acts of God and other calamity; includes armed conflicts like war or insurgency), or -because of legitimate business reverses (substantial losses due to fire, robbery, theft or other economic reasons).

GROSS INCOME TAX (GIT) àààà The President, upon the recommendation of the Secretary of Finance, may allow domestic corporations the option to be taxed at fifteen percent (15%) of gross income, after the following conditions have been satisfied:

Tax effort ratio 20% of GNP

Ratio of IT collection to total tax revenue

40%

VAT tax effort 4% of GNP

Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP

0.90%

Ratio of the Corporation’s Cost of Sales to Gross Sales

Does not exceed 55%

Gross Sales – Sales Returns – Sales Returns &

Allowances – Cost of Goods Sold = GI

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

• [Sec. 27(A)] 4. Improperly Accumulated Earnings Tax (IAET) [Sec. 29, as implemented by RR 2-2001 which prescribes rules governing the imposition of IAET]

a) Rule àààà There is imposed for each taxable

year, in addition to other taxes, a tax equal to 10% of the improperly accumulated taxable income of domestic and closely-held corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by

permitting the earnings and profits of the

corporation to accumulate instead of dividing

them among or distributing them to the shareholders.

b) Rationale à It is a tax in the nature of a

PENALTY to the corporation for the improper accumulation of its earnings, and a DETERRENT to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them.

c) Exception àààà The use of undistributed earnings and profits for the reasonable needs of the business would not generally make the accumulated or undistributed earnings subject to the tax. What is meant by “reasonable needs of the business” is determined by the IMMEDIACY TEST. Ø Immediacy Test - It states that the

“reasonable needs of the business” are the 1) immediate needs of the business;

and 2) reasonably anticipated needs.

Ø How to prove the “reasonable needs

of the business” à The corporation should prove that there is 1) an immediate need for the

accumulation of the earnings and profits; or

2) a direct correlation of anticipated needs to such accumulation of profits.

d) Composition: The following constitute accumulation of earnings for the reasonable needs of the business: (ILL ABE)

1) ALLOWANCE for the increase in the

accumulation of earnings up to 100% of

the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years;

2) Earnings reserved for definite corporate EXPANSION projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body;

3) Earnings reserved for BUILDING, PLANT or EQUIPMENT ACQUISITION as approved by the Board of Directors or equivalent body;

4) Earnings reserved for compliance with any LOAN COVENANT or pre-existing obligation established under a legitimate business agreement;

5) Earnings required by LAW or applicable

regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution;

6) In the case of subsidiaries of foreign

corporations in the Philippines, all undistributed earnings intended or reserved for INVESTMENTS WITHIN THE PHILIPPINES as can be proven by corporate records and/or relevant documentary evidence.

e) Covered Corporations àààà Only domestic

and closely-held corporations are liable for IAET.


TAXATION LAW 1

Closely-held corporations are those: a) at least 50% in value of the outstanding capital stock; or b) at least 50% of the total combined voting power of all classes of stock entitled to vote

è is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.

To determine whether the corporation is

closely held corporation, insofar as such determination is based on stock ownership, the following RULES shall be applied: a. Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. b. Family and Partnership Ownership. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the ‘family of an individual’ includes his brothers or sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants. c. Option to Acquire Stocks. - If any person has an option to acquire stock, such stock shall

be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of option shall be considered as an option to acquire such stock. d. Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of (a) or (c) shall, for purposes of applying (a) or (b), be treated as

actually owned by such person; but stock constructively owned by the individual by reason of the application of (b) shall NOT be

treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock.

èèèè BIR Ruling 025-02 àààà The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company. Where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered as publicly held corporation. f) Exempt Corporations: (BIG-PEN-T)

1. Banks and other non-bank financial intermediaries;

2. Insurance companies; 3. Publicly-held corporations; 4. Taxable partnerships; 5. General professional partnerships;

6. Non- taxable joint ventures; and

7. Enterprises that are registered:

a. with the Philippine Economic Zone

Authority (PEZA) under R.A. 7916;

b. pursuant to the Bases Conversion and

Development Act of 1992 under R.A.

7227; and

c. under special economic zones declared by

law which enjoy payment of special tax

rate on their registered operations or

activities in lieu of other taxes, national

or local.

Words in regular letters are found in Sec. 29(B)(2) of the NIRC. Words in italics are additions made by the revenue regulation to consolidate Sec. 29 with other pertinent laws.

g) Computation: TI + (ET + EG + FT +

NOLCOD) – (TP + D + RN) = IATI

Year's taxable income P xx

Add: Income exempt from tax xx

Income excluded from gross income xx

Income subject to final tax xx

Amount of NOLCO deducted xx

Total P xx Less: Income tax paid/payable for the

taxable year xx

Dividends actually or constructively paid from the applicable year's taxable income xx

Amount reserved for the reasonable needs of the business emanating from the covered year's taxable income xx

Improperly accumulated taxable income P xx

Multiplied by IAET rate 10% Improperly accumulated earnings(IAET) tax P xx

è Words in regular letters are in the statutory formula. Words in italics are additions made by the revenue regulation. h) Limitation àààà The profit that has been

subjected to IAET shall no longer be subjected to IAET in later years even if not declared as dividend. However, profits which have been subjected to IAET, when declared as dividends, shall be subject to tax on dividends except in those instances where the recipient is not subject thereto.

i) Declaration of Dividends from earnings àààà

For purposes of determining the source of earnings or profits declared or distributed from accumulated income, the dividends shall be deemed to have been paid out of the most recently accumulated profits or surplus and shall constitute a part of the annual income of the distributee for the year in which received pursuant to Section 73(C) of the Code. But, where the dividends or portion of the said dividends declared forms part of the accumulated earnings as of December 31, 1997, or emanates from the accumulated income of a particular year and is therefore an exemption to the


TAXATION LAW 1

proceeding statement, such fact must be supported by a duly executed Board Resolution to that effect.

j) Period for Payment of Dividend/IAET àààà

The dividends must be declared and paid or issued not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter.

k) Determination of Purpose to Avoid Income Tax

1) The fact that a corporation is a mere holding company or investment company shall be prima facie evidence

of a purpose to avoid the tax upon its shareholders or members Ø A "holding or investment company" is

a corporation having practically no activities except holding property, and collecting the income therefrom or investing the same; and

2) where the earnings or profits of a

corporation are permitted to accumulate beyond the reasonable needs of the business. PRIMA FACIE INSTANCES of accumulation of profits beyond the reasonable needs of a business (UBE) 1) Investment of substantial earnings and

profits of the corporation in UNRELATED BUSINESS or in stock or securities of unrelated business;

2) Investment in BONDS and other

long-term securities; and 3) Accumulation of earnings IN EXCESS

OF 100% OF PAID-UP CAPITAL, not otherwise intended for the reasonable needs of the business.

-The controlling intention of the taxpayer is that which is manifested at the time of accumulation. A speculative and indefinite purpose will not suffice. The mere recognition of a future problem or the discussion of possible and alternative solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its consummation is essential.

ONE LAST NOTE ON THE APPLICABILITY

OF TAX RATES OF DOMESTIC

CORPORATIONS: All corporations, agencies, or instrumentalities owned or controlled by the GOVERNMENT are taxable and shall pay such rate of tax upon their taxable income as are imposed on domestic corporations

engaged in a similar business, industry, or activity. EXCEPTIONS (i.e, not taxable): o Government Service Insurance

System (GSIS), o Social Security System (SSS), o Philippine Health Insurance

Corporation (PHIC), o Philippine Charity Sweepstakes Office

(PCSO) Note: Exemption for PAGCOR was withdrawn by RA 9337

E. Tax on Resident Foreign Corporations

Resident foreign corporations are subject to any or some of the following: • Capital Gain Tax • Final Tax on Passive Income • Normal Tax [OR] Minimum Corporate

Income Tax (MCIT) [OR] Gross Income Tax (GIT)

• Branch Profit Remittance Tax

1. Capital Gains subject to Capital Gains Tax à On sale, barter, exchange or other disposition of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset: On the net capital gain: Not over P100,000 Final Tax of 5% On any amount in excess of P100,000 plus Final Tax of 10% on the excess

NOTE: Tax treatment is the same as that of individuals and domestic corporations. The net taxable income from the sale of real property realized by the resident foreign corporation shall be subject to the normal corporate income tax.

2. Passive Income Subject to Final Tax Interest Income: o on any currency bank deposit, yield or

any other monetary benefit from deposit substitutes, trust funds and similar arrangements - 20%

o under the expanded foreign currency deposit system (EFCDS) - 7.5%

Dividends received from a domestic corporation (Intercompany Dividend) - EXEMPT

Royalties (any kind) – 20%

3. Income subject to Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT) à The discussion with respect to this topic (income subject to normal tax, MCIT, or GIT) under the subheading of domestic corporations is equally applicable to resident foreign corporations, both as to concepts and computations, except that RFCs are taxed only on income from sources within the Philippines.

NORMAL CORPORATE INCOME TAX RATE àààà 35% of net taxable income from sources

within the Philippines

MINIMUM CORPORATE INCOME TAX (MCIT) àààà 2% of MCIT Gross Income from sources within the Philippines. The MCIT is imposed on RFCs under the same conditions as domestic corporations. [Sec. 28(A)(2)]

GROSS INCOME TAX (GIT) àààà The President, upon the recommendation of the Secretary of Finance, may allow resident foreign corporations the option to be taxed at fifteen percent (15%) of gross income within


TAXATION LAW 1

the Philippines, under the same conditions as domestic corporations. [Sec. 28(A)(1)]

Branch Profit Remittance Tax [Sec. 28(A)(5)] Ø Taxable transaction – any profit remitted

by a branch to its head office Ø Tax Rate and Base – 15% based on the

total profits applied or earmarked for remittance without any deduction for the tax component

Ø Non-taxable activities –activities which are registered with the Philippine Economic Zone Authority

Ø Income NOT TREATED AS BRANCH

PROFITS unless effectively connected with the conduct of trade or business in the Philippines:

i. Interests, dividends, rents, royalties, including remuneration for technical services

ii. salaries, wages premiums, annuities, emoluments

iii. other fixed or determinable annual, periodic or casual gains, profits, income

iv. capital gains received during each taxable year from all sources within the Philippines

NOTES:

- imposed whether the head office of the foreign corporation is located in a tax treaty country, in a tax haven or other non-treaty country. - imposed only on the profits remitted by a Philippine branch to the head office of a foreign corporation. Should the branch of a domestic corporation remit profits to its head office, the transaction is not subject to the branch profit remittance tax.

F. Tax on Nonresident Foreign Corporations

Non-resident foreign corporations are subject to any or some of the following: • Capital Gain Tax • Final Tax on Passive Income • Final Tax on [Other] Gross Income

from sources within the Philippines

1. Capital Gains subject to Capital Gains Tax à On sale, barter, exchange or other disposition of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset:

On the net capital gain: Not over P100,000 Final Tax of 5% On any amount in excess of P100,000 plus Final Tax of 10% on the excess

NOTE: The gross income from the sale of real property realized by the non-resident foreign corporation shall be subject to a 35% final tax imposed on gross income from sources within the Philippines.

2. Passive Income Subject to Final Tax

Interest o on foreign loans contracted on or after

August 1, 1986 – 20%

o under the expanded foreign currency deposit system (EFCDS) - EXEMPT

Dividends (cash and/or property) received from a domestic corporation (Intercorporate Dividend) – 15%, AS LONG AS the country in which the nonresident foreign corporation is domiciled allows a tax credit for taxes “deemed paid” in the Philippines equivalent to 20%

20% represents the difference between the regular income tax of 35% on corporations and the 15% tax on dividends If the country within which the NRFC is domiciled does NOT allow a tax credit, a final withholding tax at the rate of 35% is imposed on the dividends received from a domestic corporation. [In other words, the dividends are subject to the third kind of tax: Final Tax on [Other] Gross Income from sources within the Philippines.]

Final Tax on [Other] Gross Income from sources within the Philippines à 35% of the gross income received from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains EXCEPT capital gains resulting from the sale of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset.

Special Types of Corporations A. Special Type of Domestic Corporations

1. Proprietary Educational Institutions and Hospitals (Non-profit)

Tax Rate and Base – 10% on net income (except on income subject to capital gains tax and passive income subject to final tax) within and without the Philippines CAVEAT: If gross income from unrelated

trade or business or other activity exceeds 50% of total gross income derived from all sources, the tax rate of 35% shall be imposed on the entire taxable income. - Unrelated trade, business or other activity à any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. - Proprietary educational institution à any private school maintained and administered by private individuals or groups with an issued permit to operate from the DECS, CHED or TESDA.

2. Depository Banks (Foreign Currency Deposit Units) [Sec. 27(D)(3) as amended by RA 9294 (2004)] Ø Coverage of the Rule – ONLY income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with: - nonresidents, - offshore banking units in the Philippines, - local commercial banks including branches

of foreign banks that may be authorized


TAXATION LAW 1

by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and

- other depository banks under the expanded foreign currency deposit system

Ø Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks

EXCEPTION: Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of 10%.

B. Special Types of Resident Foreign Corporations

1. International Carriers -Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB) What is GPB?

In the case of International Air Carriers, GPB refers to the amount of: -gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document =gross revenue from tickets revalidated, exchanged and/or indorsed to another international airline if the passenger boards a plane in a port or point in the Philippines

-for flights which originate from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, the gross revenue consisting of only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment [RR 15-2002] -Air Canada vs. CIR (CTA Case No. 6572) – A foreign airline company selling tickets in the Philippines through their local agents shall be considered as resident foreign corporation engaged in trade or business in the country. The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. The test of taxability is the source, and the source is that activity which produced the income. In the case of International Shipping, GPB means: -gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.

2. Offshore Banking Units authorized by the Bangko Sentral ng Pilipinas (BSP) [Sec. 28(A)(4) as amended by RA 9294 (2004)]

Coverage of the Rule ONLY income derived by offshore banking units from foreign currency transactions with: -nonresidents, -other offshore banking units -local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units -Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by

banks -EXCEPTION: Interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of 10%.

3. Resident Depository Bank (Foreign Currency Deposit Units) [Sec. 28(D)(7)(b) as amended by RA 9294 (2004)] -Coverage of the Rule – ONLY income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with:

-nonresidents, -offshore banking units in the Philippines, -local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and -other depository banks under the expanded foreign currency deposit system -Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks -EXCEPTION: Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of 10%.

4. Regional or Area Headquarters and Regional Operating Headquarters of multinational Companies

Regional or area headquarters – not subject to income tax Regional or area headquarters à a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates,


TAXATION LAW 1

subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

Regional operating headquarters – 10% of their taxable income -a branch established in the Philippines by multinational companies which are engaged in any of the following services:

(SMART - BAD – PPL)

1. general Administration and planning 2. business Planning and coordination 3. sourcing and Procurement of raw materials and components 4. corporate finance Advisory services 5. Marketing control and sales promotion 6. Training and personnel management 7. Logistic services 8. Research and development services and product development 9. technical Support and maintenance

10. Data processing and communications, and 11. Business development.

C. Special Types of Non-resident Foreign Corporations 1. Non-resident cinematographic film owners,

lessors or distributors – 25% of gross income from all sources within the Philippines

2. Nonresident Owner or Lessor of Vessels

Chartered by Philippine Nationals – 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Authority

3. Nonresident Owner or Lessor of Aircraft,

Machineries and Other Equipment – 7.5% of gross rentals or fees .

Summary of Tax Bases and Rates of Special Corporations QUICK GLANCE

Type of Corporation Tax Base Tax Rate

Domestic Corporations

Proprietary Educational Institutions and Hospitals (Non-profit) Taxable Income from all sources 10%

Depository Banks (Foreign Currency Deposit Units) v With respect to income derived under the expanded

foreign currency deposit system from certain foreign currency transactions

v With respect to interest income from foreign currency loans to residents other than offshore units in the Philippines or other depository banks under the expanded system

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

-

Amount of interest income 10%

Resident Foreign Corporations

International Carriers Gross Philippine Billings 2.5%

Offshore Banking Units v With respect to income derived by offshore banking

units from certain foreign currency transactions v With respect to interest income derived from foreign

currency loans granted to residents other than offshore banking units or local commercial banks


-


Resident Depository Bank (Foreign Currency Deposit Units) v With respect to income derived under the expanded

foreign currency deposit system from certain foreign currency transactions

v With respect to interest income from foreign currency loans to residents other than offshore units in the Philippines or other depository banks under the expanded system


-


Regional or Area Headquarters Exempt -

Regional Operating Headquarters of Multinational Companies Taxable Income from within the Philippines

10%

Non-resident Foreign Corporations

Non-resident cinematographic film owners, lessors or distributors

Gross Income from the Philippines 25%

Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals

Gross Rentals, Lease and Charter Fees from the Philippines

4.5%

Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment

Gross Rentals, Charges and Fees from the Philippines

7.5%


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Exempt Corporations [Sec. 30] (CREB-CLEF-SMB)

The following organizations shall not be taxed in respect to income received by them as such (e.g. membership fees): 1. LABOR, agricultural or horticultural

organization not organized principally for profit

2. MUTUAL savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit

3. A BENEFICIARY society, order or association, operating for the exclusive

benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness,

accident, or other benefits exclusively to the

members of such society, order, or association, or non-stock corporation or their dependents

4. CEMETERY company owned and operated exclusively for the benefit of its members

5. Non-stock corporation or association organized and operated exclusively for RELIGIOUS, charitable, scientific, athletic, or cultural purposes, or for the

rehabilitation of veterans, no part of its net

income or asset shall belong to or inures to

the benefit of any member, organizer, officer or any specific person

6. BUSINESS league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual

7. CIVIC league or organization not organized for profit but operated exclusively for the promotion of social welfare

8. A non-stock and nonprofit EDUCATIONAL institution

9. Government EDUCATIONAL institution 10. FARMERS' or other mutual typhoon or fire

insurance company, mutual ditch or irrigation

company, mutual or cooperative telephone

company, or like organization of a purely

local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses and

11. Farmers', fruit growers', or like association

organized and operated as a SALES agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

è Notwithstanding the exemptions, income of whatever kind and character of the enumerated 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.

Note: RA 9178 Barangay Micro Business Enterprises (BMBEs) implemented by DO 17-04, April 20, 2004

• BMBEs shall be exempt from income tax for income arising from the operations of the enterprise.

• BMBE is any business entity or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing trading and services, whose total assets including those arising from loans but exclusive of land on which the particular business entity’s office, plant and equipment are situated, shall not be more that P3M.


TAXATION LAW 1

Summary of Tax Bases, Tax Rates and Applicable Tax Regimes for Corporations

CATEGORY OF INCOME

DOMESTIC RESIDENT NON-RESIDENT

All sources Within the Philippines


1. Taxable Income (i.e., income other than #s 2 to 9)

35% Normal Tax

35% Normal Tax

35% of Gross Income

2. Interest from any currency bank deposit , etc.

GIW - 20% Final Tax

3. Royalties

GIW - 20% Final Tax

4. Interest (Expanded Foreign Currency Deposit System)

GIW - 7.5% Final Tax EXEMPT

5. Cash / Property Dividends from a domestic corporation

EXEMPT

15% or 35%, whichever is applicable

6. Capital Gains on Sale of Shares (not traded in a domestic stock exchange)

Net Capital Gains within: Not Over P100,000 – 5% Final Tax

Amount in Excess of P100,000 – plus 10% Final Tax on the excess

7. Capital Gains on Sale of Land and/or Building

GSP or FMV, whichever is higher – 6% Final Tax

35% Normal Tax

35% of Gross Income

8. Sale of Shares (traded in a domestic stock exchange)

½ of 1% of the Selling Price (Stock Transaction Tax) Note: Stock Transaction Tax is not an income tax,

but a business (percentage) tax

TAX REGIMES APPLICABLE

Normal Tax YES YES

YES, but based on Gross Income

Minimum Corporate Income Tax YES YES NO

Gross Income Tax YES YES NO

Improperly Accumulated Earnings Tax YES, if closely- held

corporation NO NO

Branch Profit Remittance Tax NO YES Not Applicable

Legend:

GIW - Gross Income within the Philippines

GSP – Gross Selling Price

FMV – Fair Market Value


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V. TAXATION OF FRINGE BENEFITS V. TAXATION OF FRINGE BENEFITS V. TAXATION OF FRINGE BENEFITS V. TAXATION OF FRINGE BENEFITS [Sec. 33 of the NIRC]

A. Definition of Fringe Benefit àààà any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee except rank and file employees (The fringe benefit covered by Sec 33 refers to those enjoyed by managerial and supervisory employees.)

Key definitions: Managerial employee à one who is vested with the powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory employees à those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. All employees not falling within any of the above definitions are considered rank-and-file

employees.

Examples of fringe benefits:

1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel, such as maid, driver

and others 5. Interest on loan at less than market rate to

the extent of the difference between the market rate and actual rate granted

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

7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the employee or his

dependents 10. Life or health insurance and other non-life

insurance premiums or similar amounts in excess of what the law allows

B. Tax Rate and Tax Base – [Generally] 32% of the grossed-up monetary value (GMV) GMV represents the whole amount of income realized by the employee.

How GMV is determined à GMV is determined by dividing the actual monetary value of the fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of the fringe benefit is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit tax, therefore, is P470.59 [P1470.59 x 32%].

Special Cases: § For fringe benefits received by non-resident

alien not engaged in trade of business (NRANETB), the tax rate is 25% of the grossed-up monetary value (GMV). The GMV is determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%].

§ For fringe benefits received by alien individuals and Filipino citizens employed by

regional or area headquarters, regional operating headquarters, offshore banking units (OBUs), or foreign service contractor, the tax rate is 15% of the grossed-up monetary value (GMV). The GMV is determined by dividing the actual monetary value of the fringe benefit by 85% [100% - 15%]. What is the tax implication if the employer gives ‘fringe benefits’ to rank-and-file employees? Fringe benefits given to a rank-and-file employee are treated as part of his

compensation income subject to income tax

and withholding tax on compensation income.

Payor of Fringe Benefit Tax (FBT) – the employer [but the law allows the employer to deduct such tax as a business expense, in determining his taxable income] Fringe Benefits which are not taxable [Sec. 33 of the NIRC, consolidated with Sec. 2.33(C) of RR 03-98] [RED CNC] 1. Fringe benefits which are authorized and

EXEMPTED from tax under special laws 2. CONTRIBUTIONS of the employer for the

benefit of the employee to retirement, insurance and hospitalization benefit plans

3. Benefits given to the RANK AND FILE employees, whether granted under a collective bargaining agreement or not

4. DE MINIMIS benefits 5. If the grant of fringe benefits to the employee

is required by the nature of, or NECESSARY to the trade, business, or profession of the employer

6. If the grant of fringe benefits is for the CONVENIENCE of the employer [Convenience of the Employer Rule]

NOTES:

De minimis benefits – those which are of relatively small value are offered by the employer as a means of promoting health, goodwill, contentment, or efficiency of his employees, such as the following: (CLAMMP – RUST)

1. Monetized unused vacation leave credits of private employees not exceeding ten (10)

days during the year and the monetized value of leave credits paid to government

officials and employees; 2. Medical cash allowance to dependents

of employees not exceeding P750 per

semester or P125 per month;

BIR Ruling 019-02: To be considered “de minimis” medical allowance, the following conditions must concur:

1. The amount given to the EE shall be for his own medical expense; 2. The amount actually given and actually spent shall not exceed P10, 000 in any given calendar year; 3. The EE must fully substantiate with or in his name the medical allowance to be granted.

3. Rice subsidy of P350 per month granted

by an employer to his employees;


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4. Uniforms given to employees by the employer;

5. Medical benefits given to the employees by the employer;

6. Laundry allowance of P150 per month; 7. Employee achievement awards, e.g. for

length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value

not exceeding one-half (½) month of the

basic salary of the employee receiving the award under an established written plan

which does not discriminate in favor of highly paid employees;

8. Christmas and major anniversary

celebrations for employees and their guests;

9. Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; and

10. Flowers, fruits, books or similar items given to employees under special

circumstances, e.g. on account of illness, marriage, birth of a baby, etc. [as enumerated in RR 03-98, as amended by RR 10-00]

Tax implication of de minimis benefits: EXEMPTED from tax. However, should the amount of the benefits given be in EXCESS of the ceilings prescribed, the following rules apply:

-If given to managerial / supervisory employees à The amount in excess of the ceiling prescribed is taxable as a fringe benefit (i.e., there will be a 32% tax imposed on the grossed-up monetary value of the residual amount). -If given to rank-and-file employees à The amount in excess of the ceiling prescribed is taxable as salary or compensation income.

BIR Ruling 023-02: Meal and food allowance, although not for overtime work, is considered de minimis if it does not exceed 25% of the basic wage. The rules and regulations on de minimis benefits do not allow aggregation of the amounts set for each type of benefit.

BIR Ruling 034-02 (Aug 16, 2002): Representation and Transportation Allowance (RATA) and Personnel Economic Relief Allowance (PERA) are not subject to Income Tax and Withholding Tax. Additional Compensation Allowance (ACA) is part of “other benefits” under Sec. 32(b)(7)(e) of the Tax Code of 1997 which are excluded from gross compensation income provided the total amount of such benefits does not exceed P30,000. It is also not subject to withholding tax pending its formal integration into basic pay.

Example of Benefits Necessary to the Trade / Business of the Employer: BIR Ruling 013-02: Outstation Allowance given by the Philippine Gaming Management Corporation to its managerial and supervisory employees (who will be away from the office site for at least 8 hours to visit the lotto franchise holders for repair and/or inspection of equipment) intended to cover meals and trip related expenses is clearly required by the nature of or necessary to the trade or business of the employer and hence, not subject to the fringe benefits tax. It is also not subject to withholding tax.

Examples of Convenience of the Employer Rule: 1. The value of the meals given to the employee

is not taxable, if the employer provides the meals for a substantial non-compensatory business purpose (generally, when employee is required to be on duty during the meal period).

2. Lodging is not taxable if the employee must accept the lodging on the employer’s business premises as a condition of his employment.


TAXATION LAW 1

VI. TAXATION OF PARTNERSHIPSVI. TAXATION OF PARTNERSHIPSVI. TAXATION OF PARTNERSHIPSVI. TAXATION OF PARTNERSHIPS

A. Classification of Partnerships for Tax Purposes 1. General Professional Partnerships (GPP) –

partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business

2. Other Partnerships (or General Co-

partnerships) – partnerships wherein all or part of their income is derived from the conduct of trade or business

B. General Professional Partnerships [Sec 26] Rules: 1. A GPP as such shall not be subject to

the income tax. 2. The partners shall only be liable for

income tax only in their separate and

individual capacities. 3. For purposes of computing the

distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.

4. Each partner shall report as gross income his distributive share, actually or

constructively received, in the net income of the partnership.

5. The share of a partner shall be subject to a creditable withholding income tax of 15%. (RR 2- 1998)

NOTES: • GPP is not a taxable entity àààà The partnership is a mere mechanism or a flow-through entity in the generation of income by, and the ultimate mechanism distribution of such income to the individual partners. (Tan v.

Commissioner [Oct. 3, 1994]) But, the partnership itself is required to file income tax returns for the purpose of furnishing information as to the share in the gains or profits which each partner shall include in his individual return. (RR 2- 1998) • The share of an individual partner in the net profit of a general professional partnership is deemed to have been actually or constructively received by the partner in the same taxable

year in which such partnership net income was earned, and shall be taxed to them in their individual capacities, whether actually distributed or not, at the graduated income tax ranging from 5% to 32%. Thus, the principle of constructive receipt of income or profit is being applied to undistributed profits of GPPs. The payment [to the partners] of such tax-paid profits in another year should no longer be liable to income tax. (Mamalateo)

C. Other Partnerships (or General Co-

partnerships) Rules:

1. The partnership is subject to the same rules on corporations (capital gains tax, final tax on passive income, normal tax, minimum corporate income tax [MCIT] and gross income tax [GIT]), but is not subject to the improperly accumulated earnings tax [IAET]. The partnership must file quarterly and year-end income tax returns.

2. The taxable income of the partnership, less the normal corporate income tax

thereon, is the distributable net income of the partnership.

3. The share of a partner in the partnership’s distributable net income of a year shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not. [Sec. 73(D)] Such share will be subjected to a final tax of 10% to be withheld by the partnership. [Sec. 24(B)(2)]

Ø Co-ownership - There is co-ownership: 1. When two or more heirs inherit and

undivided property from a decedent. 2. When a donor makes a gift of an

undivided property in favor of two or more donees.

- When Co-ownership is not subject to tax à When the co-ownership’s activities are limited merely to the preservation of the co-owned property. The co-owners are only liable for income tax in their separate and individual capacities.

- When Co-ownership is subject to tax à

When the income of the co-ownership is invested by the co-

owners in business, the co-owners have in effect constituted themselves into a partnership. In such a case, the co-ownership shall be subject to tax as a corporation. à automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived from them are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. [Ona v. CIR, May, 25 1972]


TAXATION LAW 1

VII. TAX ON ESTATES AND TRUSTSVII. TAX ON ESTATES AND TRUSTSVII. TAX ON ESTATES AND TRUSTSVII. TAX ON ESTATES AND TRUSTS

A. Application of Income Tax à The tax imposed upon individuals shall apply

to the income of estates or of any kind of property held in trust, including: 1. Income accumulated in trust for the

benefit of unborn or unascertained

person or persons with contingent

interests, and income accumulated or held for future distribution under the terms of the will or trust;

2. Income which is to be distributed

currently by the fiduciary to the

beneficiaries, and income collected by a

guardian of an infant which is to be held or distributed as the court may direct;

3. Income received by estates of deceased

persons during the period of

administration or settlement of the estate; and

4. Income which, in the discretion of the

fiduciary, may be either distributed to the beneficiaries or accumulated.

EXCEPTION àààà The tax shall not apply to employee's trust which forms part of a pension,

stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees i. if contributions are made to the trust

by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and

ii. if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees. - NOTE HOWEVER: Any amount

actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

B. Computation and Payment of the Tax

àààà The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary. (GENERAL RULE)

EXCEPTIONS:

1. Revocable Trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested

1. in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or

2. in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,

the income of such part of the trust shall

be included in computing the taxable

income of the grantor.

2. Income for Benefit of Grantor - Where any part of the income of a trust i. is, or in the discretion of the

grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or

ii. may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or

iii. is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor,

such part of the income of the trust shall

be included in computing the taxable

income of the grantor.

NOTE: 'In the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

Consolidation of Income of Two or More Trusts

- Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts.

C. How Taxable Income of the Estate or Trust is Computed

àààà [Sec. 61] The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, EXCEPT that: (A) There shall be ALLOWED AS A

DEDUCTION in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, BUT the amount so allowed as a deduction shall be included in


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computing the taxable income of the beneficiaries, whether distributed to

them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year.

(B) In the case of income received by

estates of deceased persons during

the period of administration or

settlement of the estate, and in the case of income which, in the discretion

of the fiduciary, may be either

distributed to the beneficiary or

accumulated, there shall be allowed as an ADDITIONAL DEDUCTION the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a

foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries.

B. Exemption Allowed to Estates and Trusts

àààà P20,000 from the income of the estate or trust.

E. Fiduciary Returns

àààà Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall: - render, in duplicate, a return of the

income of the person, trust or estate for whom or which they act, and

- be subject to all the provisions which

apply to individuals in case such person, estate or trust has a gross income of P20,000 or over during the taxable year.

Such fiduciary or person filing the return for him or it, shall: - take OATH that

§ he has sufficient knowledge of

the affairs of such person, trust or estate to enable him to make such return and

§ that the same is, to the best of

his knowledge and belief, true

and correct, and - be subject to all the provisions of this

Title which apply to individuals. A return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside, under such rules and regulations as the Secretary of Finance shall prescribe, shall be sufficient compliance.

F. Fiduciaries Indemnified Against Claims for Taxes Paid

àààà Trustees, executors, administrators and other fiduciaries are INDEMNIFIED against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make, and they shall have CREDIT for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.

VIII. SOURCE OFVIII. SOURCE OFVIII. SOURCE OFVIII. SOURCE OF INCOMEINCOMEINCOMEINCOME [Sec. 42]

A. Classification of Income according to

Source 1. Income derived from sources within the

Philippine 2. Income derived from sources without the

Philippine 3. Income derived from sources partly within

and partly without the Philippines B. Basic Principles

1. Resident Citizens (RC) and Domestic Corporations (DC) are taxable on income derived from within and without the Philippines

2. Non-resident Citizens (NRC), Non-resident Aliens (NRA), Resident Foreign Corporations (RFC) and Non-resident Foreign Corporations (NRFC) are taxable only on income derived from within the Philippines.

C. Gross Income From Sources Within the Philippines (RIDIC - within) àààà The following items of gross income shall

be treated as gross income from sources WITHIN the Philippines:

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

2. Dividends received: a. from a domestic corporation; and b. from a foreign corporation, UNLESS less

than 50% of its gross income for the previous 3-year period was derived from sources within the Philippines [in which case it will be treated as income partly from within and partly from without]. The income which is considered as derived from within the Philippines is obtained by using the following formula:

NOTE: * of the corporation giving the

dividend

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

4. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for – (stackem) a. The use of or the right or privilege to

use in the Philippines any copyright, patent, design or model, plan, secret

formula or process, goodwill,

Philippine Gross Income* x Dividend = Income Within Worldwide Gross Income*


TAXATION LAW 1

trademark, trade brand or other like

property or right; b. The use of, or the right to use in the

Philippines any industrial, commercial

or scientific equipment; c. The supply of scientific, technical,

industrial or commercial knowledge or information;

d. The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the

application or enjoyment of, any such property or right as is mentioned in (a), any such equipment as is mentioned in (b) or any such knowledge or information as is mentioned in (c);

e. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation

or operation of any brand, machinery or

other apparatus purchased from such nonresident person;

f. Technical advice, assistance or

services rendered in connection with technical management or administration of any scientific,

industrial or commercial undertaking, venture, project or scheme; and

g. The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in

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

radio broadcasting.

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

6. GENERAL RULE: Gains, profits and

income from the sale of personal property, subject to the following rules:

Place of PURCHASE

Place of SALE

Treatment**

Philippines Abroad Income from Without

Abroad Philippines Income from Within

** in other words, treated as income from the country in which sold

EXCEPTIONS:

1. Gain from the sale of shares of stock in a domestic corporation à

treated as derived entirely from sources within the Philippines regardless of where the said shares

are sold. 2. Gains from the sale of

(manufactured) personal property: a. produced (in whole or in part)

by the taxpayer within and sold without the Philippines, or

b. produced (in whole or in part) by the taxpayer without and sold within the Philippines

à treated as derived partly from sources within and partly from sources without the Philippines.

Place of

PRODUCTION Place of SALE

Treatment

Philippines Abroad Partly within, partly without

Abroad Philippines Partly within, partly without

Ø Allowable Deductions from Gross

Income From Sources Within the Philippines GENERAL RULE:

From the items of gross income above, the following are allowed as deductions: a. expenses, losses and other

deductions properly allocated to items of gross income

b. ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items of gross income

Formula for (b):

EXCEPTION:

No DEDUCTIONS FOR INTEREST paid or incurred abroad shall be allowed from the item of gross income unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines.

D. Gross Income From Sources Without the

Philippines (RIDIC - without) àààà The following items of gross income shall

be treated as income from sources without the Philippines:

1. Interests other than those derived from sources within the Philippines

2. Dividends other than those derived from sources within the Philippines

3. Compensation for labor or personal services performed without the Philippines

4. Rentals or royalties from property located without the Philippines or from any interest in such property

5. Gains, profits and Income from the sale of real property located without the Philippines

Ø Allowable Deductions to Gross Income

From Sources Without the Philippines

1. expenses, losses, and other deductions properly apportioned to items of gross income

2. ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income

e.g.:

Gross Income from Expenses Without the Philippines x Unallocated = allocated Worldwide Gross Income Expenses to income

from without

Expenses

Philippine Gross Income x Unallocated = allocated

Worldwide Gross Income Expenses to income from within


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C. QUICK GLANCE

Item of Income Test of Source of Income

Interest Residence of the debtor

Income from Services Place of performance10

Rental Location of the property

Royalty Place of use of the intangible

Gain on Sale of Real Property Location of the property sold

Gain on Sale of Personal Property (EXCEPT: - Shares of a domestic corporation - Personal property produced (in whole or in

part) by the taxpayer within and sold without the Philippines [or vice versa])

Place of sale

Gain on Sale of Domestic Shares Always income from within

Gain on sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines [or vice versa]

Partly from without and partly from within

Dividends a. From Domestic Corporation

Income from within

b. From Foreign Corporation Income from WITHIN, IF at least 50% of its gross income for the previous 3-year period was derived from sources within the Philippines. [entire income considered as income from within]

HOWEVER, if less than 50% of its gross income for the previous 3-year period was derived from sources within the Philippines, considered as partly within and partly without. Income within computed using this formula: Philippine Gross Income* x Dividend= Income Within Worldwide Gross Income* NOTE: * àààà of the corporation giving the dividend

10 Regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment.


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Taxable = Ordinary + net capital net income net income gains

IX. GROSS INCOMEIX. GROSS INCOMEIX. GROSS INCOMEIX. GROSS INCOME A. Basic Principles

Gross Income à means all income derived from whatever source11, including (but not limited to) the following items: (TRIP CARD GPP)

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

2. RENTS 3. INTERESTS 4. PRIZES and winnings 5. COMPENSATION for services in

whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items

6. ANNUITIES 7. ROYALTIES 8. DIVIDENDS 9. GAINS derived from dealings in property 10. PENSIONS 11. PARTNER'S distributive share from the

net income of the general professional partnership (GPP)

Ø The term “gross income” whenever used

without qualification, is comprehensive, as defined above, and is different from the limited meaning of gross income for purposes of minimum corporate income tax or the gross income tax of corporations.

B. Supplementary Discussion on Some Items Included in Gross Income

1. Compensation Income a. income arising from an ER-EE relationship.

It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78(A)] It includes: 1. Salaries and wages 2. Commissions 3. Tips 4. Allowances 5. Bonuses 6. Fringe Benefits of rank and file EEs

b. It does NOT include remuneration paid:

§ For agricultural labor paid entirely in

products of the farm where the labor is performed, or

§ For domestic service in a private home, or

§ For casual labor not in the course of the

employer's trade or business, or § For services by a citizen or resident of the

Philippines for a foreign gov’t or an int’l

organization. [Sec. 78(A)]

Withholding Tax on Compensation Income à The income recipient (i.e., EE) is the

person liable to pay the tax income, yet to improve the collection of compensation income of EEs, the State requires the ER to withhold the tax upon payment of the compensation income.

11 It does not include income excluded or exempted by law.

Fringe Benefits of Rank and File EEs Basic Rule: Convenience of the ER Rule If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employee’s work or position, the value of that privilege need not be included as compensation.

2. Gains Derived From Dealings In

Property – Dealings in property such as sales or exchanges may result in gain or loss. The kind of property involved (i.e., whether the property is a capital asset or an ordinary asset) determines the tax

implication and income tax treatment, as follows:

ORDINARY ASSET

CAPITAL ASSET***

Gain from sale or exchange

Ordinary Gain Capital Gain

Loss from sale or exchange

Ordinary Loss Capital Loss

Excess of Gains over the Losses

[goes into computation

of] Ordinary Net

Income

Net Capital Gain

*** à (except shares of stock not listed nor traded in a local stock exchange and real property subject to capital gains tax)

• If the asset involved is classified as ordinary, the entire amount of the gain from the transaction shall be included in the computation of gross income [Sec 32(A)], and the entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See XI. Allowable Deductions from Gross Income - Losses)

• If the property sold is a capital asset (except shares of stock not listed nor traded in a local stock exchange and real property subject to capital gains tax), the rules on capital gains and

losses apply in the determination of the amount to be included in gross income. (See XIII Capital Gains and Losses)

• Computation of Gain or Loss [Sec.

40(A)]:

Note: Amount realized from sale or other disposition of property = sum of money received + fair market value of the property (other than money) received

Amount realized from sale or other disposition of property

Less: basis or adjusted basis_____ ____ GAIN (LOSS)


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§ In computing the gain or loss from the sale or other disposition of property, the BASIS shall be as follows: 1. Property acquired by purchase –

its cost, i.e., the purchase price plus expenses of acquisition.

2. Property which should be included

in the inventory – its latest inventory value [RR-2 sec 136]

3. Property acquired by devise,

bequest or inheritance – its fair market price or value as of the date of acquisition

4. Property acquired by gift or

donation – the same as if it would be in the hands of the donor or at last preceding owner by whom it was not acquired by gift, EXCEPT that if such basis is greater than the FMV of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such FMV

5. Property (other than capital asset)

acquired for less than an adequate

consideration in money’s worth – a) the amount paid by the transferee for the property; or b) the transferor’s adjusted basis at the time of the transfer whichever is greater

6. Property acquired in a transaction

where gain or loss not recognized – The basis shall be the same as it would have been in the hands of the transferor increased by the amount of gain recognized by the transferor on the transfer.

3. Interest Income – e.g., Interest income

from government securities such as Treasury Bills

4. Rental Income – • Actual rent itself àààà included in gross

income (taxable) • Payments by lessee of obligations

of lessor to third persons àààà

considered as additional rent income of the lessor, and therefore included in gross income (taxable).

• Advance Rentals àààà Receipt of advance rentals by the lessor may or may not constitute taxable income to him depending on the true nature of the so-called advance rentals. o If the advance rental is in the

nature of prepaid rent (for the lessee), received by the lessor under a claim of right and without restriction as to use, the entire amount is taxable income of the lessor in the year received.

o If the amount received is in the nature of a security deposit for the faithful compliance by the lessee of the terms of the contract, there is no income to the lessor unless the conditions which make the security deposit the property of the lessor occur (i.e., the lessee violates the terms of the lease agreement)

5. Dividends – Any dividend which is not exempt from income tax, or which is not subject to final tax, is taxable dividend included in the computation of the taxable income (gross income) in the income tax return at the end of the year.

NOTE: Liquidating Dividend – distribution of all the property of a corporation. It is strictly not dividend income, but rather a sale of shares of stock resulting in capital gain or loss.

6. Annuities – income derived from a capital

amount paid to an insurance company.

7. Pensions – paid for past employment services rendered.

8. Cancellation of debt – The cancellation or

forgiveness of indebtedness may have any of three possible consequences: 1. It may amount to payment of income.

If, for example, an individual performs services to or for a creditor, who, in consideration thereof, cancels the debt, income in that amount is realized by the debtor as compensation for personal services.

2. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without any consideration therefore, cancels the debt, the amount of the debt is a gift to the debtor and need not be included in the latter’s report of income.

3. It may amount to a capital transaction. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of a payment of dividend.

9. Prizes and Awards – Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor. The EXCEPTIONS are as follows:

• Prizes and awards received in

recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are EXCLUSIONS from gross income if: a. The recipient was selected without

any action on his part to enter a contest or proceedings; and

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

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

10. Damage recovery –

• Compensatory damages, as constituting returns of capital, are not taxable. Thus, amounts received as moral damages for personal actions (such as alienation of affection, libel, slander or


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breach of promise to marry) are not taxable.

• Recovered damages representing recoveries of lost profits are taxable, just as profits are taxable in the regular course of business. Thus, damages recovered in patent infringement suits are taxable.

11. Bad Debt Recovery – Tax Benefit Rule – Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of

the income tax benefit of said deduction. There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser income and hence tax

savings for the company. (Sec. 4, RR 5-99)

Illustration:

Case A Case B Case C

Year 1

Gross Income 500,000

400,000

500,000

Less: Allowable Deductions (before write-off of Uncollectible Accounts/Debts)

(200,000)

(480,000)

(495,000)

Taxable Income (Net Loss) before write-off

300,000

(60,000)

5,000

Deduction for Accounts Receivable written off

(2,000)

(2,000)

(6,000)

Taxable Income (Net Loss) after write-off

298,000

(62,000)

(1,000)

Year 2 Recovery of Amounts Written Off

2,000

2,000

6,000

Taxable Income on the Recovery

2,000 - 5,000

Explanation:

§ In Case A, the entire amount recovered (P2,000) is included in the computation of gross income in Year 2 because the taxpayer benefited by the same extent. Prior to the write-off, the taxable income was P300,000; after the write-off, the taxable income was reduced to P298,000.

§ In Case B, none of the P2,000 recovered would be recognized as gross income in Year 2. Note that even without the write-off, the taxpayer would not have paid any income tax anyway. The “taxable income” before the write-off was actually a net loss.

§ In Case C, only P5,000 of the P6,000 recovered would be recognized as gross income in Year 2. It was only to this extent that the taxpayer benefited from the write-off. The taxpayer did not benefit from the extra P1,000 because at this point, the P1,000 was already a net loss.

12. Tax Refund – As a general rule, a refund

of a tax related to the business or the practice of profession, is taxable income (e.g., refund of fringe benefit tax) in the year of receipt to the extent of the income tax benefit of said deduction (i.e., the tax benefit rule applies). However, the following tax refunds are not to be included in the computation of gross income: (EXCEPTIONS) (CAP–IF–FED–VAT) 1. Philippine income tax, except the

fringe benefit tax 2. Income tax imposed by authority of

any foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred.

3. Estate and donor’s taxes 4. Taxes assessed against local benefits

of a kind tending to increase the value of the property assessed (Special assessments)

5. Value Added Tax 6. Fines and penalties due to late

payment of tax 7. Final taxes 8. Capital Gains Tax

è The enumeration of tax refunds that are

not taxable (income) is derived from an

enumeration of tax payments that are not

deductible from gross income. If a tax is

not an allowable deduction from gross

income when paid (no reduction of taxable

income, hence no tax benefit), the refund

is not taxable.

X. EXCLUSIONS FROM GROSS X. EXCLUSIONS FROM GROSS X. EXCLUSIONS FROM GROSS X. EXCLUSIONS FROM GROSS

INCOMEINCOMEINCOMEINCOME [Sec. 32(B)]

The following are excluded from gross income: (GIRL CRM) 1. LIFE Insurance General rule: The proceeds of life

insurance policies paid to heirs or beneficiaries upon the death of the insured - Reason: Insurance is a contract of

indemnity; hence, the proceeds should be treated as indemnity and not as gain or income.

Exception: If such amounts are held by

the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

2. Amount Received by Insured as

RETURN of Premium General rule: The amount received by the

insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract - Reason: This is a return of capital and

not income.

Exception: If the amounts received by the insured (when added to the amounts already received before the taxable year under such contract) exceed the aggregate


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premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income. (source unknown)

3. GIFTS, Bequests, and Devises General rule: The value of property

acquired by gift, bequest, devise, or descent. - Reason: These transactions are

subject to transfer taxes – estate or donor’s taxes.

Exception: Income from such property, as

well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.

4. COMPENSATION for Injuries or

Sickness The amounts received as compensation for

personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

5. INCOME Exempt under Treaty Income of any kind, to the extent required

by any treaty obligation binding upon the Government of the Philippines.

6. RETIREMENT Benefits, Pensions,

Gratuities, etc.- a. Retirement benefits received under

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

o REQUISITES:

i. The retiring employee has been in the service of the same employer for at least 10 years.

ii. The retiring employee is not less than 50 years of age at the time of his retirement

iii. The benefits shall be availed of by an employee only once.

iv. That there be a reasonable private benefit plan as defined below.

o A 'reasonable private benefit

plan' means § a pension, gratuity, stock bonus

or profit-sharing plan maintained by an employer for the benefit of some or all of his employees

§ wherein contributions are made by such employer for the employees

§ for the purpose of distributing to such employees the earnings and principal of the fund thus accumulated and

§ wherein it is provided in the plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the

exclusive benefit of the said officials and employees.

b. Any amount received by an employee

or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of o death o sickness o other physical disability or o for any cause beyond the

control of the employee (i.e., the separation of the employee must be involuntary and not initiated by him)

c. The social security benefits,

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

d. Payments of benefits due or to become

due to any person residing in the Philippines under the laws of the United States administered by the United

States Veterans Administration

e. Benefits received from or enjoyed under the Social Security System

f. Benefits received from the GSIS,

including retirement gratuity received by government officials and employees

è CASE LAW:

§ BIR Ruling 125-98: The phrase "shall not have availed of the privilege under a retirement benefit plan of the same or another employer" found in Sec. 32 (B) (6) (a) of the Tax Code means that the retiring official or employee must not have previously received retirement benefits from the same or another employer who

has a qualified retirement benefit plan.

§ BIR Ruling 143-98: The terminal leave pay of government employees whose employment is coterminous is

exempt since it falls within the meaning of the phrase "for any cause beyond the control of the said official or employee" found in Sec. 32(B).

7. MISCELLANEOUS Items a. Income Derived by Foreign

Government Income derived from (1) investments in

the Philippines in domestic securities (loans, stocks, bonds, etc.) or from (2) interest on deposits in banks in the Philippines by

i. foreign governments ii. financing institutions owned,

controlled, or enjoying refinancing from foreign governments, and


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iii. international or regional financial institutions established by foreign governments.

b. Income Derived by the Government

or its Political Subdivisions Income derived from any public utility

or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

c. Prizes and Awards Prizes and awards made primarily in

recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

i. recipient was selected without any action on his part to enter the contest or proceeding and

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

• d. Prizes and Awards in Sports

Competition • All prizes and awards granted to

athletes (1) in local and international sports competitions and (2) sanctioned by their national sports associations.

e. 13th Month Pay and Other Benefits Gross benefits received by employees

of public and private entities provided that the total exclusion shall not exceed P30,000 which shall cover:

i. Benefits received by government employees under RA 6686

ii. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree)

iii. Benefits received by employees not covered by PD 851 as amended by Memorandum Order No. 28 and

iv. Other benefits such as productivity incentives and Christmas bonus

è What happens if the benefits exceed P30,000? à The amount in excess of P30,000 will be considered as compensation income.

f. GSIS, SSS, Medicare and Other

Contributions GSIS, SSS, Medicare and Pag-ibig

contributions, and union dues of individuals

g. Gains from the Sale of Bonds,

Debentures or other Certificate of Indebtedness

Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than 5 years.

h. Gains from Redemption of Shares in Mutual Fund

Gains realized by the investor upon redemption of shares of stock in a mutual fund company

XI. ALLOWABLE DEDUCTIONS FROM XI. ALLOWABLE DEDUCTIONS FROM XI. ALLOWABLE DEDUCTIONS FROM XI. ALLOWABLE DEDUCTIONS FROM

GROSS INCOMEGROSS INCOMEGROSS INCOMEGROSS INCOME The term ‘taxable income’ means the pertinent items of gross income specified in the National Internal Revenue Code [Sec. 32], less the deductions [Sec. 34] and/or personal and additional exemptions [Sec. 35], if appropriate, authorized for such types of income by the Code or other special laws. [Sec. 31] A. Basic Principles Governing Tax

Deductions • He who claims it must point to the specific

provision of the statute authorizing it, and he must be able to prove that he is entitled to it.

• If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent. However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction against the taxpayer-claimant will not apply.

• Unlike gross income, there is no catch-all provision for deductions.

• Deductions must comply with the substantiation requirement.

B. Kinds of Deductions

1. Itemized Deductions à business (or professional) expenses which are ordinary and necessary in the conduct of business (or in the exercise of profession)

2. Optional Standard Deduction (OSD) à

may be taken by an individual, in lieu of itemized deductions [Section 34(L)] REQUISITES: a. Available only to citizens and resident

aliens b. The standard deduction is optional;

i.e., unless the taxpayer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions.

c. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years.

*Since an individual in business or in

the practice of profession is required

to file quarterly income tax returns,

can he choose the OSD in his quarterly

returns and then choose the itemized

deductions in his annual income tax

return, or vice versa? YES, the OSD or Itemized Deductions is against the gross income of the year. Quarterly income tax returns are only interim computations on the taxable income for the year.


TAXATION LAW 1

d. The amount of standard deduction is limited to ten percent (10%) of the taxpayer’s gross income. [However, OSD is not available against compensation income arising out of an employer-employee relationship. (Sec. 34, 1st par.)] *NOTE: The Gross Income base of OSD is – § For an individual in a

manufacturing or merchandising concern: gross income (or profit) from sales [i.e., sales less cost of sales], and incidental income, if any

§ For an individual whose income is from the sale of services: gross income (or profit) from sale of services [i.e., gross receipts less direct cost of services], and incidental income, if any

e. Proof of actual expenses is not

required, but the taxpayer should keep records pertaining to his gross income during the taxable year.

C. Who can avail of deductions? GENERAL RULE: All taxpayers EXCEPTION: Those earning compensation

income arising from personal services rendered under an employer-employee relationship

Rules: 1. Compensation income earners can avail

themselves only of the deduction in Sec. 34 (M), i.e., premium payments on health and/or hospitalization insurance (in addition to the appropriate personal exemption).

2. The following can claim ITEMIZED deductions: a. Corporations, whether domestic or

(resident) foreign b. General Professional Partnerships c. Individuals engaged in trade,

profession or business (citizen, resident alien, non-resident alien doing business in the Philippines)

d. Estates and trusts engaged in trade or business

e. Proprietary educational institutions and hospitals (non-profit)

f. Government-owned or controlled corporations

3. Only individuals, EXCEPT non-resident aliens, can elect between itemized deductions and OPTIONAL STANDARD DEDUCTION.

QUICK GLANCE The following are the deductions from gross income: v For individuals with gross

compensation income only: - Premium payments on health and/or

hospitalization insurance (if requisites are complied with)

- Personal Exemptions v For individuals with gross income

from business or practice of profession:

- Optional Standard Deduction [OR] Itemized Deductions

- Premium payments on health and/or hospitalization insurance (if requisites are complied with)

- Personal Exemptions v For corporations, general professional

partnerships, estates and trusts engaged in business, proprietary educational institutions and hospitals

(non-profit), and government-owned or controlled corporations - Itemized Deductions

D. Kinds of Itemized Deductions (BELT DID

CPR)

1. Expenses 2. Interest 3. Taxes 4. Losses 5. Bad debts 6. Depreciation 7. Depletion 8. Charitable and Other Contributions 9. Research and Development 10. Pension Trust

E. Expenses [Sec. 34(A)]

Ø Only deduction allowable à Ordinary and necessary trade, business or professional expenses

Ø REQUISITES: (SPOD RYN)

1. It must be ORDINARY AND necessary. • “Ordinary” - expense which is

normal in relation to the taxpayer’s business and the surrounding circumstances. The expense need not be recurring.

• “Necessary” – where the expenditure is appropriate or helpful in the development of the taxpayer’s business or that the same is proper for the purpose of realizing a profit or minimizing a loss.

è The TWO CONDITIONS MUST CONCUR. A court may decide on when an expense is, or is not, ordinary, but as much as possible, it will refuse to substitute its judgment for that of the taxpayer on the necessity of an expense.

2. It must be paid or incurred during the taxable YEAR.

3. It must be paid or incurred in carrying on or which are DIRECTLY attributable to, the development,

management, operation and/or

conduct of the trade, business or

exercise of a profession. 4. The amount must be REASONABLE. 5. It must be SUBSTANTIATED with

sufficient evidence, such as official receipts or other adequate records, showing: i. the amount of the expense being

deducted, and ii. the direct connection or relation of

the expense being deducted to the development, management, operation and/or conduct of the


TAXATION LAW 1

trade, business or profession of the taxpayer.

6. It is NOT CONTRARY to law, public policy or morals.

7. The tax required to be withheld on the amount paid or payable must have been PAID to the BIR by the taxpayer, who is constituted as a withholding agent of the government (for instance, withholding tax on compensation income paid to employees, fringe benefit tax on fringe benefits given to managerial and supervisory employees, etc.). (Sec. 2.58.5, RR 2-98 as amended by Sec. 6, RR 14-2002)

Ø EXAMPLES: (CERT)

1. Salaries, wages, and other forms of compensation for personal services

actually rendered, including the grossed-up monetary value (GMV) of fringe benefit furnished by the employer to the employee

2. Travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession

3. Rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor

4. Entertainment, amusement and

recreation expenses that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession

§ Representation Expenses [Sec. 2,

RR 10-2002] – incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places.

§ Ceiling [Sec. 5, RR 10-2002] à The amount of actual entertainment, amusement and recreation expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed:

- For taxpayers engaged in sale of goods or properties: 0.5% of net sales (i.e., gross sales less sales returns/allowances and sales discounts)

- For taxpayers engaged in sale of services, including exercise of

profession and use or lease of properties: 1.0% of net revenue (i.e., gross revenue less discounts)

Ø Bribes, Kickbacks and Other Similar

Payments – No deduction shall be allowed for any payment made, directly or indirectly, to an official or employee of the national or local government, government-owned or -controlled corporation, or foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback.

Ø SPECIAL CASE: Expenses Allowable to

Private Educational Institutions [Sec. 34(2), RR 10-2002] à In addition to the expenses allowable as deductions, a private educational institution may at its option elect either: 1. to deduct expenditures otherwise

considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or

2. to deduct allowance for depreciation thereof.

F. Interest [Sec 34(B)] Ø Deduction Allowable à The amount of

interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income.

Ø REQUISITES (Sec. 34(B) as

implemented by Sec. 6, RR 13-2000): (WITTY CReP DL) 1. There is an INDEBTEDNESS. 2. The indebtedness is that of the

TAXPAYER. 3. The indebtedness is connected with

the taxpayer’s TRADE, profession, or business.

4. The interest must be legally DUE. 5. The interest must be stipulated in

WRITING. 6. The taxpayer is LIABLE to pay

interest on the indebtedness. 7. The indebtedness must have been

paid or accrued during the taxable YEAR.

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

9. The interest must not be incurred to finance PETROLEUM operations.

10. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a CAPITAL expenditure,

Ø LIMITATION: The taxpayer's allowable

deduction for interest expense shall be reduced by an amount equal to 42% of the interest income subjected to final tax;


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provided, that effective January 1, 2009, the percentage shall be 33%.12

Purpose: To prevent tax arbitrage or the use of back- to-back loans to take advantage of the difference between the tax rate on interest income (20% final tax) and the rate of savings caused by the deduction of interest expense (35%-corporate rate)

ILLUSTRATION: On Jan. 1, 2007, A Corp borrowed P100,000 from B Bank at a rate of 10% per annum. On the same day A Corp. deposited the same amount to C Bank at 10% interest p.a. By the end of the year A Corp would have P10,000 interest income from C Bank, and P10,000 interest expense payable to B Bank. If not for the 42% limitation, the 2 transactions would result in tax savings for A Corp as follows:

Tax savings from deduction of interest expense (P10,000 x 35%

3,500

Less: Final tax on interest income (P10,000 x 20%)

2,000

Net Tax savings 1,500

Applying the limit, A corp.’s deductible interest expense would be:

Actual interest expense 10,000

Less: 42% of interest income

4,200

Deductible interest expense

5,800

Due to the limitation, the tax savings will be reduced from P 1,500 to P 30:

Tax savings on interest expense deduction (P 5,800 x 35%)

2,030

Less: Final Tax on interest income

2,000

Net Tax Savings 30

§ When is the limitation not

applicable? Interest incurred or paid by the taxpayer on all its business related taxes shall be fully deductible from gross income unpaid and shall not be subject to the limitation on deduction. Thus, such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax. (Sec. 4(c), RR 13-2000)

Ø NON-DEDUCTIBLE INTEREST (Sec. 34(B)(2)(b) as implemented by Sec. 4(d), RR 13-2000) 1. Interest paid in advance by the

taxpayer who reports income on cash basis

§ When allowed as deduction: in the year the indebtedness is paid.

§ If the indebtedness is payable in periodic amortizations, the amount of

12 As amended by RA 9337

interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year.

2. Interest payments made: (between related taxpayers [persons specified under Section 36 (B), see discussion on losses below-Subsection H]

3. Interest on indebtedness incurred to finance petroleum exploration

Ø OPTIONAL TREATMENT OF INTEREST

EXPENSE: At the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be either (1) allowed as a DEDUCTION or (2) treated as a CAPITAL EXPENDITURE.

ILLUSTRATION: Mr. A wanted to acquire a delivery van worth P1,000,000 for his business. To finance this, he borrowed P1,000,000 from ABC Bank on January 1, 2005. The loan bears interest of 10%, and both the interest and principal are payable on December 31, 2005. For income tax purposes, how should Mr. A account for his interest expense in 2005? ANSWER: Mr. A has two options. First, he may choose to treat the P100,000 (10% of P1,000,000) interest expense As amended by RA 9337 as an outright deduction from his gross income in 2005 (which deduction shall be subject to the limitation that it be reduced by an amount equal to 42% of the taxpayer’s interest income subjected to final tax). Alternatively, he may choose to capitalize the interest expense by incorporating its amount to the cost of the vehicle obtained for his business. In this case, the vehicle will be recorded in his books at a cost of P1,100,000 (purchase price of P1,000,000 plus the interest expense of P100,000). The total cost of the vehicle will then be gradually allowed as deduction from the gross income of the succeeding taxable years as depreciation expense.

G. Taxes [Sec. 34(C)]

Ø Definition: The word ‘taxes’ means taxes proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2)

Ø GENERAL RULE: All taxes, national or

local, paid or incurred during the taxable year in connection with the taxpayer's profession, trade or business, are deductible from gross income

Ø EXCEPTIONS:

§ Philippine income tax, except the fringe benefit tax

§ Income tax imposed by authority of any foreign country § Except when the taxpayer does

NOT signify his desire to avail of the tax credit for taxes of foreign countries, in which case the


TAXATION LAW 1

amount may be allowed as a deduction subject to the limitations set forth by law. (Note that a taxpayer qualified to take tax credits for foreign income taxes paid or incurred may alternatively claim them as deductions from gross income.)

§ Estate and donor’s taxes § Taxes assessed against local benefits

of a kind tending to increase the value of the property assessed (Special Assessments)

§ Value Added Tax § Fines and penalties due to late

payment of tax § Final taxes § Capital Gains Tax

Ø REQUISITES: (TEDY)

1. It must be paid or incurred within the taxable YEAR.

2. It must be paid or incurred in

connection with the taxpayer’s TRADE, profession or business.

3. It must be imposed DIRECTLY on the taxpayer.

4. It must not be specifically EXCLUDED by law from being deducted from the taxpayer’s gross income.

Ø EXAMPLES:

§ Import duties § Business taxes § Occupation taxes § Privilege and license taxes § Excise taxes § Documentary stamp taxes § Automobile registration fees § Real property taxes

Ø LIMITATION: In the case of a

nonresident alien individual engaged in trade or business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.

Ø Special Treatment of Foreign Income

Tax: A taxpayer qualified to take tax credits for foreign income taxes paid or incurred may alternatively claim them as deductions from gross income.

§ What is tax credit? A credit for

foreign income tax paid or incurred reduces the Philippine income tax that should be paid. Tax credit is given to a taxpayer in order to provide relief from too onerous a burden of taxation where the same income is subject to both foreign income tax and the Philippine income tax. In determining the tax credit that may be allowed a taxpayer, the foreign income tax should be understood to mean tax proper only; no credit shall be taken for any amount paid or incurred to the foreign country which represents interest, surcharge or penalty incident

to delinquency on the payment of the tax. In taking a tax credit:

Tax credit is taken for –

The foreign income tax

Tax credit is taken against –

The Philippine income tax

§ Who can claim a tax credit, and in

what amount13? 1. The amount of income taxes paid

or incurred during the taxable year to any foreign country a. Citizens b. Domestic corporations

2. The taxpayer’s proportionate share of such taxes of the general professional partnership/estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership/estate or trust is reported for taxation a. Members of general

professional partnerships b. Beneficiaries of estates or

trusts

§ Who may NOT claim a tax credit?

1. Alien individuals 2. Foreign corporations

§ Substantiation requirements: The

tax credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: 1. The total amount of income

derived from sources without the Philippines;

2. The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

3. All other information necessary for the verification and computation of such credits.

§ Limitations: The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but not to exceed the following limits: 1. [Per Country Limit] The amount

of tax credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and

2. [Worldwide Limit] The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources

13 Amounts are subject to the limitations (per country and

overall) set forth by law.


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without the Philippines taxable bears to his entire taxable income for the same taxable year.

i.e.:

è NOTE: The second limitation applies where the taxpayer derives income from more than one foreign country.

ILLUSTRATION: D Co., a domestic corporation, had the following data for a year on taxable income and income taxes paid: Taxable Income, Country A P200,000 Taxable Income, Country B P100,000 Taxable Income, Philippines P700,000 Income Tax Paid – Country A

P 60,000

Income Tax Paid – Country B

P 38,000

What is the Philippine income tax still due, after credit for foreign income taxes? Should D Co. choose to treat income taxes paid to foreign countries as deductions from gross income, what is its Philippine income tax?

Answer: Scenario A: Tax Credit option is chosen.

Step 1: Compute for total taxable

income and Philippine income tax

Taxable Income, Country A 200,000

Taxable Income, Country B 100,000

Taxable Income, Philippines 700,000

Total Taxable Income from sources within and without the Phils 1,000,000

Philippine Income Tax (P1Mx 35%)

350,000

Step 2: Compute for Limitation A (Per Country Basis). To get tax credit per country under Limitation A, this formula is followed:

The result after applying the formula above is compared to the tax actually paid for each foreign country. The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under Limitation A.

Amount

Allowed

(Whichever is Lower)

Country A

Limitation A 70,000 60,000

(200/1000 x 350,000)

Actually paid to Country A

60,000

Country B

Limitation B 35,000 35,000

(100/1000 x 350,000)

Actually paid to Country B

38,000

Tax credit allowed under Limitation A

95,000

Step 3: Compute for Limitation B (Overall Basis). To get tax credit (overall basis) under Limitation B, this formula is followed:

The result after applying the formula above is compared to the tax actually paid in total to foreign countries. The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.

Amount Allowed

(Whichever is Lower)

Overall Limit:

300/1000 x 350,000

105,000

Total foreign income taxes paid

98,000

Tax credit

allowed under Limitation B

98,000

Step 4: Compare the respective tax credits allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. In this case, the amount computed under Limitation A (P95,000) is lower, thus it becomes the final allowable tax credit. Step 5: Compute for the income tax still due.

Philippine Income tax 350,000

Less: Allowable Tax Credit 95,000

Philippine Income Tax still due 255,000

Taxable Income from sources outside the Phils x Phil. income = tax Taxable Income tax credit from all sources

Taxable Income from Foreign Country x Phil. income = tax Taxable Income tax credit from all sources

2. Taxable Income for all Foreign Countries x Phil. income = limit Worldwide tax Taxable Income

1. Taxable Income per Foreign Country x Phil. income = limit Worldwide tax Taxable Income


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Scenario B: Deduction option is chosen.

Taxable Income, Country A

P 200,000

Taxable Income, Country B

100,000

Taxable Income, Phils. 700,000 Total Taxable Income

(before deduction for foreign income tax)

P1,000,000 Less: Deductions for Foreign Income Taxes Paid Country A – P60,000 Country B – P38,000

(98,000) Net Taxable Income P 902,000

Philippine Income Tax (902,000 x 35%)

P 315,700

H. Losses [Sec. 34(D)] Ø Losses actually sustained during the

taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: § If incurred in trade, profession or

business; § Of property connected with the trade,

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

Ø REQUISITES: (CATT DID)

1. The loss must be that of the TAXPAYER. -The loss is personal to the taxpayer and is not transferable or usable by another. The loss of a predecessor partnership is not deductible by a successor corporation. The loss of the parent company may not be deducted by its subsidiary.

2. The loss must be ACTUALLY sustained and charged off within

the taxable year. -However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation). Deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)

3. The loss is evidenced by a CLOSED

and completed transaction.

§ There should be an identifiable event that fixes the loss. For instance, when a loss results from a sale, the consummation of the sale is the identifiable event that fixes the loss, and the deduction should be claimed in the year that the sale was consummated. A sale is consummated only when there is delivery.

4. The loss is not claimed as a DEDUCTION for estate tax purposes.

5. The loss must not be compensated by INSURANCE or other forms of indemnity.

6. The loss must be connected with the taxpayer’s TRADE, business or profession.

7. In the case of casualty loss, declaration of loss (Sworn DECLARATION of Loss) must be filed within 45 days from the occurrence of the casualty loss. (RR 12-77)

§ Despite concurrence of

requisites, when is loss nonetheless NOT deductible? In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B) ] 1. Between members of a family

- ”Family” -includes brothers and sisters (whole and half-blood), spouse, ancestors, and lineal descendants

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

3. Between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual;

4. Between the grantor and a fiduciary of any trust;

5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust;

6. Between a fiduciary of a trust and beneficiary of such trust.

Ø Obsolescence and worthlessness;

when deductible § Obsolescence: when the property has

to be discarded permanently because its usefulness is suddenly terminated.

§ Worthlessness: when it can be satisfactorily shown that the property had indeed become valueless.

Ø Other Types of Losses Recognized by

the Tax Code § Shrinkage in Value of Stocks (Sec.

99, RR-2) à no loss can be deducted from a mere shrinkage in value of


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such stock through fluctuation of the market. The loss allowable in such case is that actually suffered when

the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with Revenue Regulation 2-98 may be deducted by the owner in the taxable year in which the stock became worthless, provided a

satisfactory showing of its

worthlessness be made, as in the case of bad debts.

§ Wagering Losses [Sec. 34 (D)(6)]à Wagering losses are deductible only to the extent of wagering gains. Therefore, if there are no wagering gains, wagering loss cannot be deducted. [Wagering gains and losses - gains and losses from transactions where the outcome depends upon chance.]

§ Loss from Wash Sales of Stocks or

Securities [Sec. 38] à A loss from a wash sale of stock or securities is generally not deductible from gross income. A wash sale is a sale under the following circumstances: 1. There was a sale or other

disposition of stock or securities at a loss.

2. Within a period beginning thirty days before, and ending thirty days after, the date of sale or disposition (known as the sixty-one day period), there was an acquisition of shares or securities (or option to acquire shares or securities).

i.e.:

---------------- x ----------------

3. The acquisition, or option, should be a purchase or exchange upon which gain or loss is recognized under the income tax law.

4. The stock or securities acquired were substantially the same as those disposed of.

5. The taxpayer is NOT a dealer in securities.

à INCOME TAX RULE: On the shares sold at a loss with

covering acquisitions, NO LOSS shall be recognized. On the shares sold at a loss with no

covering acquisitions, CAPITAL LOSS shall be recognized (See XIII. Capital Gains and Losses, for the income tax treatment). The loss not recognized shall be adjusted into (i.e., added to) the basis of the shares acquired within the sixty-one day period.

ILLUSTRATION: S Co., not a dealer in securities, on December 27, 2000, sold for P90,000, 1,000 shares of common stock of ZZ Company, that it acquired on January 20, 2000 for P110,000. On January 5, 2001, or nine days after the sale, it acquired 900 shares of common stock of the same company for P90,000. On June 10, 2001, the latest acquisition was sold for P120,000.

INCOME TAX IMPLICATIONS: § There would have been a loss

not recognized of P18,000 on the sale of December 27, 2000.

§ There would have been a gain of P12,000 on the sale of June 10, 2001.

SUPPORTING SOLUTION:

a. Determine if the sale is a wash sale à YES, because nine days after the December 27, 2000 sale (or within the sixty-one day period), S. Co. (which is not a dealer in securities) acquired shares of stock which were the same as those disposed of.

b. Computation of loss not

recognized

Acquisition Cost P110,000

Less: Selling Price 90,000

Total Loss P 20,000

No. of shares sold at a loss 1,000

Less: Number of shares acquired within the 61-day period

900

No. of shares acquired with no matching acquisition

100

Loss on a wash sale, not recognized

(900/1,000 * 20,000) P18,000

Capital Loss recognized

(100/1,000 * 20,000) P2,000

c. Computation of basis of the

shares acquired on January 5, 2001 (i.e., adjusted cost).

Acquisition Cost P 90,000

Add: Loss not recognized

18,000

Basis of the shares acquired on January 5, 2001

P108,000

d. Computation of the gain on

the sale of June 10, 2001

Selling Price P120,000

Less: Adjusted Basis

108,000

Gain on the Sale 12,000

30 days PRIOR OR 30 days AFTER to the sale the sale

Date of sale

Acquisition occurred EITHER:


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What if the taxpayer is a dealer in securities, and the transaction

from which the loss resulted, was made in the ordinary course of the business of such dealer? à The loss is deductible in full.

§ Corporate readjustment: Merger or

Consolidation14 [Sec. 40(C)] A merger or consolidation has income

tax consequences to the corporation which is a party to the merger or consolidation, to its stockholders, and to its security holders. To the corporation, or to its stockholders, or to its security holders, loss is not recognized from the merger or consolidation.

ILLUSTRATION: Y Co. was merged into Z Co. Y Co. transferred its properties with a book value of P2,000,000 to Z Co., for which it received shares of stock of Z Co. with a fair market value of P1,800,000. Mr. AA was a stockholder of Y Co., and he was asked to surrender his shares in Y Co. (which he acquired at a cost of P200,000) to the company (Y Co.), and received in return for the shares surrendered, shares of stock of Z Co. with a fair market value of P180,000. The merger had the following tax consequences:

To Y Co.

Fair Market Value of shares of Z Co. received

P1,800,000

Less: Book Value of properties transferred

2,000,000

Loss not recognized P 200,000

To Mr. AA:

Fair Market Value of Z Co. shares received

P 180,000

Less: Cost of Y Co. shares surrendered

200,000

Loss not recognized P18,000

Suppose a merger or consolidation resulted in a GAIN to the corporation, or

stockholder, or security holder, will the gain be recognized?

14 No gain or loss shall be recognized if in pursuance of a plan

of merger or consolidation - (a) A corporation, which is a party to a merger or

consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; [property for stock] or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; [stock for stock ] or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. [securities for securities]

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

§ Corporate readjustment: Transfer to

Controlled Corporation [Sec. 40(C)] When a taxpayer transfers property to a corporation, in consideration of stock received for the transfer, as a result of which transfer, the taxpayer (alone or together with others not exceeding four [or a total of five]) gains control of the corporation15, no loss is recognized on the transfer of property.

Suppose the transfer resulted in

a GAIN to the transferor, will the gain be recognized? à Gain will be recognized only if on the transfer, the taxpayer received cash or property in addition to the shares received. The gain to be recognized shall not exceed the sum of money and fair market value of the property received.

è If before the transfer to the corporation, the transferor

already had control over the corporation, the gain or loss on the transfer will be recognized.

ILLUSTRATION: Mr. II transferred property to JJ Co., of which he had control. The property had a basis to him of P500,000. JJ Co. paid him with shares of stock with a fair market value of P450,000. Will there be a loss to recognize? Yes. This transfer does not qualify as a corporate readjustment.

BIR Ruling 383-87 (Nov. 25, 1987): Requirements for deductibility 1. Plan of reorganization should be

adopted by each of the corporation shown by acts of its duly constituted officers o Copy of the plan o Complete statement of the

cost or other basis of all property

o Statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distributions or other dispositions made thereof

o Statement of the amount and nature of any liabilities assumed upon the exchange.

15 Previous to the transfer there was no control, and it was the

transfer that resulted in control.


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2. Taxpayer (other than the corporation party to the reorganization) who received stocks or securities and other property shall be incorporated in his ITR for the taxable year in which the exchanges takes place a complete statement of facts pertinent to the non-recognition of gain or loss including: o Statement of the cost or

other basis of the stock or securities transferred in the exchange

o Statement in full amount of the stocks, securities, other property, and money including liabilities assumed upon the exchange.

§ Capital Losses (See XIII. Capital

Gains and Losses) § Abandonment Losses [Sec. 34(D)(7)]

• In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, ALL accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: o Provided, That accumulated

expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area.

o In all cases, notices of abandonment shall be filed with the Commissioner.

• In case a producing well is

subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: o Provided, That if such

abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.

§ Net Operating Loss Carry-Over

(NOLCO) [Sec. 34(D)(3)] The net operating loss16 of the business for any taxable year immediately preceding the current taxable year, which had not been

previously offset as deduction from

gross income shall be carried over as

16 Net operating loss is the excess of allowable deductions over

gross income (as defined in Sec. 32(A) of the NIRC).

a deduction from gross income for the next three (3) consecutive taxable years17 immediately following the year of such loss.

• REQUISITES: 1. Any net loss incurred in a taxable

year during which the taxpayer

was exempt from income tax shall not be allowed as a deduction.

2. A net operating loss carry-over (NOLCO) shall be allowed only if

there has been NO SUBSTANTIAL

CHANGE in the ownership of the business or enterprise. è There is no substantial change

when: a. 75% or more in nominal

value of outstanding issued shares, if the business is in the name of the corporation, is held by or on behalf of the same persons; or

b. 75% or more of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons.

• Applicability of the 75% interest rule o The 75% equity, ownership or interest rule shall only apply to a transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or business combination with another person. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger, consolidation or combination with another person, the transferee or assignee shall NOT be entitled to claim the same as deduction from gross income UNLESS, as a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor, or the transferor (in case of other business combinations) gains control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more interest in the business of the transferee/assignee (in case the transferee/assignee is

17 Exception to the Three-Year Rule à For mines other

than oil and gas wells, a net operating loss without the benefit of incentives provided for under the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.


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other than a corporation). (Sec. 2.4, RR 14-2001)

o BIR Ruling 011-02, March

27, 2002 ààààThe 75% equity, ownership or interest rule does not apply in this case, since the transfer of the shares by the previous stockholders were through straight purchase and sale and not through merger, consolidation or business combination, such transfer did not cause a substantial change in ownership.

• Time of Determination of Substantial Change in the Ownership of the Business à the end of the taxable year when NOLCO is to be claimed as deduction (e.g., in the case of merger or consolidation of two or more corporations, such change shall be determined based on the ownership of the outstanding shares of stock issued or based on paid-up capital as of the end of the taxable year, and as a result of or arising from the said merger or consolidation). (Sec. 5, RR 14-2001)

• “By or on Behalf of the Same Persons”

o refers to the maintenance of

ownership despite change as when: No actual change in ownership is

involved in case the transfer involves

change from direct ownership to

indirect ownership, or vice versa.

ILLUSTRATION: Facts: P Corporation owns Q Corporation that has NOLCO. P Corporation transfers Q Corporation's shares to R Corporation in exchange for 100% of R Corporation shares. Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R Corporation "on behalf of" P Corporation, the original owner.

No actual change in ownership is

involved as in the case of merger of

the subsidiary into the parent

company.

ILLUSTRATION: Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100% of Z Corporation. Z Corporation has NOLCO. Z Corporation is merged into Y Corporation. Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the merger, X Corporation already indirectly owned Z Corporation,

i.e., Z Corporation's shares were held "by" Y Corporation "on behalf of" X Corporation. After the merger, X now directly owns Z Corporation [absorbed corporation] which continues to exist in Y Corporation.

• Taxpayers Entitled to Deduct NOLCO from Gross Income.

1) Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession

-Special Rule: An individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO. Further, the three-year reglementary period shall continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during the said period.

2) Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters)

-Special Rule: Corporations cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable year. The three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation.

EXCEPTIONS (Who are not entitled

to deduct NOLCO): (bob-pie) 1. Offshore Banking Unit (OBU) of

a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the Bangko Sentral ng Pilipinas (BSP);

2. An enterprise registered with

the Board of Investments (BOI) with respect to its BOI-registered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO;

3. An enterprise registered with

the Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916, as amended, with


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respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO;

4. An enterprise registered under

R.A. No. 7227, otherwise known as

the Bases Conversion and Dev’t

Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered business activity. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO;

5. Foreign corporations engaged in

international shipping or air

carriage business in the Philippines; and

6. In general, any person, natural or

juridical, enjoying exemption from income tax, pursuant to the provisions of the Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the NOLCO.

ILLUSTRATION OF NOLCO:

(In Pesos) 2000 2001 2002 2003 2004

Gross Income 500,000 600,000 700,000 500,000 800,000

Less: Deductions 900,000 500,000 750,000 420,000 450,000

Net Loss [OR] (400,000) (50,000)

Net Income before NOLCO* 100,000 80,000 350,000

Less: NOLCO

From 2000 (100,000) (80,000)

From 2002

(50,000)

Taxable Income 0 0 0 0 300,000

* - whichever is applicable

Explanation:

The unused net operating loss of P220,000 (400,000 – 100,000 – 80,000) of the year 2000 could not be carried over beyond 2003. The net operating loss of 2002 could be carried over to 2004, since it is within the three-year period. Q: As of yearend of 2004, what amount of NOLCO is available to the company for offsetting against (potential) gross income of succeeding taxable years? Answer: None. While there was an unused portion of the 2000 NOLCO, such had already expired by yearend of 2003. The 2002 NOLCO (P50,000) was completely used up in 2004. There is, therefore, no NOLCO available to the company for year 2005 and thereafter.

I. Bad Debts [Sec. 34(E)]

Ø Definition: debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2, RR 5-99 as amended by RR 25-2002)

Ø Deduction Allowed: Debts due to the

taxpayer actually ascertained to be worthless and charged off within the taxable year

Ø ”Actually ascertained to be worthless”

In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes which have long become overdue, and where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year. While a

> >

>


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mere hope probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit the account to be carried along notwithstanding that the probabilities are that the debt may not be collected at all.

�� Good faith is not enough. –Taxpayer

must show also that he had reasonably investigated the relevant

facts and had drawn a reasonable inference from the information thus obtained by him. Where a taxpayer has failed to attach to his tax returns a statement showing the propriety of the deductions therein made for alleged bad debts, the account written off will be disallowed. (Collector v. Goodrich International Rubber Co., 21 SCRA 1336)

�� What does good faith require? à The

taxpayer may strike a middle course between pessimism and optimism and determine debts to be worthless in the exercise of sound business judgment based upon as complete information as is reasonably ascertainable. The taxpayer need not have perfect discernment. (Sec. 2, RR 5-99 as amended by RR 25-02)

Ø "Actually charged off from the

taxpayers books of accounts" means that the said receivable has been

cancelled and written-off from the said taxpayer's books of account. In no case

may any bad debt deduction be allowed

unless the facts pertaining to the money or

property lent and its cancellation or write-

off from the taxpayer's accounting records,

after having been determined that the same

has actually become worthless, have been

complied with by the taxpayer. (Sec. 2, RR 5-99 as amended by RR 25-02)

Ø EXCEPTIONS: The following are not deductible as bad debts:

1. debts not connected with profession, trade or business

2. debts sustained in a transaction entered into between family members or related taxpayers [see Sec. 36(B) or discussion on Losses above-Subsection H]

Ø REQUISITES: (PICU)

1. There must be an existing INDEBTEDNESS due to the taxpayer, which must be valid and legally demandable.

2. The debt must be connected with PROFESSION, trade or business.

3. The debt must be actually ascertained to be worthless or UNCOLLECTIBLE. (e.g., bankrupt debtor)

§ Determining uncollectibility àààà Before a taxpayer may charge off and deduct a debt, he must ascertain and must be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue

will consider ALL PERTINENT EVIDENCE, including

• the value of the collateral, if any, securing the debt and the

• financial condition of the debtor in determining whether a debt is worthless, or the

• assigning of the case for collection to an independent

collection lawyer who is not under the employ of the taxpayer and who shall issue a statement under oath showing the propriety of the deductions thereon made for alleged bad debts. (Sec. 3, RR 5-99 as amended by RR 25-2002)

§ Other factors

àààà The flight or disappearance of the debtor, the insolvency of the debtor, or the death of the debtor with insufficient properties to pay creditors, may indicate worthlessness of the debt.

§ Note: A creditor cannot deduct the

debt of an insolvent debtor as long as it is possible to proceed against the guarantor or surety who is insolvent. All efforts must be exhausted to collect from the guarantor or surety.

4. The debt must be actually CHARGED

OFF the books of accounts of the taxpayer as of the end of the taxable year.

à NOTE: The debts due a taxpayer may arise

out of securities held. But in a case where securities are ascertained to be worthless and charged off within the taxable year, and are capital assets, the loss to the taxpayer (other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits) will not be treated as bad debts, but as capital loss on the last day of the taxable year (See XIII. Capital Gains and Losses for the income tax treatment). The date that the securities were written off is immaterial. [Sec. 34(E)(2)]18

Ø GENERAL RULE: The determination by the Commissioner of Internal Revenue as to the worthlessness of bad debt is adequate.

Ø EXCEPTIONS: Who are required to submit

additional documents or to secure approval from their regulatory agencies before they are allowed to deduct bad debts from gross income?

18 ILLUSTRATION: Mr. A purchased bonds of B Co. on March 10,

2000 for P100,000 and held them as capital assets. On February 2, 2001, B Co. was declared by the Court as insolvent, and the bonds were totally worthless. Mr. A wrote off the bonds from his books of accounts on February 4, 2001. There is no bad debt for Mr. A. He would be considered to have a capital loss of P100,000 for the year 2001. The holding period of the bonds was from March 10, 2000 to December 31 2001, or more than 12 months. The capital loss would be considered at 50%, or at P50,000. (See XIII. Capital Gains and Losses for the detailed explanation on income tax treatment of capital asset transactions.)


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1. Banks: Without prejudice to the Commissioner’s determination of the worthlessness and uncollectibility of debts, the taxpayer shall submit a

Bangko Sentral ng Pilipinas (BSP) /

Monetary Board written approval of the

writing off of the indebtedness from the banks' books of accounts at the end of the taxable year. Requirements for deductibility (RR

5-99) �� Bad debts uncollected for 6 months �� Resolution by the BOD of the bank �� Approval by the monetary board

2. In no case may a receivable from an

insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for

any such similar reason by the

Insurance Commissioner.

Ø Recovery of Bad Debts Previously Deducted (Tax Benefit Rule) (Sec. 4, RR 5-99) The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said deduction.

J. Depreciation [Sec. 34(F)]

Ø Definition: Depreciation is the gradual diminution of the useful value of tangible property resulting from wear and tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets (i.e., patents), the use of which in the trade or business is definitely limited in duration.

Ø Deduction Allowable: There shall be allowed

as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. The rationale for this is that property gradually approaches a point where its usefulness is exhausted.

§ What if the property is used in

business and for personal purposes? The depreciation expense must be pro-rated; only the portion attributable to business use is deductible.

e.g., the car of the petitioner was used more for business than for personal purposes. He was a law practitioner, a law professor and engaged in business. He had only one car. Consequently, ¾ of the value of the depreciation of the car may be considered as business related, while ¼ thereof represents non-deductible personal expense. (Jamir v. Collector, CTA Case No. 443, November 28, 1959)

Ø Who may take depreciation: The person

who sustains an economic loss from the decrease in property value due to

depreciation gets the deduction. Ordinarily, this is the person who owns and has a capital investment in the property.

Ø When to deduct depreciation: The period of

depreciation starts when the asset is placed in service. It ends when the asset is disposed of, or its usefulness exhausted.

Ø REQUISITES: (TRUCE)

1. The allowance for depreciation must be for property used in the TRADE or business, or those not being used temporarily during the year (Conwell Bros. Co. v. Collector, CTA Case No. 411).

2. The asset must have a limited USEFUL life.

3. The allowance for depreciation must be REASONABLE.

4. The allowance must be CHARGED off during the taxable year from the taxpayer’s books of accounts.

5. The total allowances must not EXCEED the cost of the property.

Ø What is the appropriate useful life of the

property? What rate of depreciation must be

applied?

Generally, the estimated useful life is determined by the taxpayer himself. HOWEVER, where the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of

facts and circumstances not taken into

consideration during the adoption of such

agreement.

The responsibility of establishing the existence of such facts and circumstances shall rest with the party

initiating the modification.

General Rule: Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for

taxable years prior to the taxable year

in which notice in writing by certified

mail or registered mail is served by the party initiating such change to the other party to the agreement.

Exception: Where the taxpayer has adopted such useful life and depreciation rate for any depreciable property and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the depreciable asset.

Ø Methods and Rates of Depreciation

1. Straight-line method


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The depreciation expense deductible in each of the years of the property’s estimated useful life is constant.

ILLUSTRATION: H Co. acquired a machine at a cost of P380,000. It has no scrap (or salvage) value, and the useful life is estimated at 25 years. The depreciation expense per year is P15,000, computed as follows:

2. Declining-balance method, using a rate

not exceeding twice the rate for straight

line method

Under this method, the depreciation

allowance per year varies. Depreciation is largest in the first year and continually decreases towards the end of the useful life of the property. The depreciation rate under the straight-line method is first computed, and the result is multiplied with the rate relative to the straight-line method rate. The product (the “declining balance rate”) is then multiplied to the yearly declining balance of the property (i.e., book value of the property at the start of the current year, which is equal to its original cost minus its accumulated depreciation) to determine the deduction for depreciation for the current year. However, in the last year of the asset’s estimated life, the depreciation is equal to the book value of the property at the start of that year (i.e., the amount of depreciation must be just enough to reduce the property’s book value to zero). Note that the salvage value is ignored in the declining balance method. ILLUSTRATION: P Company acquired a machine on January 1, 2002 at a cost of P400,000. It had a scrap value of P50,000, and a useful life of 4 years. The company uses the declining balance method, at a rate of one and a half that of the straight line method. Determine the depreciation chargeable in years 2002, 2003, 2004 and 2005.

Step 1: Compute for the depreciation rate under the straight-line method.

Step 2: Compute for the Declining

Balance Rate (DBR).

Step 3: Apply the Declining Balance Rate to the book value of the property at the start of the current

year. Year 2002:

Book value of the property ***

P400,000

Multiplied by: DBR 37.5% Deduction for Depreciation

P150,000

*** à Since this is the year of the acquisition, the book value of the property at the start of the year is equal to its original cost.

Year 2003:

Original Cost P 400,000 Less: Accumulated Depreciation

150,000

Book Value of the Property, start of current year

P 250,000

Multiplied by: DBR

37.5%

Deduction for Depreciation

P 93,750

Year 2004:


Year 2002 – P150,000

Year 2003 – P93,750

243,750


P 156,250 Multiplied by: DBR

37.5%

Deduction for Depreciation

P58,593.75

Declining = Straight Line Rate Relative to Balance Rate Depreciation Rate x the Straight Line Depreciation Rate = ¼ x 1.5 = 37.5%

Straight Line = 1 _ _

Depreciation Rate Estimated Useful Life

= ¼, or 25%

Depreciation = [(380,000 – 0) / 25] Expense [OR] = (1/25) x (380,000 – 0)

Formula: Deduction = Cost – Salvage Value__ for Depreciation Estimated Useful Life of the Property

NOTE: (Cost – Salvage Value) is known as the depreciable cost.

Alternative Method: Depreciation = 1 _ _ Rate Estimated Useful Life of the Property

Deduction for = Depreciation x (Cost– Salvage Value)

Depreciation Rate


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Year 2005:


Year 2002 – P150,000

Year 2003 – P93,750

Year 2004 – P58,593.75

302,343.75


P 97,656.25

Deduction for Depreciation ***

P97,656.25

*** The deduction for depreciation in 2005 is equal to the book value of the property at the start of the year because the machine had a useful life of 4 years, which ended in 2005.

3. Sum-of-the-years-digit method

Under this method, the annual depreciation is computed by applying a changing fraction to the depreciable cost of the property (original cost reduced by the salvage value). In the fraction, the numerator is the number of remaining years of the estimated useful life of the property and the denominator is the sum of the numbers representing the years of the property’s life. ILLUSTRATION: On January 1, 2001, J Company acquired a machine at a cost of P105,000. It had a salvage value of P5,000, and an estimated useful life of 5 years. The company uses the sum-of-the-years method in determining depreciation. Determine the depreciation chargeable in years 2001, 2002, 2003, 2004 and 2005. Step 1: Compute for the sum of the numbers representing the years of

the property’s life. The property has an estimated useful life of 5 years. The sum, therefore, is 15 (5 + 4 + 3 + 2 + 1). This sum will be used as the denominator in the fraction. Step 2: Compute for the depreciable

cost of the property. The depreciable cost is P100,000 (P105,000 – P5,000). Step 3: Compute for the yearly deduction for depreciation (Column D).

A B

(A/15)

C D

(= B x C)

Year Remainin

g Useful

Life

(Reckoning Point: Start of

the Year)

Resulti

ng

Fractio

n

Depreciabl

e Cost

Deduction

for

Depreciati

on

2001 5 5/15 P105,000 P35,000 2002 4 4/15 P105,000 P28,000 2003 3 3/15 P105,000 P21,000 2004 2 2/15 P105,000 P14,000 2005 1 1/15 P105,000 P7,000

4. Any other method which may be

prescribed by the Secretary of Finance

upon recommendation of the

Commissioner

Ø Special Rules:

§ Depreciation of Properties Used in

Petroleum Operations – • An allowance for depreciation in

respect of all properties DIRECTLY related to production of petroleum shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may

shift to the straight-line method. The useful life of properties used in or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the Commissioner.

• Properties NOT USED DIRECTLY in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of 5 years.

§ Depreciation of Properties Used in

Mining Operations – An allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: • At the normal rate of depreciation if

the expected life is ten (10) years

or less; or • Depreciated over any number of

years between five (5) years and the expected life if the latter is

more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed will be used.

§ Depreciation Deductible by Nonresident

Aliens Engaged in Trade or Business

(NRAETB) or Resident Foreign

Corporations (RFC)


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- A reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession shall be permitted only when such property is located in the Philippines.

K. Depletion of Oil and Gas Wells and Mines [Sec. 34(G)]

Definition: Depletion is the exhaustion of natural resources due to production. It is the reduction of cost or value of natural resources such as oil and gas wells and mines as the resources are converted into inventories.

Limitation: A reasonable allowance for depletion computed using the cost-depletion method shall be granted provided that the allowance for depletion shall not exceed the capital invested.

ILLUSTRATION: Land containing natural resources was purchased for P100,900,000. It was estimated that the land, after exploitation of its natural resources, will have a value of P900,000. It was estimated that the natural resource supply was 5,000,000 tons. If withdrawal of resources from the land in 2005 was 500,000 tons, how much was the deduction for the year?

Purchase Price P100,900,000 Less: Residual Value of the Land

900,000 Depletion Base P100,000,000 Divided by: Estimated Resource Supply, in tons

5,000,000

Depletion Base per ton P20 Multiplied by: Withdrawal of Resources in 2005, in tons

500,000

Depletion Expense, 2005 P 10,000,000

Allowable Deduction for a Nonresident Alien

individual Engaged in Trade or Business or a Resident Foreign Corporation à Allowance for depletion of oil and gas wells or mines shall be authorized only in respect to oil and gas wells or mines located within the Philippines.

L. Charitable and Other Contributions [Sec. 34(H)]

REQUISITES: (TEE / BE) 1. The charitable contribution must actually be

paid or made to the ENTITIES specified by

law (i.e., Philippine government or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic corporations or associations specified in the NIRC).

1. It must be made within the TAXABLE year. 2. It must be EVIDENCED by adequate

receipts or records. 3. Additional Requisite for Contributions Other

than Money: The amount of charitable contribution of property other than money shall be BASED on the acquisition cost of the property (i.e., not the fair market value at the time of the contribution).

4. Additional Requisite for Contributions subject

to the statutory limitation: It must not EXCEED 10% (individual) or 5%

(corporation) of the taxpayer’s taxable income before charitable contributions.

Kinds of Contributions: 1. Contributions deductible in full 2. Contributions subject to the statutory limit

Contributions Deductible in Full: (FoNG) 1. Donations to the Government - Donations to

the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking PRIORITY ACTIVITIES in: • education, • health, • youth and sports development, • human settlements, • science and culture, and • in economic development,according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions. è Any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with

the said annual priority plan shall be considered a contribution subject to the statutory limit.

2. Donations to Certain Foreign Institutions

or International Organizations - Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;

3. Donations to Accredited Non-government

Organizations - The term "non-government organization" means a non-profit domestic corporation: • Organized and operated exclusively for: (CRWSH Cys ChE Com)

-Scientific, -Research, -Educational, -Character-building and youth and sports development, -Health, -social Welfare, -Cultural or -CHaritable purposes, or -a COMbination thereof, no part of the net income of which

inures to the benefit of any private individual;

• Which, not later than the 15th day of the third month after the close of the accredited non-government organizations’ taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated,


TAXATION LAW 1

-UNLESS an extended period is granted by the Secretary of Finance;

• The level of administrative expense shall,

on an annual basis, not exceed thirty percent (30%) of the total expenses; (Sec. 1, RR 13-1998) and

• The assets of which, in the event of dissolution, would be distributed to -another nonprofit domestic corporation organized for similar purpose or purposes, or -to the state for public purpose, or -would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.

• All the members of the Board of Trustees of

the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization. (added by Sec. 3, RR 13-1998)

Utilization means: a. Any amount, including admin expenses, paid or

utilized by an accredited NGO to accomplish one or more of its purposes

b. Any amount paid to acquire an asset used directly in carrying out one or more purposes for which the accredited NGO was created or organized; or

c. Any amount set aside for a specific project which comes within the NGO’s purpose/s, but the NGO has to establish that the amount will be utilized within at least five (5) years, and that the project will be better accomplished by setting aside such amount than by immediate payments of funds

d. Any amount in cash or in kind invested in any activity related to the purpose for which the NGO was created

e. Any amount invested in capital sustaining and generating activities. Provided that, any income derived from those investments shall be exclusively used in activities directly related to one or more of its purposes (Sec. 1, RR 13-1998)

Contributions subject to the Statutory Limit (DNGS) 1. Contributions made to the Government or any

of its agencies or political subdivisions exclusively for public purposes (contributions for non-priority activities)

2. Contributions made to accredited domestic

corporation or associations Organized exclusively for

o religious, o charitable, o scientific, o youth and sports development, o cultural or o educational purposes or o for the rehabilitation of veterans

3. Contributions to social welfare institutions

4. Contributions to non-government

organizations è no part of the net income of which inures to the benefit of any private stockholder or individual

• Statutory Limit: Amount deductible must

not be in excess of: § 10% in the case of an individual, and § 5% in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession before the deduction for contributions and donations. è In other words, the amount deductible is the actual contribution or the statutory limit computed, whichever is lower.

ILLUSTRATION: N Co. had a gross income from business of P1,000,000 and allowable deductions (except deductions for contributions) of P400,000. It made during the year a contribution that is fully deductible of P10,000 and contributions subject to limitation of P50,000. Compute for the total deduction for contributions and the taxable income of the company. ANSWER: The total deduction for contributions is P40,000, and the taxable income is P560,000.

SUPPORTING SOLUTION:

Gross Income P1,000,000 Less: Allowable Deductions (except deduction for contributions)

400,000

Taxable Income before deduction for contributions P 600,000

Multiplied by: Statutory Limit (%) 5%

Statutory Limit (in Pesos) P 30,000

Actual Contributions made (subject to limitation) P 50,000

Allowable Deduction for Contributions subject to limitation (whichever is lower)

P 30,000

Taxable Income before deduction for contributions P 600,000 Less: Allowable Deduction for Contributions

40,000

Deductible in Full Allowable Deduction for Contributions subject to limitation

P 10,000

30,000 Taxable Income P 560,000


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M. Research and Development [Sec. 34(L)] Definition: R&D costs are for improvements of processes and formulas as well as the development of improved or new products. As a general rule, R&D only extends from the laboratory or drawing board to prototype status; i.e., so long as an activity still contains an element of uncertainty/technical risk, it is within the realm of R&D. Ø Quality control, routine product testing, data

collection, efficiency surveys, management studies, market research and sales promotion are NORMALLY NOT CONSIDERED R&D ACTIVITIES.

Tax Treatment: R&D expenditures which are paid or incurred by a taxpayer during the taxable year in connection with his trade, business or profession may be treated EITHER as: 1. Ordinary and necessary expenses allowed

as deduction during the taxable year when paid or incurred (i.e., as an outright deduction for the full expenditure), or

2. Deferred asset (or deferred expense) which is periodically subject to amortization

At the election of the taxpayer, the following R&D expenditures may be treated as deferred assets: 1. Those paid or incurred by the taxpayer in

connection with his trade, business or profession.

2. Those not treated as expenses. 3. Those chargeable to capital account but not

chargeable to depreciable property.

In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). -The taxpayer may elect this alternative not later than the time prescribed by law for filing the return for such taxable year (April 15). The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years UNLESS with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. -The election shall not apply to any expenditure paid or incurred during any taxable year prior to the taxable year for which the taxpayer makes the election. Limitations on Deduction: The above tax treatment of R&D expenses does NOT apply to: 1. Any expenditure for the acquisition or

improvement of land or the improvement of depreciable property, used in connection with research and development.

2. Any expenditure incurred in ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

NOTE: Cost of acquisition or improvements of property subject to depreciation or depletion used in research and development becomes part of the cost of the asset, and deduction from it is by

way of depreciation or depletion, as the case may be. ILLUSTRATION:

Q Co., a manufacturer of food seasoning, is continuously conducting research and development on its product lines. In early January 2004, it completed the extension and improvement of its research and development building at a cost of P1,000,000. The extension has an estimated useful life of 25 years. The company also incurred an aggregate of P1,800,000 for other research and development costs. Determine the tax treatment of the various expenditures.

ANSWER:-The P1,000,000 cost of expansion of the building cannot be deducted as research and development costs in 2004. However, depreciation of P40,000 may be recognized yearly for 25 years (P1,000,000 / 25 years). -The other costs of P1,800,000 may be either: a. An outright deduction from gross income for P1,800,000 in 2004; [OR] b. A deferred expense of P1,800,000, from which there shall be a monthly deduction of P1,800,000 divided by 60 months (cannot be shorter, but can be longer), or P30,000 per month, beginning with the first month from which benefits were acquired from the expenditure. The aggregate of monthly deductions for a given taxable year is then deductible from that year’s gross income.

N. Pension Trusts [Sec. 34(J)] Deduction Allowable: An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Sec. 34(A)(1) [Ordinary and Necessary Expenses]) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions REQUISTES: Such reasonable amount will only be allowed as a deduction if it: 1. has not theretofore been allowed as a

deduction, and 2. is apportioned in equal parts over a period of

ten (10) consecutive years beginning with the year in which the transfer or payment is made.

Background Concepts: The rules in the law on deduction for pension payments to employees apply to a pension plan that is funded. An employer does not provide for pension for his employees in his initial years of operations. A pension plan is usually set up after some years of operations have gone by, when the employer is already financially capable of providing benefits to his employees. Since the benefits from any pension plan consider the length of service of the employee, the plan

should take into account the services of the

employees who were already with the employer

even before the plan was set up. Such past services will require a lump sum payment to the pension fund; this is called “past-service cost.” For each year after the pension plan was set up, there should be payment to the fund for pension for the services rendered during the year by the employees. This is called “present service cost.” • Present service cost – deductible in full in the

year transferred or paid into the trust; covered by Sec. 34(A)(1) [Ordinary and Necessary Expenses]

• Past-service cost – amount so transferred is apportioned and deductible in equal parts over a period of ten (10) consecutive years


TAXATION LAW 1

beginning with the year in which the transfer or payment is made; covered by Sec. 34(J) [Pension Trusts]

ILLUSTRATION: F Co. established a pension trust in 2001, transferring thereto a lump sum payment of P500,000 to cover past services rendered by its employees. Additionally, the terms of the trust are such that P20,000 in pension liability would accrue yearly, covering services rendered during the year by its employees. Determine the total deduction on account of the pension trust allowed to F Co. from 2001 onwards.

Year Yearly Amortization

of Past Service

Cost (= 1/10 of P500,000)

[covered by Sec. 34(J)]

Current Liability / Present Service Cost

[covered by Sec. 34(A)(1)]

TOTAL

2001 P50,000 P20,000 P70,000 2002 P50,000 P20,000 P70,000

2003 P50,000 P20,000 P70,000 2004 P50,000 P20,000 P70,000 2005 P50,000 P20,000 P70,000 2006 P50,000 P20,000 P70,000 2007 P50,000 P20,000 P70,000 2008 P50,000 P20,000 P70,000

2009 P50,000 P20,000 P70,000 2010 P50,000 P20,000 P70,000 2011

onwards - P20,000 P20,000

O. Special Provisions Regarding Income and Deductions of Insurance Companies, Whether Domestic or Foreign [Sec. 37]

Special Deduction Allowed to Insurance Companies. - In the case of insurance companies, whether domestic or foreign doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income. However, the released reserve should be treated as income for the year of release.

Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves. Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their return of gross income, gross premiums collected and received by them less amounts paid to policyholders on account of premiums previously paid by them and interest paid upon those amounts between the ascertainment and payment thereof.

Assessment Insurance Companies. - Assessment insurance companies, whether domestic or foreign, may deduct from their gross income the actual deposit of sums with the officers of the Government of the Philippines pursuant to law, as additions to guarantee or reserve funds. Allocation of Income and Deductions [Sec. 50] - In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned and controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order: (a) to prevent evasion of taxes; or (b) to clearly reflect the income of any such organizations, trades or businesses.


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XII. NONXII. NONXII. NONXII. NON----DEDUCTIBLE EXPENSES DEDUCTIBLE EXPENSES DEDUCTIBLE EXPENSES DEDUCTIBLE EXPENSES [Sec.

36] GENERAL RULE: In computing net income, no deduction shall be allowed in respect to: (PIRI) 1. Personal, living or family expenses –

Rationale: not related to conduct of trade or business

2. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or

estate EXCEPTION: Intangible drilling and development costs incurred in petroleum operations which are deductible under Sec. 34(G)(1)

3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance [for depreciation or depletion] is or has been made (i.e., Major Repairs)

NOTE: Nos. (2) and (3) are capital expenditures. Examples are: a. The cost of defending or perfecting title to

property constitutes a part of the cost of the property and is not a deductible expense.

b. The amount expended for architect’s services is part of the cost of the building

c. Expenditures to promote the sales of additional capital stock or the cost, commissions and fees for obtaining stock subscriptions are capital expenses. (Atlas Consolidated Mining Co. v. Commissioner, 102 SCRA 246)

4. Premiums paid on any life insurance policy

covering the life of any officer, employee, or

person financially interested in the trade or

business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary

under such policy. • A person is said to be “financially

interested” in the taxpayer’s business, if he is a stockholder thereof or he is to receive as his compensation a share of the profits of the business.

ILLUSTRATION:

CASE 1 CASE 2

Insured

Officer, employee, or

person financially

interested in the taxpayer’s trade

or business


person financially interested in the taxpayer’s trade

or business

Beneficiary of Life

Insurance Policy

Company


person financially interested in the taxpayer’s trade

or business

Premium a deductible expense?

NO (covered by Sec. 36)

YES (Premium is likewise a fringe benefit on the

part of the beneficiary.)

XIII. CAPITAL GAINS ANDXIII. CAPITAL GAINS ANDXIII. CAPITAL GAINS ANDXIII. CAPITAL GAINS AND LOSSES LOSSES LOSSES LOSSES [Sec.

39] Definitions: Net Capital Gain – the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges Net Capital Loss – means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges Holding Period – the length of time the asset was held by the taxpayer Meaning of sale or exchange – requirements for capital gain § Gain or loss is recognized in a sale or exchange

of property if the following conditions are satisfied: 1. The property received in exchange is

essentially different from the property disposed of;

2. The property received has a market value

Sale – a delivery of goods for money Exchange – a delivery of goods for goods received. HOWEVER, there are transactions which the law considers sales or exchanges though they do not meet the definitions given. These are: 1. Retirement of bonds, etc. 2. Short sales of properties19 3. Failure to exercise a privilege or option to buy

or sell property; 4. Securities becoming worthless. 5. Receipt of a liquidating dividend Percentage taken into account (Long-term / Short term) by taxpayers: § Taxpayers Other than a Corporation (i.e.,

individual taxpayers and taxpayers treated as individuals, such as estates and trusts) - 100% if the capital asset was held for not

more than 12 months - 50% if the capital asset has been held for

more than 12 months NOTE:

o GENERAL RULE: For purposes of computing capital loss and capital gain, the actual holding period is taken into account.

o EXCEPTION: If securities become

worthless during the taxable year and are capital assets, the loss resulting therefrom shall be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. [Sec. 34(D)(4)(b)]

§ Corporate Taxpayers – 100% of the capital gain or loss, regardless of the holding period

Limitation on Capital Losses GENERAL RULE: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.

19 A transaction in which a speculator sells securities which he does not own in anticipation of a decline in its price. The seller intends to cover the sale by purchasing the securities when the price declines, in which case he will make a profit.


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SPECIAL RULE FOR BANKS AND TRUST COMPANIES: If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits or the sale of bond, debenture, note, certificate or other evidence of indebtedness, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. è Rationale: The securities mentioned are ordinary assets of the bank or trust company.

Formula: (Sec. 134, RR2)

Taxable net income = Ordinary net income + net taxable capital gains

Net taxable capital gains = Gains of sales of capital assets, or 50% thereof – Losses from sales of capital assets, or 50% thereof Net Capital Loss Carry-over: If an individual taxpayer sustains a net capital loss in a taxable year, such loss (in an amount not in excess of the

net income20 for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months (100% deduction). ILLUSTRATIONS: Mr. O, a citizen of the Philippines, single, had the following data for 2001 and 2002:

2001 2002

Net Income, Business 80,000 90,000

Interest Income from notes of clients

4,000 2,000

Capital Gain on assets: 50,000

70,000

Shares of foreign corporations, held for 3 years

Jewelry, held for 10 months

Capital Loss on bonds, held for 4 months

120,000 -

20 Net Income à should be understood as taxable income

(Executive Order No. 37)


TAXATION LAW 1

Mr. O’s taxable income for 2001 was P64,000, and for 2002 was P78,000, computed as follows:

2001 2002

Net Income, Business P 80,000 P 90,000 Interest Income 4,000 2,000 Ordinary Net Income P84,000 P92,000 Capital Gain (50%) P25,000 Capital Gain (100%) P70,000 Capital Loss (100%) (120,000)

Net Capital Loss

(P95,000)

Net Capital Loss Carry-Over from 2001

(64,000)

Net Capital Gain [70,000 – 64,000] 6,000 Total P98,000 Less: Basic Personal Exemption (20,000) (20,000)

Taxable Income

P64,000 P78,000

Legend:

P Co., a domestic corporation, had the following results of operations for a taxable year:

Ordinary Net Income P52,000

Gain on sale of capital asset, held for ten months 2,000 Gain on sale of capital asset, held for eighteen months 2,000 Loss on sale of capital asset, held for six months 1,100 Loss on sale of capital asset, held for twenty months 2,000

and in the preceding year it had a net capital loss of P1,500 and a taxable income of P60,000. The taxable income of the corporation for the year is computed as follows***:

Ordinary net income P52,000 Gain on sale of capital asset, held for ten months (100%) P2,000 Gain on sale of capital asset, held for eighteen months (100%)

2,000

Total Capital Gains P4,000 Loss on sale of capital asset, held for six months (100%) P1,100 Loss on sale of capital asset, held for twenty months (100%) 2,000

Total Capital Loss 3,100

Net Capital Gain 900

Taxable Income P52,900

*** For corporations, capital gains and losses are always considered at 100%, and there is no net capital loss carry-over.

SUMMARY OF RULES For Corporations: 1. Corporations shall recognize 100% of the capital gain or loss, regardless of the holding period. 2. Corporations cannot carry-over net capital loss. 3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from

such sales or exchanges.

For Individuals, and Taxpayers Treated as Individuals: 1. The holding period is relevant in determining the percentage of capital gains and losses to be taken into

account, as follows: - 100% if the capital asset was held for not more than 12 months - 50% if the capital asset was held for more than 12 months

2. Net capital loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months (100% deduction)

3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.

>

>

>

> Net Capital Loss Carry-Over from the previous year

To determine the maximum that may be carried over to the next year: Taxable Income


TAXATION LAW 1

XIV. SITUS OF TAXATIONXIV. SITUS OF TAXATIONXIV. SITUS OF TAXATIONXIV. SITUS OF TAXATION [Sec. 42] A. Gross Income From Sources Within the

Philippines •••• Interests derived from sources within the

Philippines, and interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise

•••• Dividends •••• Compensation for labor or personal services

performed in the Philippines •••• Rentals and royalties from property located in

the Philippines or from any interest in such property, including rentals or royalties for:

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use:

(i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting.

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

•••• Gains; profits and income from the sale of personal property

B. Taxable Income From Sources Within the Philippines

GENERAL RULE. – Deduct the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. EXCEPTION. - No deductions for interest paid or incurred abroad shall be allowed unless indebtedness was actually incurred to provide

funds for use in connection with the conduct or operation of trade or business in the Philippines. C. Gross Income From Sources Without the

Philippines. (1) Interests other than those derived from sources within the Philippines as provided in A. (2) Dividends other than those derived from sources within the Philippines as provided in A. (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines.

D. Taxable Income From Sources Without the

Philippines. - Deduct from the gross income from sources without the Philippines (a) the expenses, losses, and other deductions

properly apportioned or allocated thereto and

(b) a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income.

The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. E. Income From Sources Partly Within and

Partly Without the Philippines. § Allocated or apportioned to sources within or

without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner

§ For the purpose of computing the taxable income therefrom, where items of gross income are separately allocated to sources within the Philippines, there shall be deducted: (a) the expenses, losses and other deductions

properly apportioned or allocated thereto, and

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income.

The remainder, if any, shall be included in full as taxable income from sources within the Philippines.

§ In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance.

§ Gains, profits and income from the sale of

personal property


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(a) produced (in whole or in part) by the taxpayer within and sold without the Philippines, or

(b) produced (in whole or in part) by the taxpayer without and sold within the Philippines,

shall be treated as derived partly from sources within and partly from sources without the Philippines.

F. Gains, profits and income derived: (a) from the purchase of personal property within

and its sale without the Philippines, or (b) from the purchase of personal property without

and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided,

however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: ØØØØ the transferor has filed with the Commissioner

a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or

ØØØØ the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement.

ØØØØ Definition of Royalties - Philamlife vs. CTA

[CA GR SP 31283 April 25, 1995] The CTA ruled that it is not the presence of any property from which one derives rentals and royalties that is controlling, but rather it includes royalties for the supply of scientific, technical, industrial, or commercial knowledge

or information .

XV. INSTALLMENT BASISXV. INSTALLMENT BASISXV. INSTALLMENT BASISXV. INSTALLMENT BASIS [Sec. 49]

A. Sales of Dealers in Personal Property – A person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment

payments actually received that year, which the

gross profit realized or to be realized when

payment is completed, bears to the total

contract price.

B. Sales of Realty and Casual Sales of

Personal Property 1. A casual sale or other casual disposition of

personal property (other than property of a kind

which would properly be included in the

inventory of the taxpayer if on hand at the

close of the taxable year) for a price exceeding One thousand pesos (P1000); or

2. A sale or other disposition of real property èèèè In either case the initial payments must

NOT exceed 25% of the selling price

'Initial payments' means the payment received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

è Income Tax Treatment: Income may be returned on the same basis as sales of dealers in personal property (see section A)

C. Sales of Real Property Considered as Capital Asset by Individuals – An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments.

D. Tax Evasion vs. Tax Avoidance [CIR vs. Estate of Toda (Sept, 14, 2004)]

Tax Evasion Tax Avoidance

– a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities

tax saving device within the means sanctioned by law, used by the taxpayer in good faith and at arms length

FORMULA:

Gross Profit Installment payments Income to be

---------------------- X actually received = reported for

Contract price the year


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XVI. RETURNS AND PAYMENTS OF XVI. RETURNS AND PAYMENTS OF XVI. RETURNS AND PAYMENTS OF XVI. RETURNS AND PAYMENTS OF

TAX / WITAX / WITAX / WITAX / WITHHOLDING TAXES THHOLDING TAXES THHOLDING TAXES THHOLDING TAXES

A. Returns and Payment of Tax 1. Individual Return (Sec. 51, NIRC) a. Who are required to file

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;

(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and

(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.

b. Those not required to file The following individuals shall not be required to file an income tax return:

a. An individual whose gross income does not

exceed his total personal and additional

exemptions for dependents under Section 35 Exception: That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of gross income; b. An individual with respect to pure

compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code Exceptions: i. an individual deriving compensation concurrently from two or more employers at any time during the taxable year ii. an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000)

c. An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code d. An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

Any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

SPECIAL RULES: 1. Husband and Wife →→→→ Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. 2. Return of Parent to Include Income of Children →→→→ The income of unmarried minors

derived from property received from a living parent shall be included in the return of the parent, except

o when the donor's tax has been paid on such

property, or o when the transfer of such property is exempt

from donor's tax.

3. Persons Under Disability →→→→ If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or

representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

Signature Presumed →→→→ The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him. c. Where to file Except in cases where the Commissioner otherwise permits, the return shall be filed: è If person has legal residence or place of business in the Philippines - with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines

è If there be no legal residence or place of business in the Philippines - with the Office of the Commissioner. d. When to file - The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. e. Where to pay (Sec. 56, NIRC) The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed.

When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case: 1. the first installment shall be paid at the time

the return is filed and 2. the second installment, on or before July 15

following the close of the calendar year 3. if any installment is not paid on or before the

date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.

f. Capital gains on shares of stocks and real estate FILING A RETURN Individuals subject to tax on capital gains: (a) From the sale or exchange of shares of stock

not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and


TAXATION LAW 1

(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition.

PAYMENT The total amount of tax imposed and prescribed shall be paid on the date the return prescribed is filed by the person liable. If the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required. o In case of failure to qualify for exemption

under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable.

o If the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption.

o In case the taxpayer elects and is qualified to report the gain by installments, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments.

g. Quarterly declaration of income tax (Sec. 74, NIRC) Every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year.

In general, self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. 1. Nonresident Filipino citizens, with respect to

income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax.

2. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Estimated tax means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates.

Return and Payment of Estimated Income Tax by Individuals: The amount of estimated income with respect to which a declaration is required shall be paid in four (4) installments: o 1st installment - at the time of the declaration o 2nd installment - on August 15 of the current

year o 3rd installment – on November 15 of the

current year o 4th installment - on or before April 15 of the

following calendar year when the final adjusted income tax return is due to be filed

h. Substituted filing for ITR of Salaried Individuals RR 19-2002

Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316). — In general, every employer required to deduct and withhold the tax on compensation including fringe benefits given to rank and file employees, shall furnish every employee the Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316), on or before January 31 of the succeeding calendar year, or if the employment is terminated before the close of such calendar year, on the day on which the last payment of compensation is made. Failure to furnish the same shall be a ground for the mandatory audit of payor’s income tax liabilities (including withholding tax) upon verified complaint of the payee.

The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall contain a certification to the effect that the employer’s filing of BIR Form No. 1604-CF shall be considered as a substituted filing of the employee’s income tax return to the extent that the amount of compensation and tax

withheld appearing in BIR Form No. 1604-CF as

filed with BIR is consistent with the

corresponding amounts indicated in BIR Form

No. 2316. It shall be signed by both the employee and employer attesting to the fact that the information stated therein has been verified and is true and correct to the best of their knowledge. Withholding agents/employers are required to retain copies of the duly signed BIR Form No. 2316 for a period of three (3) years.

The employee who is qualified for substituted filing of income tax return under these regulations, shall no longer be required to file income tax return (BIR Form No. 1700) since BIR Form No. 1604-CF shall be considered a substituted return filed by the employer. BIR Form No. 2316, duly certified by both employee and employer, shall serve the same purpose as if a BIR Form No. 1700 had been filed, such as proof of financial capacity for purposes of loan, credit card, or other applications, or for the purpose of availing tax credit in the employee’s home country and for other purposes with various government agencies. This may also be used for purposes of securing travel tax exemption, when necessary.

However, information referring to the certification, appearing at the bottom of BIR Form No. 2316, shall not be signed by both the employer and the employee if the latter is not qualified for substituted filing. In which case, BIR Form No. 2316 furnished by the employer to the employee shall be attached to the employee’s


TAXATION LAW 1

Income Tax Return (BIR Form No. 1700) to be filed on or before April 15 of the following year.

i. Modes of Payment of Taxes Through Banks RR 16-2002 SECTION 3. Modes Of Payment To Authorized Agent Banks. — Aside from the electronic payment system currently used by some taxpayers in paying their BIR taxes, the rest shall pay their tax liabilities through any of the following modes: a) "Over–the–counter cash payment" -

payment of taxes to an authorized agent bank in the currencies that are legal tender in the Philippines. The maximum amount allowed per tax payment shall not exceed ten thousand pesos (P10,000.00)

b) "Bank debit system" - taxpayer, through a bank debit memo/advice, authorizes withdrawals from his bank accounts for payment of tax liabilities.

c) "Checks" refers to a bill of exchange or Order Instrument drawn on a bank payable on demand.

The following checks are, however, NOT acceptable as check payments for internal revenue taxes: (SUESAP) 1. Accommodation checks — checks issued or

drawn by a party other than the taxpayer making the payment;

2. Second endorsed checks — checks issued to the taxpayer as payee who indorses the same as payment for taxes;

3. Stale checks — checks dated more than six (6) months prior to presentation to the authorized agent bank;

4. Postdated checks — checks dated a day or several days after the date of presentation to the authorized agent bank;

5. Unsigned checks 6. Checks with alterations/Erasures.

AABs accepting checks as payment must see to it that the check covers one tax type for one return period only. Second indorsement of checks which are payable to the BIR or Commissioner of Internal Revenue is absolutely prohibited

2. Corporation Regular Returns a. Quarterly Income Tax (Sec. 75, NIRC) Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, shall be levied, collected and paid.

↓ The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. b. Final Adjustment Return (Sec. 76, NIRC) Every corporation liable to tax shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to

the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed.

c. When to File (Sec. 77, NIRC) Quarterly declaration – shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return – shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. Extension of Time to File Returns – The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations)

d. Where to File (Sec. 77, NIRC) Except as the Commissioner otherwise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required in Section 76 shall be filed with: o the authorized agent banks or o Revenue District Officer or o Collection Agent or o duly authorized Treasurer of the city or

municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept.

e. When to Pay (Sec. 77, NIRC) The income tax due on the corporate quarterly returns and the final adjustment income tax shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.

f. Capital Gains on Shares of Stock Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transaction and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.


TAXATION LAW 1

g. Return of Corporations Contemplating Dissolution / Reorganization

Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

Sec. 244. RR-2 All corporations, partnerships, joint accounts and associations, contemplating dissolution or retiring from business without formal dissolution, shall, within 30 days after the approval of such resolution authorizing their dissolution, and within the same period after their retirement from business, file their IT returns covering the profit earned or business done by them from the beginning of the year up to the date of such dissolution or retirement and pay the corresponding IT due thereon upon demand of the Commissioner. In addition to the IT return, they shall also submit within the same period the following: (a) a copy of the resolution authorizing such

dissolution; (b) balance sheet at the date of dissolution or

retirement and a profit and loss statement covering the period from the beginning of the taxable year to the date of dissolution or retirement;

(c) in the case of a corporation, the names and addresses of the shareholders and the number and par value of the shares held by each; and in case of a partnership, joint account or association, the name of the partners or members and the capital contributed by each;

(d) the value and a description of the assets received in liquidation by each shareholder;

(e) the name and address of each individual or corporation, other than shareholders, if any, receiving assets at the time of dissolution together with a description and the value of the assets received by such individuals or corporations and the consideration if any, paid by each of them for the assets received.

B. WITHHOLDING TAX 1. Final Withholding Tax at Source Sec. 57. NIRC

Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income

payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of the NIRC on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of the NIRC. Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. Tax-free Covenant Bonds. - In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines.

2. Withholding of Creditable Tax RR 2-98 Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

The income recipient is still required to file an income tax return, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature.

RR 12-2001

The amounts subject to withholding tax under this paragraph shall include not only fees but also per diems, allowances and any other form of income payments not subject to withholding tax on compensation.

In the case of professional entertainers, professional athletes, directors involved in movies, stage, radio, television and musical productions and other recipients of talent fees, the amounts subject to withholding tax shall also


TAXATION LAW 1

include amounts paid to them in consideration for the use of their names or pictures in print, broadcast, or other media or for public appearances, for purposes of advertisements or sales proportion.

Furthermore, in order to determine the applicable tax rate (10% or 20%) to be applied/withheld by the withholding agent, every professional entertainer, professional athlete, director involved in movies, stage, radio, television and musical productions and other recipients of talent fees shall annually disclose his gross income for the current year to the BIR, by submitting a notarized sworn declaration thereof, copy furnished all the current payors of the declaration duly stamped received by the BIR. The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the talent's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The initial disclosure after the effectivity of these Regulations shall be filed on or before September 30, 2001 or within fifteen (15) days after the effectivity of these Regulations, whichever comes later. In case of failure to submit the annual declaration/disclosure to the BIR, the payor shall withhold the tax at the rate of 20%.

If an individual recipient receives talent fees in addition to salaries from the same payor, the said talent fees shall be considered as supplemental compensation and, thus, be subject to the withholding tax on compensation."

3. Return and Payment of Tax Sec. 58 Quarterly Returns and Payments of Taxes

Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or, where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.

Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not later than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the

succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of the NIRC in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection. Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon


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recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code.

C. Withholding on Wages Sec. 78. Definitions. Wages - The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid:

(1) For agricultural labor paid entirely in products

of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the course of the

employer's trade or business, or (4) For services by a citizen or resident of the

Philippines for a foreign government or an international organization.

If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one-half (1/2) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. Payroll Period - a period for which payment of wages is ordinarily made to the employee by his employer, and the term "miscellaneous payroll

period" means a payroll period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period. Employee - any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. Employer - means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that: (1) If the person for whom the individual performs

or performed any service does not have control of the payment of the wages for such

services, the term "employer" (except for the purpose of Subsection (A)) means the person having control of the payment of such wages; and

(2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose of Subsection (A)) means such person.

Sec. 79. Income Tax Collected at Source Requirement of Withholding - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. Tax Paid by Recipient - If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withhold. Refunds or Credits - (1) Employer. - When there has been an

overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer.

(2) Employees. - The amount deducted and

withheld 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. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of counter-signature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987.


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Personal Exemptions - In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title.

Exemption Certificate. - (a) When to File. - On or before the date of

commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled.

(b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change.

(c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld.

(d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof.

Withholding on Basis of Average Wages - The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to: (1) estimate the wages which will be paid to an

employee in any quarter of the calendar year; (2) determine the amount to be deducted and

withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and

(3) deduct and withhold upon any payment of wages to such employee during such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection.

Husband and Wife - When a husband and wife each are recipients of wages, whether from the same or from different employers, taxes to be withheld shall be determined on the following bases: (1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate. (2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof.

Nonresident Aliens - Wages paid to nonresident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this Chapter.

Year-End Adjustment - On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each

employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.

Sec. 79. Liability for Tax

Employer - The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit. Employee - Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to: (1) failure or refusal to file the withholding

exemption certificate; or (2) false and inaccurate information shall not be

refunded to the employee but shall be forfeited in favor of the Government.

Sec. 81. Filing of Return and Payment of Taxes Withheld Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank, Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located.

The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers.


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Taxation Law 2Taxation Law 2Taxation Law 2Taxation Law 2

TABLE OF CONTENTS

I.I.I.I. Transfer TaxesTransfer TaxesTransfer TaxesTransfer Taxes 66665555

II.II.II.II. ValueValueValueValue----Added TaxAdded TaxAdded TaxAdded Tax 78787878

III.III.III.III. Percentage TaxPercentage TaxPercentage TaxPercentage Tax 99999999

IV.IV.IV.IV. Excise TaxExcise TaxExcise TaxExcise Tax 101010103333

V.V.V.V. Documentary Documentary Documentary Documentary Stamp TaxStamp TaxStamp TaxStamp Tax 111106060606

VI.VI.VI.VI. RemediesRemediesRemediesRemedies 111111110000

VII.VII.VII.VII. Local TaxationLocal TaxationLocal TaxationLocal Taxation 111128282828

VIII.VIII.VIII.VIII. Real Property TaxationReal Property TaxationReal Property TaxationReal Property Taxation 139139139139

IX.IX.IX.IX. Tariff and Customs CodeTariff and Customs CodeTariff and Customs CodeTariff and Customs Code 151151151151


TAXATION LAW 2

I. TRANSFER TAXES

-excise taxes imposed upon the privilege of gratuitously transmitting one’s property to another. Two Types of Transfer Taxes Donor’s Tax Estate Tax

Imposed upon the privilege to give

Imposed upon the privilege to transmit property to heirs

Transfer is between the living

Transfer is from the deceased, through his/her estate, to the living

Transfer may take place between natural and juridical persons

Transfer takes place only between natural persons

A. ESTATE TAX PRINCIPLES

Definition

-a graduated tax imposed upon the privilege of the decedent to transmit property at death and is based on the entire net estate. -not a direct tax on the property transmitted or transferred although its amount is based thereon. Applicable Law Estate taxation is governed by the statute in force at the time of the death of the decedent. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. (Section 3, RR 2-2003) Transfers Affected 1. Transfers Mortis Causa - Gratuitous

transfers after death, either testate or intestate.

2. Transfers Inter Vivos – Generally attract donor’s tax. However, certain transfers inter vivos are treated as testamentary dispositions and are accordingly included in the computation of the gross estate in order to arrive at the proper estate tax liability.

These transfers are the following: a. Transfers in contemplation of death (Sec.

85B) Term does not refer to the general expectation of death which all entertain. The transfers referred to are those impelled by the thought of death (i.e., the motivating factor or controlling motive is the thought of death), regardless of whether the transferor was near the possibility of death or not. b. Transfer with retention or reservation of

certain rights (Sec. 85B) It involves cases where the owner transfers his property during life but still retains the economic benefits – the possession or enjoyment of the property, or the power to designate the persons

who may exercise such rights. By reason of the restriction the transferee is incapable of freely enjoying or disposing of the property until the transferor’s death. The transfer may be regarded as having been intended to take effect in possession or enjoyment at the transferor’s death.

ILLUSTRATION: X transfers his property to Y in naked ownership and to Z in usufruct throughout Z’s lifetime subject to the condition that if Z predeceases X, the property shall return to X. If X dies during Z’s life, the value of the reversionary interest of X at death is includible in his gross estate (see Articles 756-757 of the Civil Code). The transfer is taxable as intended to take effect at or after death because the possibility of reversion to X makes Z’s interest conditional as long as X lives. NOTE: Transfer with retention or reservation of certain rights is grouped by the Tax Code under transfer in contemplation of death.

c. Revocable transfers (Sec. 85C) Transfers where the transferor has reserved the right to alter, amend or revoke such transfer, regardless of WON the power is actually exercised during his lifetime, and WON the power should be exercised by him alone or in conjunction with someone else. The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death EVEN THOUGH: • the exercise of the power is subject to a

precedent giving of notice, or • the alteration, amendment or revocation

takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised. • If notice has not been given or the power

has not been exercised before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death.

d. Transfers of property arising under a general power of appointment (Sec. 85D)

Gross estate shall include any property passed or transferred under a general power of appointment exercised by the decedent: • by will, or • by deed executed in contemplation of, or

intended to take effect in possession or enjoyment at, or after his death, or

• by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death o the possession or enjoyment of, or the

right to the income from, the property, or o the right, either alone or in conjunction

with any person, to designate the persons who shall possess or enjoy the property or the income therefrom

Q: What is a power of appointment? The power or right to designate by will or by deed the person(s) who shall succeed to, possess or enjoy the property, or the income therefrom, received from the estate of the prior decedent. It involves the person creating the power (donor) and the person to


TAXATION LAW 2

whom is given the right to exercise the power (donee). Two Kinds of Appointment and their Effects:

Kind of Appointment

Nature Tax Implications

Effects

General DONEE has power to appoint any person he chooses who shall possess or enjoy the property without restriction

Makes appointed property, for all legal intents, the property of the DONEE (includible in his estate)

DONEE holds the appointed property with all the attributes of ownership, under the concept of owner

Special DONEE must appoint successor to the property only within a limited group or class of persons

Not includible in the gross estate of the DONEE when he dies

DONEE holds the appointed property in trust, or under the concept of trustee

e. Transfers for insufficient consideration

(Sec. 85G) Transfers that are not bona fide sales of property for an adequate and full consideration in money or money’s worth.

• If bona fide sale – no value shall be included

in the gross estate [Case B] • If not a bona fide sale - the excess of the fair

market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. [Case A]

• If inter vivos transfer is proven fictitious – total value of the property at the time of death included in the gross estate.[Case C]

Case A Case B Case C

FMV, transfer 1,500 2,000 2,500 FMV, death 2,000 2,500 2,000 Consideration Received

800 2,000 0

Value Included in the Gross Estate

1,200 0 2,000

Exempt Transfers [MTTB] (Sec. 87)

a. Merger of the usufruct in the owner of the naked title

b. Transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee to the fideicommisary

c. Transmission from the first heirs, legatees or donees in favor of another beneficiary in accordance with the desire of the testator

d. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the income of which

inures to the benefit of any individual, provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used for administrative purposes

Excluded Properties [DULUTS 200] 1. PROCEEDS of:

a. Life insurance policy taken out - by the decedent upon his own life,

- when beneficiary is OTHER THAN the estate, executor or administrator,

- and designation is IRREVOCABLE (Sec. 85E)

Thus, proceeds are INCLUDED in the gross estate: • When beneficiary is the estate,

executor or administrator, whether designation is revocable or irrevocable

• When beneficiary is other than the estate, executor or administrator, and designation is REVOCABLE NOTE: According to the Insurance Code, the designation is presumed to be revocable, in case the designation of the beneficiary is not clear.

b. group life insurance policy taken out - by a company for its employees, (law only speaks of policies “taken out by the decedent upon his own life”)

c. life insurance policies-issued by the GSIS to government officials or employees, as they are exempt by law from taxes of all kinds (PD 1146, as amended)

2. Death benefits received from the SSS, accruing by reason of death (RA 1161, as amended) 3. Amounts received from the Philippine and the U.S. Governments from the damages suffered during the last war (RA 227) 4. Benefits received by beneficiaries residing in the Philippines under laws administered by the U.S. Veterans Administration (RA 360) 5. Properties held in Trust by the decedent 6. Transfers by way of bona fide Sales 7. Separate or exclusive property of the surviving spouse is not deemed part of the gross estate of the decedent spouse. (Sec. 85, NIRC) 8. Net estates which are not in excess of P200,000 are exempt from estate tax. (Sec. 84, NIRC)

GROSS ESTATE

Composition The following properties and interest therein at the time of decedent’s death: • Citizens and Resident Aliens – all properties,

real or personal, tangible or intangible, wherever situated

• Non-resident Aliens – only properties situated in the Philippines provided that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Sect 104, NIRC

Q: What is “residence” for estate tax purposes?


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It refers to the permanent home, the place to which whenever absent, for business or pleasure, one intends to return, and depends on facts and circumstances, in the sense that they disclose intent. (Corre v. Tan Corre, 100 Phil 321) It is, therefore, not necessarily the actual place of residence. The term “residence” and “domicile” are synonymous and are used interchangeably without distinction. (Collector v. Lara, 102 Phil 813; Velilla v. Posadas, 62 Phil 624). Q: What is the situs of intangible personal property? GR: situs is at the domicile or residence of the owner. Exception: • When it is inconsistent with the express

provisions of statute, or • Justice does not demand that it should be, as

where the property has in fact a situs elsewhere.

CASE LAW: Collector v. Lara (102 Phil 813) –When the owner of personal property, during his lifetime, extended his activities with respect to his interests so as to avail himself of the protection and benefits of the laws of the Philippines, so as to bring his person or property within the reach of the Philippines, the reason for a single place of taxation no longer obtains. His property in the Philippines enjoys the protection of the government so that the right to collect the estate tax cannot be questioned. Q: What are the intangible properties which are considered by law as situated in the Philippines?

• Franchise which must be exercised in the Philippines

• Obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines

• Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines

• Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines

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

Q: What is the reciprocity rule? (Sec. 104, NIRC) There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: • did not impose a transfer tax of any

character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or

• allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country

[In sum, both states must exempt nonresidents (citizens of the other state) from transfer taxes in respect of intangible personal property.] NOTE: • For the reciprocity rule to apply, there must

be TOTAL reciprocity. [For instance,] in the Philippines, both estate and inheritance taxes are imposed on the estate while in California only inheritance tax is imposed. The reciprocity rule may not be

availed of. Reciprocity has to be total. (CIR v. Fisher, 110 Phil 686)

• Reciprocity in exemption does not require the “foreign country” to possess international personality in the traditional sense (i.e., compliance with the requisites of statehood). Thus, Tangier, Morroco (Collector v. Campos-Rueda, 42 SCRA 23) and California, a state in the American Union (Collector v. de Lara, 102 Phil 813) were held to be foreign countries within the meaning of Section 104.

Valuation of the Gross Estate (§88 of the NIRC and §5 of RR 2-2003)

GENERAL RULE: The properties comprising the gross estate shall be valued based on FAIR MARKET VALUE (FMV) as of the time of death. Real property-FMV as determined by the Commissioner OR FMV as shown in the schedule of values fixed by the provincial and city assessors, whichever is HIGHER. Shares of Stock o Listed shares – FMV is the arithmetic mean

between the highest and lowest quotation at a date of death, OR the date nearest the date of death, if none is available on the date of death itself

o Unlisted shares - COMMON shares are valued based on BOOK VALUE; while PREFERRED shares are valued at PAR VALUE

• Right to usufruct, use or habitation,

annuity - the probable life of the beneficiary in accordance with the latest basic standard mortality table is to be taken into account, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

Decedent’s interest àààà Value to be included in the gross estate is the extent of the interest therein of the decedent at the time of his death

DEDUCTIONS [ELIT VTMSFH]

1. Expenses, Losses, Indebtedness and

Taxes [ELIT] [fjc cult]

a. Funeral expenses (§86-A1) (max.

P2ook) Allowable deduction is whichever is lower of -the actual funeral expenses (WON paid) up to the time of interment, or -an amount equal to 5% of the gross estate, but in no case to exceed P200,000.

NOTE: The unpaid portion of the funeral expenses incurred which is in excess of the P200,000 threshold is NOT allowed to be claimed as a deduction under “claims against the estate” (see 1(c) below). (Sec. 6(A)(1) of RR 02-2003)

Examples of funeral expenses

(RR 2-2003, Sec. 6-A1) o The MOURNING APPAREL of the surviving

spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial


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o EXPENSES for the deceased’s WAKE, including food and drinks

o PUBLICATION CHARGES for death notices o TELECOMMUNICATIONS EXPENSES

incurred in informing relatives of the deceased

o 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 plot where he is buried is deductible

o INTERMENT and/or CREMATION FEES and CHARGES

o All other expenses incurred for the performance of the RITES and CEREMONIES incident to interment

Expenses NOT deductible as funeral expenses

o Expenses incurred AFTER INTERMENT, such as for prayers, masses, entertainment, or the like

o Any portion of the funeral and burial expenses BORNE or DEFRAYED by RELATIVES and FRIENDS of the deceased

ILLUSTRATIONS:

o If five percent (5%) of the gross estate is P220,000 and the amount actually incurred is P215,000, the maximum amount that may be deducted is only P200,000;

o If five percent (5%) of the gross estate is P 100,000 and the total amount incurred is P150,000 where P20,000 thereof is still unpaid, the only amount that can be claimed as deduction for funeral expenses is P100,000. The entire P50,000 excess amount consisting of P30,000 paid amount and P20,000 unpaid amount can no longer be claimed as FUNERAL EXPENSES. Neither can the P20,000 unpaid portion be deducted from the gross estate as CLAIMS AGAINST THE ESTATE.

b. Judicial expenses of testamentary and intestate proceedings (§86-A1)

Allowable deductions are expenses incurred, in the inventory-taking of the assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs, DURING THE SETTLEMENT OF THE ESTATE BUT NOT BEYOND THE LAST DAY PRESCRIBED BY LAW, or the extension thereof, FOR THE FILING OF THE ESTATE TAX RETURN (RR 2-2003, Sec. 6-A2)

Examples of judicial expenses o Fees of executor or administrator o Attorney’s fees o Court fees o Accountant’s fees o Appraiser’s fees o Clerk hire o Costs of preserving and distributing the

estate o Costs of storing or maintaining property

of the estate

o Brokerage fees for selling property of the estate

CASE LAW: Commissioner v. CA (328 SCRA 666) The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of the estate to the lawful heirs. Attorney’s fees to be deductible from the gross estate must be essential to the collection of assets, payment of debts or the distribution of property to the persons entitled to it

c. Claims against the estate (§86-A1)

Claims – debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. May arise out of contract, tort or operation of law.

Requisites for deductibility [PVN GF](RR 2-2003, Sec. 6-A3): 1) must be a PERSONAL OBLIGATION of the

deceased existing at the time of his death (except unpaid funeral expenses and unpaid medical expenses, which are classified into their own separate categories)

2) liability must have been contracted in GOOD FAITH and for adequate and full consideration in money or money’s worth

3) the claim must be a debt or claim which is VALID IN LAW and ENFORCEABLE IN COURT

4) indebtedness NOT CONDONED by the creditor or the action to collect from the decedent must not have prescribed.

Substantiation Requirements 1) The duly-notarized debt instrument, If

the claim arose out of a debt instrument 2) A statement showing the disposition of

the proceeds of the loan, if the indebtedness was incurred within 3 years before the death of the decedent.

d. Claims against insolvent persons (§86-A1)

Deductible from the gross estate, provided that the value of the decedent’s interest in the claim is included in the value of the gross estate.

e. Unpaid mortgages. losses and taxes(§86-A1 and RR 2-2003, Sec. 6-A5)

• UNPAID MORTGAGES – Deductible from gross estate, provided: o That the value of the decedent’s

interest in the property encumbered by such mortgage or indebtedness is included in the value of the gross estate

o That the deduction shall be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth, if such unpaid mortgages or indebtedness were founded upon a promise or an agreement.

• LOSSES – deductible from the gross

estate if ALL of the following conditions are satisfied:


TAXATION LAW 2

The losses o were INCURRED DURING the

SETTLEMENT of the estate o arose from FIRES, STORMS,

SHIPWRECK or OTHER CASUALTIES, or from ROBBERY, THEFT or EMBEZZLEMENT

o are NOT COMPENSATED BY INSURANCE or otherwise

o are not claimed as a deduction for income tax purposes in an income tax return

o were incurred NOT LATER THAN THE LAST DAY FOR PAYMENT OF THE ESTATE TAX

• TAXES –Deductible from the gross estate

IF: o They have accrued as of the death of

the decedent o They were unpaid as of the time of

death NOTE: This deduction DOES NOT include income tax upon income received after death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate.

2. Property previously taxed (Vanishing

deductions) (§86-A2) Deduction allowed on the property left behind

by the decedent which he had acquired previously by inheritance or donation.

Previously, a transfer tax had already been

imposed on the property, either the estate tax (if property inherited) or the donor’s tax (if property donated). Now that the recipient of the inheritance or donation has died, the same property will again be subjected to a transfer tax, the estate tax. Thus, to minimize the effects of a double tax on the same property within a short period of time, i.e. five (5) years, the law allows a deduction to be claimed on the said property.

Example: Mr. A died in December 2003. In March 2003, Mr. B (Mr. A’s father) died and left Mr. A some properties as inheritance. May vanishing deductions be claimed as deductions in computing Mr. A’s net taxable estate? YES, vanishing deductions shall be allowed if the following conditions are met (REQUISITES FOR DEDUCTIBILITY): [PINID]

1) Death – the present decedent (Mr. A) died within five years from the receipt of the property from a prior decedent (Mr. B) or donor;

2) Identity of the property – The property with respect to which deduction is sought can be identified as the one received from the prior decedent or the donor, or as the property acquired in exchange for the original property so received.

3) Inclusion of the property – The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or the total amount of the gifts of the donor

4) Previous taxation of the property – the donor's tax on the gift or estate tax on

the prior succession (Mr. B’s succession) was finally determined and paid

5) No vanishing deduction on the property

was allowed to the estate of the prior

decedent. (Illustration of how this

requirement may NOT be met: In the example above, if Mr. B received the same properties as a donation from Mr. C in July 2002, a vanishing deduction on the properties was claimed with respect to Mr. B’s estate. Thus, no more vanishing deduction may be claimed by Mr. A’s estate)

Computation of vanishing deduction Using the facts above, assume that Mr. A inherited a car and a house from his father Mr. B. The FMV of the car was P120,000 and the FMV of the house was P800,000 at the time of Mr. B’s death. At the time Mr. A inherited the land, it was subject to a mortgage of P80,000. Mr. A paid P70,000 of the mortgage during his lifetime (leaving a balance of P10,000). The FMV of the properties at the time of Mr. A’s death were P850,000 for the land and P70,000 for the car. Mr. A’s gross estate amounted to P3,200,000 while total deductions (excluding medical expenses, standard deductions, family home) amounted to P600,000.

1) First, compare the values of the

property at the time of the prior decedent’s death and at the time of the present decedent’s death. The lower amount shall be the initial basis.

→ in the example, the initial basis shall

be P800,000 for the land and

P70,000 for the car, for a total of

P870,000

NOTE: The value used as initial basis is significant only for purposes of

computing the amount of vanishing

deduction. The value included in the decedent’s gross estate is ALWAYS the fair market value at the time of his death.

2) Then, the value in (1) shall be reduced by any payment made by the present decedent on any mortgage or lien on the property

→ Mr. A paid P70,000 of the mortgage.

Thus, P870,000 less 70,000 is

P800,000

3) The value as reduced in (2) shall be

further reduced by an amount equal to:

Value as reduced in (2) X Total amount of Gross Estate deductions*

* excluding family home, medical expenses, standard deduction and amounts received under RA 4917

→ 800/3200 x 600,000 equals 150,000.

This will be deducted from P800,000,

which gives a balance of P650,000

4) Finally, the remaining balance shall

be multiplied by the corresponding percentage:


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% If received by inheritance or gift:

100% within one (1) year prior to the death of the present decedent

80% More than one year but not more than two years prior to the death of the decedent

60% More than two years but not more than three years prior to the death of the decedent

40% More than three years but not more than four years prior to the death of the decedent

20% More than four years but not more than five years prior to the death of the decedent

→ Since Mr. A received the inheritance in

March 2003 (within 1 year from his death

in December 2003), the balance of

P650,000 shall be multiplied by 100%.

Thus, the allowable vanishing deduction is

P650,000

3. Transfers for public purpose The whole amount of all the BEQUESTS, LEGACIES, DEVISES or TRANSFERS to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes shall be deductible from gross estate, provided such amount or value had been included in the gross estate. 4. Family home (maximum of P1m) It is the dwelling house, including the land on which it is situated, where the husband and wife, or a head or the family, and members of their family reside, as certified to by the Barangay Captain of the locality. It is deemed constituted on the house and lot from the time it is actually occupied as the family residence and considered as such for as long as any of its beneficiaries actually resides therein. (Arts. 152 and 153, Family Code) Temporary absence from the constituted family home due to travel or studies or work abroad, etc. does not interrupt actual occupancy. The family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return. (RR 2-2003, Sec. 6D)

Requisites for Deductibility

1) The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the barangay captain of the locality.

2) The total value of the family home must be included as part of the gross estate of the decedent

3) Allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included in the gross estate but in no case shall the deduction exceed P1,000,000

5. Standard deduction (§86-A5) (P1m) An amount equivalent to One million pesos (P1,000,000) shall be deducted from the gross estate without need of substantiation.

6. Medical expenses (§86-A6) (max. of P5ook)

All medical expenses (cost of medicine, hospital bills, doctors’ fees, etc.) incurred (whether paid or unpaid) Requisites for Deductibility: - The expenses were incurred by the decedent within one (1) year prior to his death - The expenses are duly substantiated with receipts PROVIDED, that in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000). NOTE: Any amount of medical expenses incurred within one year from death in excess of P500,000 CANNOT be claimed as a deduction under “Claims against the estate”. (RR 2-2003, Sec. 6-F) 7. Amounts received by heirs under R.A.

4917 (§86-A7)

Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with RA No. 4917 (this law provides that retirement benefits of private employees shall not be subject to attachment, levy execution or any tax) PROVIDED that such amount is included in the gross estate of the decedent. QUICK GLANCE:

Resident or citizen decedent

Non-resident alien decedent

GROSS ESTATE – all property at the time of death, wherever situated

GROSS ESTATE – includes only that part of gross estate located in the Philippines

DEDUCTIONS § funeral

expenses § judicial

expenses § claims against

the estate § claims against

insolvents § unpaid

mortgage and debt

§ taxes and losses § transfers for

public use § vanishing

deductions § family home

§ standard

deduction

§ medical

expenses

§ amounts

received under

R.A. 4917

§ share in conjugal property

DEDUCTIONS § funeral expenses § judicial expenses § claims against the

estate § claims against

insolvents § unpaid mortgage

and debt § taxes and losses § transfers for public

use § vanishing

deductions § share in conjugal

property NOTE: To compute for total allowable deductions of the first six items above, this formula is used: Gross estate, Phils

X Gross estate, world

World expenses, losses, indebtedness, taxes etc.

NOTE: No deduction shall be allowed in the case of a non-resident decedent not a citizen of the


TAXATION LAW 2

Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate not situated in the Philippines. (Section 86, NIRC) Tax Rates Applicable: If the net estate is:

Tax Credit for Estate Taxes (§86-E) Q: What is a tax credit? 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. Q: Who may avail of tax credit? Only the estate of a decedent who was a citizen or a resident of the Philippines at the time of his death can claim tax credit for any estate tax paid to a foreign country. Q: What is the amount allowable as tax credit?

GENERAL RULE: The estate tax imposed by the Philippines shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. 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 decedent's net estate situated within such country taxable under the NIRC bears to his entire net estate; (PER COUNTRY BASIS) 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 decedent's net estate situated outside the Philippines taxable under the NIRC bears to his entire net estate. (OVERALL BASIS)

ILLUSTRATION:

Assume: Net Estate – Philippines (reduced by all allowable deductions, except standard deduction)

P 1,050,000

Country G Net Estate 300,000 Country H Net Estate 150,000 Tax paid/incurred: Philippines Country G Country H

15,000 5,000 1,400

Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 –

1,000,000 standard deduction). The Philippine estate tax on P500,000 is P15,000

Solution – Limitation A:

To get tax credit per country under Limitation A, this formula is followed:

Net Estate in a Particular Country x Phil. estate tax = Tax credit Net Estate – Worldwide

The result after applying the formula above is compared to the tax actually paid for each foreign country. The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under Limitation A.

Amount Allowed

whichever is Lower)

Country G (300/1500 x 15,000) Actually paid to Country G

3,000 5,000

3,000

Country H (150/1500 x 15,000) Actually paid to Country H

1,500 1,400

1,400

Tax credit allowed under Limitation A

P 4,400

Solution – Limitation B: Net estate in all foreign countries. x Phil. estate tax = Tax credit Net Estate – Worldwide

The result after applying the formula above is compared to the tax actually paid in total to foreign countries. The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.

Amount Allowed

(Lower) 450/1500 x 15,000 P 4,500 Total foreign income taxes paid

6,400

Tax credit allowed under Limitation B

P 4,500

Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it becomes the final allowable tax credit. If there is only one foreign country involved, both Limitations will yield the same answer. To get the tax credit allowable, use the formula in Limitation A. The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will be the final allowable tax credit. (Source: Reyes, Income Tax Law and

Accounting)

OVER BUT NOT OVER

TAX IS PLUS

OF THE EXCESS OVER

200,000 Exempt

P 200,000 500,000 0 5% 200,000

500,000 2,000,000 15,000 8% 500,000

2,000,000 5,000,000 135,000 11% 2million

5,000,000 10million 465,000 15% 5million

10,000,000 And Over 1,215,000 20% 10million


TAXATION LAW 2

COMPLIANCE REQUIREMENTS

ESTATE TAX

1. Person Liable for Payment Primarily, the estate, through the executor or administrator. Payment shall be made before the delivery of the distributive share in the inheritance to any heir or beneficiary. If there are two or more executors or administrators, all of them are severally liable for the payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District Officer (RDO) having jurisdiction over the estate, will serve as the authority to distribute the remaining properties/share in the inheritance to the heir or beneficiary. Subsidiarily, heirs or beneficiaries, for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance. 2. Notice of Death A written Notice of Death must be given to the BIR -within two (2) months after the death of the decedent or -within a period after the executor or administrator or executor qualifies as such:

1. In all cases of transfers subject to tax or 2. Where, though exempt from tax, the gross

value of the estate exceeds P20,000. ESTATE TAX RETURN I: When required 1. When the estate is subject to estate tax, OR 2. When, though exempt from tax, the gross

value of the estate exceeds Two hundred thousand pesos (P200,000), OR

3. Regardless of the gross value of the estate, when the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee,

II: Contents The executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth: 1. The value of the gross estate of the decedent

at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;

2. The deductions allowed from gross estate in determining the net taxable estate; and

3. Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.

4. For estate tax returns showing a gross value exceeding Two million pesos (P2,000,000)→ there must be a statement duly certified to by a Certified Public Accountant containing the following:

§ Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;

§ Itemized deductions from gross estate allowed in Section 86; and

§ The amount of tax due whether paid or still due and outstanding.

III: When filed GR: Filed within six (6) months from the decedent's death. Exception: The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return IV: Where filed Except in cases where the Commissioner otherwise permits, the return shall be filed with:

§ an authorized agent bank (AAB), § or Revenue District Officer (RDO), § Collection Officer, or § duly authorized Treasurer of the city or

municipality in which the decedent was domiciled at the time of his death, or

§ if there be no legal residence in the Philippines, with the Office of the Commissioner.

Payment of Estate Tax I: When paid At the time the return is filed by the executor, administrator or the heirs. Extension of Payment The Commissioner may allow an extension of payment, if he finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs

→ extension not to exceed five (5) years, in case the estate is settled judicially, → or two (2) years in case the estate is

settled extrajudicially Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner.

• If extension granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a BOND in such amount, not exceeding DOUBLE the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.

Effects of granting an extension • Payment of the amount in respect of which

the extension is granted on or before the date of the expiration of the period of the extension

• Suspension of the running of statute of limitations for deficiency assessment for the period of any extension

• Any amount paid after the statutory due date of the tax, but within the extension period,


TAXATION LAW 2

shall be subject to interest but not to surcharge.

• Q: Can estate tax be paid in installments? Yes. In case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the corresponding/computed tax on which has been paid. (RR 2-2003) Government Collection of Unpaid Estate Tax Due 1. Filing of Action – The Government may file an

action against all the heirs for the collection from each one of them the amount of the tax proportionate to the inheritance received. Hereditary property consists only of that part which remains after the settlement of all lawful claims against the estate for the settlement of which the entire estate is first liable. It achieves payment of the tax and adjustment of the shares of each heir in the distributed estate as lessened by the tax.

2. Enforcement of Tax Lien – Another remedy,

pursuant to the lien created by Sec. 219 of the Tax Code upon all property and rights to property belonging to the taxpayer, 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 on the estate. This remedy seeks only the payment of the tax. As a holder of property belonging to the estate, an heir is liable for the tax up to the amount of the property in his hands. He is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. After payment of the tax, he will have a right of contribution from his co-heirs, to achieve an adjustment of the proper share of each heir in the distributable estate. (Commissioner v. Pineda, 21 SCRA 105)

OBLIGATIONS OF EXECUTOR, ADMINISTRATOR, OFFICERS, OTHERS 1. Executor or Administrator When the gross estate is more than P20,000, the executor, administrator or any of the legal heirs shall: a) give a written notice of death to the BIR

within two months after the decedent’s death OR after the executor or administrator shall have qualified

b) file the estate tax return within the time prescribed by law

c) pay the estate tax within the time prescribed by law

If the executor or administrator makes a written application to the Commissioner for determination of the amount of estate tax and discharge from personal liability therefor, the Commissioner shall notify the executor or administrator of the amount of the tax. Upon payment of the tax, the executor or administrator shall be DISCHARGED from PERSONAL LIABILITY for any deficiency in the tax thereafter found to

be due, and shall be entitled to a receipt or writing showing such discharge. (§92)

2. Judge No judge shall authorize the executor or administrator to deliver a distributive share to any party interested in the estate, unless a certification from the BIR that the estate tax has been paid is shown. (§94)

3. Register of Deeds The Register of Deeds shall not register in the registry of property any transfer of real property or real rights therein, or any mortgage, by way of donation or mortis causa or inheritance, without a certification from the BIR of payment of the estate tax, and they shall immediately notify the BIR of non-payment of tax discovered by them. (§95)

4. Bank If a bank has knowledge of the death of a person who maintained a joint account or deposit jointly with another, it shall not allow any withdrawal by a surviving depositor from the said joint account unless the Commissioner has certified that the estate tax has been paid. EXCEPTION: the administrator or any heir may, with the authorization of the Commissioner, withdraw an amount NOT EXCEEDING P20,000. (§95)

5. Lawyer, Notary Public or any

Government Officer Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donations mortis causa, legacy or inheritance, shall furnish the BIR with copies of such documents and any information whatsoever which may facilitate the collection of estate tax. (§95) 6. Debtor A debtor shall not pay his debts to the heirs, legatees, executor or administrator of his creditor-decedent without a certification from the BIR that the estate tax has been paid. EXCEPTION: if the credit is included in the inventory of estate of the decedent. (§95)

7. Corporate Secretary of other

responsible officer

No transfer to any new owner in the books of any corporation, sociedad anonima, partnership, business or industry organized or established in the Philippines, of any shares, obligations, bonds or rights by way of donations mortis causa, legacy or inheritance shall be made, UNLESS a certification from the BIR that the estate tax has been paid is shown. (§97)


TAXATION LAW 2

ILLUSTRATIONS o Decedent is an unmarried head of a family

a. Real and personal properties 5,000,000

family home 2,000,000

Gross estate 7,000,000

Less: Deductions

Ordinary deductions

Funeral expenses 200,000

Other deductions 1,300,000

(1,500,000)

Special deductions

Family Home 1,000,000

Standard deduction 1,000,000

Medical expenses 500,000

(2,500,000)

Net taxable estate 3,000,000

NOTE: Although the family home is valued at P2 million, the maximum allowable deduction for the family home is P1million only. Medical expenses are not included in the deductions referred under Section 86(A)(1) of the Code but are treated as a special item of deduction under Section 86(A)(6) of the same Code.

o Decedent is a married man with a

surviving spouse § Family home is exclusive property

Conjugal Exclusive Total Real&personal properties 5,000,000 5,000,000 Family home 2,000,000 2,000,000 Other exclusive prop 2,500,000 2,500,000 Gross estate 5,000,000 4,500,000 9,500,000 Less: Ordinary Deductions



Total Conjugal deductions (1,500,000) (1,500,000)

Net estate b4 share of spouse 3,500,000 4,500,000 8,000,000 Less Share of surviving spouse ` 1/2 of 3,500,000 (1,750,000) Net Estate b4 special ded'ns 6,250,000 Less: Special Deductions Family Home (1,000,000) Standard Deduction (1,000,000) Medical Expenses (500,000)

Net Taxable Estate 3,750,000

§ Family home is conjugal or community property

Conjugal Exclusive Total Real and personal properties 5,000,000 5,000,000 Family home 2000000 2,000,000 Other exclusive properties 2,000,000 2,000,000 Gross estate 7,000,000 2,000,000 9,000,000 Less: Ordinary Deductions


Other ded’ns 1,300,000


Net estate b4 share of spouse 5,500,000 2,000,000 7,500,000 Less Share of surviving spouse ` 1/2 of 5,500,000 (2,750,000)

Net Estate b4 special ded'ns 4,750,000 Less: Special Deductions Family Home (1,000,000) Standard Deduction (1,000,000) Medical Expenses (500,000) Net Taxable Estate 2,250,000

§ Family home is conjugal property,

valued at P1,500,000 Conjugal Exclusive Total Real and personal properties 5,000,000 5,000,000 Family home 1,500,000 1,500,000 Other exclusive properties 2,000,000 2,000,000

Gross estate 6,500,000 2,000,000 8,500,000 Less: Ordinary Deductions




Net estate b4 share of spouse 5,000,000 2,000,000 7,000,000 Less Share of surviving spouse ` 1/2 of 5,000,000 (2,500,000) Net Estate b4 special ded'ns 4,500,000 Less: Special Deductions Family Home (750,000) Standard Deduction (1,000,000) Medical Expenses (500,000)

Net Taxable Estate 2,250,000

NOTE: Only 750,000 is allowed as a deduction for the family home, considering that it was conjugal property valued at P1,500,000. This value is subdivided into P750,000, which belonged to the decedent, and P750,000, which belonged to the surviving spouse. The part owned by the decedent (P750,000) is compared with the P1,000,000 maximum deduction, the lower of the two amounts being the allowable deduction.


TAXATION LAW 2

B. Donor’s Tax

PRINCIPLES

Definition

Not defined under the Tax Reform Act of 1997 . A “gift” is merely subjected to donor’s tax.

GIFT or DONATION- “an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it.” (Art 725, Civil Code) REQUISITES for a gift to be subject to donor’s tax: [ACID] 1. The donor must have CAPACITY 2. There must be an INTENT TO DONATE 3. There must be DELIVERY, either actual or

constructive 4. The donee must ACCEPT the donation

Kinds of Donations 1. Donations inter vivos – a donation made

between living persons, which is perfected the moment the donor knows of the acceptance of the gift by the donee21; subject to donor’s tax

2. Donations mortis causa – a donation which takes effect upon the death of the donor; subject to estate tax

Q: What are considered donations for tax purposes? 1. Sales, exchanges and other transfers of

property for less than an adequate and full consideration in money or money’s worth

2. Condonation or remission of debt where the debtor did not render service in favor of the creditor

è Noteworthy, the element of donative intent is conclusively presumed in transfers of property for less than an adequate or full consideration in money or money’s worth. However, real property considered capital assets under the Tax Code are excepted from this rule. (Sec 100 in relation to Sec 24(d)) Under Section 24(d), the fair market value itself, if higher than the gross selling price, is the base for computing the capital gains tax imposed upon the sale of such capital assets. Thus, what the seller avoids in the payment of the donor’s tax, it pays for in the capital gains tax. Applicable Law The law in force at the time of the perfection/ completion of the donation (Sec 11, RR 2-2003) NOTE: Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended. (Sec. 99(C), NIRC) CASE LAW: Abello v. CIR (Feb. 23, 2005)— The contributions of the ACCRA partners to the campaign funds of Sen. Angara during the 1987

• 21 In the case of donations of immovable property, they must be made in a public document specifying therein the property donated. The acceptance may be made in the same Deed of Donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.

national elections constitutes a donation, thus, subject to gift taxes. However, the SC noted that succeeding cases shall be governed by RA 7166 enacted by Congress on Nov. 25, 1991. The RA provides in Sec 13 that political/electoral contributions, duly reported to the Commission on Elections, are NOT subject to the payment of any gift tax. PROPERTIES INCLUDED

Classes of Donors and their Gross Gift 1. Citizens or Residents of the Philippines – all

properties located not only within the Philippines but also in foreign countries

2. Nonresident Alien – all real and tangible properties within the Philippines, and intangible personal property, unless there is reciprocity, in which case it is not taxable

Q: What are the intangible properties which

are considered by law as situated in the Philippines? 1. Franchise which must be exercised in the

Philippines 2. Obligations or bonds issued by any

corporation or sociedad anonima organized or constituted in the Philippines

3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines

4. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines

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

Rule on Reciprocity (Sec 104, NIRC) There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: 1. did not impose a transfer tax of any

character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or

2. allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country

This rule applies to the transmission by gift of intangible personal property located or with a situs within the Philippines of a nonresident alien.

EXEMPTIONS

• Deductible from gross gifts in order to arrive at the taxable net gifts.

• Not to be treated as exclusions from the gross gifts of the donor.

1. Dowries or donations made on account of

marriage before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first P10,000. However, this exemption may not be availed of by a non-resident not a citizen of the Philippines. Q: Can both parents making a donation

to a child in consideration of marriage avail of the P10,000 deduction?


TAXATION LAW 2

Yes. If both spouses made the gift, then the gift is taxable one-half to each donor spouse. Separate donor’s tax returns must be filed; husband and wife are considered as separate and distinct taxpayers for purposes of donor’s tax. (Section 12, RR 2-2003) However, where there is failure to prove that the donation was actually made by both spouses, the donation is taxable as an exclusive act of the husband (Tang Ho v. BTA, 97 Phil 890), without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the provisions of the Civil Code and the Family Code. (Section 12, supra)

2. Gifts made to or for the use of the National

Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government

3. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution or organization, provided not more than 30% of said gifts will be used by such donee for administration purposes

Q: What is a non-profit educational and/or charitable corporation, etc? It is a school, college or university and/or charitable corporation, accredited NGO, trust or philanthropic organization and/or research institution or organization: • Incorporated as a non-stock entity, • Paying no dividends, • Governed by trustees who receive no

compensation, and • Devoting all its income, whether students’

fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation

4. Encumbrances on the property donated if

assumed by the donee in the deed of donation

5. Donations made to entities exempted under special laws, e.g.: o Aquaculture Department of the Southeast

Asian Fisheries Development Center of the Philippines

o Development Academy of the Philippines o Integrated Bar of the Philippines o International Rice Research Institute o National Museum o National Library o National Social Action Council o Ramon Magsaysay Foundation o Philippine Inventor’s Commission o Philippine American Cultural Foundation o Task Force on Human Settlement on the

donation of equipment, materials and services

6. Donations to persons not strangers where the

total of such net gifts for the calendar year is not more than P100,000.00

“Net Gifts” “Net Gift” is the net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. (Section 11, RR 2-2003)

COMPUTATION

How is donor’s tax computed? This general formula shall be followed:

Gross gifts made Less: Deductions from the gross gifts Net gifts made Multiplied by applicable rate Donor’s tax on the net gifts

If there were several gifts made during the year, this formula is followed:

Gross gifts made on this date Less: Deductions from the gross gifts Net gifts made on this date Add: all prior net gifts during the year Aggregate net gifts Multiplied by applicable rate Donor’s tax on the aggregate net gifts Less: donor’s tax paid on prior net gifts Donor’s tax due on the net gifts to date

RATES OF TAX

The applicable donor’s tax rate is dependent upon the relationship between the donor and the donee. 1. If the donee is a stranger to the donor,

the tax rate is equivalent to 30 % of the net gifts.

A stranger for purposes of the donor’s tax a. a person who is not a brother, sister

(whether by whole or half-blood), spouse, ancestor or lineal descendant, or

b. a person who is not a relative by consanguinity in the collateral line within the fourth degree of relationship. (Sec. 99(B)) Note that donations made between business organizations and those made between an individual and a business organization shall be considered as donations made to a stranger (RR 2-2003)

2. If the donee is not a stranger to the

donor, the tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year:


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Over But not Over

Tax Is Plus Of the Excess

Over

0 100,000 Exempt

100,000 200,000 0 2% 100,000

200,000 500,000 2,000 4% 200,000

500,000 1 million 14,000 6% 500,000

1 million 3 million 44,000 8% 1 million

3 million 5 million 204,000 10% 3 million

5 million 10 M 404,000 12% 5 million

10 M 1,004,000 15% 10 million

Note: A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, a donation to him shall not be considered as a donation made to a stranger. OBJECT OF TAXATION

• Donor’s tax shall be imposed whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.

• The computation of the donor’s tax is on a cumulative basis over a period of one calendar year

Illustrations: 1. Donation to son by parents on account of

marriage (P100,000): • Husband Net Taxable Gift = P50,000 – 10,000 = P40,000 Tax Due = None, since P40,000 is below the P100,000 threshold • Wife – same as above

2. Donation to son and daughter-in-law by

parents on account of marriage (P100,000): • Husband

o Gift pertaining to the son Net Taxable Gift = P25,000 – 10,000 =

P15,000 Tax Due = None, since P15,000 is below

the P100,000 threshold o Gift pertaining to the daughter-in-law Net Taxable Gift = P25,000

Tax Due = P25,000 x 30% = P7,500 • Wife – same as above

3. Donations to donees not considered strangers

for tax purposes were made on: January 30, 2002 – P 2,000,000 March 30, 2002 -- 1,000,000 August 15, 2002 -- 500,000

After the first donation

After the second donation

After the third donation

Net Taxable Gift

2,000,000 January Donation - P2,000,000

January Donation - P2,000,000

March Donation - 1,000,000

March Donation - 1,000,000

Total

P3,000,000

August Donation - 500,000

Total P3,500,000

Corresponding Donor’s Tax (refer to schedule)

124,000 P 204,000 P254,000

Tax Due / Payable

124,000 Donor’s Tax P 204,000

Donor’s Tax P 254,000

Less: Tax Previously Paid 124,000

Less: Tax Previously paid (124k+80k) 204,000

Tax Due P80,000

Tax Due P50,000

VALUATION

• If the gift is made in property, the fair

market value at that time will be considered the amount of gift.

• Real Property taxable base = FMV as determined by the

Commissioner of BIR (Zonal Value) or FMV as shown in the latest schedule of values of the provincial and city assessor (Market Value per Tax Declaration), whichever is higher.

If there is no zonal value, the taxable base is the FMV that appears in the latest tax declaration

• Improvement value of improvement is the construction

cost per building permit and/or occupancy permit plus 10% per year after year of construction, or the FMV per latest tax declaration. TAX CREDIT A situation may arise when the property given as a gift is located in a foreign country and the donor may be subject to donor’s tax twice on the same property: first, by the Philippine government and second, by the foreign government where the property is situated. The remedy of claiming a tax credit is, therefore, aimed at minimizing the burdensome effect of double taxation by allowing the taxpayer to deduct his foreign tax from his Philippine tax, subject to the limitations provided by law. Q: Who may claim tax credit? Tax credit for donor’s tax may be claimed only by a resident citizen, non-resident citizen and resident alien.

Q: What are the limitations on the tax credit? 1. NET GIFT (foreign country) X PHIL DONOR’S ENTIRE NET GIFTS TAX 2. NET GIFT(all foreign countries)X PHILDONOR’S ENTIRE NET GIFTS TAX NOTE: The computation of the donor’s tax credit is the same as the computation for estate tax credit.

COMPLIANCE REQUIREMENTS

DONOR’S TAX RETURN I. Who Files


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Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. Contents of the Donor’s Tax Return 1. Each gift made during the calendar year

which is to be included in computing net gifts; 2. The deductions claimed and allowable; 3. Any previous net gifts made during the same

calendar year; 4. The name of the donee; 5. Relationship of the donor to the donee; and 6. Such further information as the Commissioner

may require. When Filed Filed within thirty (30) days after the date the gift is made or completed and the tax due thereon shall be paid at the same time that the return is filed. Where Filed and Paid Unless the Commissioner otherwise permits, it shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a non-resident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner.

II.II.II.II. VALUEVALUEVALUEVALUE----ADDED TAXADDED TAXADDED TAXADDED TAX22222222

I. CONCEPT VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange, or lease of goods or properties, and on the performance of service in the course of trade or business, or on the importation of goods, whether for business or non-business purposes. It is a business tax levied on certain transactions involving a wide range of goods, properties, and services, such tax being payable by the seller, lessor, or transferor. The tax is so-called because it is imposed on the value not previously subjected to VAT (De Leon, “The National Internal Revenue Code Annotated,” 2000 edition) It is also an excise tax, or a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods. The taxpayer (seller) determines his tax liability by computing the tax on the gross selling price or gross receipt (output tax), and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the sale of service (input tax) against the tax due on his own sale.

VAT payable to BIR = OUTPUT TAX – INPUT TAX

Computation of the VAT Payable:

II. NATURE & CHARACTERISTICS • It is an indirect tax, the amount of which may

be shifted to or passed on the buyer, transferee, or lessee of the goods, properties or services. (Sec. 105)

• This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. –RR 16-200523

22 Credits: 2008 AD, C2005 23 Revenue Regulations (RR) No. 4-2007 dated February 7, 2007 introduced changes to RR No. 16-2005. SUCH as: “SEC. 4.106-1. VAT on Sale of Goods or Properties. – VAT is imposed and collected on every sale, barter or exchange, or transactions “deemed sale” of taxable goods or properties at the rate of twelve percent (12%) (starting February 1, 2006) of the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged, or deemed sold in the Philippines.”

Gross taxable sales/receipts xxx Less: Sales returns xxx Sales allowances xxx Sales discounts xxx (xxx) Net sales xxx Multiply with the VAT rate 12% Output tax (12% of Net sales) xxx Input tax carried over from previous period xxx Domestic purchases xxx Importations xxx Total xxx Input tax (12% of Total) xxx Total Input tax (xxx)

VAT payable (Output tax less input tax) xxx (All amounts in the formula must be NET of VAT)


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Constitutionality of VAT

ABAKADA Guro Party List, et. al. v Ermita

The validity of raising the VAT rate from 10% to 12% by the President was upheld by SC. The assailed provisions of RA 9337 are those that say that the President, upon the recommendation of the Sec. of Finance, shall raise the rate of VAT to 12% when VAT as a percentage of the GDP of the previous year exceeds 2 4/5% and when the deficit as a percentage of the previous year’s GDP exceeds 1 ½%. This is NOT an undue delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increased rate under the law is contingent. 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.24 Another assailed provision is Sec. 8 amending Sec. 110(B), which imposes a limitation on the amount of input tax (70% of the output tax) that may be credited against the output tax. The Court says this does not violate due process. The excess input tax, if any, is retained in a business’ books of accounts and remains creditable in the succeeding quarter/s. In addition, Sec. 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.25 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 right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can remove, or in this case, limit. [Note: This limitation of creditable input tax has

been eliminated by RA 9361, effective December

2006. Pls refer to the discussion on input taxes

on page30.]

With respect to Sec. 8, amending Sec. 110 (A), which provides for 60-month amortization of the input tax on capital goods purchased: It is not oppressive, arbitrary, and confiscatory. The taxpayer is not permanently deprived of his privilege to credit the input tax. For whatever is the purpose, it involves executive economic policy and legislative wisdom in which the Court cannot intervene. The tax law is uniform: it provides a standard rate of 0% or 10% (or 12% now) on all goods or services. The law does not make any distinction as to the type of industry or trade that will bear

24 The rate was indeed increased to 12%, effective Feb. 1,

2006, as per Revenue Memorandum (RMC) No. 7-06, dated

January 31, 2006 25 This, however, is not accurate. The option to apply for tax

credit certificate or refund is available to the VAT taxpayer only

in case his VAT registration is cancelled, unless he is subject to VAT zero-rate.

the 70% limitation on the creditable input tax, 5-year amortization of input tax on purchase of capital goods, or the 5% final withholding tax by the government. It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic marine and agricultural products in their original state are still not subject to tax. Congress also provided for mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax. VAT, by its very nature, is regressive. BUT the Constitution does not really prohibit the imposition of indirect taxes (which is essentially regressive). What it simply provides is that Congress shall “evolve a progressive system of taxation”. In Tolentino v. Sec. of Finance, the Court said that direct taxes are to be preferred, and as much as possible, indirect taxes should be minimized… but not avoided entirely because it is difficult, if not impossible, to avoid them. Tolentino v. Guingona Regressivity is not a negative standard for courts to enforce. What Congress is required by the Consti to do is to “evolve a progressive system of taxation.” This provision is placed in the Consti as moral incentives to legislation, not as judicially enforceable rights. The Consti mandate to “evolve a progressive system of taxation” simply means that direct taxes are to be preferred as much as possible, and indirect taxes should be minimized. Resort to indirect taxes should be minimized but not avoided entirely. Also, the regressive effects are corrected by the zero rating of certain transactions and through the exemptions. The transactions which are subject to VAT are those which involve goods and services which are used or availed of mainly by higher income groups ( real properties held primarily for sale to customers, right or privilege to use patent, copyright...) III. TRANSACTIONS SUBJECT TO VAT A. Any sale, barter or exchange of goods and

properties, or similar transactions in the course of trade or business

B. Any sale of services, or similar transactions, in the course of trade or business

C. Any lease of goods and properties or similar transactions, in the course of trade or business

D. Any importation of goods, whether in the course of trade or business or not

RMC 9-2006: Reimbursable expenses Transactions and amounts that are subject to VAT: 1. If the reimbursable expenses and/or

advanced payments for certain expenses (e.g. arrastre, wharfage, documentation, trucking, handling charges, storage fees, duties and taxes, etc.) made by brokers on


TAXATION LAW 2

behalf of their customers are receipted with the broker’s VAT official receipt.

2. Any advanced payment for expenses incurred (e.g. transportation, overtime and facilitation fee to facilitate the clearing of goods through customs) for the benefit of brokers, notwithstanding that the same is reimbursed by their customers.

Reimbursable expenses and/or advanced payments shall NOT be subject to VAT on the part of the broker if the following conditions/procedures are complied with: 1. The reimbursable expenses and/or advanced

payments EXCEPT those incurred for the benefit of the brokers, are receipted separately using NON-VAT Official Acknowledgment Receipts to be issued by the brokers to the Customers upon collection of the reimbursements or advances previously recorded as “Receivable For Cash Advances on Behalf of Customers”, which recording was done upon payment, on behalf of customers, of the advances to the third-party service providers who issued official receipts in the name of the customers and not of the brokers

2. The third-party service providers to whom the advanced payments or reimbursable expenses of the customers have been paid by the brokers shall issue receipts in the name of the Customers

3. The brokers shall record the reimbursable expenses of or the advanced payments on behalf of Customers under the account “Receivable for Cash Advances on Behalf of Customers”

4. For liquidation purposes, the brokers shall attach the original copy of all said official receipts issued by the third-party service providers in the name of the customers to the NON-VAT official acknowledgment receipts of the brokers issued to their Customers upon payment by the latter of the reimbursable expenses *The Customers may be able to claim input tax for the services of the third-party service providers that are subject to VAT if the same are receipted by the third-party service providers’ VAT official receipts evidencing the latter’s reporting of the same for VAT purposes.

IV. PERSONS LIABLE (Sec. 105) A. Any person who, in the course of trade or

business26, (1) sells, barters, exchanges goods or properties, (2) leases goods or properties, and (3) renders services.

26 The phrase “in the course of trade or business”

means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Sec 105

Exception: 1. When the sales do not exceed P100,000

(meaning not considered to be in the

course of trade or business but only for

subsistence, even if he, in the course of

trade or business, (1) sells, barters,

exchanges goods or properties, (2) leases

goods or properties, and (3) renders

services; hence, he is not liable for either

VAT or percentage tax)

2. Services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

RR 16-2005 clarifies this: Non-resident persons who perform services in the Philippines are deemed to be in the course of trade or business, even if performance is NOT regular.

B. Any person who imports goods

RR 16-2005: … the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to pay VAT.

RATES IN GENERAL [12%, 0%]

A. 12% VAT

i. SALE OF GOODS OR PROPERTIES (§ 106, A) • On sale, barter, exchange of goods or

properties Rate: 12% VAT (beginning 1 February 2006,

RMC No. 7-06) Basis: Of gross selling price or gross value in money of the goods or properties PROVIDED, That the President, upon the recommendation of the Sec. of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following conditions has been satisfied: 1. Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 2 4/5%; or 2. National government deficit as a percentage of GP of the previous year exceeds 1 ½%. Who Pays: Paid by SELLER Goods or properties- all tangible and intangible objects which are capable of pecuniary estimation, including:

(a)Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business

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

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

The right or the privilege to use motion picture films, films tapes and discs

(e) Radio, television, satellite transmission and cable television time


TAXATION LAW 2

Gross Selling Price (GSP)- The total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price…xxx….

1) The consideration stated in the sales

document, or 2) The fair market value (FMV),

Whichever is HIGHER FMV- whichever is the HIGHER of:

a) FMV as determined by the Commissioner (zonal value), or

b) FMV as shown in schedule of values of the Provincial & City assessors (real property tax declaration)

If GSP is based on the zonal value or market value of the property, the zonal or market value shall be deemed INCLUSIVE of VAT. If the VAT is not billed separately, the selling price stated in the sales document shall be deemed to be INCLUSIVE of VAT.

RR 16-2005: • Sale of Real Property on installment plan

Sale of real property by a real estate dealer, the initial payments of which in the year of sale (down payment + all payments actually or constructively received during the year of sale) do not exceed 25% of the gross selling price. However, in the case of sale of real properties on the deferred-payment basis, not on the installment plan, (meaning the initial payments in the year of sale exceed 25% of the gross selling price), the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. The real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller. Sale of residential lot exceeding P1.5M, residential house and lot or other residential dwellings exceeding P2.5M, where the instrument of sale is executed on or after July 1, 2005, shall be subject to [12%] VAT. Where the instrument of sale was executed prior to July 1, 2005, the price needs only to exceed P1M for the installment sale of residential house and lot or other residential dwellings to be subject to 10% VAT. Transmission of property to a trustee shall NOT be subject to VAT IF the property is to be merely held in trust for the trustor and/or beneficiary. However, IF the property transferred is one for sale, lease or use in the ordinary course of trade or business AND the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale transaction. The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary.

TRANSACTIONS DEEMED SALE (subject to 12% VAT) (§ 106, B) [DR TC] (1) Transfer, use or consumption not in the

course of business of goods properties originally intended for sale or for use in the course of business (e.g. when a VAT-registered person withdraws goods from his business for his personal use.- RR 16-2005)

(2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b)Creditors in payment of debt; (NOTE: Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings on or after Jan. 1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or FMV at the time of the distribution, whichever is applicable. - RR 16-2005)

(3) Consignment of goods if actual sale is not

made within 60 days following the date such goods were consigned; and

(NOTE: Consigned goods returned by the consignee within the 60-day period are not deemed sold. - RR 16-2005)

(4) Retirement from or cessation of business,

with respect to inventories of taxable goods existing as of such retirement or cessation.

(with respect to ALL goods on hand, whether capital goods, stock-in-trade, supplies or materials, as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. Examples are change of ownership of the business (e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business) and dissolution of a partnership and creation of a new partnership which takes over the business. - RR 16-2005)

TAX BASE on transactions deemed sale

Output tax = market value of the goods deemed sold as of the time of the occurrence of the transactions. CHANGES IN OR CESSATION OF STATUS OF A VAT-REGISTERED PERSON (12% VAT) (§ 106, C)

VAT shall apply to goods disposed of or existing as of a certain date if under the circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated…xxx…. RR 16-2005: 1) Subject to output tax—applicable to

goods/properties originally intended for sale or use in business and capital goods which are existing as of the occurrence of the following:


TAXATION LAW 2

a) Change of business activity from VAT taxable status to VAT-exempt status.

b) Approval of a request for cancellation of registration due to reversion to exempt status

c) Approval of a request for cancellation of registration due to a desire to revert to exempt status AFTER the lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2)

d) Approval of request for cancellation of registration of one who commenced business with the expectation of gross sales/receipts exceeding P1.5M but who failed to exceed this amount during the first 12 months of operation

2) NOT subject to output tax

a) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders.

b) Change in the trade or corporate name of the business

c) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed the surviving or new corp.

TAX BASE in case of retirement/cessation of business Tax Base= acquisition cost or current market price of the goods or properties, whichever is lower.

ii. IMPORTATION OF GOODS (§107, A)

• On every importation of goods (WON goods are for use in business)

Rate: 12% (as amended) Basis: total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges,

Where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. PROVIDED, That the President, upon the recommendation of the Sec. of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following conditions has been satisfied: 1. Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 2 4/5%; or 2. National government deficit as a percentage of GP of the previous year exceeds 1 ½%. Who Pays: Paid by the importer prior to the release of such goods from customs custody Transfer of Goods by Tax-Exempt Persons (§107, B) If importer is tax-exempt, the subsequent purchasers, transferees or recipients of such imported goods shall be considered as importers who shall be liable for the tax on importation.

The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. (as amended by RA 9337)

iii. SALE OF SERVICES & USE/LEASE OF PROPERTIES (§ 108, A)

• On sale or exchange of services, use of lease

properties Rate: 12% (as amended) Basis: gross receipts derived from the sale or exchange of services, including the use of lease of properties. PROVIDED, That the President, upon the recommendation of the Sec. of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following conditions has been satisfied: 1. Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds 2 4/5%; or 2. National government deficit as a percentage of GP of the previous year exceeds 1 ½%. Sale or Exchange of Services The performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by: (CLIMB-SCHERD-TFF) 1. Construction and service contractors; 2. stock, real estate, commercial, customs and

immigration Brokers; 3. Lessors of property, whether personal or real;

warehousing services; 4. lessors or distributors of cinematographic

Films; 5. persons engaged in Milling, processing,

manufacturing or repacking goods for others; 6. proprietors, operators or keepers of Hotels,

motels, rest-houses, pension houses, inns, resorts;

7. proprietors or operators of Restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;

8. Dealers in securities; 9. lending Investors; 10. Transportation contractors on their transport

of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes;

11. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines;

12. sales of Electricity by generation companies, transmission, and distribution companies;

13. services of Franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies;

14. and Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.


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The phrase 'sale or exchange of services' shall likewise include: (A- FACT-PIE) 1. The lease or the use of or the right or

privilege to use any Copyright, patent, design or model plan, secret formula or process, goodwill, trademark, trade brand or other like property or right

2. The lease or the use of, or the right to use of any industrial, commercial or, scientific Equipment;

3. The supply of scientific, technical, industrial or commercial knowledge or Information;

4. The supply of any Assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3);

5. The supply of services by a nonresident person or his employee in connection with the use of Property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

6. The supply of technical Advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;

7. The lease of motion picture Films, films, tapes and discs; and

8. The lease or the use of or the right to use radio, television, satellite transmission and cable television Time.

Lease of Properties - subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. 'Gross Receipts' -the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax…xxx…. (as amended by RA 9337, underscored parts amended or added by RA 9337) Notes: (unless otherwise indicated, from RR 16-2005) 1. Persons engaged in milling, processing,

manufacturing or repacking goods for others are subject to VAT, EXCEPT palay into rice, corn into corn grits, and sugarcane into raw sugar

2. For dealers in securities, “gross receipts”

means gross selling price less cost of the securities sold. RR 7-95: Pre-need companies are considered dealers in securities.

3. Lending investors – all persons OTHER than

banks, non-bank financial intermediaries, finance companies and other financial intermediaries NOT performing quasi-banking

functions who make a practice of lending money for themselves or others at interest

4. Subject to VAT: Franchise grantees of electric

utilities, telephone and telegraph, radio and/or TV broadcasting and all other franchise grantees (including PAGCOR and its licensees/franchisees) EXCEPT franchise grantees of radio and/or TV broadcasting whose annual gross receipts of the preceding year do not exceed P10M (which shall be subject to 3% franchise tax under Sec. 119, subject to optional registration), and franchise grantees of gas and water facilities (under Sec. 109, subject to 2% franchise tax). With respect to franchise grantees of telephone and telegraph services, amounts received for overseas dispatch, message, or conversation originating from the Philippines are subject to the percentage tax under Sec. 120 and hence exempt from VAT.

5. In a lease contract, the advance payment by

the lessee may be: a) a loan to the lessor from the lessee –

NOT subject to VAT b) an option money for the property – NOT

subject to VAT c) a security deposit to insure the faithful

performance of certain obligations of the lessee to the lessor – NOT subject to VAT. BUT if the security deposit is applied to rental, it shall be subject to VAT at the time of its application.

d) or pre-paid rental – subject to VAT when received, irrespective of the accounting method employed by the lessor

6. On transportation:

• All receipts from service, hire, or operating lease of transportation equipment not subject to the percentage tax on domestic common carriers and keepers of garages shall be subject to VAT. (Pls refer to Sec. 117 for other percentage taxes.

Common carrier

Transporting Kind of carrier

Tax Liability

By land Persons Domestic 3%, Sec. 117

Goods/cargo Domestic 12% VAT

By sea Whether transporting persons or goods/cargo

Domestic Domestic trip - 12% VAT

International trip – zero-rated

International 3%, Sec. 118

By air Domestic Domestic flight - 12% VAT

International flight – zero-rated


7. Sale of electricity by generation,

transmission, and distribution companies shall be subject to 12% VAT, EXCEPT sale of power or fuel generated through renewable sources of energy, such as, but not limited to, biomass, solar, wind hydropower,


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geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels, which shall be subject to 0% rate of VAT (zero-rated). The universal charge passed on and collected by distribution companies and electric cooperatives shall be excluded from the computation of gross receipts.

8. Insurance and reinsurance commissions, as

opposed to premiums, whether life or non-life, are subject to VAT. Non-life insurance premiums are subject to VAT. Life insurance

premiums are NOT subject to VAT, for they are subject to percentage tax.

B. 0% VAT (ZERO-RATED

TRANSACTIONS)

A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. Input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. (RR 16-2005)27

i. ZERO-RATED SALE OF GOODS OR

PROPERTIES (§ 106, (2)) A. Export sales (IF-GONE) 1) The sale and actual shipment of goods from

the Philippines to a Foreign country… AND paid for in acceptable foreign currency or its equivalent in goods or services, AND accounted for in accordance with the rules and regulations of the BSP

2) Sale of raw materials or packaging materials to a Nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods AND paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP

3) Sale of raw materials or packaging materials

to Export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production. Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall

27 Thus, the benefit of being zero-rated vis-à-vis being exempt is that enterprises which enjoy zero-rating of transactions can avail of input taxes on purchases of goods, properties, or services (as either tax credit or refund, there being no output tax against which input tax can be credited). In mathematical terms, the enterprises enjoy 100% of their input taxes. On the other hand, exempt enterprises cannot avail of these input taxes; instead, these input taxes form part of cost/expense. Thus, the net benefit these enterprises get from their exempt transactions is 35% (in the case of corporations), or to the extent that they can be used as deductions from income in the computation of income tax payable (subject to rules in income taxation).

There is therefore a 65% difference (100% in the case of zero-rated transactions, less 35% in exempt transactions). [Editor’s

note]

be considered an export-oriented enterprise upon accreditation under the rules & regulations of Export Development Act, RA 7844 (RR 7-95)

4) Sale of Gold to the Bangko Sentral ng Pilipinas (BSP);

5) Those considered export sales under the Omnibus Investment Code of 1987, and other special laws (ex. Bases Conversion & Development Act of 1992) Under Omnibus Investment Code: a) Phil. port FOB value of export products

exported directly by a registered export producer

b) Net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same (only when actually exported by the latter)

Constructive Exports: a) sales to bonded manufacturing

warehouses of export-oriented manufacturers

b) sales to export processing zones c) sales to registered export traders

operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the BIR and Bureau of Customs

d) sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products, whether paid for in foreign currency or not. Provided that export sales of registered export traders may include commission income, and that exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee, and provided finally that sales by a VAT-registered supplier to a manufacturer/producer whose products are 100% exported are considered export sales. A certification to his effect must be issued by the Board of Investment which shall be good for 1 year unless subsequently re-issued. (RR 16-2005)

6) The sale of goods, supplies, equipment and

fuel to persons engaged in International shipping or international air transport operations. (added by RA 9337) Provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Phil. directly to a foreign port without docking or stopping at any other port in the Phil., and that if any portion of such fuel, goods, or supplies is used for purposes other than that mentioned here, such portion of fuel, goods, and supplies shall be subject to 12% VAT.

B. Foreign Currency Denominated Sale - sale to a nonresident of goods, except those mentioned in Sections 149 and 150 (automobiles and non-essential goods like jewelry, perfume, and yachts), assembled or manufactured in the


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Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign currency AND accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales. C. Sales to persons or entities whose exemption under special laws or

international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. e.g.

a) sales to enterprises duly registered & accredited with the i) Subic Bay Metropolitan Authority, ii) Philippine Economic Zone Authority (PEZA),

b) international agreements to which the Phil. is signatory, such as

i. Asian Development Bank (ADB), ii. International Rice Research Institute

(IRRI) Section 6 of RR 4-2007, dated February 7, 2007: The term effectively zero-rated sale of goods and properties shall refer to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. NOTE: RR 4-2007 removed the distinction between automatic and effectively zero-rated transactions found in prior Revenue Regulations (including RR 16-2005) with respect to prior application. The following line in RR 16-2005 has been DELETED by RR 4-2007: “Other cases of zero-rated sales shall require prior application with the appropriate BIR office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of applications for effective zero-rating.” CIR vs. Seagate Technology (Philippines)

February 11, 2005 The BIR regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of Seagate’s transactions (subject to zero-rating, as an entity registered with the PEZA). Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer’s transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot

become exempt simply because an application therefor was not made or, if made, was denied.

RMC 74-99: Tax Treatment of Sales of Goods and Services Made by Suppliers from Western Territory to a PEZA registered enterprise and Sale Transactions made by PEZA registered enterprises Within and Without the Zone

CROSS- BORDER DOCTRINE (adhered to by Phil VAT law)

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. Hence, actual export of goods and services from the Phil to a foreign country must be free from VAT. Conversely, those destined for use or consumption WITHIN the Phil shall be imposed with the 10% VAT. (now 12%, as amended)

Tax Treatment of Sales Made:

A. By VAT registered Supplier from Customs Territory to a PEZA registered enterprise

1) if the buyer is a PEZA registered enterprise which is subject to the 5% special tax regime

(a) Sale of Goods – this shall be treated as INDIRECT EXPORT, hence considered SUBJECT TO 0% VAT.

(b) Sale of Service – this shall be treated SUBJECT TO 0% VAT under the “cross border doctrine”

2) if the buyer is a PEZA registered enterprise which is NOT embraced by the 5% tax regime

(a) Sale of Goods – this shall be treated as INDIRECT EXPORT, hence considered SUBJECT TO 0% VAT.

(b) Sale of Service – this shall be treated SUBJECT TO 0% VAT under the “cross border

doctrine”

NOTE: Any sale of goods, property or services made by a VAT registered supplier from the Customs Territory* to any registered enterprise operating in the ecozone, REGARDLESS of the class or type of the latter’s PEZA registration, is actually qualified and thus LEGALLY ENTITLED TO THE 0% VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated SUBJECT TO 0% VAT.

“Customs Territory” means the national territory of the Phil OUTSIDE of the proclaimed boundaries of the ECOZONES.

B. By a VAT-Exempt Supplier from the Customs Territory to a PEZA registered enterprise

Sale of goods, property and services by VAT-Exempt supplier from the Customs Territory to a PEZA registered enterprise shall be treated EXEMPT FROM VAT, regardless of


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whether or not the PEZA registered buyer is

subject to taxes under the NIRC or enjoying

the 5% special tax regime.

C. By a PEZA Registered Enterprise

1) Sale of Goods by a PEZA registered enterprise to a buyer from the Customs Territory (ie domestic sales) -- this case shall be treated as a technical IMPORTATION made by the buyer. Such buyer shall be treated as an IMPORTER thereof and shall be imposed with the corresponding VAT.

2) Sale of Services by a PEZA registered enterprise to a buyer from the Customs Territory – this is NOT embraced by the 5% special tax regime, hence, such seller shall be SUBJECT TO 10% VAT.

3) Sale of Goods by a PEZA registered enterprise to Another PEZA registered enterprise (ie Intra-ECOZONE Sales of Goods) – this shall be EXEMPT from VAT.

4) Sale of Services by ECOZONE enterprise, to Another ECOZONE enterprise (Intra-ECOZONE enterprise Sale of Service) (a) if PEZA registered seller is subject to

5% special tax regime – EXEMPT from VAT

(b) if PEZA registered seller is subject to taxes under NIRC (ie not subject to 5% special tax regime) – subject to 0% VAT pursuant to “cross border

doctrine”

ii. ZERO-RATED SALE OF SERVICES & USE/LEASE OF PROPERTIES (§ 108, B)

Zero-rated 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

2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP

3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate [as amended by RA 9337]

4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof [as amended by RA

9337]; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Phil. to another place in the Phil., the same being subject to 12% VAT under Sec. 108

5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country [as added by RA 9337]; (pls see table on page 29) and;

7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. [as added by RA 9337] Zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power.

RR 4-2007 removed the distinction between automatic and effectively zero-rated transactions found in prior Revenue Regulations (inc. RR 16-2005) with respect to prior application.

C. FINAL WITHHOLDING VAT-5% (§ 114, C)

The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the VAT imposed in Sections 106 and 108 of this Code, deduct and withhold a final VAT at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. The payor or person in control of the payment- considered as the withholding agent. The VAT withheld shall be remitted within ten (10) days following the end of the month the withholding was made. [NOTE: This 5% final VAT withheld by the

government is an innovation of RA 9337.] RR 16-2005: The 5% final VAT shall represent the net VAT payable of the seller. The remaining 5% (or 7%, with the raise of VAT to 12%) effectively accounts for the standard input VAT, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. (This

means that where the 5% final VAT applies, the

basic formula of output tax less input tax does

not apply.) Should actual input VAT exceed 7% of the gross payments, the excess may form part of the sellers’ expense or cost. On the other hand, if actual input VAT is less than 7% of gross


TAXATION LAW 2

payment, the difference must be closed to expense or cost, in effect reducing it.

However, 12% shall be withheld with respect to the following: 1) Lease or use of properties or property rights

owned by non-residents 2) Services rendered to local insurance

companies, with respect to reinsurance premiums payable to non-residents; and

3) Other services rendered in the Philippines by non-residents. V. TRANSACTIONS EXEMPT FROM VAT

(§ 109) (amendments introduced by RA 9337 indicated, text in ALL CAPS added by RA 9337) SEC. 109. Exempt Transactions. –

1) SUBJECT TO THE PROVISIONS OF SUBSECTION (2) HEREOF, The following shall be exempt from the value-added tax:

(a) Sale of nonfood agricultural products; marine and forest products in their original state by the primary producer or the owner of the land where the same are produced; [DELETED BY RA 9337]

(b) Sale of cotton seeds in their original state; and copra; [DELETED]

(c) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of or kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.

Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, AND COPRA shall be considered in their original state; [AMENDED]

(d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

(e) Sale or importation of coal and natural gas, in whatever form or state, and petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax imposed under Title VI; [DELETED]

(f) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax, except lubricating oil, processed gas, grease, wax and petrolatum; [DELETED]

(g) Importation of passenger and/or cargo vessels of more than five thousand tons (5,000) whether coastwise or ocean-going, including engine and spare parts of said vessel to be used by the importer himself as operator thereof; [DELETED]

(h) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;

(i) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;

(j) Services subject to percentage tax under Title V;

(k) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

(l) Medical, dental, hospital and veterinary services subject to the provisions of Section 17 of Republic Act No. 7716, as amended EXCEPT THOSE RENDERED BY PROFESSIONALS: [AMENDED]

(m) Educational services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports (DECS) Department of Education (DEPED), the Commission on Higher Education (CHED), THE TECHNICAL EDUCATION AND SKILLS DEVELOPMENT AUTHORITY (TESDA), and those rendered by government educational institutions; [AMENDED]

(n) Sale by the artist himself of his works of art, literary works, musical compositions and similar creations, or his services performed for the production of such works; [DELETED]

(o) Services rendered by individuals pursuant to an employer-employee relationship;

(p) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree


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Nos. 66, 529 [Petroleum Exploration

Concessionaires under the Petroleum Act of

1949] and 1590; [AMENDED]

(r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

(s) Sales by electric cooperatives duly registered with the Cooperative Development authority or National Electrification Administration, relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity; [DELETED]

(t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending operation is limited to their members; [AMENDED]

(u) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

(v) Export sales by persons who are not VAT-registered;

(w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings valued at One million pesos (P1,000,000) and below RESIDENTIAL LOT VALUED AT ONE MILLION FIVE HUNDRED THOUSAND PESOS (P1,500,000) AND BELOW, HOUSE AND LOT, AND OTHER RESIDENTIAL DWELLINGS VALUED AT TWO MILLION FIVE HUNDRED THOUSAND PESOS (P2,500,000) AND BELOW: Provided, That not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million pesos (P1,000,000) shall be adjusted to its present value JANUARY 31, 2009 AND EVERY THREE (3) YEARS THEREAFTER, THE AMOUNTS HEREIN STATED SHALL BE ADJUSTED TO THEIR PRESENT VALUES using the Consumer Price Index, as published by the national Statistics Office (NSO); [AMENDED]

(x) Lease of a residential unit with a monthly rental not exceeding TEN THOUSAND PESOS (10,000) Eight thousand pesos (P8,000); Provided, That not later than January 31st of the calendar year subsequent to the effectivity of Republic Act No. 8241 and each

calendar year thereafter, the amount of Eight thousand pesos (P8,000) JANUARY 31, 2009 AND EVERY THREE (3) YEARS THEREAFTER, THE AMOUNT HEREIN STATED shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NS0); [AMENDED]

(y) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; and

[RA 9337 ADDED THE FOLLOWING TWO SUBSECTIONS]

(S) SALE, IMPORTATION OR LEASE OF PASSENGER OR CARGO VESSELS AND AIRCRAFT, INCLUDING ENGINE, EQUIPMENT AND SPARE PARTS THEREOF FOR DOMESTIC OR INTERNATIONAL TRANSPORT OPERATIONS;

(T) IMPORTATION OF FUEL, GOODS, AND SUPPLIES BY PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRANSPORT OPERATIONS;

(U) Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and

(z) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Five hundred fifty thousand pesos (P550,000) ONE MILLION FIVE HUNDRED THOUSAND PESOS (P1,500,0000: Provided, That not later than January 31st of the calendar year subsequent to the effectivity of Republic Act No. 8241 and each calendar year thereafter, the amount of Five hundred fifty thousand pesos (550,000) JANUARY 31, 2009 AND EVERY THREE (3) YEARS THEREAFTER, THE AMOUNT HEREIN STATED shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO). [AMENDED]

The foregoing exemptions to the contrary notwithstanding, any person whose sale of goods or properties or services which are otherwise not subject to VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his liability to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input tax credit, and such tax shall also be recognized as input tax credit to the purchaser under Section 110, all of this Code. [DELETED] (2) A VAT-REGISTERED PERSON MAY ELECT THAT SUBSECTION (1) NOT APPLY TO ITS SALE OF GOODS OR PROPERTIES OR SERVICES: PROVIDED, THAT AN ELECTION MADE UNDER THIS SUBSECTION SHALL BE IRREVOCABLE FOR A PERIOD OF THREE (3) YEARS FROM THE QUARTER THE ELECTION WAS MADE. [ADDED BY RA 9337]


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Notes on exempt transactions (from RR 16-2005): VAT-EXEMPT TRANSACTIONS - Refer to sale of goods or properties and/or services and the use or lease of properties that is NOT subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT.

1. Sale/ import of agricultural, marine food products in original state; of livestock and poultry

Original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, AND COPRA shall be considered in their original state; [AMENDED]

Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. [RR 16-2005] Original state –including preservation using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods. [RR 16-2005]

2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds

3. Import of personal and household effects of Phil resident returning from abroad and nonresident citizens coming to resettle in the Philippines

4. Import of professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange

5. Services subject to percentage tax under Title V:[refer to percentage tax, next part] 6. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services EXCEPT THOSE RENDERED BY PROFESSIONALS: [AMENDED] Laboratory services are exempted. If the

hospital or clinic operates a pharmacy or drug store, the sale

of drugs and medicine is subject to VAT. [RR 16-

2005] 8. Educational services rendered by private educational institutions, duly accredited by DEPED, CHED, TESDA, and those rendered by government educational institutions; [AMENDED]

“Educational services” does not include seminars, in-service training, review classes

and other similar services rendered by persons who are not accredited by the DepED, CHED, and/or TESDA. [RR 16-2005]

9. Services rendered by individuals pursuant to an employer-employee relationship;

10. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

11. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No., 529 [Petroleum

Exploration Concessionaires under the Petroleum

Act of 1949]; [AMENDED]

12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce. Exemption includes importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority; [AMENDED]

14. Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority are exempt BUT their importation of machineries and equipment, including spare parts thereof, to be used by them are SUBJECT to VAT. 15. Export sales by persons who are not VAT-registered; 16. Sale of real properties – the ff. sales are exempt: (1) Sale of real properties NOT primarily held for

sale to customers or held for lease in the ordinary course of trade or business.

(2) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other related laws, such as RA No. 7835 and RA No. 8763. “Low-cost housing" refers to housing projects intended for homeless low-

income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of P750,000.00 under RA No. 7279, and other laws, such as RA No. 7835 and RA No. 8763.

(3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. "Socialized


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housing" refers to housing programs and projects covering houses and lots or home lots only undertaken by the Government or the private sector for the underprivileged

and homeless citizens which shall include sites and services development, long-term financing, liberated terms on interest payments, and such other benefits in accordance with the provisions of RA No. 7279and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or non-government organizations.

(4) Sale of residential lot valued at P1.5M and below, or house & lot and other residential dwellings valued at P2.5M and below, where the instrument of sale/transfer/disposition was executed on or after July 1, 2005; [to be adjusted every 3 years from Jan 31, 2009]; If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots does not exceed P1.5M. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [RR 16-2005]

17. Lease of residential units with a monthly

rental per unit not exceeding P10K, regardless of the amount of aggregate rentals received by the lessor during the year. Lease of residential units where the monthly rental per unit exceeds 10K but the aggregate of such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos P1.5M shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P10K while others are leased out for more than P10K per unit, his tax liability will be as follows: a. The gross receipts from rentals not

exceeding P10K per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts.

b. The gross receipts from rentals exceeding P10K per month per unit shall be subject to VAT IF the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P10K) exceeds P1.5M. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code. The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as

dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent. [RR 16-2005]

18. Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; 19. SALE, IMPORTATION OR LEASE OF PASSENGER OR CARGO VESSELS AND AIRCRAFT, INCLUDING ENGINE, EQUIPMENT AND SPARE PARTS THEREOF FOR DOMESTIC OR INTERNATIONAL TRANSPORT OPERATIONS;[added by RA 9337] The exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above, including engine and spare parts of said vessels; Provided, further, that the vessels to be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessel's original commissioning, as follows:

(i) for passenger and/or cargo vessels, the age limit is 15 years old, (ii) for tankers, the age limit is 10 years old, and (iii) for high-speed passenger crafts, the age limit is 5 years old [RR 16-2005]

20. IMPORTATION OF FUEL, GOODS, AND SUPPLIES BY PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRANSPORT OPERATIONS; [added by RA 9337]

Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; Provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT [RR 16-2005]

21. Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and

22. Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount ofP1,500,0000: [to be adjusted every 3 years from Jan 31, 2009] [AMENDED] For purposes of the threshold of P1,5M, the husband and the wife shall be considered

separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of


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determining whether the threshold has been exceeded. The VAT-exempt sales shall NOT be included in determining the threshold. [RR 16-2005]

VI. DETERMINING THE VAT BASE a) Sale of Goods

VAT Base = gross selling price or gross

value in money of the goods sold or exchanged

Gross selling price shall include:

• charges for packaging, delivery & insurance

• excise taxes if goods are subject to excise tax

For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time of the occurrence of the transactions. However, in case of retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is LOWER. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base.

b) Sale of Services VAT Base = Gross Receipts

“Gross receipts” means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or

constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT.

“Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. Examples: 1) deposit in banks which are made

available to the seller of services without restrictions

2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered

3) transfer of the amounts retained by the contractee to the account of the contractor.

Reimbursable expenses may be EXCLUDED from the tax base IF the ff. conditions are complied with: 1) the expenses are supported by

invoices/receipts in the name of the customer

2) the expenses are paid or will be paid to a 3rd party

3) there is no mark-up on the amounts billed, and

4) the reimbursable expenses should NOT be included in the Seller’s VAT

Invoice or if so included, these should be clearly indicated in the VAT Invoice as reimbursable expenses.

c) Importation of Goods

VAT Base = total value (used by Bureau of Customs in determining tariff and customs duties) + customs duties + excise tax (if any) + other charges In case the valuation used by Bureau of Customs in computing customs duties is by volume or quantity, the LANDED COST* shall be the tax base. *LANDED COST = invoice amount + customs duties + freight + insurance + other charges + excise tax (if any) NOTE: The VAT on importation shall be paid by the importer PRIOR to the release of such goods from customs custody. (RR 16-2005)

VII. INPUT TAXES

(amendments introduced by RA 9337 indicated, text in ALL CAPS added by RA 9337) CREDITABLE INPUT TAX (§ 110, A) (1) Any INPUT TAX evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the OUTPUT TAX:

(a) Purchase or importation of goods: (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except automobiles, aircraft and yachts. [AMENDED]

(b) Purchase of services on which a VAT has been actually paid.

(2) Input tax on domestic purchase OR IMPORTATION of goods or properties shall be creditable: [AMENDED]

(a) To the purchaser upon consummation of sale and on importation of goods or properties; and

(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs.

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000):


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Provided, however, That if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period:

Provided, finally, that in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee. [AMENDED]

(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity.

INPUT TAX- the VAT due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It includes the transitional input tax determined in accordance with Section 111 of this Code. It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. Input tax must evidenced by a VAT invoice or official receipt issued by a VAT-registered person in accordance with Secs. 113 and 237 of the Tax. [RR 16-2005] OUTPUT TAX- the VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of this Code.

EXCESS OUTPUT OR INPUT TAX (§ 110, C) If at the end of any taxable quarter: § the output tax exceeds the input tax, the

excess shall be paid by the VAT-registered person.

§ the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters:

Provided, however, that any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.28 [AMENDED]

28 As amended by RA 9361. RA 9337, effective July 1, 2005, amended this subsection to read as follows: “If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, That the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: Provided, however, That any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.” HOWEVER, this was again amended by Congress through RA 9361 passed on Nov. 21, 2006. RR 2-2007, dated January 11, 2007, provides that this regulation enforcing the amendment introduced by RA 9361 shall take effect immediately and shall apply to the quarterly VAT returns to be filed after the effectivity of RA 9361 (which is 15 days

Determination of Creditable Input Tax (§ 110, C)

- The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. The claim for tax credit referred to includes not only those filed with the BIR but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs. Transitional Input Tax Credits (§ 111, A) Any person liable for VAT or who elects to be a VAT-registered person shall be allowed INPUT TAX in his beginning inventory of goods, materials and supplies

§ equivalent to eight percent (8%) TWO PERCENT (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. [AMENDED]

[NOTE: subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner] Presumptive Input Tax Credits (§ 111, B) (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil AND PACKED NOODLE BASED INSTANT MEALS, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) FOUR PERCENT (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. [AMENDED] "Processing" shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. (2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom. [DELETED]

REFUNDS OR TAX CREDITS OF INPUT TAX Zero-Rated Sales (§ 112, A) Any VAT-registered person, whose sales are

zero-rated or effectively zero-rated may apply

after its publication) except VAT returns covering taxable quarters ending earlier than December 2006.


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for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: [within two (2) years after the close of the taxable quarter when the sales were made]

PROVIDED, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):

PROVIDED, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

PROVIDED, FINALLY, THAT FOR A PERSON MAKING SALES THAT ARE ZERO-RATED UNDER SECTION 108 (B)(6), THE INPUT TAXES SHALL BE ALLOCATED RATABLY BETWEEN HIS ZERO-RATED AND NON-ZERO-RATED SALES. [AMENDED]

(B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made. [DELETED] Cancellation of VAT Registration. (§ 112, C) A person whose registration has been cancelled

due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes.

Provided, however, that he shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.

Where to file the claim for refund/tax credit

certificate (§ 112, D) Claims for refunds/tax credit certificate shall be filed with the appropriate BIR office (Large Taxpayers Service (LTS) or Revenue District Office (RDO)) having jurisdiction over the principal place of business of the taxpayer; Provided, however, that direct exporters may also file their claim for tax credit certificate with the One Stop Shop Center of the Department of Finance; Provided, finally, that the filing of the claim with one office shall preclude the filing of the same claim with another office.

Period within which refund or tax credit

certificate/refund of input taxes shall be made (§ 112, D)

In proper cases, the Commissioner of Internal Revenue shall grant a tax credit certificate/refund for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with subparagraph (a) above.

In case of full or partial denial of the claim for tax credit certificate/refund as decided by the Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals (CTA) within thirty (30) days from the receipt of said denial, otherwise the decision shall become final. However, if no action on the claim for tax credit certificate/refund has been taken by the Commissioner of Internal Revenue after the one hundred twenty (120) day period from the date of submission of the application with complete documents, the taxpayer may appeal to the CTA within 30 days from the lapse of the 120-day period. [RR 16-2005]

Manner of Giving Refund (§ 112, E)- Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit. Notes from RR 16-2005: Apportionment of Input Tax on Mixed Transactions. — A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: 1. All the input taxes that can be directly

attributed to transactions subject to VAT may be recognized for input tax credit; Provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non-Government entities; and

2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.

Illustration: ERA Corporation has the following sales during the month: Sale to private entities subject to 12% 100,000.00

Sale to private entities subject to 0% 100,000.00

Sale of exempt goods 100,000.00 Sale to gov't. subjected to 5% final VAT w/holding 100,000.00

Total sales for the month 400,000.00

The following were its input taxes (or passed on by its VAT suppliers):

Input tax on taxable goods (12%) 5,000.00

Input tax on zero-rated sales 3,000.00


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Input tax on sale of exempt goods 2,000.00

Input tax on sale to government 4,000.00

Input tax on depreciable capital good

not attributable to any specific activity

(monthly amortization for 60 months) 20,000.00

A. The creditable input tax for the month shall be computed as follows:

Input tax on sale subject to 12% P5,000.00 Input tax on zero-rated sale 3,000.00 Ratable portion of the input tax not directly attributable to any activity, computed below

Taxable sales (0% and 12%) X Amount of ——————————— input tax Total Sales not directly attributable

P200,000.00 —————----- X P20,000.00 = P10,000.00 400,000.00 Total creditable input tax for the month (P5,000+ P3,000 +P10,000) P18,000.00 B. The input tax attributable to sales to government for the month shall be computed as follows: Input tax on sale to gov't. P4,000.00 Ratable portion of the input tax not directly attributable to any activity, computed as follows: Taxable sales to government X Amount of ——————————— input tax Total Sales not directly

attributable P100,000.00 X P20,000.00 = P5,000.00 ————— 400,000.00 Total input tax attributable to sales to government P9,000.00 (P4,000 + P5,000) – These amounts are not available for input tax credit but may be recognized as cost or expense. That is because as far as sales to government are concerned, there is a VAT that is finally withheld (at 5%). C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows: Input tax on VAT-exempt sales P2,000.00 Ratable portion of the input tax not directly attributable to any activity, computed below: VAT-exempt sales X Amount of ——————— input tax Total Sales not directly attributable P100,000.00 X P20,000.00 = P5,000.00 —————--- 400,000.00 Total input tax attributable to P7,000.00 VAT-exempt sales (P2,000+ P5,000) - These amounts are not available for input tax credit but may be recognized as cost or expense. Determination of Input Tax Creditable during a Taxable Month or Quarter. —

All creditable input taxes29 xxx (as illustrated in the previous example to be P18K) during the month or quarter any amount of input tax carried-over xxx from the preceding month or quarter Less: amount of claim for VAT refund or tax credit certificate

(whether filed with the BIR, the Department of Finance, the Board of Investments, BOC) (xxx)

other adjustments (purchases returns or allowances) (xxx)

xxx

VIII. SUBSTANTIATION REQUIREMENTS RR 16-2005: Substantiation of Input Tax Credits (a) INPUT TAXES must be substantiated and supported by the following documents, and must be reported in the information returns required to be submitted to the Bureau:

(1) For the importation of goods — import entry or other equivalent document showing actual payment of VAT on the imported goods.

(2) For the domestic purchase of goods and properties— invoice showing the information required under Secs. 113 and 237 of the Tax Code.

(3) For the purchase of real property — public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller.

(4) For the purchase of services— official receipt showing the information required under Secs. 113 and 237 of the Tax Code.

A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Secs. 113 and 237 of the Tax Code.

(b) TRANSITIONAL INPUT TAX shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR. (c) Input tax on "deemed sale" transactions shall be substantiated with the invoice required (please refer to the table on page 46). (d) Input tax from payments made to non-residents (such as for services, rentals and royalties) shall be supported by a copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor. (e) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT.

29 Remember, this does NOT include input tax attributable to

exempt sales, and input tax attributable to sales subject to final withholding VAT


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IX. INVOICING REQUIREMENTS (§ 113) A VAT-registered person shall issue:

(1) A VAT invoice for every sale, barter or exchange of goods or properties; and

(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.

Information Contained in the VAT Invoice or

VAT Official Receipt: (1) A statement that the seller is a VAT-

registered person, followed by his taxpayer's identification number (TIN);

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided, That: (a) The amount of the tax shall be shown as

a separate item in the invoice or receipt; (b) If the sale is exempt from value-added

tax, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt;

(c) If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt;

(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt: "Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.

(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and

(4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client.

…xxx…. Notes from RR 16-2005: Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or official receipts. Said documents shall be considered as a "VAT Invoice" or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. VAT invoice/official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records.

Invoicing & Recording Deemed Sale Transactions.

Transaction Invoicing Requirement

Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business

Memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use

Distribution or transfer to shareholders/investors or creditors

Invoice, at the time of the transaction, which should include all the info prescribed in Sec. 113(B)

Consignment of goods if actual sale is not made within 60 days

Invoice, at the time of the transaction, which should include all the info prescribed in Sec. 113(B)

Retirement from or cessation of business with respect to all goods on hand

An inventory shall be prepared and submitted to the RDO who has jurisdiction over the taxpayer’s principal place of business not later than 30 days after retirement or cessation from the business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales journal. The invoice need not enumerate the specific items appearing in the inventory regarding the description of the goods. If the business is to be continued by the new owners or successors, the entire amount of output tax on the amount deemed sold shall be allowed as input taxes.

X. ACCOUNTING REQUIREMENTS (§ 113, B)

Notwithstanding the provisions of Section 233, all persons subject to VAT under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance. ...xxx….

RR 16-2005: A subsidiary record in ledger form shall be maintained for the acquisition, purchase or importation of depreciable assets or capital goods which shall contain, among others, information on the total input tax thereon as well as the monthly input tax claimed in VAT declaration or return.


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XI. CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE OR VAT OFFICIAL RECEIPT (§ 113, D) [Added by RA 9337]

(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed by the word "VAT":

(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:

(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and (ii) A 50% surcharge under Section 248 (B) of this code;

(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code.

(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale", the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109 did not apply.

Transitional Period (§ 113, E) - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices and VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal Revenue administrative practices that existed as of December 31, 2004. Under sub-par(2), clarification: If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words "VAT-exempt sale", the transaction shall become taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase. (RR 16-2005) XIII. REGISTRATION REQUIREMENTS (§ 236, F) Cancellation of Registration. -

(1) General Rule. - The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the Revenue District Office where he is registered, an application for registration information update in a form prescribed therefor;

(2) Cancellation of VAT Registration. - IF (a) He makes written application and can

demonstrate to the Commissioner's satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) TO (U), will not exceed One million five hundred thousand pesos (P1,500,000); or

(b) He has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months.

The cancellation of registration will be effective from the first day of the following month.

Persons Required to Register for VAT (§ 236, G)

(1) Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of services, shall be liable to register for Value-added tax if:

(a) His gross sales or receipts for the past twelve (12) months, other than those that are exempt under section 109 (a) to (u), have exceeded One million five hundred thousand pesos (P1,500,000); or (b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will exceed one million five hundred thousand pesos (P1,500,000).

(2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the Revenue District Office which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee prescribed in Subsection (B) hereof. If he fails to register, he shall be liable to pay the tax under Title IV as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered.

Optional Registration for Value-added Tax of Exempt Person. (§ 236, H)

(1) Any person who is not required to register for Value-added tax under Subsection (G) hereof may elect to register for Value-added tax by registering with the Revenue District Office that has jurisdiction over the head office of that person, and paying the annual registration fee in Subsection (B) hereof. (2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F)(2) for the next three (3) years.

For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as a "VAT-registered person" who shall be assigned only one Taxpayer Identification Number (TIN). … xxx…. (amended by RA 9337)

RR 16-2005: Annual registration fee = P500.00 Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. Non-VAT or VAT-exempt persons are also required to register as NON-VAT persons and pay the annual registration fee of P500.00 for every separate or distinct establishment or place of business before the start of such business and


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every year thereafter on or before the 31st day of January. Individuals engaged in business where the gross sales or receipts do NOT exceed P100,000.00 during any 12-month period, and cooperatives other than electric cooperatives, are required to register but will not be made to pay the P500.00 fee. Franchise grantees of radio and television broadcasting whose gross annual receipt for the preceding calendar year exceeded P10M shall register within 30 days from the end of the calendar year. Franchise grantees of the same whose annual gross receipts do not exceed P10M derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable (as opposed to VAT-exempt persons, in general, who choose to be VAT-registered, in which case VAT registration cannot be cancelled for 3 years only). Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt. Cancellation of VAT registration: A VAT-registered person may cancel his registration for VAT as provided for in Sec. 236 (F) (2), and also in the following instances: 1. A change of ownership, in the case of a

single proprietorship; 2. Dissolution of a partnership or corporation; 3. Merger or consolidation with respect to the

dissolved corporation(s); 4. A person who has registered prior to

planned business commencement, but failed to actually start his business

Some instances where taxpayer will update his registration by submitting a duly accomplished Registration Update Form: 1. A person's business has become exempt in

accordance with Sec. 109 2. A change in the nature of the business itself

from sale of taxable goods and/or services to exempt sales and/or services;

3. A person whose transactions are exempt from VAT who voluntarily registered under VAT system, who after the lapse of three years after his registration, applies for cancellation of his registration as such; and

4. A VAT-registered person whose gross sales or receipts for three consecutive years did not exceed P1,500,000.00 beginning July 1, 2005, which amount shall be adjusted to its present value every three years using the Consumer Price Index, as published by the NSO.

Upon updating his registration, the taxpayer shall become liable to the percentage tax imposed in Sec. 116 of the Tax Code. A short period return for the remaining period that he was VAT-registered shall be filed within twenty five (25) days from the date of cancellation of his registration. XIV. FILING OF RETURNS & PAYMENT OF VAT

VAT RETURNS(§ 114) - Filed by person liable to pay the VAT

* quarterly return of the amount of his gross sales or receipts within twenty-five (25) days after the close of each taxable quarter30 prescribed for each taxpayer: NOTE: VAT paid on a monthly basis31

Short Period Return Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.32

Persons Required to Submit Summary Lists of Sales/Purchases. — (1) Persons Required to Submit Summary Lists of Sales. — All persons liable for VAT such as manufacturers, wholesalers, service-providers, among others, with quarterly total sales/receipts (net of VAT) exceeding Two Million Five Hundred Thousand Pesos (P2,500,000.00). (2) Persons Required to Submit Summary Lists of Purchases. — All persons liable for VAT such as manufacturers, service-providers, among others, with quarterly total purchases (net of VAT) exceeding One Million Pesos (P 1,000,000.00). When and Where to File the Summary Lists of Sales/Purchases. shall be submitted in diskette form to the RDO or LTDO or LTAD having jurisdiction over the taxpayer, on or before the twenty-fifth (25th) day of the month following the close of the taxable quarter (VAT quarter. However, taxpayers under the jurisdiction of the LTS, and those enrolled under the EFPS, shall, through electronic filing facility submit their Summary List of Sales/Purchases to the RDO/LTDO/LTAD, on or before the thirtieth (30th) day of the month following the close of the taxable quarter. Information that Must be Contained in the Quarterly Summary List of Sales to be Submitted: the monthly total sales generated from regular buyers/customers, regardless of the amount of sale per buyer/customer, as well as from casual buyers/customers with individual

30 The term "taxable quarter" shall mean the quarter

that is synchronized to the income tax quarter of the taxpayer (i.e., the calendar quarter or fiscal quarter). [RR 16-2005] 31

The monthly VAT Declarations (BIR Form 2550M) of

taxpayers whether large or non-large shall be filed and the taxes paid not later than the 20th day following the end of each month. The return for withholding of VAT shall be filed and the withholding VAT paid on or before the tenth (10th) day of the following month. [RR 16-2005]

32 Any person who retires from business with due notice

to the BIR office where the taxpayer (head office) is registered or whose VAT registration has been cancelled shall file a final quarterly return and pay the tax due thereon within twenty five (25) days from the end of the month when the business ceases to operate or when VAT registration has been officially cancelled; Provided, however, that subsequent monthly declarations/quarterly returns are still required to be filed if the results of the winding up of the affairs/business of the taxpayer reveal taxable transactions. [RR 16-2005]


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sales amounting to P100,000.00 or more. For this purpose, the term "regular buyers/customers" shall refer to buyers/customers who are engaged in business or exercise of profession AND those with whom the taxpayer has transacted at least 6 transactions regardless of amount per transaction

either in the previous year or current year. The term "casual buyers/customers", on the other hand, shall refer to buyers/customers who are engaged in business or exercise of profession BUT did not qualify as regular buyers/customers as defined in the preceding statement. The Quarterly Summary List of Sales to Regular Buyers/Customers and Casual Buyers/Customers and Output Tax shall reflect the following: (1) BIR-registered name of the buyer who is

engaged in business/exercise of profession; (2) TIN of the buyer (Only for sales that are

subject to VAT); (3) Exempt Sales; (4) Zero-rated Sales; (5) Sales Subject to VAT (exclusive of VAT); (6) Sales Subject to Final VAT Withheld; and (7) Output Tax (VAT on sales subject to 10%).

(The total amount of sales shall be system-generated)

Information that must be Contained in the Quarterly Summary List of Purchases (1) The Quarterly Summary List of Local Purchases and Input Tax

a. BIR-registered name of the seller/supplier/service-provider; b. Address of seller/supplier/service-provider; c. TIN of the seller; d. Exempt Purchases; e. Zero-rated Purchases; f. (i) Purchases Subject to VAT (exclusive of VAT) — on services; (ii) Purchases Subject to VAT (exclusive of VAT) — on capital goods; and (iii) Purchases Subject to VAT (exclusive of VAT) — on goods other than capital goods (iv) Purchases Subject to Final VAT Withheld g. Creditable Input Tax; and (to be computed not on a per supplier basis but on a per month basis) h. Non-Creditable Input Tax (to be computed not on a per supplier basis but on a per month basis) (The total amount of purchases shall be system-generated)

(2) The Quarterly Summary List of Importations. —

(a) The import entry declaration number; (b) Assessment/Release Date; (c) The date of importation; (d) The name of the seller; (e) Country of Origin; (f) Dutiable Value; (g) All Charges Before Release From Customs' Custody; (h) Landed cost: (i) Exempt; (ii) Taxable (Subject to VAT); (i) VAT paid; (j) Official Receipt (OR) Number of the OR evidencing payment of the tax; and (k) Date of VAT payment

For the claimed input tax arising from services rendered in the Philippines by nonresidents, no summary list is required to be submitted. Once any of the taxable quarters total sales and/or purchases exceed the threshold amounts as provided above, VAT taxpayer shall be required to submit the summary lists for the next 3 succeeding quarters, regardless of whether or not such succeeding taxable quarter sales and/or purchases exceed the herein set threshold amounts of P2,500,000.00 for sales and P1,000,000.00 for purchases. Penalties in case of failure to submit quarterly summary list of sales and purchases.

A person who fails to file, keep or supply a statement, list, or information required herein on the date prescribed therefor shall pay, upon notice and demand by the Commissioner of Internal Revenue, an administrative penalty of P1,000.00 for each such failure, unless it is shown that such failure is due to reasonable cause and not to willful neglect. For this purpose, the failure to supply the required information for each buyer or seller of goods and services shall constitute a single act or omission punishable hereof. However, the aggregate amount to be imposed for all such failures during a taxable year shall not exceed P25,000.00.

In addition to the imposition of the administrative penalty, willful failure by such person to keep any record and to supply the correct and accurate information at the time or times as required herein, shall be subject to the criminal penalty under the relevant provisions of the Tax Code (e.g., Sec. 255, Sec. 256, etc.,), upon conviction of the offender. The imposition of any of the penalties under the Tax Code and the compromise of the criminal penalty on such violations, notwithstanding, shall not in any manner relieve the violating taxpayer from the obligation to submit the required documents.

Finally, the administrative penalty shall be imposed at all times, upon due notice and demand by the Commissioner of Internal Revenue. A subpoena duces tecum for the submission of the required documents shall be issued on the second offense. A third offense shall set the motion for a criminal prosecution of the offender.

XV. ENFORCEMENT MEASURES

RR 16-2005: Administrative and Penal Provisions. — (a) Suspension of business operations. — In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the Commissioner of Internal Revenue or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations:

(1) Failure to issue receipts and invoices. (2) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code. (3) Understatement of taxable sales or receipts by 30% or more of his correct


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taxable sales or receipt for the taxable quarter. (4) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code.

(b) Surcharge, interest and other penalties. — The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code.

III.III.III.III. PPPPERCENTAGE TAXESERCENTAGE TAXESERCENTAGE TAXESERCENTAGE TAXES

TAX ON PERSONS EXEMPT FROM VAT (Sec. 116, NIRC)

• 3% of gross quarterly sales or receipts. Q: Who are liable? GENERAL RULE: Any person who are exempt from VAT and who is not a VAT-registered person.

§ Those whose gross annual sales and receipts does not exceed P1.5M are exempted from VAT

EXCEPTION: • Cooperatives shall be exempt from the

3% GRT. • Those earning LESS THAN P100,000

which is neither covered by percentage tax nor by VAT.

TAX ON DOMESTIC CARRIERS AND KEEPERS OF GARAGES (Sec. 117, NIRC)

• 3% of quarterly gross receipts • Gross receipts of common carriers

derived from INCOMING and OUTGOING freight is NOT subject to local taxes under the Local Gov’t Code.

Q: Who are covered? (ReCoLaKe no BA)

1. Cars for Rent or hire driven by lessee; 2. Transportation Contractors, including

persons who transport passengers for hire;

3. Other domestic carriers by LAND; 4. Keepers of garages.

EXCEPT: 1. Owners of Bancas 2. Owners of Animal-drawn two-wheeled

vehicles

Minimum quarterly gross receipts: Jeepneys

Manila and other cities P2,400 Provincial P1,200

Public Utility Bus Not exceeding 30 passengers P3,600 > 30 but not > 50 passengers P6,000 Exceeding 50 passengers P7,200

Taxis Manila and other cities P3,600 Provincial P2,400

Car for hire (with chauffeur) P3,000 Car for hire (w/o chauffeur) P1,800 TAX ON INTERNATIONAL CARRIERS (Sec. 118, NIRC) • 3% of their quarterly gross receipts. • To be subject to this percentage tax, they

MUST BE DOING BUSINESS IN THE PHILIPPINES.

Q: Who are liable?

1. International air carriers 2. International shipping carriers • Amendment introduced by RA 9337 (July

2005):


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Common carrier

Transporting Kind of carrier

Tax Liability

By land Persons Domestic 3%, Sec. 117

Goods/cargo Domestic 12% VAT By sea

Whether transporting persons or

goods/cargo

Domestic Domestic trip - 12% VAT International trip – zero-rated


By air Domestic Domestic flight - 12% VAT International flight – zero-rated


TAX ON FRANCHISES (Sec. 119) Q: Who are liable?

1. Radio and broadcasting companies a. annual gross receipts of the

preceding year does not exceed P10M

b. 3% of gross receipts derived from business covered by law granting the franchise.

c. The franchisee has the option to register as VAT taxpayer and pay the VAT instead.

d. once option is exercised, it is IRREVOCABLE.

2. Electric, gas and water utilities 2% of gross receipts derived from business covered by the law granting the franchise.

* Under RA 9337, electric companies are now

subject to VAT and not percentage tax. OVERSEAS COMMUNICATIONS TAX (Sec. 120)

• 10% of the amount paid for the services. • Levied upon EVERY overseas dispatch,

message or conversation TRANSMITTED FROM THE PHILIPPINES by:

- telephone - telegraph - telewriter exchange - wireless - other communication equipment

services. Q: Who are liable? Payable by: the person paying for the services rendered Payable to: the person rendering the service, who will in turn pay the taxes at the end of the quarter. Q: Who are exempted? (D’ GIN)

1. Government and any of its political subdivisions and instrumentalities;

2. Diplomatic services (any embassy and consular offices of a foreign gov’t)

3. International Organizations (if bases in the Phils. and enjoying privileges, exemptions and immunities pursuant to an international agreement)

4. News services (which deals EXCLUSIVELY with the collection of news and dissemination to the public)

TAX ON BANKS AND NON-BANK FINANCIAL INTERMEDIARIES PERFORMING QUASI-BANKING FUNCTIONS (Sec. 121, NIRC) tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries Definitions (from RR 09-04, Sec 2): Non-bank Financial Intermediaries refer to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity Deposited with them, Acquired by them or otherwise Coursed through them, either for their own account or for the account of others. (LIP – DAC) Quasi-banking Activities refer to the borrowing of funds from 20 or more personal or corporate lenders at any one time for purposes of relending or purchasing receivables and other similar obligations. Exception: If borrowing of funds is for LIMITED PURPOSE of financing their own needs or the needs of their agents or dealers. Receipts Maturity Rate

1. interest, commissions, discounts from lending activities and financial leasing bases on remaining maturities of instruments:

maturity period is 5yrs or less maturity period is more than 5yrs

5% 1%

2. dividends & equity shares in net income of subsidiaries

0%

3. royalties, rentals of property (real/personal), profits from exchange and all other items treated as gross income under sec. 32)

7%

4. net trading gains on foreign currency, debt securities, derivatives & other similar financial instruments

7%

[Note: rates in #s 3 & 4 are as amended by RA

9337]

COMPUTING FOR THE NET TRADING GAINS:

Cumulative Total of the net trading gain/loss since the first month of the applicable taxable year LESS: figures already reflected in the previous months of the same year

FIGURE TO BE REPORTED IN THE MONTHLY PERCENTAGE TAX Net Trading Loss - may only be deducted from the net trading

gain to arrive at the total gross receipts tax due.


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- cannot be deducted on net trading gain earned on any taxable year other than the year it was incurred

- may not be carried over to the succeeding taxable year.

RULE ON PRETERMINATION: In case the maturity period of an instrument is shortened by pretermination, the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and applying the correct rate of tax. (RR 09-04, Sec. 5)

CASE LAW: China Bank v. CTA (GR 146749, June 10, 3003) – The 20% withholding tax on interest income shall form part of the gross receipts in computing gross receipts tax on banks. ‘Gross Receipts’ is commonly understood as the entire receipts without any deductions.

TAX ON OTHER NON-BANK FINANCE

INTERMEDIARIES (Sec. 122, NIRC) • tax on gross receipts derived by other non-

bank finance intermediaries, DOING BUSINESS IN THE PHILIPPINES, from: - interest - commissions - discounts from lending activities - financial leasing

• tax is based on the remaining maturities of the instruments from which receipts are derived

MATURITY RATES

maturity period is 5 yrs or less

5%

maturity period is more than 5 yrs

3%

[Note: The same rule on pretermination applies.]

However, RR 10-2004 has classified pawnshops as under “NON-BANK FINANCIAL INTERMEDIARIES”, thus are now subject to 5% gross receipts tax. The revenue regulation also required pawnshops to register, from VAT taxpayers, as percentage taxpayers. TAX ON LIFE INSURANCE PREMIUMS (Sec. 123, NIRC)

• 5% of total premiums collected (whether in money, notes, credits or any substitute for money).

Q: Who are liable? GENERAL RULE: Every person, company or corporation DOING LIFE INSURANCE BUSINESS OF ANY SORT IN THE PHILIPPINES. EXCEPTION: Purely cooperative companies or associations. Cooperative companies or associations are such as are

§ conducted by the members thereof § with the money collected from among

themselves and § solely for their own protection and § NOT for profit.

PREMIUMS NOT INCLUDED IN THE TAXABLE RECEIPTS: V- ROAR

1. Premiums Refunded within 6 months after payment on account of rejection of risks

2. Premiums paid upon reinsurance by a company that has Already paid the tax.

3. Premiums collected or received by any branch of a domestic corporation, firm or association doing business OUTSIDE the Phils. on account of any life insurance of the insured who is a NON-RESIDENT, if any tax on such premiums is imposed by the foreign country where the branch is established.

4. Premiums collected or received on account of any reinsurance, if the insured of personal insurance, RESIDES OUTSIDE THE PHILS., if any tax on such premiums is imposed by the foreign country where the original insurance has been issued or perfected.

5. Portions of premiums collected or received by insurance companies on VARIABLE CONTRACTS in excess of the amounts necessary to insure the lives of variable contract owners.

Variable Contracts —benefits under the contract vary as to reflect investment results of any segregated portfolios of investments. (PD612) CASE LAW: CIR v. Insular Life Assurance (CA GR SP 46516) – MUTUALIZED LIFE INSURANCE COMPANY is not subject to premium tax or DST on policies as cooperatives. If a mutualized life insurance company satisfies all the elements of ‘cooperative’ [1. managed by members; 2. operated with money collected from members; 3. has for its main purpose the mutual protection of members and not for profit] as defined in Sec. 123, it shall not be subject to premiums tax. TAX ON AGENTS OF FOREIGN INSURANCE

COMPANIES (Sec. 124, NIRC)

• 10% of total premiums collected. Q: Who are liable? GENERAL RULE: Tax shall be levied upon every FIRE, MARINE OR MISCELLANEOUS INSURANCE AGENT authorized to procure policies of insurance as he may have previously been legally authorized to transact on risks located in the Phils FOR COMPANIES NOT AUTHORIZED TO TRANSACT BUSINESS IN THE PHILS. EXCEPTION: Premiums paid on reinsurance. • where an owner of property obtains

insurance DIRECTLY from foreign insurance companies NOT authorized to transact insurance business in the Phils., he shall pay a tax of 5% on the premiums paid.

AMUSEMENT TAXES (Sec. 125, NIRC) Q: Who are liable? The proprietor, lessee or operator of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and racetracks. Q: When to pay?


TAXATION LAW 2

§ return should be filed and tax paid within 20 days after the end of every quarter

§ SOURCE RATES

Cockpits 18% cabarets, night or day clubs 18% boxing exhibitions 10% professional basketball games (in lieu of all other percentage taxes)

15%

Jai-Alai & racetracks (WON they charge for admissions)

30%

EXEMPTION: If boxing exhibition is a World or Oriental Championship in any division featuring at least 1 Filipino contender and promoted by a Filipino or by a corporation with at least 60% Filipino equity.

Tax Base: GROSS RECEIPTS nnnn it embraces ALL the receipts of the

proprietor, lessee or operator of the amusement place; including income from TV, radio and motion picture rights.

RMC 08-88 transferred the EXCLUSIVE JURISDICTION to levy tax on gross receipts from ADMISSIONS to places of amusement to the local government. TAX ON WINNINGS (Sec. 126, NIRC) Q: Who are liable?

1. every person who wins in horse races 2. owners of winning race horses

SOURCE RATES

winnings or dividends (bases on the actual amount paid to winner for every winning ticket AFTER deducting the cost of the ticket)

10%

winnings from double, forecast/quinella and trifecta bets

4%

prizes, in case of owners of race horses

10%

• tax shall be WITHHELD by the operator,

manager or person in charge of the horse races before paying the dividends or prizes

• return shall be filed and tax paid within 20 days from the date tax was deducted and withheld

TAX ON SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED

THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING (IPO) (Sec. 127, NIRC) A. Through the Local Stock Exchange

• ½ of 1% of the GROSS SELLING PRICE or GROSS VALUE IN MONEY (GSP/GVM) of the shares of stocks sold, bartered, exchanged or otherwise disposed of through the local stock exchange OTHER THAN THE SALE BY A DEALER IN SECURITIES.

• Tax shall be paid by seller or transferor.

B. Through IPO

• covers sale, barter, exchange of shares of stock of CLOSELY HELD CORPORATIONS

• tax shall be paid by the issuing corporation in the primary offering or by the seller in the secondary offering

• tax base is the GSP/GVM • levied in accordance with the proportion

of shares sold, bartered, exchanged or disposed, to the total outstanding shares after the listing in the local stock exchange:

NUMBER OF SHARES RATES

up to 25% of all shares

4% GSP/GVM

>25% but not over 33.33%

2% GSP/GVM

Over 33.33% 1% GSP/GVM

Closely Held Corporation—any corporation at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Rules to be applied to determine whether the corporation is closely held: 1. Stock owned directly or indirectly by

corporations, partnerships, estates or trusts shall be considered as actually owned by its stockholders, partners or

beneficiaries in proportion to their shares as individuals.

2. An individual is considered the constructive owner of the stock owned by members of his family (includes only brothers and sisters—whole/half-blood, spouse, ancestors and lineal descendants)

3. A person having an option to acquire stock is considered the actual owner of such stock

C. Return on Capital Gains realized from sale of Shares of Stocks 1. return on capital gains realized from sale

of shares of stock listed and traded in the local stock exchange

• it is the duty of every stockbroker who effected the sale to collect the tax and remit it to the BIR within 5 banking days from date of collection and to submit to the secretary of the stock exchange a true and complete return

2. return on public offerings of shares of

stocks • the corporate issuer shall file the return

and pay the tax within 30days from the date of listing of the shares in the local stock exchange.

[Note: Both IPOs and sales of stock through the local exchange are EXEMPT from capital gains tax and from regular individual or corporate income tax. Also, such tax is not deductible from income tax.] PAYMENT OF PERCENTAGE TAXES Q: When to file return and pay? Persons subject to percentage taxes shall file a QUARTERLY RETURN and PAY the tax due within 25 days after the end of each taxable quarter. (Sec. 128 (A)(1), NIRC)


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However, RR 6-2001 has changed the period from 25 days after end of quarter to 10 days after end of the month. Exception: Persons… • whose VAT registration is cancelled and

become liable under Sec 116 - liable for the tax due from the

date of cancellation of registration.

• retiring from business - must file a return and pay within

20 days from closing of the business.

Q: Where to file?

At the option of the person liable, he may file - a separate return for each branch or

place of business, or - a consolidated return

with: - authorized agent bank, - Revenue District Office, - Collection Agent or City/Mun. Treasurer

where the business or principal place of business is located.

• The Commissioner may prescribe

- rules and regulations altering the time and manner of payment prescribed herein.

- a minimum amount of gross receipts where it is found that a person:

1. has failed to issue receipts or invoices

2. does not file a return, or 3. if records of the books of

accounts do not correctly reflect the declarations in the return.

IV.IV.IV.IV. EXCISEEXCISEEXCISEEXCISE TAXTAXTAXTAX

Goods Subject to Excise Tax (Sec. 129, NIRC) • Goods manufactured or produced in the

Philippines for domestic sale or consumption or other disposition

• Things imported NOTE: • Excise tax is imposed in addition to VAT. • The tax attaches even on articles illicitly

made, or the production of which is prohibited or punished by law.

Two Classifications of Excise Tax: • Specific tax- tax is based on weight or

volume capacity or other physical unit of measurement

• Ad valorem tax - tax is based on selling

price or other specified value of the good Purpose and justification of excise taxes:

1. To curtail consumption of certain commodities, excessive or indiscriminate use of which is considered harmful to the individual or community.

2. To protect a domestic industry the products of which face competition from similar imported articles

3. To distribute the tax burden in proportion to the benefit derived from a particular government service.

4. To raise revenue

When Excise Taxes Accrue • As to domestic products –as soon as the

articles are produced, or come into existence as in the case of distilled spirits (Sec. 141) and manufactured and other fuel oils (Sec. 148)

• As to imported articles –as soon as the articles are brought into the Philippine jurisdiction with the intention to unload them here.

Filing of Return and Payment of Excise Tax on DOMESTIC Products (Sec. 130) (A) Persons liable to file a return, filing of return

on removal and payment of tax

1. Person Liable to File a Return-such person shall file a separate return for each place of production setting forth, among others: DAT

o Description and quantity or volume of products removed

o Applicable tax base o Tax due - in the case of indigenous petroleum,

natural gas or liquefied natural gas à excise tax shall be paid by first

buyer, purchaser or transferee for local sale, barter or transfer

- export products à excise tax shall be paid by

owner, lessee, concessionaire or operator of the mining claim


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- should domestic products be removed from the place of production without the payment of tax, the owner or possessor shall be liable for the tax due

2. Time of Filing of Return and Payment of

Tax

GENERALLY: return shall be filed and excise tax shall be paid by the manufacturer or producer before removal of the domestic products from place of production unless otherwise specifically allowed

EXCEPTIONS:

PRODUCT TIME OF PAYMENT

nonmetallic mineral or mineral products and quarry sources

upon removal of such products from locality where mined and extracted

locally produced or extracted metallic mineral or mineral products

within 15 days after end of the calendar quarter when such products were removed subject to conditions prescribed by rules and regulations to be promulgated by Secretary of Finance, upon recommendation of the Commissioner taxpayer shall file bond ≈ amount of excise tax due

IMPORTED mineral or mineral products, whether metallic or nonmetallic

before their removal from customs duty

3. Place of Filing of Return and Payment of

Tax (GENERAL RULE) § any authorized agent bank or Revenue

Collector Officer, or § duly authorized City or Municipal

Treasurer

4. Exceptions (TO GENERAL RULE SET OUT

ABOVE)

IN GENERAL: Sec of Finance, upon recommendation of Commissioner, may by rules and regulations prescribe: a. time of filing the return at intervals

for a particular class or classes of taxpayer

b. manner and time of payment under a tax prepayment, advance deposit and other similar schemes

IN THE SPECIFIC CASES of: § minerals, mineral products or

quarry resources where the place of extraction is different from the place of processing or production, or

§ metallic minerals processed abroad,

à file and pay at the Revenue District Office having jurisdiction

in the locality where it was mined, extracted or quarried

(B) Determination of Gross Selling Price of Goods

Subject to Ad Valorem Tax

Gross Selling Price= Price - VAT - PRICE: That at which the goods are sold

at wholesale in the place of production or through their sales agents to the public

- If the goods are sold in another establishment where the manufacturer is the owner or in the profits of which he has an interest, wholesale price there

NOTE: if price < cost of manufacture + expenses incurred until the goods are finally sold àààà a proportionate margin of the profit (which is not less than 10% of such manufacturing costs + expenses) shall be added to the GSP

(C) Manufacturer’s or Producer’s Sworn

Statement

It shall show: - different goods and products

manufactured or produced, - their corresponding GSP or market value - Costs of manufacture or production +

expenses incurred or to be incurred until goods are sold

(D) Credit for Excise Tax on Goods Actually

Exported

In case goods produced or manufactured are removed and actually exported without returning to the Philippines: - GENERAL RULE à any excise tax paid

shall be credited or refunded upon submission of proof of actual exportation and upon receipt of the foreign exchange payment

- EXCEPTION (i.e., NOT credible): mineral products o EXCEPTION TO EXCEPTION: coal &

coke Payment of Excise Tax on IMPORTED

Articles (Sec. 131) (A) Persons Liable

- Paid by: § owner or importer to the Customs

Officers before release from the customhouse, OR

§ person found in possession of articles which are exempt from excise taxes other than those legally entitled to exemption

- In case tax-free articles brought in by exempted persons or entities or

agencies are subsequently sold, transferred or exchanged in the Philippines à purchaser or recipients shall be considered importers and shall be liable for duty and internal revenue tax due

- Importation of cigar, cigarettes, distilled spirits and wines even if destined to tax and duty-free shops shall be subject to all applicable taxes, EXCEPT: (not subject to tax)


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1. such are brought directly into Subic Special Economic and Freeport Zone; Cagayan Special Economic Zone and Freeport; Zamboanga City Special Economic Zone and not transshipped to any other port in the Philippines

2. importation done by government-owned and operated duty free shop like DFP, PROVIDED such products are labeled ‘tax and duty free’ and ‘not for

resale’ EXCEPTION TO THE EXCEPTION: if such

products are eventually introduced to Philippine customs territory, then such articles shall be deemed imported into Phil and be subject to all import and excise taxes

NOTE: Removal and transfer from one Freeport to another Freeport shall not be deemed an introduction to Phil territory. VIOLATIONS: - cigar, cigarettes, distilled spirits and wines in

duty free shops which are NOT LABELED AS REQUIRED, as well as

- those articles obtained from duty free shops and subsequently FOUND IN NON DUTY FREE SHOPS FOR RESALE

PENALTY:

- articles shall be confiscated and perpetrator punished - tax due on any such goods, products, machinery, equipment and other similar articles shall constitute a lien on the article itself which shall be superior to all other liens

(B) Rate and Basis of the Excise Tax on Imported

Articles Unless otherwise specified, imported articles shall be subject to the same rate and basis of excise taxes applicable to locally manufactured articles

Exemption / Conditional Tax-Free Removal of Certain Articles

a. denatured wine/spirits for treatment of tobacco leaf

b. domestic denatured alcohol rendered unfit for oral intake, but VAT should be paid

c. petroleum products sold to: § international carriers (Philippine or

foreign carriers) on their use or consumption outside the Philippines, provided there is reciprocity

§ exempt entities covered by tax treaties, conventions, international agreements, provided there is reciprocity

§ entities which are by law exempted from direct & indirect taxes

d. removal of spirits under bond for rectification

e. removal of fermented liquors to bonded warehouse

f. removal of damaged liquors g. removal of tobacco products entirely unfit

for chewing/smoking

Tax on Alcohol Products

Definition a. distilled spirits – substance known as ethyl

alcohol, ethanol or spirits of wine including whiskey, brandy, rum, gin and vodka, from whatever source, by whatever process produced

b. wines – all alcoholic beverages produced by fermentation without distillation from the juice of any kind of fruit; and fortified beverages

c. fermented liquor – alcoholic beverages produced by fermentation without distillation of grain or malt (beer, lager, ale, porter)

Sec. 141 Distilled Spirits (Rates of tax à as per RR 3-2006) (for rates see Sec. 141) - Medicinal preparations, flavoring extracts,

other preparations except toilet preparations, wherein distilled products form chief ingredient

**same tax as chief ingredient - Tax shall proportionally increase for any

strength of spirit taxed over proof spirits. - Tax shall attach as soon as it is in existence

whether it is subsequently separated as pure or impure spirits or transformed into any other substance either in the process of original production or by any subsequent process.

Sec. 142 Wines (Rates of tax à as per RR 3-2006) (for rates see sec. 142) Fortified wines - containing more than 25% of alcohol by

volume - natural wines to which distilled spirits are

added to increase their alcoholic strength - taxed as distilled spirits

Sec. 143 Fermented Liquor (Rates of tax à as per RR 3-2006) Beer, lager beer, ale. Porter and other fermented

liquor

except tuba, basi, tapuy and similar domestic

fermented liquors

(For rates, see sec. 143) PENAL PROVISIONS:

VIOLATION BY: PENALTY

Brewer or importer who knowingly misdeclares or misrepresents in his sworn statement any pertinent data or information

summary cancellation or withdrawal of his permit

Corporation, association or partnership

fined treble the amount of deficiency taxes + surcharges + interest

Person liable for acts or omissions prohibited under this section

criminally liable and penalized under Sec 254

those who willfully abet or aid in the commission of such act or omission

liable same as principal

offender not citizen of Phil

deported after service of sentence


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Tax on Tobacco Products

- Definition a. cigar – all rolls of tobacco or any

substitute wrapped in leaf tobacco b. cigarette – all rolls of finely-cut leaf

tobacco or any substitute wrapped in paper or any other material

Sec. 144 Tobacco Products (Rates of tax à as per RR 3-2006) (for rates, see Sec. 144) Sec. 145 Cigars and Cigarettes (Rates of tax à as per RR 3-2006) (for rates, see sec. 145) PENAL PROVISIONS: Same with Wines and Spirits

Tax on Petroleum Products

Sec. 148 Manufactured Oils and other Fuels (Rates of tax à 1997 NIRC, as amended by RA 9337 [2005]) (for rates, see sec. 148)

Tax on Miscellaneous Articles

On Automobiles (Sec. 148 of the NIRC, as

amended by RA 9224) NATURE: Ad valorem tax on automobiles based on manufacturer’s or importer’s selling price (net excise tax and VAT)

NET SELLING PRICE RATE Up to P600T 2% P600T – P1.1M P12,000 + 2% in excess of P600T P1.1M – P2.1 M P112T + 40% in excess of P1.1M over P2.1M P512T + 60% in excess of P2.1M

NOTE:

• imported cars NOT for sale, tax shall be based on total landed value + transaction value + customs duty + other charges

• cars used exclusively in Freeport zones are exempt

Sec. 150 Non Essential Goods Sec. 151 Mineral Products

VVVV.... DOCUMENTARYDOCUMENTARYDOCUMENTARYDOCUMENTARY STAMP TAXSTAMP TAXSTAMP TAXSTAMP TAX General Principles

DEFINITION: Tax on documents, instruments and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property thereto NATURE: It is an excise or privilege tax imposed on the privilege to enter into the transaction. o It is only paid once. o The amount of DST depends on the

nature of the document and the value appearing upon its face.

o If the transaction is subsequently annulled or invalidated, the tax may be refunded since the law presupposes a valid transaction.

Q: Who are required to file the Documentary Stamp Tax Declaration Return? a) In case of constructive affixture of

documentary stamps, by the persons making, signing, issuing, accepting or transferring documents, instruments, loan agreements and papers, acceptances, assignments, sales and conveyances of the obligation, right or property incident thereto wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines at the same time such act is done or transaction had;

b) By metering machine user who imprints the

Documentary Stamp Tax due on the taxable documents; and

c) By Revenue Collection Agent, for remittance

of sold loose documentary stamps. NOTE: Wherever one party to the taxable document enjoys exemption from the tax imposed, the other party who is not exempt will be the one directly liable to file Documentary Stamp Tax Declaration and pay the applicable stamp tax. Q: What are the implications of failure to stamp taxable documents?

The untaxed document will: o not be recorded, o not be admitted or used in evidence in court

until the requisite stamp or stamps have been affixed thereto and cancelled

o Not be notarized (No notary public or other officer authorized to administer oaths will add his jurat or acknowledgment to any document subject to Documentary Stamp Tax unless the proper documentary stamps are affixed thereto and cancelled.


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TAX RATES APPLICABLE (1997 NIRC, as amended by RA 9243 [2004]) Document Taxable Unit Tax Due Per Unit Taxable Base

Debentures & Certificates of Indebtedness DELETED by RA 9243

Original Issue of Shares of Stock with par value Original Issue of Shares of Stock without par value Stock Dividends

P200.00 or fraction thereof P200.00 or fraction thereof P200.00 or fraction thereof

1.00 1.00 1.00

Par value of shares of stocks -actual consideration for the issuance of shares of stocks -Actual value represented by each share

Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-bills, Certificate of Obligation, or Shares or Certificates of Stock -In the case of stocks without par value

P200.00 or fraction thereof

0.75 -25% of the DST paid upon the original issue of said stock

Par value of such due-bills, certificate of obligation or stocks

Bonds, Debentures, Certificate of Stock or Indebtedness issued in foreign Countries


1.50 Par value of such bonds, debentures or Certificate of Stocks

Certificate of Profits or Interest in Property or Accumulation


0.50 Face value of such certificate / memorandum

Bank Checks, Drafts, Certificate of Deposit not bearing interest and other Instruments

On each Document 1.50

Original issue of debt instruments -For such debt instruments with terms of less than one year

P200.00 or fraction 1.00 -proportional amount in accordance w/ the ratio of its term in number of days to 365 days

Issue price of any such debt instrument

Bills of exchange (between points within the Philippines) and drafts


.30 Face value of the bill of exchange or draft

Bills of Exchange or order drawn in foreign country but payable in the Philippines


.30 Face value of such bill of exchange or order or the equivalent of such value, if expressed in foreign currency

Foreign Bills of Exchange and Letter of Credit


.30 Face value of bill of exchange/ order or the equivalent of such value if expressed in foreign currency

Life Insurance Policies P200.00 or fraction thereof

.50 Amount of premium collected

Policies Of Insurance upon Property P4.00 premium or fraction thereof

.50 Premium charged

Fidelity Bonds and other Insurance Policies

P4.00 premium or fraction thereof

.50 Premium charged

Policies of Annuities, Annuity or other instruments


0.50 Amount of premium or installment payment of contract price collected

Pre-Need Plans P200.00 or fraction .20 Premium or contribution collected

Indemnity Bonds P4.00 or fraction thereof

.30 Premium charged

Certificates of Damage or otherwise and Certificate or document issued by any customs officers, marine surveyor, notary public and certificate required by law or by rules and regulations of a public office

Each Certificate 15.00

Warehouse Receipts (except if value does not exceed P200.00)

Each Receipt 15.00

Jai-alai, Horse Race Tickets, lotto or Other Authorized Number Games

P1.00 cost of ticket and Additional P0.10 on every P1.00 or fraction thereof if cost of ticket exceeds P1.00

.10 Cost of the ticket

Bills of Lading or Receipts (except charter party)

>P100 not > P1000 >P1000

1.00 10.00

Proxies Each Proxy 15.00 Powers of Attorney Each Document 5.00 Lease and other Hiring agreements of memorandum or contract for hire, use or rent of any land or tenements or portions thereof

First 2,000 For every P1,000 or fractional part thereof in excess of the first P2,000 for each year of the term of the contract or agreement

3.00 1.00

Mortgages Pledges of lands, estate, or property and Deeds of Trust

First 5,000 On each P5,000 or

20.00 10.00

Amount Secured Amount Secured


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fractional part thereof in excess of 5,000

Deed of Sale, instrument or writing and Conveyances of Real Property (except grants, patents or original certificate of the government)

First 1,000 For each additional P1,000 or fractional part thereof in excess of P1,000

15.00 15.00

Consideration or Fair Market Value, whichever is higher (if government is a party, basis shall be the consideration)

Charter parties and Similar Instruments 1,000 tons and below 1,001 to 10,000 tons Over 10,000 tons

P500.00 for the 1st 6 months +P50/month or fraction thereof in excess of 6 mos -P1,000 for the 1st 6 mos + P100/month or fraction thereof in excess of 6 mos -P1,500 for the 1st 6 mos + P150/month or fraction thereof in excess of 6 mos

Tonnage and duration of the contract

Assignment or transfer of any mortgage, lease or policy of insurance Renewal of any agreement/ contract

At the same rate as that imposed on the original instrument

When are shares considered issued? àààà Upon the acquisition of the stockholder of the attributes of ownership over the shares (the right to vote, the right to receive dividends, the right to dispose, etc., notwithstanding that restrictions on the exercise of any of these rights may be imposed by the Corporation’s Articles and/or by-laws, the SEC, stockholder agreement, court order, etc.) which acquisition of such attributes of ownership shall be manifested by the acceptance by the Corporation of the stockholder’s subscription to its shares of stock. The delivery of the certificates of stock to the stockholders is NOT essential for the DST to accrue. [RR 13-2004] What is the basis of DST? àààà The entire shares of stock subscribed are considered issued for purposes of DST, even if not fully paid. [RR 13-2004] When is a sale or exchange of shares taxable? à There must be actual or constructive transfer of beneficial ownership of shares of stock from one person to another. This may be manifested by: a) the clear exercise of attributes of ownership

over such stocks by the transferee, or b) by an actual entry of a change in the name

appearing in the certificate of stock or in the stock and transfer book of the corporation or by any entry indicating transfer of beneficial ownership in any form of registry including those of a duly authorized scripless registry, such as those maintained for or by the Philippine Stock Exchange. [RR 13-2004]

Documents and Papers Not Subject to Stamp Tax BAD- STAF- LIMB-PC40

a. Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association or cooperative company conducted solely by the members thereof for their benefit.

b. Certificates of oaths administered to any government official in his official capacity or of acknowledgment by any government official in the performance of his official duties, written appearance in any court by any government official, in his official capacity; certificates of the administration of oaths to any person as to the authenticity of any paper required to be filed in court by any

person or party thereto, whether the proceedings be civil or criminal; papers and

documents filed in courts by or for the national, provincial, city or municipal governments; affidavits of poor persons for the purpose of proving poverty; statements and other compulsory information required of persons or corporations by the rules and regulations of the national, provincial, city or municipal governments exclusively for statistical purposes and which are wholly for the use of the bureau or office in which they are filed, and not at the instance or for the use or benefit of the person filing them; certified copies and other certificates placed upon documents, instruments and papers for the national, provincial, city or municipal governments, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal governments; and certificates of the assessed value of lands, not exceeding Two hundred pesos (P200) in value assessed, furnished by the provincial, city or municipal Treasurer to applicants for registration of title to land.

c. Borrowing and lending of securities executed under the Securities Borrowing and lending Program of a registered exchange, or in accordance with regulations prescribed by the appropriate regulatory authority: Provided,

however, That any borrowing or lending of securities agreement as contemplated hereof shall be duly covered by a master securities borrowing and lending agreement acceptable to the appropriate regulatory authority, and which agreements is duly registered and approved by the Bureau of Internal Revenue. (BIR).

d. Loan agreements the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000), or any such amount as may be determined by he Secretary of Finance, executed by an individual for his purchase on installment for his personal use or that of his family and not for business or resale, barter or hire of a house, lot, motor vehicle, appliance or furniture: Provided,

however, That the amount to be set by the Secretary of Finance shall be in accordance


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with a relevant price index but not to exceed ten percent (10%) of the current amount and shall remain in force at least for three (3) years.

e. Sale, barter or exchange of Shares of stock listed and traded through the local stock exchange for a period of five (5) years from the effectivity of this Act.

f. Assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness, if there is no change in the maturity date or remaining period of coverage from that of the original instrument.

g. Fixed income and other securities Traded in the secondary market or through an exchange.

h. Derivatives: Provided, That for purposes of this exemption, repurchase agreements and reverse repurchase agreements shall be treated similarly as derivatives.

i. Interbranch or interdepartmental Advances within the same legal entity.

j. All Forebearances arising from sales or service contracts including credit card and trade receivables: Provided, That the exemption be limited to those executed by the seller or service provider itself.

k. Bank deposit accounts without a fixed term or Maturity.

l. All contracts, deeds, documents and transactions related to the conduct of business of the Banko Sentral ng Pilipinas.

m. Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended.

n. Interbank call loans with maturity of not more than seven (7) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasibanks.

One-Transaction Rule: Where only one instrument was prepared, made signed and executed to cover a loan agreement/promissory note, pledge/mortgage, the documentary stamp tax shall be paid and computed on the full amount of the loan or credit granted. In this regard, the instrument shall be treated as covering only one taxable transaction, subject to the higher documentary stamp tax. (RR 9-94, Sec. 8) Payment of Documentary Stamp Tax (Sec 200) WHERE: filed and paid at • authorized agent bank within territorial

jurisdiction of Revenue District Officer which had jurisdiction over residence or principal place of business of taxpayer

• Revenue District Officer, collection agent, duly authorized treasurer of municipality or

city where the taxpayer has his residence or principal place of business

EXCEPTION: Tax may be paid thru purchase and actual affixture or imprinting the stamp thru documentary stamp metering machine as prescribed by the pertinent rules and regulations. WHEN: 5 days after close of the month when the taxable document was made, signed issued, transferred or accepted. (RR 6-01) [Note: 10-day rule

provided in Sec. 200(B) of the NIRC no longer

applicable) Applicability of DST Law on Electronic Documents: The DST rates shall be applicable on all documents not otherwise expressly exempted by the law, notwithstanding that they are in electronic form. As provided for in RA 8792 (Electronic Commerce Act), electronic documents are the functional equivalent of a written document under existing laws, and the issuance thereof is therefore tantamount to the issuance of a written document, and therefore subject to DST. (RR 13-04, Sec. 10)


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V.V.V.V. REMEDIESREMEDIESREMEDIESREMEDIES

STAGES IN BIR AUDIT EXAMINATION

(Framework of discussion)

Audit Stage/Issuance of Letter of Authority

↓ Pre-Assessment Stage

↓ Formal Assessment Stage

↓ Collection Letter/Warrants

↓ Compromise and Abatement

I. AUDIT STAGE (Issuance of Letter of

Authority)

A. Powers of the Commissioner Relative

to the Audit Process (PATRIA-CED) 1. EXAMINE RETURNS and DETERMINE TAX

DUE (§5)→ Authorizing the examination of any taxpayer and the assessment of the correct amount of tax, WON a return has been filed by such taxpayer. NOTE: Any return filed with the Commissioner shall not be withdrawn, BUT the taxpayer may MODIFY, CHANGE or AMEND such return within three (3) years from the date of filing, provided that no notice for audit or investigation of such return has been actually served on the taxpayer.

2. CONDUCT INVENTORY-TAKING, SURVEILLANCE and to prescribe presumptive gross sales and receipts (§6C)→ § Inventory-taking – at any time

during the taxable year, for the purpose of determining the correct tax liabilities.

§ Surveillance – done if there is reason to believe that the taxpayer is not declaring his correct income, sales or receipts for tax purposes.

§ Prescribe presumptive gross sales and receipts if: Ø It is found that the taxpayer has

failed to issue receipts and invoices, or

Ø When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made by the taxpayer

3. Terminate TAXABLE PERIOD (§6D)→

Terminating taxable period and ordering the immediate payment of the tax for the terminated period and any remaining tax that is unpaid, when the taxpayer is: § retiring from business subject to

tax, or § intending to leave the Philippines or

to remove his property therefrom or to hide or conceal his property

§ performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partially ineffective unless such proceedings are begun immediately

4. Prescribe REAL PROPERTY VALUES

(§6E)→ Dividing the Philippines into different zones or areas, and determining the FMV of real properties in each zone or area, upon consultation with competent appraisers from private and public sectors. For the purpose of computing any internal revenue tax, the value of the property shall be WHICHEVER IS HIGHER OF: § The fair market value as determined

by the Commissioner, or § The fair market value as shown in

the schedule of values of the provincial and city assessors

5. Inquire into BANK DEPOSIT ACCOUNTS

(§6F) → Notwithstanding any contrary provision of R.A. 1405 (Bank Secrecy Law) and other general or special laws, the Commissioner is authorized to inquire into bank deposits of: § A decedent to determine his gross

estate, and § Any taxpayer who has filed an

application for compromise of tax liability by reason of financial incapacity→ the taxpayer must waive in writing his privilege under R.A. 1405 and other relevant laws, before the Commissioner may inquire into his bank accounts

6. Accredit and register TAX AGENTS

(§6G) → Accrediting and registering tax agents (may be individuals or general professional partnerships) based on the following criteria: § Professional competence § Integrity § Moral fitness

7. Prescribe additional PROCEDURAL OR DOCUMENTARY REQUIREMENTS (§6H) → in relation to the manner of compliance of any requirement in connection with the submission or preparation of financial statements accompanying the tax returns.

8. ACCESS LETTER (§5B)→ Obtaining on a regular basis, from any person OTHER THAN the person whose tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies or instrumentalities, including BSP and GOCCs, any information such as, but not limited to, costs and volumes of production, receipts or sales and gross incomes of taxpayers, and the names addresses, and financial statements of corporations, mutual fund companies, insurance companies etc.


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NOTE: This is known as the Third Party

Information Rule.

9. INTERPRET TAX LAWS and to DECIDE TAX CASES (§4)→ shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

RMC 44-01 § VALIDITY: A ruling by the BIR

Commissioner shall be presumed VALID unless modified, reversed or superseded by the Secretary of Finance.

§ REVIEW: A taxpayer who receives an adverse ruling from the Commissioner may, within thirty (30) days from the date of receipt of such ruling, seek its review by the Secretary of Finance, either by himself/itself or though his/its duly authorized representative.

§ EFFECT OF REVIEW: A reversal or modification of the BIR ruling shall terminate its effectivity upon the receipt by the taxpayer or the BIR of written notice of reversal or modification, whichever came earlier. NOTE: DOF Order 7-02 added that the Secretary of Finance may review the rulings MOTU PROPRIO.

Section 246, NIRC: Non-retroactivity of Rulings Any revocation, modification or reversal of…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, EXCEPTION: a) Where the taxpayer deliberately misstates

or omits material facts from his return or any document required of him the BIR;

b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or

c) Where the taxpayer acted in bad faith.

B. Letter of Authority

Q: What is a letter of authority? An official document that empowers a Revenue Officer to examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order to determine the taxpayer’s correct internal revenue tax liabilities. Q: Who issues the Letter of Authority?

§ Commissioner→ for those units reporting directly to him

§ Regional directors→ for taxpayers covered by his particular region. If the Commissioner has already issued an LA to investigate a particular taxpayer, the Regional director shall desist from issuing another LA for the same taxpayer. Q: What are the cases which need not be covered by a valid LA?

§ Cases involving civil/criminal tax fraud which fall under the jurisdiction of the tax fraud division of the Enforcement Services, and

§ Policy cases under audit by the special teams in national offices

II. PRE-ASSESSMENT STAGE

A. Step 1: Issuance of Notice of Informal Conference What is a notice of informal

conference? A written notice informing a taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid. The taxpayer shall then have fifteen (15) days from the date of his receipt of the Notice for Informal Conference to explain his side.

B. Step 2: Informal Conference

What matters are taken up during the informal conference? 1. Discussion on the merits of the

assessment 2. Attempt of taxpayer to convince the

examiner to conduct a re-investigation and/or re-examination

3. Evaluate if submission of the waiver of the statute of limitations is necessary→ because evaluation may extend beyond three years

4. Taxpayer to advise the examiner if position paper will be submitted

What is a jeopardy assessment? A tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of the deficiency tax will be jeopardized by delay caused by the taxpayer’s failure to:

i. Comply with audit and investigation requirements to present his books of accounts and/or pertinent records

ii. Substantiate all or any of the deductions, exemptions or credits claimed in his return.

It is usually issued when statutory prescriptive periods for the assessment or collection of taxes are about to lapse due principally to the taxpayer’s fault.

C. Step 3: Issuance of Pre-

Assessment Notice

What is a pre-assessment notice (PAN)? A communication issued by the Regional Assessment Division or any other concerned BIR office, informing a taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings. The assessment shall be: ü in writing, and


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ü should inform the taxpayer of the law and the facts on which the assessment is made;

ü otherwise, the assessment shall be void. (Sec. 228, NIRC)

If the taxpayer disagrees with the findings in the PAN, he has fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment. PAN no longer required when :

(a) The finding for any deficiency tax is the

result of MATHEMATICAL ERROR in the computation of the tax as appearing on the face of the return; or

(b) A DISCREPANCY has been determined between the TAX WITHHELD and the amount ACTUALLY REMITTED by the withholding agent; or

(c) A taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; OR

(d) The EXCISE TAX due on excisable articles has not been paid; or

(e) An article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to a non-exempt person. (Sec. 228, NIRC)

III. FORMAL ASSESSMENT STAGE

What is a Notice of Assessment (Final Assessment Notice “FAN” or Formal

Letter of Demand)? A declaration of deficiency taxes issued to a taxpayer who fails to respond to a pre-assessment notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. This is commonly known as the Final Assessment Notice (FAN). An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to pay. An assessment is a notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. (Tupaz v. Ulep, 1999) The formal letter of demand shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for the payment of the taxpayer’s deficiency taxes shall state the FACTS, the LAW, RULES and REGULATIONS or JURISPRUDENCE on which the assessment is based, OTHERWISE, the formal letter of demand or assessment notice shall be VOID. (RR 12-99)

NOTE:

§ A follow-up letter/demand letter for payment of taxes is considered a notice of assessment. [REPUBLIC vs. CA and NIELSON & CO. (April 30, 1987)]

§ Where the taxpayer is appealing on the ground that the assessment is erroneous, it is incumbent upon him to prove what is the correct and just liability by a full and fair disclosure of all pertinent data. [Bonifacio Sy Po v. CTA]

Within what time may the Commissioner issue a notice of assessment?

§ If the taxpayer filed a return→

internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. If a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. A return filed before the last day prescribed by law for filing shall be considered as filed on the last day. (Sec. 203, NIRC) è NOTE: In short, the period for assessment is within three years from the time the return is filed or from the time the return is due, WHICHEVER IS LATER.

§ If the taxpayer DID NOT file a return→ internal revenue taxes shall be assessed within ten years after the discovery of the failure to file the return (Sec. 222a, NIRC)

§ If the taxpayer filed a false or fraudulent return with intent to evade tax→ internal revenue taxes shall be assessed within ten years after the discovery of the falsity or fraud (Sec. 222a, NIRC)

o Fraud or falsity on the return with intent to evade payment of tax is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. The finding of the trial court as to its existence and non-existence is final and cannot be reviewed by the Supreme Court unless clearly shown to be erroneous. [CIR V. Ayala Securities (1976)]

o Q: Are there tax returns which are

false but not fraudulent? àààà YES. There must be a distinction between false returns (due to mistakes, carelessness or ignorance) and fraudulent returns (with intent to evade taxes). The fraud contemplated by law is actual and not constructive, and must amount to intentional wrongdoing with the sole object of avoiding the tax. [Aznar v. CTA (1974)]

• WAIVER: The taxpayer and the Commissioner may agree in writing, before the expiration of the time


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prescribed in Sec. 203, to extend the period of assessment (Sec. 222b, NIRC)

è The waiver of prescription must be executed properly per RMO 20-90, otherwise, invalid and results to prescription of the right to assess/collect. [PHIL JOURNALISTS INC. v. CIR (December 16, 2004)]

è Requirements under RMO 20-90: 1. definite agreed date, 2. date of acceptance indicated,

and 3. taxpayer must be furnished with

a copy of the waiver.

Q: What is the nature of prescription on

the right to assess? The law on prescription, being a remedial measure, should be LIBERALLY CONSTRUED in order to afford protection. As a corollary, the exceptions to the law on prescription should be clearly construed. Hence, negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind. [CIR v. Goodrich Philippines (1999)]

RMC No. 48-90 Counting of the Prescriptive Periods (April 23, 1990) The 3-year prescriptive period expires on the 1,095th day, notwithstanding the fact that within the period, there is a leap year which is of 366 days. This principle applies to ALL prescriptive periods under the Code. (applied in ASIABANK v. CIR, CTA Case No.6095, Oct. 9, 2001) When is an assessment deemed made? An assessment is deemed made when the demand letter or notice is RELEASED, MAILED OR SENT by the BIR to the taxpayer. The law does not require that the taxpayer receive the notice within the three-year or ten-year period. [CIR vs. BAUTISTA (May 27, 1959)]

If the taxpayer does not agree with the assessment, what is his REMEDY? o To contest an assessment by filing a

letter of PROTEST stating in detail his reasons for contesting the assessment.

o When no protest is seasonably made by the taxpayer, the assessment shall become final and unappealable, and thus the tax shall be collectible.

Q: What is the nature of an assessment when it is final and executory? It is in the nature of an enforcement judgment such that no inquiry can be made thereon on the merits of the original case. Within what time may the taxpayer protest the assessment? o Within thirty (30) days by filing a

request for reconsideration or reinvestigation from receipt of the assessment.

o Within sixty (60) days from filing of the protest, all relevant supporting documents must be submitted,

otherwise the assessment shall become final. (§228)

What are the characteristics of a valid protest? A protest is considered validly made if it satisfies the following conditions: 1) it is made in writing, and addressed

to the Commissioner of Internal Revenue

2) it contains the information the following information (from RR 12-85): § name of the taxpayer and address

for the immediate past three taxable years

§ nature of request whether reinvestigation or reconsideration specifying newly-discovered evidence he intends to present if it is a request for reinvestigation

§ the taxable periods covered § assessment number § date of receipt of assessment notice

or letter of demand § itemized statement of the findings

to which the taxpayer agrees 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

§ the itemized schedule of the adjustments with which the taxpayer does not agree

§ a statement of facts and/or law in support of the protest.

3) It states the FACTS, applicable LAW, RULES and REGULATIONS or JURISPRUDENCE on which his protest is based, otherwise the protest shall be considered void and without force and effect.

4) It is filed within the period prescribed by law

What should the taxpayer do if his protest is denied or is not acted upon

by the Commissioner? § Situation 1: If the Commissioner

DENIES THE PROTEST filed by the taxpayer→ the taxpayer may appeal to the Court of Tax Appeals within thirty days from receipt of the decision denying the protest (Sec. 228, NIRC)

→ Where there is a request for

reconsideration, final demand letter from BIR is considered a decision on a disputed or protested assessment which is therefore appealable to the CTA. [CIR v. ISABELA CULTURAL CORP. (July 11, 2001)]

§ Situation 2: If the Commissioner did

NOT ACT UPON THE PROTEST within one hundred and eighty days from the time the documents were submitted→ the taxpayer may either:


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o Appeal to the CTA within thirty days from the lapse of the 180-day period OR

o Wait until the Commissioner decides before he elevates the case to the CTA

NOTE: If Situation 1 occurs and the taxpayer does not file a protest within the prescribed period, the assessment becomes FINAL, EXECUTORY and DEMANDABLE. But if the Situation 2 occurs and the taxpayer does not file a protest within the prescribed period, the assessment DOES NOT become FINAL, EXECUTORY and DEMANDABLE. In cases of inaction by the Commissioner, Section 228 of the Tax Code merely gave the taxpayer an OPTION: first, he may appeal to the Court of Tax Appeals within thirty days from the lapse of the 180-day period, or second, he may wait until the Commissioner decides on his protest before he elevates his case. [LASCONA LAND Co vs. CIR (January 4, 2000)]

When does the 30-day period to appeal in Situation 1 commence to run? The 30-day period starts when the taxpayer receives the decision of the Commissioner denying the protest. The decision of the Commissioner must categorically state that his action on the disputed assessment

is final, otherwise period to appeal will not commence to run. [ADVERTISING ASSOCIATES vs. CA (December 26,

1984)] NOTE: A Division of the CTA shall hear the appeal. (Sec. 11, RA 1125 as amended by RA 9282 [2004])

If the taxpayer is not satisfied with the CTA Division’s ruling, what is his

REMEDY? § FIRST, he may file a motion for

reconsideration before the same Division of the CTA within fifteen (15) days from notice thereof. (Sec. 11, RA 1125 as amended by RA 9282 [2004])

§ THEN, a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration may file a petition for review with the CTA en banc. (Sec. 18, RA 1125 as amended by RA 9282 [2004])

If the taxpayer is not satisfied with the decision of the CTA en banc, what is his REMEDY? A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Court. (Sec. 19, RA 1125 as amended by RA 9282 [2004]) .

EFFECTS OF RA 9282 ON THE CTA’S JURISDICTION: The CTA shall exercise

A. EXCLUSIVE APPELLATE JURISDICTION to review by appeal:

Decisions of the Commissioner of Internal Revenue

1. disputed assessments, 2. refunds of internal revenue taxes, fees or other charges, 3. penalties in relation thereto, or 4. other matters arising under the National Internal Revenue

or other laws administered by the Bureau of Internal Revenue;

Inaction by the Commissioner of Internal Revenue

5. disputed assessments, 6. refunds of internal revenue taxes, fees or other charges, 7. penalties in relations thereto, or 8. other matters arising under the National Internal Revenue

Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;

Decisions, orders or resolutions of the Regional Trial Courts

local tax cases originally decided or resolved by them in the exercise of their

→ original or appellate jurisdiction; Decisions of the Commissioner of Customs

→ liability for customs duties, fees or other money charges, → seizure, detention or release of property affected, → fines, forfeitures or other penalties in relation thereto, or → other matters arising under the Customs Law or other laws

administered by the Bureau of Customs; Decisions of the Central Board of Assessment Appeals

exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals;

Decisions of the Secretary of Finance

customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code;

Decisions of the Secretary of Trade and Industry (nonagricultural product, commodity or article) Secretary of Agriculture (agricultural product, commodity or article)

→ involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and

→ safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties.


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B. Jurisdiction over cases involving CRIMINAL OFFENSES:

1. EXCLUSIVE ORIGINAL JURISDICTION over all criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: § EXCEPTION: That offenses or felonies

where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate.

§ NOTE: Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized.

2. EXCLUSIVE APPELLATE JURISDICTION

in criminal offenses:

a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respected territorial jurisdiction.

b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

C. Jurisdiction over TAX COLLECTION CASES:

1. EXCLUSIVE ORIGINAL JURISDICTION

in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties.

§ EXCEPTION: Collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court, Metropolitan

Trial Court and Regional Trial Court.

2. EXCLUSIVE APPELLATE

JURISDICTION in tax collection cases:

a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction.

b. Over petitions for review of the

judgments, resolutions or orders of the Regional Trial Courts in the Exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.

IV. COLLECTION LETTER/WARRANTS

A. Collection of Deficiency Taxes Within what time period must

collection of internal revenue taxes be made?

Return filed was NOT false or fraudulent

No return filed, or the return was false or fraudulent.

Collection with PRIOR ASSESSMENT - should be made within three years from the date of assessment of the tax. → by distraint or levy, or by judicial proceedings

Collection with PRIOR ASSESSMENT - should be made within five years from the date of assessment (based on §222c) → by distraint or levy, or by judicial proceedings

Collection WITHOUT PRIOR ASSESSMENT – should be made within three years from the date of filing of return or date return is due, whichever is LATER (based on §203) → by judicial proceedings

Collection WITHOUT PRIOR ASSESSMENT – should be made within ten years after the discovery of the falsity, fraud or omission to file a return. → by judicial proceedings

• If tax was assessed within the different

period agreed upon by the Commissioner and the taxpayer, it may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the 5-yr period. (Sec. 222d, NIRC)

When shall the period for assessment or collection of taxes be suspended? (§223) The running of the statute of limitations provided in §203 and §222 shall be suspended for the period: (P-CORN)

1. During which the commissioner is Prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty (60) days thereafter

2. When the taxpayer requests for a

Reinvestigation which is granted by the Commissioner

CIR vs. WYETH (September 30, 1991) à The statutory period of limitation for collection may be interrupted when, by the taxpayer’s repeated requests, the government has been, persuaded to postpone collection to make him feel the


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demand was not unreasonable or that no harassment or injustice was meant by government.

RR 12-85 (Difference between Reconsideration & Reinvestigation) § RECONSIDERATION – refers to a

plea of re-evaluation of the assessment on the basis of existing records WITHOUT NEED OF ADDITIONAL EVIDENCE. It may involve both question of fact or of law or both

§ REINVESTIGATION – refers to a

plea of re-evaluation of an assessment on the basis of NEWLY-DISCOVERED EVIDENCE that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both.

PHIL GLOBAL COMMUNICATION vs. CIR (October 31, 2006) à A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax.

3. When the taxpayer Cannot be located in the Address given by him in the return filed upon which a tax is being assessed or collected, but if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations shall not be suspended

4. When the warrant of distraint or levy is

duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and No Property is located

5. When the taxpayer is Out of the

Philippines

B. Remedies of the taxpayer against a tax erroneously or illegally paid

When may taxes be refunded or credited? Taxes may be refunded or credited in the following cases: § Taxes erroneously or illegally

assessed or collected § Penalties imposed without authority § Value of internal revenue stamps

when they are returned in good condition by the purchaser

§ Unused stamps that have been rendered unfit for use (Commissioner may redeem, change or refund their value upon proof of destruction)

§ Any sum alleged to have been excessively or in any manner wrongfully collected

Q: What is the nature of a claim for refund? It partakes of the nature of an exemption and is strictly construed against the claimant. The

burden of proof is on the taxpayer claiming the refund that he is entitled to the same. [CIR v. Tokyo Shipping (1995)]

Q: When are there erroneously paid, or illegally assessed or collected taxes? Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at the time that payment is made. Taxes are illegally collected when payments are made under duress. Q: What is the difference between a tax credit and refund? REFUND takes place when there is actual reimbursement. TAX CREDIT takes place upon the issuance of a tax certificate or tax credit memo, which can be applied against any sum that may be due and collected from the taxpayer. Q: Is payment under protest necessary

in claims for refund? No. Section 229 of the NIRC is specific on this point when it provides that a suit or proceeding for tax refund may be maintained “whether or not such tax, penalty or sum has been paid under protest or duress.”

What is the procedure for obtaining a refund or tax credit? First, the taxpayer must file a claim for refund before the Commissioner within two years from the date of payment. (Sec. 229, NIRC) [GENERAL RULE]

§ EXCEPTIONS to the rule requiring a

claim for refund: àààà When on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid (e.g. mathematical errors), the Commissioner may refund or credit the tax even without

a written claim therefor. § NOTE: A return filed showing an

overpayment shall be considered as a written claim for credit or refund. (Sec. 204C, NIRC)

But how shall the date of payment be determined?

i. If the income tax is withheld at

source→ the taxpayer is deemed to have paid his tax liability at the end of the taxable year.

GIBBS vs. COMMISSIONER (November 29, 1965) à A taxpayer whose income is withheld at the source will be deemed to have paid his tax liability when the same

falls due at the end of the tax year. It is from this latter date then, or when the tax liability falls due, that the 2-year prescriptive period starts to run with respect to payments effected thru the withholding tax system.

ii. If the income is paid on a quarterly basis→ the two-year period is counted from the time of filing the

final adjustment return.


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CIR vs. TMX SALES (January 16, 1992) à When a tax is paid in installments, the prescriptive period should be counted from the date of final payment or the last installment. This rule proceeds from the theory that there is no payment until

the entire tax liability is completely paid. Installments should be treated as

advances or portions of the annual tax due.

What should the taxpayer do if his claim for refund is denied or is not acted upon by the Commissioner?

o SITUATION 1: The Commissioner

denies the claim for refund→ the taxpayer may appeal to the CTA within thirty (30) days from the receipt of the Commissioner’s decision AND within two years from the date of payment. (Note

that §229 states that ‘no such suit or

proceeding shall be filed after the

expiration of the 2-year period regardless

of any supervening cause that may arise

after payment’)

o SITUATION 2: The Commissioner does not act on the claim, and the two-year period is about to lapse→ the taxpayer must file a claim before the CTA before the 2-year period lapses, otherwise he may no longer file a claim before the CTA in case the Commissioner renders an adverse decision beyond the 2-year period.

èèèè NOTE HOWEVER! Is the two-year

period jurisdictional with respect to the CTA?

NO. Even if the two-year period had already lapsed, the same is not a jurisdictional defect which, upon grounds of justice and equity, may be set aside by the court. [(COMMISSIONER vs. PHILAMLIFE (May 29, 1995)]

If the Commissioner grants the refund, within what time must it be claimed?

Within five years from the date such warrant or check was mailed or delivered, otherwise it shall be forfeited in favor of the government and the amount thereof shall revert to the general fund.

What can be done with a Tax Credit Certificate?

Tax credit certificates (TCCs) can be applied against all internal revenue taxes, excluding withholding tax. TCCs which remain

unutilized after five years from the date of issue shall be considered as invalid, unless revalidated. If not revalidated, the amount covered by the TCC shall revert to the general fund

C. Remedies of the State for Collection

of Taxes GENERALLY, the remedies of distraint, levy or civil or criminal action may be pursued SIMULTANEOUSLY. (Sec. 205, NIRC)

→ Remedies of distraint and levy may be repeated if necessary until the full amount due,

including all expenses, is collected. (Sec. 217, NIRC)

→ HOWEVER, the remedies of distraint and levy shall not be available where the amount of the tax involved is not more than One hundred pesos.

o Q: When may the government

avail of the remedies of collection? àààà When the assessment shall have become final, executory and demandable.

NOTE: A court MAY NOT GRANT AN INJUNCTION to restrain the collection of any national internal revenue tax, fee or charge imposed under the NIRC. (Sec. 218, NIRC)

EXCEPTION: Under Section 11 of RA 1125, as amended by RA 9282, suspension is allowed when the following conditions concur:

1. it is an appeal to the CTA from a

decision of the Commissioner of Internal Revenue or Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be, and

2. in the opinion of the Court of Tax

Appeals, the collection may jeopardize the interest of the Government and/or the taxpayer.

Q: In case of suspension, what may the taxpayer be required to do? Either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

Q: What are tax liens? (Sec. 219, NIRC) When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the CIR until paid with interest, penalties, and costs that may accrue in addition thereto upon ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING to the taxpayer.

HOWEVER, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until NOTICE of such lien shall be filed by the Commissioner in the Office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located.

o Q: What is the difference between

seizure under forfeiture and a seizure to enforce a tax lien? àààà In the former all the proceeds derived from the sale of the thing forfeited are turned over to the Collector of Internal Revenue; in the latter, the residue of such proceeds over and above what is required to pay the tax sought to be realized, including expenses, is returned to the owner of the property. [BPI v. Trinidad]


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ADMINISTRATIVE REMEDIES

1. Distraint-involves the SEIZURE by the

Government of PERSONAL PROPERTY, tangible or intangible, to enforce the payment of taxes; followed by the PUBLIC SALE of such property, if the taxpayer fails to pay the taxes voluntarily.

What are the kinds of distraint? a. Actual Distraint – resorted to when there

is ACTUAL delinquency in tax payment

b. Constructive Distraint – is a preventive remedy which aims at forestalling a possible dissipation of the taxpayer’s assets when delinquency sets in. Hence, no actual delinquency in payment is necessary.

How is ACTUAL distraint of personal

property effected? Upon failure to pay the delinquent tax at the time required, the proper officer shall SEIZE and DISTRAINT any GOODS, CHATTELS, or EFFECTS, and the PERSONAL PROPERTY, including STOCKS and other SECURITIES, DEBTS, CREDITS, BANK ACCOUNTS and INTERESTS in and RIGHTS to personal property of the taxpayer in sufficient quantity to satisfy the tax, expenses of distraint and the cost of the subsequent sale.

Who is the proper officer authorized to issue the warrant of distraint? a. Commissioner or his duly authorized

representative – if the amount involved is in EXCESS of One million pesos (P1,000,000)

b. Revenue District Officer – if the amount involved is One million pesos (P1,000,000) or LESS. (Sec. 207A, NIRC)

§ The officer serving the warrant of distraint shall: → make an account of the goods, chattels,

effects or other personal property distrained.

→ shall leave a copy with the person from whom the goods were taken, or at the dwelling or place of business of such person with someone of suitable age and discretion.

→ indicate statement of the sum demanded and the time and place of sale of the distrained property. (Sec. 208, NIRC)

How are different kinds of personal property distrained? Stocks and other securities → by serving a copy of the warrants of distraint on the taxpayer, AND upon the president, manager, treasurer or other responsible officer of the corporation, company or association which issued the stocks or securities. Debts and credits → by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint.

The person owing the debts shall then pay the Commissioner instead of his creditor (taxpayer) on the strength of such warrant. Bank accounts → by serving a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank. The bank shall then turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. (NOTE: distraint of bank accounts is called GARNISHMENT)

What is the remedy of the taxpayer once the Commissioner or other proper officer issues the warrant of distraint? The taxpayer may request that the warrant be lifted. The commissioner may, in his discretion, allow the lifting of the order of distraint. He may ask for a bond as a condition for the cancellation of the warrant. (Sec. 207, NIRC)

If the taxpayer does not ask for the lifting of the warrant, what shall be done with the seized properties?

The properties will be SOLD in a PUBLIC SALE, and the procedure shall be as follows:

(1) The Revenue District Officer or his duly

authorized representative (not the officer who served the warrant), shall cause a notification of the public sale to be posted in not less than two (2) public places in the municipality or city (one of which is the Office of the Mayor) where the distraint was made. The notice shall specify the time and place of the sale. The time of sale shall not be less than twenty (20) days after notice to the owner and the publication or posting of such notice.

(2) At the time of the public sale, the revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained at a PUBLIC AUCTION, to the HIGHEST BIDDER for CASH or with the approval of the Commissioner, through a DULY LICENSED COMMODITY or STOCK EXCHANGES.

(3) Any residue over and above what is required to pay the entire claim, including expenses of sale and distraint, shall be RETURNED to the owner of the property sold. Expenses shall be limited to actual expenses of SEIZURE and PRESERVATION of the property pending the sale, no charge shall be imposed for the services of the local internal revenue officer or his deputy. (§209)

(4) If the amount offered by the highest bidder is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due thereon. The property so purchased may thereafter be resold by the Commissioner or his deputy. (§212)

(5) If the proceeds from the sale of the distrained properties is not sufficient to satisfy the tax delinquency, the Commissioner or his duly authorized representative shall within thirty


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(30) days after execution of the distraint, proceed with the levy on the taxpayer’s real property. (§207B)

May the taxpayer recover his property prior to consummation of the sale? YES. If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (Sec. 210, NIRC) How is CONSTRUCTIVE distraint effected? a. By requiring a taxpayer or any person in

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 Commissioner’s authority.

b. If the taxpayer or person in possession or control refuses to sign the receipt, the revenue officer shall prepare a list of the property and leave a copy of such list in the premises where the properties are located, in the presence of two (2) witnesses.

Q: When may property of the taxpayer be placed in constructive distraint?

The property of a taxpayer may be placed in constructive distraint, if in the Commissioner’s opinion:

§ the taxpayer is retiring from any business subject to tax

§ the taxpayer is intending to leave the Philippines

§ the taxpayer is intending to remove his property from the Philippines or to hide or conceal his property

§ the taxpayer is planning to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him (§206) NOTE: In constructive distraint, the property is not actually confiscated or seized by the revenue officer

2. Levy – is the same act of seizure as in

distraint, but in this case, of real property, an interest in or rights to such property in order to enforce the payment of taxes. The real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy. How is levy of real property effected?

1) After the expiration of time required to

pay the delinquent tax, real property may be levied upon, BEFORE, SIMULTANEOUSLY or AFTER the distraint of personal property belonging to the delinquent. The IR 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 tax and penalty due from him. This certificate shall operate with the force of LEGAL EXECUTION throughout the Philippines.

2) The certificate shall contain 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 of the province or city where the property is located and upon the taxpayer (if he is absent from the Philippines, to his agent or manager of business in respect to which the liability arose or to the occupant of the property in question)

3) Within twenty (20) days after the levy, the officer conducting the proceedings shall proceed to advertise for SALE the property or a portion thereof as may be necessary to satisfy the claim and costs of sale. Such advertisement shall cover a period of at least thirty (30) days. The notice shall be posted at the main entrance of the city or municipal all AND in a public and conspicuous place in the barrio or district where the real property lies. The notice must also be published in a newspaper of general circulation in the place where the property is located, once a week for three (3) weeks. → CONTENTS of notice: statement of

amount of taxes, and penalties due, time and place of sale, name of taxpayer, short description of property.

4) The sale shall be held either at the main

entrance of the municipal or city hall or on the premises to be sold. Property will be awarded to the highest bidder. In case the proceeds of the sale exceeds the claim and costs of sale, the excess shall be turned over to the owner of the property. (§213)

5) If there is no bidder for the real property OR if the highest bid is not sufficient to pay the taxes, penalties and costs, the IR Officer conducting the sale shall declare the property FORFEITED to the GOVERNMENT in satisfaction of the claim. (Sec. 215, NIRC) The Commissioner may resell the property at a public auction after the giving of not less than twenty (20) days notice. (Sec. 216, NIRC)

May the taxpayer recover his property prior to consummation of the sale? YES. At any time before the day fixed for the sale, the taxpayer may discontinue all proceeding by paying the taxes, penalties and interest. (Sec. 213, NIRC) May the taxpayer recover his property after the consummation of the sale? YES. Within one (1) year from the date of sale, the taxpayer or anyone for him, may pay to the Revenue District Officer the total amount of the following: § public taxes § penalties § interest from the date of delinquency to the

date of sale § interest on said purchase price at the rate

of fifteen percent (15%) per annum from the date of sale to the date of redemption. (NOTE: if the property was forfeited in


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favor of the government, the redemption price shall include only the taxes, penalties and interest plus costs of sale – no interest

on purchase price since the Gov’t did not

“purchase” the property anyway, it was

forfeited) NOTE: The taxpayer-owner shall not be deprived of possession of the said property and shall be entitled to rents and other income until the expiration of the period for redemption (Sec. 214, NIRC)

JUDICIAL PROCEEDINGS

Civil and criminal action and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the BIR → shall be BROUGHT IN THE NAME OF THE

GOVERNMENT of the Philippines → shall be CONDUCTED BY LEGAL

OFFICERS OF THE BIR No civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under the NIRC shall be filed in court without the APPROVAL OF THE COMMISSIONER approval of the Commissioner. (Sec. 220, NIRC)

Q: How is a criminal action a collection

remedy? The judgment in the criminal case shall:

→ impose the penalty; and → order payment of the taxes subject of

the criminal case as finally decided by the Commissioner. (Sec. 205, NIRC)

Q: Is an assessment necessary before filing a criminal charge for tax evasion? No, an assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of a willful attempt to file taxes, such as failure to file a required tax return. [CIR v. Pascor Realty (June 29, 1999)]

V. COMPROMISE AND ABATEMENT

1. Compromise (to reduce the amount of tax payable) Grounds for a compromise: The Commissioner may compromise the payment of any internal revenue tax in the following cases:

1) A REASONABLE DOUBT as to the validity

of the claim against the taxpayer exists; or

2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (FINANCIAL INCAPACITY)

What are the limits of the Commissioner’s power to compromise? § For cases of financial incapacity→ a

minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax

§ For other cases→ a minimum compromise rate equivalent to forty

percent (40%) of the basic assessed tax èèèè NOTE: When the basic tax involved exceeds One Million Pesos (P1,000,000), or where the settlement offered is less than the prescribed minimum rates, the compromise must be approved by the Evaluation Board (composed of the Commissioner and 4 deputy commissioners)

May the Commissioner compromise cases of criminal violations? Generally, ALL CRIMINAL VIOLATIONS may be compromised, EXCEPT: a) those cases already filed in court b) those involving fraud

2. Abatement (to cancel the entire amount of tax payable)

When may the Commissioner abate or

cancel a tax liability? The Commissioner may abate or cancel a tax

liability when:

1) the tax or any portion thereof appears to be UNJUSTLY or EXCESSIVELY ASSESSED; or

2) the ADMINISTRATION and COLLECTION COSTS do not justify the collection of the amount due. (costs of collection > amount of tax due)

VI. STATUTORY OFFENSES AND PENALTIES A. Additions to the Tax

1. Civil Penalties

Surcharge àààà a civil penalty imposed by law as an addition to the main tax required to be paid. It is a civil administrative sanction provided as a 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. Rates of Surcharge: There shall be imposed a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: § FAILURE TO FILE ANY RETURN and PAY

THE TAX DUE THEREON on the date prescribed; or

§ Filing a return with an internal revenue officer than those with whom the return is required to be filed (except when authorized by the Commissioner); or

§ FAILURE TO PAY THE DEFICIENCY TAX within the time prescribed for its payment in the notice of assessment

§ FAILURE TO PAY THE FULL OR PART of the amount of tax shown on any return required to be filed, 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. (Sec. 248A, NIRC)


TAXATION LAW 2

The penalty shall be fifty percent (50%) of the tax or of the deficiency tax, in the following cases: § WILLFUL NEGLECT to FILE THE RETURN

within the period prescribed § A FALSE OR FRAUDULENT RETURN is

willfully made (§248B) è Prima-facie evidence of false or

fraudulent return:

→ substantial underdeclaration of taxable sales, receipts or income (failure to report sales, receipts or income in an amount exceeding 30% of that declared per return)

→ substantial overstatement of deductions (a claim of deduction in an amount exceeding 30% of actual deductions)

2. Interest

20% per annum on any unpaid amount of tax or higher rate prescribed by rules and regulations from the date prescribed for payment until the amount is fully paid.

→ Deficiency interest – the term ‘deficiency’ means the amount by which the taxed imposed under the Code exceeds the amount shown on the return filed (§249B)

→ Delinquency Interest. - In case of failure to pay: § tax due on any return required to be

filed, or § tax due for which no return is required,

or § a deficiency tax, or any surcharge or

interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed until the amount is fully paid, which interest shall form part of the tax. (§249C)

B. Crimes, Other Offenses and Forfeitures

1. General Provisions

§ Any person convicted of a crime under the Code shall: o be liable for the payment of the tax,

o be subject to the penalties imposed under the Code.

NOTE: Payment of the tax due after a case has been filed shall not constitute a valid defense in any prosecution for violation of the provisions under the Code.

§ Any person who willfully aids or abets in

the commission of a crime penalized under the Code or who causes the commission of any such offense by another shall be liable in the same manner as the principal.

§ If the offender is:

OFFENDER PENALTY

Not a citizen of the Philippines

he shall be deported immediately after serving the sentence

A public officer or employee

the maximum penalty prescribed for the offense shall be imposed on him shall be dismissed from public office, and perpetually disqualified from holding any public office, to vote, and to participate in any election

CPA

his license shall be automatically revoked or cancelled once he is convicted

Corporations, associations,

partnerships etc

imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation

§ The fines imposed for any violation of the

Code shall not be lower than the fines imposed herein or twice the amount of taxes, interests and surcharges due from the taxpayer, whichever is higher. (§253)

All violations of any provision of the Code shall prescribe after five (5) years.

2. Criminal Offenses

Sec. Offense Who is liable Penalty

254 Willful attempt to evade or defeat tax.

Any person who willfully attempts in any manner to evade or defeat any tax or the payment thereof.

Fine - P30,000 or 100,000; and Imprisonment - 2 to 4 years; Plus other penalties

255 Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation

Any person required to pay any tax, make a return, keep any record, or supply correct and accurate information

Fine - P10,000 or more; and Imprisonment - 1 to 10 years; Plus other penalties

Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequently

Fine - P10,000 - 20,000; and Imprisonment - 1 to 3 years; Plus other penalties


TAXATION LAW 2

withdraws the same return or statement

257 Making false entries, records, or reports, or using falsified or fake accountable forms.

Any financial officer or Independent CPA engaged to examine and audit books of accounts of taxpayers under Sec.232 (A) and any person under his direction.

Fine - P50,000 - 100,000; and Imprisonment - 2 to 6 years

258 Unlawful pursuit of business

Any person who carries on any business for which in annual registration fee is imposed without paying the tax as required by law.

Fine - P5,000 - 20,000; and Imprisonment - 6 months to 2 years

A person engaged in the business of distilling, rectifying, repacking, compounding or manufacturing any article subject to excise tax.


259 Illegal Collection of Foreign Payments

Any person who knowingly undertakes the collection of foreign payments under Sec. 67 without a license or without complying with the implementing rules and regulations.


260 Unlawful Possession of Cigarette Paper in Bobbins or Rolls, Etc.

Any person, manufacturer or importer of cigar or cigarettes

Fine - P20,000 - 100,000; and Imprisonment - 6 years 1 day to 12 years

261 Unlawful Use of Denatured Alcohol

Any person who for the purpose of manufacturing any beverage, uses denatured alcohol or alcohol specially denatured to be used for motive power or withdrawn under bond for industrial uses or alcohol knowingly misrepresented to be denatured to be unfit for oral intake or who knowingly sells or offers for sale such preparations containing as an ingredient such alcohol. Any person who unlawfully recovers or attempt to recover by distillation or other process any denatured alcohol or who knowingly sells or offers for sale, conceals or otherwise disposes of alcohol as recovered or redistilled


262 Shipment or Removal of Liquor/Tobacco Products under False Name or Brand or as an Imitation of any Existing or Known Product Name or Brand

Any person who ships, transports or removes


263 Unlawful Possession or Removal of Articles Subject to Excise Tax W/o Payment of the Tax

Any person who owns or is found in possession of these articles

Value of goods not > P1,000: Fine – not < than P1,000 not > P2,000, imprisonment of not < 60 days, not > 100 days Value of goods > P1,000, not > than P50,000: Fine – not < than P10,000 not > P20,000, imprisonment of not < 2 yrs, not > 4 years Value of goods > P50,000, not > than P150,000: Fine – not < than P30,000 not > P60,000, imprisonment of not < 4 yrs, not > 6


TAXATION LAW 2

years Value of goods > P150,000: Fine – not < than P50,000 not > P100,000, imprisonment of not < 10 yrs, not > 12 years

264 Failure or Refusal to Issue Receipts or Sales or Commercial Invoices, Violations Related to the Printing of Such Receipts or Invoices and Other Violations

Any person who, being required under Section 237 to issue receipts or sales or commercial invoices

Fine - P 1,000 - 50,000; and Imprisonment - 2 to 4 years

265 Offenses Relating to Stamps

Fine - P 20,000 - 50,000; and Imprisonment 4-8 yrs

266 Failure to Obey Summons

Any person who being duly summoned to appear to testify, or to appear and produce books of accounts, records, memoranda or other papers, or to furnish info. as required under the pertinent provisions of this Code.

Fine - P 5,000 - 10,000; and Imprisonment - 1 to 2 yrs

267 Declaration under Penalties of Perjury

Any person who willfully files a declaration, return or statement containing information which is not true and correct as to every material matter

Perjury under the Revised Penal Code

268 Misdeclaration or Misrepresentation of Manufacturers Subject to Excise Tax

Any manufacturer subject to excise tax

Summary cancellation or withdrawal of the permit to engage in business as a manufacturer of articles subject to excise tax

Forfeiture of Property Used in Unlicensed Business or Dies Used for Printing False Stamps, Etc.

Any person who conducts an unlicensed business

Forfeiture

Forfeiture of Goods Illegally Stored or Removed

Any person subject to excise tax who fails to store the goods in proper place, or removes goods without payment of excise tax

Forfeiture

274 Penalty for Second and Subsequent Offenses

Maximum of the penalty prescribed for the offense

Forfeiture of Property Used in Unlicensed Business or Dies Used for Printing False Stamps, Etc.

Any person who conducts an unlicensed business

Forfeiture

Forfeiture of Goods Illegally Stored or Removed

Any person subject to excise tax who fails to store the goods in proper place, or removes goods without payment of excise tax

Forfeiture

274 Penalty for Second and Subsequent Offenses

Maximum of the penalty prescribed for the offense

275 Violation of Other Provisions of the Tax Code or Rules or Regulations in General

Any person who violates any provision of this Code or any rule or regulation promulgated by the Department of Finance for which no specific penalty is provided by law

Fine: not more than P 1,000 or Imprisonment: not more than 6 months, or both

276 Penalty for Selling, Transferring, Encumbering or in any way disposing of property Placed

Any taxpayer, whose property has been placed under constructive distraint

Fine: not less than twice the value of the property but not less than P 5,000 or Imprisonment: 2 yrs 1 day - 4 yrs or both


TAXATION LAW 2

under Constructive Distraint

277 Failure to Surrender Property Placed under Distraint and Levy

Any person having in his possession or under his control any property or rights to property, upon which a warrant of constructive distraint or actual distraint and levy has been issued

Fine: P 5,000 or more or Imprisonment: 6 months 1 day - 2 years, or both

278 Procuring Unlawful Divulgence of Trade Secrets

Any person procures an officer or employee of the BIR to divulge any confidential information regarding the business, income or inheritance of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, and which it is unlawful for him to reveal, and any person who publishes or prints in any manner whatever, not provided by law, any income, profit, loss or expenditure appearing in any income tax return

Fine: not more than P 2,000 or Imprisonment: 6 months - 5 years, or both

3. Penalties Imposed on Public Officers

The law imposes a fine of not less than P50,000 nor more than P100,000 or imprisonment for not less than 10 years nor more than fifteen years on every official, agent or employee of the BIR or of any agency or employee of the Government charged with the enforcement of the Tax Code, who shall: (CONED- FRAP)

a) Extort or willfully oppress under color of

law; b) knowingly Demand other or greater sums

than are authorized by law or receive any fee, compensation or reward, except as by law prescribed, for the performance of any duty;

c) willfully Neglect to give receipts, as by law required, for any sums collected in the performance of duty, or who willfully neglect to perform any of the duties enjoined by law;

d) Conspire or collude with another or others to defraud the revenues or otherwise violate the law;

e) willfully make Opportunity for any person to defraud the revenues, or who do or omit to do any act with intent to enable

any other person to defraud the

revenues; f) negligently or by design Permit the

violation of the law by any other person; g) make or sign any False certificate or

return in any case where the law requires the making by them of such entry, certificate or return;

h) having knowledge or information of a violation of any provision of the Code or of any fraud committed on the revenues collectible by the BIR, fail to Report such knowledge or information to their superior officer, or to report as otherwise required by law; or

i) without the authority of law, demand or Accept or attempt to collect, directly or indirectly, as payment or otherwise, any sum of money or other thing of value for the compromise, adjustment or settlement of any charge or complaint for

any violation or alleged violation of law. (§235)

VII. COMPLIANCE REQUIREMENTS

What records are required to be kept by taxpayers? (Sec. 232, NIRC)

Gross Quarterly Sales or Output

Requirements

P50,000 or less

simplified form of bookkeeping records duly authorized by the Secretary of Finance • all transactions and results of

operation are shown • all taxes may be readily and

accurately ascertained at that time of the year

exceeding P50,000 but not more than P150,000

a journal and ledger or their equivalent

exceeding P150,000

books of accounts, examined and audited by an independent CPA and their income tax return shall be accompanied by § certified balance sheets § profit and loss statements § list of income-producing

properties and other relevant data

NOTES: § Taxpayers may also keep other subsidiary

books at their option, as the needs of their business may require which shall form part of the accounting system of the taxpayer. (Sec. 233, NIRC)

§ Books or records shall be kept in a native

language, English or Spanish. The keeping of books and records in any language other than the three mentioned is prohibited, unless the taxpayer makes a true and complete translation of all the entries in the said books and records. (Sec. 234, NIRC)


TAXATION LAW 2

§ All the books and records shall be kept by

the taxpayer until the period for making an assessment under Sections 203 and 222 have prescribed. (Sec. 235, NIRC)

§ Examination and inspection of all books

and records shall be made only once in a taxable year, EXCEPT in these cases:

§ Fraud, irregularity or mistakes, as determined by the Commissioner § The taxpayer requests

reinvestigation § Verification of compliance with

withholding tax laws and regulations § Verification of capital gains tax

liabilities § In the exercise of the

Commissioner’s power to issue an access letter. (Sec. 235, NIRC)

Who are required to register with the BIR? Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer:

§ Within ten (10) days from date of employment, or

§ On or before the commencement of business, or

§ Before payment of any tax due, or § Upon filing of a return, statement or

declaration as required under the Code (Sec. 236, NIRC)

What shall the BIR do after the taxpayer registers?

The BIR shall assign a Taxpayer Identification Number (TIN) which the taxpayer shall indicate in every return, statement or document filed with the BIR. Only one TIN shall be given a person. Any person who secures more than one TIN shall be criminally liable. (§236)

VIII. INFORMER’S REWARD (Sec. 282 of the NIRC)

§ To whom given àààà persons instrumental in the discovery of violations of the NIRC and in discovery and seizure of smuggled goods.

§ Conditions to qualify for the reward: 1. Person is not an internal revenue official

or employee, public official, or employee or relative within 6 th degree of consanguinity

2. Voluntarily gives definite and sworn information:

a) Not yet in the possession of BIR b) Leading to discovery of frauds c) Resulting in:

i. the recovery of revenues, surcharges and fees and/or

ii. conviction of the guilty party. d) Not refer to a case already pending

or previously investigated or examined by the Commissioner or his agents or the SOF or his agents.

§ Amount of reward: 10% of the revenues,

surcharges or fees recovered and/or fine/penalty imposed, or P1,000,000, whichever is LOWER.

§ The same amount shall be given if the offender offered to compromise and

such offer has been accepted and collected by the Commissioner.

§ If no revenue, surcharge or fees be actually collected, such person is not entitled to a reward

§ For discovery and seizure of SMUGGLED GOODS à The cash reward is 10% of the FMV of the smuggled and confiscated goods, or P1,000,000, whichever is LOWER.

§ The cash rewards shall be subject to income TAX at the rate of 10%.

§ Rule of construction àààà Statutes offering rewards must be liberally construed in favor of informers and with regard to the purpose for which they are intended, with mere technicality yielding to the substantive purpose of the law.

[Penid v. Virata]


TAXATION LAW 2

START

Commissioner or

Regional Director

Issues Letter of

Authority (LA)

RO sends notice

of informal

conference

Revenue Officer (RO)

conducts Audit w/in 120

days. If 120 days lapse

LA is revalidated,

Taxpayer

responds w/in 15

days

Regional

Assessment

Division issues a

Preliminary

Assessment Notice

(PAN)

Is response w/n

15 days? Is it

meritorious?

Send Formal Letter

of demand and Final

Assessment Notice

(FAN) is issued

NO to

either

ASSESSMENT

ENDS

Yes to

both

File protest w/n 30

days from receipt of

assessment. Submit

supporting papers wi/in

60 days from protest

Protest made w/in

30 days?

Supporting papers

submitted w/in 60

days?

Commissioner decides on

protest within 180 days

YES to

both

Assessment becomes

Final, Warrant of Distraint

& Levy Issued

Commissioner

decides w/n

180 days?

Appeal to the Court of Tax

Appeals w/in 30 days after

lapse of 180 days OR wait for

a decision by the BIR

(Lascona Land oil vs. CIR)

Appeal to the Court of Tax

appeals within 30 days OR file

motion for reconsideration

within 30 days. MR tolls 30

day period to appeal to CTA

Decision

favorable to

taxpayer?

NO

If MR is denied, appeal to

the CTA within remainder

of the 30 days

NO

If CTA decision is unfavorable to

taxpayer, file MR with CTA

Division w/in 15 days. Appeal to

CTA en banc if MR denied.

Appeal to

Supreme Court

NO to

either

YES

Appeal made

on time?

CTA decides on

the appealNOYES

ASSESSMENT

ENDS

YES

Taxpayer

responds w/in

15 days

Assessment

becomes Final,

Warrant of Distraint

& Levy Issued

END

Flowchart I: Taxpayer’s Remedies from Tax Assessment-NIRC


TAXATION LAW 2

START

Flowchart II: Procedures for Distraint and Levy-NIRC

Yes

Commissioner seizes sufficient

personal property to satisfy the

tax, charge & expenses of seizure

(Sec. 207 (A))

Distraining Officer accounts for

the goods distrained (Sec. 208)

RDO posts notice in at least 2 public

places in the municipality/city where

the distraint is made. One place of

posting must be at the mayor’s office.

Time of sale shall not be less than 20

days after the notice (Sec. 209)

Goods shall be restored to owner,

if charges are paid (Sec. 210)

Officer sells the goods to the

highest bidder for cash or

with the Commissioner’s

approval, through commodity/

stock exchanges. (Sec. 209)

Real property may be levied

on before, simultaneously, or

after the distraint of personal

property (207 (B))

Delinquent tax

more than 1M?

Person owing any

delinquent tax to

fails to pay w/in

the time required

RDO seizes sufficient

personal property to satisfy

the tax, charges & expenses

of seizure (Sec. 207 (A))

No

Excess of proceeds over the

entire claim, shall be returned

to the owner. No charge shall

be imposed for the services of

the officer (Sec. 209)

W/in 2 days after

the sale, officer

shall report to the

Commissioner.

(Sec. 211)

Commissioner may purchase

property for the National

Government (Sec. 212)

Bid less than

amount of tax/

FMV of goods

distrained?

Property may be resold and

the net proceeds shall be

remitted to the National

Treasury as internal revenue.

(Sec. 212)

Officer

conducts

public auction

Yes

No, bid just right

W/n 10 days after receipt of the

warrant, levying officer shall

report to the Commissioner who

shall have the authority to lift the

warrant of levy (Sec. 207 B)

Internal revenue officer,

designated by the Commissioner,

shall prepare a certificate with the

force of a nationwide legal

execution (Sec. 207 B)

Levy shall be affected by writing upon said certificate a

description of the property. Notice of the levy shall be

served upon the Register of Deeds of LGU where the

property is located and upon the owner (Sec. 207 B)

Excess of proceeds

of the sale over claim

and cost of sale shall

be turned over to the

owner (Sec. 213)

W/n 1 year from sale, the

owner may redeem, by paying

to the RDO the amount of the

taxes, penalties, and interest

thereon from the date of

delinquency to the date of sale,

and 15% per annum interest on

purchase price from the date

of purchase to the date of

redemption. (Sec. 214)

W/n 1 year from forfeiture,

the taxpayer, may redeem

said property by paying full

amount of the taxes and

charges (Sec. 215)

The Commissioner may,

after 20 days notice, sell

property at public auction

or at private sale with

approval of the SoF.

Proceeds shall be

deposited with the National

Treasury (Sec. 216) Levy and distraint

may be repeated until

the full amount due,

and all expenses are

collected. (Sec. 217)

W/n 20 days after levy, officer shall post

notice at the main entrance of the

municipal/city hall & in public place in the

barrio/district where the real estate lies for

at least 30 days by AND publish it once a

week for 3 weeks. Owner may prevent

sale by paying all charges (Sec. 213)

Sale shall be held at the

main entrance of the

municipal/city hall, or on the

premises of the levied

property. (Sec. 213)

W/n 5 days after the sale,

levying officer shall enter

return of the proceedings

upon the records of the RCO,

RDO and RRD (Sec. 213)

Owner shall not be

deprived of the

possession and shall

be entitled to the

fruits until 1 year

expires (Sec. 214)

Officer conducting the

sale shall forfeit the

property to the

Government (Sec. 215)

No bidder or

highest bid

insufficient?

W/n 2 days, he shall make a return

of the forfeiture. Register of Deeds,

upon registration of forfeiture shall

transfer title to the Government w/o

court order. (Sec. 215)

W/in 5 days after sale,

distraining officer shall enter

return of proceedings in the

records of RCO, RDO and

RRD (Sec. 213)

No, bid ok

Yes

RCO - Revenue Collection Officer RDO - Revenue District officer

RRD - Revenue Regional Director LGU- Local Government Unit


TAXATION LAW 2

VI.VI.VI.VI. LOCAL TAXATIONLOCAL TAXATIONLOCAL TAXATIONLOCAL TAXATION

I. BASIC CONCEPTS a. Local Government Unit - 1987

CONSTI, ART X, SECTION 1.

The territorial and political subdivisions of the Republic of the Philippines are the provinces, cities, municipalities, and barangays. There shall be autonomous regions in Muslim Mindanao and the Cordilleras as hereinafter provided.

b. Scope of Local Taxation – The

provisions in LGC shall govern the exercise by PROVINCES, CITIES, MUNICIPALITIES, and BARANGAYS of their taxing and other revenue-raising powers. (Sec 128 LGC)

c. Power to Create Sources of Revenue

-- Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. (SEC. 129, LGC)

d. Fundamental Principles -- The

following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: (PUPUPICE)

(a) Taxation shall be Uniform in each

local government unit;

NOTE: the uniformity required is only within the territorial jurisdiction of

an LGU. (IRR)

(b) Taxes, fees, charges and other impositions shall: (1) be Equitable and based as far as

practicable on the taxpayer's ability to pay;

(2) be levied and collected only for Public purposes;

(3) not be Unjust, excessive, oppressive, or confiscatory;

(4) not be Contrary to law, public policy, national economic policy, or in the restraint of trade;

(c) The collection of local taxes, fees,

charges and other impositions shall not be let to any Private person;

(d) The revenue collected pursuant to the

provisions of this Code shall Inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as

far as practicable, evolve a

Progressive system of taxation. (SEC. 130, LGC)

e. Local Taxing Authority. - shall be

exercised by the SANGGUNIAN of the LGU concerned through an appropriate ordinance. (SEC. 132, LGC)

§ HOWEVER, the local chief executive of the LGUs (except the punong barangay) possesses veto powers, as laid out in Sec. 55 of the LGC:

SEC. 55. Veto Power of the Local Chief Executive. – (a) The local chief executive may veto any ordinance of the sangguniang panlalawigan, sangguniang panlungsod, or sangguniang bayan on the ground that it is ultra vires or prejudicial to the public welfare, stating his reasons therefor in writing. (b) The local chief executive, except the punong barangay, shall have the power to veto any particular item or items of an appropriations ordinance, an ordinance or resolution adopting a local development plan and public investment program, or an ordinance directing the payment of money or creating liability. In such a case, the veto shall not affect the item or items which are not objected to. The vetoed item or items shall not take effect unless the sanggunian overrides the veto in the manner herein provided; otherwise, the item or items in the appropriations ordinance of the previous year corresponding to those vetoed, if any, shall be deemed reenacted. (c) The local chief executive may veto an ordinance or resolution only once. The sanggunian may override the veto of the local chief executive concerned by two-thirds (2/3) vote of all its members, thereby making the ordinance effective even without the approval of the local chief executive concerned.

II. COMMON LIMITATIONS ON THE

TAXING POWERS OF LOCAL GOVERNMENT UNITS (SEC 133)

Unless otherwise provided, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall NOT EXTEND to the levy of the following (IDEC-GAPE-PGP-RECN):

1. Income tax, except when levied on banks

and other financial institutions; 2. Documentary stamp tax; 3. Taxes on Estates, inheritance, gifts, legacies

and other acquisitions mortis causa, except as otherwise provided herein;

4. 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


TAXATION LAW 2

constructed and maintained by the LGU concerned;

5. 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;

6. Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen;

7. 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;

8. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products;

9. Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

10. 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;

11. Taxes on Premiums paid by way or reinsurance or retrocession;

12. 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;

13. Taxes, fees, or other charges on Philippine products actually Exported, except as otherwise provided herein;

14. Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and Cooperatives duly registered under the "Cooperative Code of the Philippines"; and

15. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units

III.SPECIFIC PROVISIONS ON THE TAXING AND OTHER REVENUE-RAISING POWERS OF LGUS

TAX TAX RATE & TAX BASE

A. PROVINCES Tax on Transfer of Real Property Ownership (Sec. 135) - tax on sale, donation or on any other mode of transferring ownership NOTE: • sale, transfer or other disposition pursuant to RA 6657

(Comprehensive Agrarian Reform Law) shall be EXEMPT from this tax.

• the Register of Deeds shall require the presentation of evidence of payment of this tax, BEFORE registering any deed.

• the Provincial Assessor shall also make the same requirement BEFORE cancelling an old tax declaration and issuing a new one.

• it shall be the DUTY of the seller, donor,transferor,executor/administrator to pay the tax herein imposed within 60 days from the date of execution of the deed or from the date of decedent’s death.

Not more than 50% of 1% of the total consideration involved in the acquisition of the property OR of the FMV in case the monetary consideration involved in the transfer is not substantial, whichever is higher NOTE: the FMV used shall be that reflected in the prevailing schedule of FMVs enacted by the sanggunian concerned. (IRR)

Tax on Business of Printing and Publication (Sec. 136) - imposed on business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature

Not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year

- In the case of a newly started business

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 NOTE: receipts from the printing and/or publishing of books or other reading materials prescribed by DECS as school texts or references shall be EXEMPT from this tax.

Based on the gross receipts for the preceding calendar year, or any fraction thereof

Franchise Tax (Sec. 137) - imposed on businesses enjoying a franchise (notwithstanding any exemption granted by any law or other special law) “business enjoying a franchise” – shall not include holders of

certificates of public convenience for the operation of public utility

vehicles for reason that such certificates are NOT considered as franchises. (IRR)

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 Not exceed one-twentieth


TAXATION LAW 2

(1/20) of one percent (1%) of the capital investment

- In the succeeding calendar year, regardless of when the business started to operate

Based on the gross receipts for the preceding calendar year, or any fraction thereon

Tax on Sand, Gravel and Other Quarry Resources (Sec. 137) NOTE: 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.

Not more than 10% of FMV in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, & other public waters within its territorial jurisdiction

Professional Tax (Sec. 139) - on each person engaged in the exercise or practice of his profession requiring government examination (ie bar or any board exam conducted by PRC) NOTE:

• Where to pay the tax? Ø where he practices his profession; OR Ø where he maintains his principal office in case he practices in

several places PROVIDED, that such person who has paid the professional tax

shall be entitled to practice his profession in any part of the Phil without being subjected to any other national or local tax, license, or fee for the practice of such profession.

• Any employer employing a person subject to this tax shall require such payment BEFORE the employment and annually thereafter.

• 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.

At such amount and reasonable classification as the sangguniang panlalawigan may determine but shall in no

case exceed Three hundred pesos (P300.00)

Amusement Tax (Sec. 140) - collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement NOTE: • In 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 distributors of cinematographic films.

• The holding of operas, concerts, dramas, recitals, painting and

art exhibitions, flower shows, musical programs, literary and

oratorical presentations, shall be EXEMPT from this tax while pop, rock or similar concerts are NOT EXEMPT.

at a rate of not more than thirty percent (30%) of the gross receipts from admission fees.

Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or

Retailers in, Certain Products (Sec. 141) - 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 NOTE: the manufacturers, producers, wholesalers, dealers and retailers referred above shall be EXEMPT from the tax on peddlers described elsewhere in LGC.

in an amount not exceeding Five hundred pesos (P500.00)

B. MUNICIPALITIES

SCOPE - municipalities may levy taxes, fees, and charges not otherwise levied by provinces. (SEC. 142,LGC)

Tax on Business (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

in accordance with the schedule (refer to Sec 143)


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kind or nature, NOTE: the rates in Sec 143 (a) shall apply ONLY to amount of DOMESTIC sales. (IRR)

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature

in accordance with the schedule (Sec 143 again)

(c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors, dealers or retailers of essential commodities -- such as: (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.

Not exceeding one-half (½) of the rates prescribed under subsection (a), (b) and (d) of Sec 143

(d) On retailers: With gross sales or receipts for the preceeding CY of: P400,000 or less More than P400,000

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 P50,000 or less, in the

case of cities, and P30,000 or less, in the case of municipalities.

per annum 2% 1%

(e) On contractors and other independent contractors

in accordance with the schedule (Sec 143 again)

(f) On banks and other financial institutions NOTE: all other income and receipts of banks and financial institutions NOT otherwise enumerated (→) shall be EXCLUDED from the taxing authority of the LGU.(IRR)

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

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 NIRC, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. (this is the catch-all provision)

NOTE: The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case

to exceed the rates prescribed in the LGC. 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 Sec 143. (SEC. 144, LGC) Retirement of Business A business subject to tax pursuant to Sec 143 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 145) Payment of Business Taxes • The taxes imposed in sec 143 shall be

payable for EVERY SEPARATE OR DISTINCT ESTABLISHMENT or PLACE where business subject to tax is conducted.


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• One line of business does NOT become exempt by being conducted with some other businesses for which such tax has been paid.

• The tax on a business must be paid by the person conducting the same.

• In cases where a person conducts or operates 2 or more businesses mentioned in Sec 143 – a.) which are subject to THE SAME tax rate →

tax shall be computed on the COMBINED TOTAL GROSS SALES/RECEIPTS

b.) which are subject to DIFFERENT tax rates → the gross sales/receipts shall be SEPARATELY REPORTED for the computation of taxes.

• Condominium corporations are not business

entities, thus not subject to local business tax. Even though the corporation is empowered to levy assessments or dues from the unit owners, these amounts are not intended for the incurrence of profit by the corporation, but to shoulder the multitude of necessary expenses for maintenance of the condominium. [YAMANE vs. LEPANTO CONDO CORP. (Oct. 25, 2005)]

Fees and Charges GENERAL: The municipality may impose and collect such reasonable fees and charges on business and occupation and 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. SPECIFIC: 1. For Sealing and Licensing of Weights and Measures. at such reasonable rates as shall be prescribed by the sangguniang bayan. 2. Fishery Rentals, Fees and Charges. Municipalities shall have the exclusive authority to grant fishery privileges in the

municipal waters and impose rentals, fees or charges thereon. The sangguniang bayan may: (1) Grant fishery privileges to erect fish corrals,

oysters, mussels or other aquatic beds or bangus fry areas, within a definite zone of the municipal waters, as determined by it

(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

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 the LGC Provided, finally, That the sanggunian concerned shall have the authority to prosecute any violation of the provisions of applicable fishery laws. (Sec. 149, LGC)

C. CITIES

SCOPE --- 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 LGC. 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. (Sec. 151, LGC) IRR:

• The city may levy and collect a percentage tax on ANY business NOT otherwise specified in the LGC or the IRR, at rates NOT exceeding 3% of

the gross sales or receipts of the preceding calendar year.

• The rates of the following taxes shall be uniform for the city and the province:

a. Professional tax – shall not exceed P300

b. Amusement tax – the rate shall not be more than 30% of the gross receipts from admission fees

• The proceeds of the tax on sand, gravel, and other quarry resources in highly-urbanised cities shall be distributed as follows:

highly urbanised city 60% barangay where the sand, gravel, etc are extracted 40%

D. BARANGAYS SCOPE --- 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 at a rate not exceeding one percent (1%) on such gross sales or receipts. • IN CASE OF CITIES -- with gross sales

or receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less

• IN CASE OF MUNICIPALITIES – with gross sales or receipts of Thirty thousand pesos (P30,000.00) or less

(b) Service Fees or Charges - Barangays may collect reasonable fees or charges for services rendered in connection with the regulations or the use of barangay-owned properties or service facilities such as palay, copra, or tobacco dryers.

(c) 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.

(d) Other fees and Charges. - The barangay may levy reasonable fees and charges:

(1) On commercial breeding of fighting cocks, cockfights and cockpits;


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(2) On places of recreation which charge admission fees; and

NOTE: “places of recreation” – include places of amusement where one seeks admission to entertain himself by seeing or viewing the show or performance or those where one amuses himself by direct participation.

(3) On billboards, signboards, neon signs, and outdoor advertisements. (Sec. 152, LGC)

QUICK GLANCE TYPE OF TAX PR

OVINCE

MUNICIPALITY

CITY

BARANGAY

Sec. 135 – Tax on Transfer of Real Property Ownership

X X

Sec. 136 – Tax on Business of Printing and Publication

X X

Sec. 137 – Franchise Tax33 X X Sec. 138 – Tax on Sand, Gravel and Other Quarry Resources34

X X

Sec. 139 – Professional Tax X X Sec. 140 – Amusement Tax X X Sec. 141 –Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products

X X

Sec. 143 – Tax on Business X X Sec. 147 – Fees and charges on regulation/licensing of business and occupation (except professional taxes)

X X

Sec. 148 – Fees for Sealing and Licensing of Weights and Measures

X X

Sec. 149 – Fishery Rentals, Fees and Charges

X X

Sec. 156 – Community Tax X X Sec. 152(a) – Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers

X

Sec. 152(b) – Service Fees on the use of Barangay-owned properties

X

Sec. 152(c) – Barangay Clearance

X

Sec. 152(d) – Other Fees and Charges (on commercial breeding of fighting cocks, cockfights, cockpits; places of recreation which charge admission fees; outside ads)

X

Sec. 153 – Service Fees and Charges

X X X X

Sec. 154 – Public Utility Charges35

X X X X

Sec. 155 – Toll Fees or Charges36

X X X X

Sec. 232 – Real Property Tax X XX X Legend: X à Authorized to impose the tax XX à Only if the municipality is within the Metro Manila Area

IV. SITUS OF TAX

33 The franchise tax provided in Sec. 137 is intended to be in addition to the franchise tax imposed by the National Government. (de Leon, p. 463) 34 Note that under Sec. 138, the proceeds of this tax are allocated 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%).

35 Applies to public utilities operated and maintained by them within their jurisdiction. 36 Applies to the use of any public road, pier, wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the local government unit concerned. Exemptions: (1) officers and enlisted men of the Armed Forces of the Philippines and members of the Philippine National Police on mission, (2) post office personnel delivering mail, (3) physically-handicapped, and (4) disabled citizens who are sixty-five (65) years or older.

RULE 1: In case of persons maintaining/operating a branch or sales outlet

making the sale or transaction, the tax shall be recorded in said branch or sales outlet and paid to the municipality/city where the branch or sales outlet is located. RULE 2: Where there is NO branch or sales

outlet in the city/municipality where the sale is

made, the sale shall be recorded in the principal office and the tax shall be paid to such city/municipality. RULE 3: In the case of manufacturers, contractors, producers, and exporters having

factories, project offices, plants, and plantations, the ff sales allocation shall be observed: • 30% of sales recorded in the principal office

shall be made taxable by the city/municipality where the principal office is located

• 70% shall be taxable by the city/municipality where the factory, project office, plant,

or plantation is located Illustration of Rule 1 to 3: A company has a principal office in Mandaluyong, while its sales office and factory are in Sta Rosa Ø sales made in Sta Rosa, will be recorded in

Sta Rosa Ø sales made in Los Baños, Calamba or

Cabuyao (ie delivered to customers located in those places), will be recorded in Mandaluyong

Ø aside from sales made in Sta Rosa, Sta Rosa also gets 70% of sales recorded in Mandaluyong, pursuant to Rule 3

RULE 4: In case the plantation is located in a

place other than the place where the factory is

located, the 70% portion in Rule 3 will be divided as follows: • 60% to the city/municipality where the

factory is located • 40% to the city/municipality where the

plantation is located RULE 5: In case of 2 or more factories,

plantations, etc in different localities, the 70% shall be prorated among the localities where the factories, plantations, etc are located in proportion to their respective volume of production. NOTE: In case of manufacturers or producers which engage the services of an independent contractor to produce or manufacture some of their products, these rules shall apply except that the factory or plant and warehouse of the

contractor utilised for the production and storage

of the manufacturers’ products shall be

considered as the factory or plant and warehouse

of the manufacturer. (IRR) NOTE: The city or municipality where the port of loading is located shall not levy and collect the reasonable fees unless the exporter maintains in said city or municipality its principal

office, a branch, sales office, or warehouse,

factory, plant or plantation in which case, the rule on the matter shall apply accordingly. (IRR)


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V. COMMON REVENUE-RAISING POWERS

A. Service fees and charges -- LGUs may impose such reasonable fees and charges for services rendered. (Sec. 153, LGC)

B. Public Utility charges – LGUs may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction. (Sec. 154, LGC)

C. Toll fees or charges – LGUs, thru their sanggunian concerned, may fix the rates for the imposition of toll fees or charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU.

PROVIDED, that no such toll fees or charges

shall be collected from: (1) officers and enlisted men of AFP and members of PNP on mission, (2) post office personnel delivering mail, (3) physically-handicapped, and disabled citizens who are 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. (Sec. 155, LGC)

VI. COMMUNITY TAX

A. Who may levy Cities or municipalities may levy a community tax (Sec. 156, LGC)

NOTE: For purposes of enactment of a local tax ordinance levying a community tax, the conduct of a public hearing shall NO longer be required.

B. Who are liable (Sec. 157 &158, LGC)

1. Individuals -- every inhabitant of the Philippines eighteen (18) years of age or over

Ø Who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year, OR

Ø Who is engaged in business or occupation, OR

Ø Who owns real property with an aggregate assessed value of P1,000 or more, OR

Ø Who is required by law to file an income tax return

o shall pay § an annual community tax of

Five pesos (P5.00) AND § an annual additional tax of One

peso (P1.00) for every One thousand pesos (P1,000.00) of income regardless of whether

from business, exercise of

profession or from property which

in no case shall exceed Five thousand pesos (P5,000.00).

NOTE: In the case of husband and wife, EACH shall pay the basic tax of P5.00; but 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.

2. Juridical Persons -- every corporation no matter how created or

organized, whether domestic or

resident foreign, engaged in or doing business in the Philippines

Ø shall pay o an annual community tax of Five

hundred pesos (P500.00) AND o an annual additional tax, which,

in no case, shall exceed Ten thousand pesos (P10,000.00) in accordance with the following schedule:

(1) For every P5,000 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated – P2; AND

(2) For every P5,000.00 of gross

receipts or earnings derived by it from its business in the Philippines during the preceding year – P2.00

NOTE: 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.

C. Who are exempted (Sec. 159, LGC)

(1) Diplomatic and consular representatives;

(2) Transient visitors when their stay in the Philippines does not exceed 3 months

D. Manner of Payment • PLACE OF PAYMENT -- 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. 160, LGC)

• TIME OF PAYMENT – community tax shall accrue on the 1st day of January of each year which shall be paid not later than the last day of February of each year

Ø if a person reaches 18 or loses the

benefit of exemption o ON OR BEFORE the LAST DAY OF

JUNE → liable for the tax on the day he reaches 18 or loses exemption.

o ON OR BEFORE the LAST DAY OF MARCH → he shall have 20 days to pay the community tax without becoming delinquent


TAXATION LAW 2

Ø persons who become resident of Phil or

reaches 18 or loses exemption ON OR AFTER the 1ST DAY OF JULY → shall NOT be subject to community tax for that year.

Ø corporations established and organised o ON OR BEFORE the LAST DAY OF

JUNE → shall be liable for the tax for that year

o ON OR BEFORE the LAST DAY OF MARCH → shall have 20 days to pay the tax without becoming delinquent

o ON OR AFTER the 1ST DAY OF JULY → shall NOT be subject to community tax for that year

NOTE: if the tax is not paid within the prescribed period, there shall be added to the unpaid amount an interest of 24% per annum from the due date until it is paid. (Sec. 161, LGC)

VII. COLLECTION OF TAXES

A. Tax Period -- unless otherwise provided in this Code, the tax period of all local taxes, fees and charges shall be the calendar year. (Sec. 165, LGC)

B. Manner of Payment -- Such taxes, fees

and charges may be paid in quarterly installments. (Sec. 165, LGC)

C. Accrual of Tax -- All local taxes, fees,

and charges shall accrue on the first (1st) day of January of each year. However, new taxes, fees or charges, or changes in the rates thereof, shall accrue on the first (1st) day of the quarter next following the effectivity of the ordinance imposing such new levies or rates. (Sec. 166, LGC)

D. Time of Payment -- All local taxes, fees,

and charges shall be paid within the first twenty days of January or of each subsequent quarter, as the case may be. (Jan 20, Apr 20, July 20, and Oct 20). The sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six

(6) months. (Sec. 167, LGC)

E. Surcharges and Penalties • 25% surcharge on taxes, fees or

charges NOT paid on time, AND • interest at the rate NOT exceeding

2% per month of the unpaid taxes, fees or charges INCLUDING surcharges, until the amount is fully paid NOTE: in no case shall the total interest exceed 36 months. (Sec. 168, LGC)

F. Collecting Authority – All local taxes,

fees and charges shall be collected by the provincial, city, municipal, or barangay

treasurer, or their duly authorised

deputies. (Sec. 170, LGC)

G. Examination of Books – The local treasurer or his deputy duly authorised in writing, may examine the books, accounts and other pertinent records of any person, partnership, corporation, or association in order to ascertain, assess and collect the correct amount of tax. Such examination shall be made during the regular business hours, ONLY ONCE for every tax period, and shall be certified to by the examining official. (Sec. 171, LGC)

VIII. CIVIL REMEDIES (BOTH LGU AND TAXPAYER)

A. Personal Property Exempt from

Distraint or Levy – the following property shall be EXEMPT from distraint or levy for delinquency in the payment of any LOCAL tax, fee or charge: • tools and implements necessarily

used by the delinquent taxpayer in his trade or employment

• one horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select and necessarily used by him in his ordinary occupation

• his necessary clothing, and that of all his family

• household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding P10,000

• provisions, including crops, actually provided for individual or family use sufficient for 4 months

• the professional libraries of doctors, engineers, (ehem) lawyers and judges

• one fishing boat and net, not exceeding the total value of P10,000 by the lawful use of which a fisherman earns his livelihood

• any material or article forming part of a house or improvement of any real property (Sec. 185, LGC)

B. Periods of Assessment and Collection of LOCAL Taxes GEN RULE: Assessment shall be made within 5 years from the date they become due, and collection shall be made within 5 years from the date of assessment by administrative or judicial action. EXCEPTION: In case of FRAUD, or INTENT TO EVADE PAYMENT OF TAX, the same may be assessed within 10 years from discovery of fraud or intent to evade payment. (Sec. 194, LGC)

C. When Running of Prescription of Above Periods is Suspended – The running of the periods of prescription above shall be suspended for the time during which: • the treasurer is legally prevented

from making the assessment or collection


TAXATION LAW 2

• the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect

• the taxpayer is out of the country or otherwise cannot be located (Sec. 194 (d), LGC)

D. Protest of Assessment (see flowchart

III below)

E. Claim for Refund or Tax Credit • 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 2 years from the date of payment of such tax, or from the date the taxpayer is entitled to a refund or credit. (Sec. 196, LGC)

F. Remedy for Illegal or

Unconstitutional Tax Ordinance STEP 1: Any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within 30 days from the effectivity thereof to the Sec of Justice. STEP 2: The Sec of Justice shall decide within 60 days from the date of receipt of the appeal. However, this appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax levied therein. STEP 3: Within 30 days after receipt of the decision or the lapse of the 60-day period without the Sec of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. (Sec 187, LGC)

IX. MISCELLANEOUS PROVISIONS

A. Power to Levy Taxes, Fees or

Charges GEN RULE: LGU may exercise the power to levy taxes, fees or charges on ANY BASE OR SUBJECT not otherwise specifically enumerated in LGC or NIRC. EXCEPTION: It must NOT be unjust, excessive, oppressive, confiscatory or contrary to declared national policy. (Sec. 186, LGC)

B. Requirements for a Valid Tax Ordinance (3 P’s) 1. the ordinance shall only be enacted if

there is a prior public hearing conducted for the purpose (Sec. 187)

2. within 10 days after the approval of the ordinance, it must be published in full for 3 consecutive days in a

newspaper of local circulation, or if no such newspaper, it must be posted in at least 2 conspicuous and publicly accessible places. (Sec. 188)

CASE LAW: The requirement of publication in full for 3 consecutive days is MANDATORY for a tax ordinance to be valid. The tax ordinance will be null and void if it fails to comply with such publication requirement. [COCA-COLA vs. CITY OF MANILA (Jun. 27, 2006)]

C. Authority to Adjust Rates – LGU shall

have the authority to adjust the tax rates prescribed in LGC NOT oftener than once every 5 years, but in no case shall such adjustment exceed 10% of the rates fixed. (Sec. 191, LGC)

D. Authority to Grant Exemption – LGU

may, through ordinances, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. (Sec. 192, LGC)


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START

Local Treasurer (LT) assess

local taxes w/in 5 years from

date they become due or 10

years from discovery of fraud

(Sec. 195)

LT issues notice

of assessment

Taxpayer files written protest is

protest made w/n 60 days from

receipt of notice of assessment

Is protest made

w/in prescribed

period?

LT grants

protest?

Assessment

becomes

final

LT decides on

protest w/in 60

days from filing of

protest

LT Issues notice

canceling

partially/wholly

the assessment

Taxpayer appeals to

court of competent

jurisdiction (regular

courts) w/in 30 days

from receipt of notice or

from lapse of 60 days

LT decides w/in

60 days?NoYes

Yes

No

YesNo

Flowchart III: Taxpayer’s Remedies From Assessment of Local Taxes

other than Real Property Taxes-Local Government Code

End

Appeal to CTA Division but

If the decision is from an

RTC exercising appellate

jurisdiction, appeal should

be made directly no CTA en

banc under Rule 43 of ROC

If Division decides against

taxpayer file MR w/in 15 with

the same division.

If MR is denied, file Petition

for review with CTA en banc

Appeal to

Supreme Court

End


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START

Tax constitutes a lien superior

to all liens and may only be

extinguished upon payment of

the tax and the related charges.

(Sec. 173)

Flowchart IV: Procedure for Distraint and Levy for Purposes of Satisfying

Local Taxes-Local Gov’t Code

Time for payment

of Local taxes

expires

Local Treasurer (LT), upon written

notice, seizes sufficient personal

property to satisfy the tax, and

other charges (Sec. 175)

LT issues a certificate

which serves as warrant

for the distraint of personal

property, (Sec. 175)

Officer executing the

distraint accounts for the

goods, distrained (Sec. 175)

Officer posts notice in office of the

chief executive of the LGU where

the property is distrained.& in at

least 2 other public places

specifying the time & place of sale,

and distrained goods. The time of

sale shall not be less than twenty

(20) days after the notice. (Sec. 175)

Before the sale, the goods or

effects distrained shall be

restored to the owner.if all

charges are paid (175d)

Officer sells the goods at public

auction to the highest bidder

for cash. w/in 5 days, the local

treasurer shall report sale to

the local chief executive

concerned (175e)

it shall be considered as sold to

the LGU for the amount of the

assessment made by the

Committee on Appraisal and to

the extent of the same amount,

the tax delinquencies shall be

cancelled. (175e)

If the proceeds of the sale

are insufficient other

property may be distrained

until the full amount due,

including all expenses, is

collected. (175f)Real property may be levied

on before, simultaneously, or

after the distraint of personal

property (Sec. 176)

Procedure for levying real properties to satisfy local taxes is the same as levy

procedure for satisfying real property taxes (Sec. 258-266) (See Flowchart VII)

Except for the following:

1. Publication is once a week for 3 weeks for local taxes (Sec. 178) and once a

week for 2 weeks for real property taxes (Sec. 260)

2. For local taxes, LGU may purchase levied property if there is no bidder or if

the highest bid is insufficient to cover the taxes and other charges (Sec. 181)

while for real property taxes the LGU may purchase levied property if there is no

bidder (Sec. 263)

Property

distrained

disposed w/in

120 days from

distraint?

Yes

No

Excess of proceeds over

charges shall be returned

to the owner of the

property sold. (175f)

Committee On Appraisal:

Local Treasurer- chairman,

COA representative &LGU

assessor as members


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VII.VII.VII.VII. REAL PROPERTY TAXATIONREAL PROPERTY TAXATIONREAL PROPERTY TAXATIONREAL PROPERTY TAXATION

I. Kinds of Real Property Tax and Special Levies → Basic real property tax → Additional levy on real property for the

Special Education Fund → Additional ad valorem tax on idle lands → Special levy by local government units

II. Basic Concepts Definition: Real property tax has been defined as “a direct tax on the ownership of lands and buildings or other improvements thereon not specially exempted, and is payable regardless of whether the property is used or not, although the value may vary in accordance with such factor.” NOTE: Real property tax is a fixed proportion of the assessed value of the property being taxed and requires, therefore, the intervention of assessors. Characteristics of real property tax → It is a direct tax on the ownership or use of real

property. → It is an ad valorem tax. Value is the tax base. → It is proportionate because the tax is calculated

on the basis of a certain percentage of the value assessed.

→ It creates a single, indivisible obligation. → It attaches on the property (i.e., a lien) and is

enforceable against it.

Nature and scope of power to impose realty tax The taxing power of local governments in real property taxation is a delegated power. Fundamental principles governing real property taxation (CAPUE) 1. Real property shall be appraised at its Current

and fair market value. 2. Real property shall be classified for assessment

purposes on the basis of its Actual use. 3. Real property shall be assessed on the basis of

a Uniform classification within each local government unit.

4. The appraisal, assessment, levy and collection of real property tax shall not be let to any Private person.

5. The appraisal and assessment of real property shall be Equitable. [Section 197, Local Government Code]

Real properties subject to tax Generally, Real Property Tax is imposed on lands, buildings, machineries and other improvements. The Local Government Code contains no definition of “real property”; however, the following terms are defined: § Improvement àààà It is a valuable addition

made to a property or an amelioration in its condition amounting to more than a repair or replacement of parts involving capital expenditures and labor which is intended to enhance its value, beauty, or utility or to adopt it for new or further purposes. [Section 199(m), Local Government Code]

§ Machinery àààà Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus, which may or may not be attached, permanently or temporarily, to the real property. It includes

the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes. [Section 199(o), Local Government Code] § NOTE: this definition of machinery is too all-

encompassing and broad in that everything that is used even indirectly for the needs of the industry can be classifies as machinery which is REAL property, which in turn means that it is subject to RPT; example would be a SCREWDRIVER being used in an office – since this is used by the office and indirectly contributes the to smooth functioning of the general business then this can be treated as real property

§ This was solved by the LGC IRR sec 290 (o) that now limits and qualifies this: this is known as the GENERAL PURPOSE RULE àààà This rule states that if it used in line or for the general purpose of the business but only indirectly, then it is NOT to be treated as real property. This means that a typewriter being used in the main office of a firm that manufactures cars is NOT real property as the typewriter is NOT used to actually make the car which is the main purpose of the company.

Generally the SC has held that Art 415 CC (which enumerates the kinds of real property) is an exclusive list as to what constitutes real property. BUT FOR TAX PURPOSES ONLY, it is common that certain properties be classified as real property even if according to the general principles of the CC, they would only be classified as personal property. LESSON: the NIRC and the LGC code prevail in classifying property for tax purposes.

Properties EXEMPT from real property taxes

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. Q: Are GOCCs covered by the exemption? àààà No. The tax exemption of “property owned by the Republic of the Philippines” refers to properties owned by the government and by its agencies which do not have separate and distinct personalities, as distinguished from GOCCs which have separate and distinct personalities. [National Development Company v. Cebu City] Q: What is the scope of the exemption? à The exemption from tax of property owned by the government obtains even as to properties owned in a private, proprietary or patrimonial character. The law makes no distinction between property held in governmental capacity and those possessed in a proprietary


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capacity. [Board of Assessment Appeals of Laguna v. CTA] CONFLICTING CASES: Mactan Airport Authority vs. Pres. Marcos (September 11, 1996) and Manila Int’l Airport Authority vs. CA (July 20, 2006) Both cases involves the following provisions: Sec 133(o), LGC: Unless otherwise provided herein, the LGUs are not allowed to levy… (o) taxes, fees or charges of any kind on the national gov’t, its agencies, instrumentalities and LGUs. Sec 234(a), LGC: Properties exempt from PPT (a) real properties owned by the Republic or any of its political subdivisions… MACTAN Case: The SC held that since Mactan Airport Authority is a GOCC and GOCCs are not among those enumerated as exempt, it is not exempted from RPT. Legislature in amending the law has specifically deleted GOCCS from the enumeration in Sec 234(a). MIAA Case: SC held that MIAA is not a GOCC since it is neither a stock corporation nor a non-stock corp as defined in the Administrative Code. Although not covered by the enumeration in Sec 234, MIAA is a public utility which falls under the term “instrumentality” outside the scope of LGS’s local taxing powers under Sec 133(o). NOTE: The MIAA Case may be argued to have

superseded the previous case, being a more

recent ruling decided by SC en banc.

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.

è CASE LAW: LUNG CENTER of the PHILS vs. QUEZON CITY (June 29, 2004)

As a general principle, a charitable institution does not lose its character and its exemption from taxes simply because it derives income from paying patients, 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 benefit of persons managing or operating the institution. TEST: The test whether an enterprise is charitable or not is whether it exists to carry out a purpose recognized by law as charitable or whether it is maintained for gain, profit, or private advantage. EXTENT: The portions of Lung Center’s 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. However, 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.

3. All machineries and equipment that are actually, directly and exclusively used by local water utilities 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 Republic Act No. 6938.

5. Machinery and equipment used for Pollution control and environmental protection. [Section 234, Local Government Code]

NOTE: A taxpayer claiming exemption must submit sufficient documentary evidence to the local assessor within thirty (30) days from the date of the declaration of real property; otherwise, it shall be listed as taxable in the Assessment Roll. (Sec. 206, LGC)

III. Rates of levy [BASIC RPT] A province or city or a municipality within the Metro Manila area shall fix a uniform rate of basic real property tax applicable to their respective localities as follows: 1. In the case of a province, at the rate not

exceeding 1% of the assessed value of real property; and

2. In the case of a city or a municipality within the Metro Manila area, at the rate not exceeding 2% of the assessed value of real property. [Section 233, Local Government Code]

[ADDITIONAL LEVY ON REAL PROPERTY FOR THE SPECIAL EDUCATION FUND] A province,

city or a municipality within the Metro Manila area

may levy and collect an annual tax of one percent

(1%) on the assessed value of real property which

shall be in addition to the basic real property tax.

The proceeds thereof shall exclusively accrue to the

Special Education Fund created under Republic Act

No. 5447. [Section 235, Local Government Code]

[ADDITIONAL AD VALOREM TAX ON IDLE LANDS] A province or city or a municipality within the Metro Manila area may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax. [Section 236, Local Government Code]

Sec 237. Idle Lands, Coverage. —idle

lands shall include: (a) Agricultural lands

§ more than one (1) hectare in area § suitable for cultivation, dairying,

inland fishery, and other agricultural uses

§ one-half (1/2) of which remain uncultivated or unimproved by the owner or person having legal interest.

Agricultural lands planted to permanent or perennial crops with at least fifty (50) trees to a hectare shall NOT be considered idle lands. Lands actually used for grazing purposes shall likewise NOT be considered idle lands (b) Lands other than agricultural § located in a city or municipality § more than one thousand (1,000)

square meters in area § one-half (1/2) of which remain

unutilized or unimproved by the


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owner or person having legal interest.

Regardless of land area, this Section shall applies to residential lots in subdivisions duly, ownership of which has been transferred to individual owners, who shall be liable for the additional tax: Provided, however, That individual lots of such subdivisions, ownership of which has not been transferred to the buyer shall be considered as part of the subdivision, and shall be subject to the additional tax payable by subdivision owner or operator.

§ EXEMPTION from idle lands tax: Exemptions are given due to: a. force majeure; b. civil disturbance; c. natural calamity; or d. any cause or circumstance which

physically or legally prevents the owner or person having legal interest from improving, utilizing or cultivating the same.

[SPECIAL LEVY BY LOCAL GOVERNMENT UNITS] A province, city or municipality may impose a special levy on the lands comprised a. within its territorial jurisdiction b. specially benefited by public works projects or

improvements by the LGU concerned. The 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. § It shall not apply to lands exempt from basic

real property tax and the remainder of the land, portions of which have been donated to the LGU concerned for the construction of such projects or improvements.

§ Need for public hearing and publication before enactment of ordinance imposing special levy.

§ Special levy accrues on the first day of the quarter next following the effectivity of the ordinance imposing the levy. [Section 240, Local Government Code]

IV. Other Important Provisions APPRAISAL AND ASSESSMENT OF REAL PROPERTY

Sec 201. Appraisal of Real Property. — All real

property, whether taxable or exempt, appraised at the current and fair market value prevailing in the locality where the property is situated

Sec 202. Declaration of real Property by the Owner or Administrator. — shall be the duty of all persons (natural or juridical) or their duly authorized representative § owning or administering real property,

including the improvements therein § to prepare and file with assessor, a sworn

statement declaring the true value of their property, whether previously declared or undeclared, taxable or exempt, which shall be the current and fair market value of the property, as determined by the declarant

§ The sworn declaration of real property herein referred to shall be filed with the assessor concerned once every three (3) years during

the period from January first (1st) to June thirtieth (30th) commencing with the calendar year 1992.

Sec 203. Duty of Person Acquiring Real Property or Making Improvement Thereon. — duty of any person, or his authorized representative § acquiring at any time real property in any

municipality or city § or making any improvement on real property, § to prepare and file with the a sworn

statement declaring the true value of subject property

§ within sixty (60) days after the acquisition of such property or upon completion or occupancy of the improvement, whichever comes earlier.

Sec 204. Declaration of Real Property by the Assessor. — any person, by whom real property is required to be declared under Section 202 § refuses or fails for any reason to make such

declaration within the time prescribed § assessor shall himself declare the property in

the name of the defaulting owner, if known, or against an unknown owner, as the case may be, and shall assess the property for taxation

Sec 205. Listing of Real Property in the Assessment Rolls. § In every province and city, municipalities

within the Metropolitan Manila Area, there shall be prepared and maintained by the assessor

§ an assessment roll wherein shall be listed all real property, whether taxable or exempt, located within the local government unit; property shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property.

§ undivided real property of a deceased person may be listed, valued and assessed in the name of the estate or of the heirs and devisees without designating them individually § BUT undivided real property other than

that owned by a deceased may be listed, valued and assessed in the name of one or more co-owners: Provided, however, That such heir, devisee, or co-owner shall be liable severally and proportionately for all obligations imposed by this Title and the payment of the real property tax with respect to the undivided property.

§ real property of a corporation, partnership, or association shall be listed, valued and assessed in the same manner as that of an individual.

§ Real property owned by the Republic of the Philippines, its instrumentalities and political subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease.

Sec 206. Proof of Exemption of Real Property from Taxation. § Every person who shall claim tax exemption

for such property


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§ shall file with assessor within thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support of such claim…like corporate charters, contracts, titles, articles of incorporation etc…

§ If the required evidence is NOT submitted within the period prescribed, the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt, shall be dropped from the assessment roll.

Sec 208. Notification of Transfer of Real Property Ownership. § Any person who shall TRANSFER real

property OWNERSHIP to another § shall notify the assessor concerned within

sixty (60) days from the date of such transfer § The notification shall include the mode of

transfer, the description of the property alienated, the name and address of the transferee.

Sec 209. Duty of Registrar of Deeds to Appraise Assessor of Real Property Listed in Registry. § Duty of the Registrar of Deeds to require

every person who shall present for registration a document of transfer, alienation, or encumbrance of real property to accompany the same with a certificate to the effect that the real property subject has been fully paid of all real property taxes due.

§ Failure to provide such certificate shall be a valid cause for the refusal of the registration of the document.

Sec 212. Preparation of Schedule of Fair Market Values. — Before any general revision of property assessment is made § there shall be prepared a schedule of fair

market values by the assessor of the provinces, cities and municipalities within the Metropolitan Manila Area for the different classes of real property situated in their respective local government units

§ for enactment by ordinance of the sanggunian

§ schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality; in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in two other conspicuous public places

Sec 214. Amendment of Schedule of Fair Market Values. § assessor may recommend to the sanggunian

amendments to correct errors in valuation in the schedule of fair market values

§ sanggunian shall, by ordinance, act upon the recommendation within ninety (90) days from receipt

Sec 215. Classes of Real Property for Assessment Purposes. — For purposes of assessment, real property shall be classified: (CRAMS-IT)

1. Residential 2. Agricultural 3. Commercial 4. Industrial

5. Mineral 6. Timberland 7. Special The city or municipality within the Metropolitan Manila Area, through their respective sanggunian, shall have the power to classify lands as residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance with their zoning ordinances. Sec 216. Special Classes of Real Property. —lands, buildings, and other improvements thereon § actually, directly and exclusively used for

hospitals, cultural, or scientific purposes § those owned and used by local water districts § 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.

Sec 217. Actual Use of Real Property as Basis for Assessment. — Real property shall be classified, valued and assessed on the basis of its actual use

(Regardless of ULO) § regardless of where Located § regardless whoever Owns it § regardless whoever Uses it

Sec 220. Valuation of Real Property. — In cases

where:

(a) real property is declared and listed for taxation purposes for the first time

(b) there is an ongoing general revision of property classification and assessment

(c) a request is made by the person in whose name the property is declared

assessor shall make a classification, appraisal and assessment or taxpayer's valuation § Provided, however, That the assessment of

real property shall NOT be increased oftener than once every three (3) years § EXCEPT in case of new improvements substantially increasing the value of said property or of any change in its actual use.

Sec 221. Date of Effectivity of Assessment or Reassessment. § All assessments/ reassessments made after

the first (1st) day of January of any year shall take effect on the first (1st) day of January of the succeeding year

§ Provided, the reassessment of real property shall be made within ninety (90) days from the date if any such cause or causes occurred, and shall take effect at the beginning of the quarter next following the reassessment due to its (ACIDI): § partial or total Destruction § major Change in its actual use § great and sudden Inflation or deflation of

real property values § gross Illegality of the assessment § any other Abnormal cause

Sec 222. Assessment of Property Subject to Back Taxes. — Real property declared for the FIRST TIME shall be assessed for taxes (back


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taxes) for the period during which it would have been liable but in no case of more than ten (10) years prior to the date of initial assessment § Provided, however, That such taxes shall be

computed on the basis of the applicable schedule of values in force during the corresponding period.

§ If such taxes are paid on or before the end of the quarter following the date the notice of assessment was received by the owner – NO interest for delinquency shall be imposed thereon; otherwise, taxes shall be subject interest at the rate of two percent (2%) per month or a fraction thereof from the date of the receipt of the assessment until such taxes are fully paid.

Sec 224. Appraisal and Assessment of Machinery. —

(a) The fair market value of brand-new

machinery shall be acquisition cost § In all other cases, the fair market value

shall be determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement or reproduction cost.

(b) If machinery imported, the acquisition

cost includes (FIB-BADC) Freight, Insurance, Bank and other charges, Brokerage, Arrastre and handling, Duties and taxes, plus Charges at the present site

Sec225. Depreciation Allowance for

Machinery. —depreciation allowance shall be made for machinery at a rate NOT exceeding five percent (5%) of its original cost or its replacement or reproduction cost, as the case may be, for each year of use § Provided, the remaining value for all kinds of

machinery shall be fixed at NOT less than twenty percent (20%) of such original, replacement, or reproduction cost for so long as the machinery is useful and in operation.

ASSESSMENT APPEALS

Sec 226. Local Board of Assessment Appeals. — Any owner or person having legal interest in the property NOT satisfied with the action of the assessor in the assessment of his property § May within sixty (60) days from the date of

receipt of the written notice of assessment § appeal to the Board of Assessment Appeals of

the provincial or city § by filing a petition under oath in the form

prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal.

Sec 229. Action by the Local Board of Assessment Appeals. —

(a) Board shall decide the appeal within one

hundred twenty (120) days from the date of receipt of such appeal. The Board, after hearing, render its decision based on substantial evidence

(b) In the exercise of its appellate jurisdiction, the Board shall have the power to summon

witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena and subpoena duces tecum. The proceedings of the Board shall be conducted SOLELY for the purpose of ascertaining the facts without necessarily adhering to technical rules applicable in judicial proceedings.

(c) secretary of the Board shall furnish the owner of the property or the person having legal interest therein and the assessor with a copy of the decision of the Board. In case the provincial or city assessor concurs in the revision or the assessment, it shall be his duty to notify the owner or the person having legal interest of such fact using the form prescribed.

(d) The owner, the person having legal interest or the assessor who is NOT satisfied with the decision of the Board, § May within thirty (30) days after receipt

of the decision of said Board appeal to the Central Board of Assessment

Appeals - decision of the Central Board shall be final and executory

Sec 231. Effect of Appeal on the Payment of Real Property Tax. — Appeal on assessments of real property shall, in NO case, suspend the collection of the corresponding realty taxes on the property involved as assessed – but without prejudice to subsequent adjustment depending upon the final outcome of the appeal. SPECIAL LEVY BY LGUs

Sec 241. Ordinance Imposing a Special Levy. — A tax ordinance imposing a special levy shall: § describe with reasonable accuracy the

nature, extent, and location of the public works projects or improvements to be undertaken

§ state the estimated cost § specify the metes and bounds by monuments

and lines and the § number of annual installments for the

payment of the special levy which in no case shall be less than five (5) nor more than ten (10) years

*The sanggunian shall NOT be obliged, in the apportionment and computation of the special levy, to establish a uniform percentage of all lands subject to the payment of the tax for the entire district. May fix different rates for different parts or sections thereof, depending on whether such land is more or less benefited by proposed work.

Sec 242. Publication of Proposed Ordinance

Imposing a Special Levy. — Before the enactment of an ordinance imposing a special levy, the sanggunian concerned shall: § conduct a public hearing § notify in writing the owners to be affected

or the persons having legal interest as to the date and place thereof and afford the latter the opportunity to express their positions or objections relative to the proposed ordinance.

Sec 244. Taxpayer's Remedies Against Special Levy. — Any owner of real property affected by a special levy or any person having a legal interest therein may, upon receipt of the written notice of


TAXATION LAW 2

assessment of the special levy, avail of the remedies provided for in Chapter 3, Title Two, Book II of this Code.

Sec245. Accrual of Special Levy. — The special

levy shall accrue on the first day of the quarter next following the effectivity of the ordinance imposing such levy.

COLLECTION OF REAL PROPERTY TAX

Sec 246. Date of Accrual of Tax. — real property

tax for any year shall accrue on the first day of January § from that date it shall constitute a lien on

the property § superior to any other lien, mortgage, or

encumbrance of any kind whatsoever § extinguished only upon the payment of the

delinquent tax. Sec 247. Collection of Tax. — The collection of

the real property tax with interest thereon and related expenses, and the enforcement of the remedies are the responsibility of the city or municipal treasurer. § treasurer may deputize the barangay

treasurer to collect all taxes on real property located in the barangay: § Provided, the barangay treasurer is

properly bonded for the purpose § Provided, further, That the premium on

the bond shall be paid by the city or municipal government concerned.

Sec 249. Notice of Time for Collection of Tax.

— treasurer shall post the notice of the dates when the tax may be paid without interest publicly accessible place at the city or municipal hall + notice shall likewise be published in a newspaper of general circulation in the locality once a week for two (2) consecutive weeks. § on or before the thirty-first (31st) day of

January each year in the case of the basic real property tax and the additional tax for the Special Education Fund (SEF)

§ or any other date to be prescribed by the sanggunian concerned in the case of any other tax levied under this title

Sec 250. Payment of Real Property Taxes in Installments. — The owner or the person having legal interest may pay the basic real property tax and the additional tax for Special Education Fund (SEF) due without interest: § in four (4) equal installments;

§ the first installment to be due and payable on or before March Thirty-first (31st)

§ the second installment, on or before June Thirty (30)

§ the third installment, on or before September Thirty (30)

§ and the last installment on or before December Thirty-first (31st)

*except the special levy the payment of which shall be governed by ordinance of the sanggunian concerned. *The date for the payment of any other tax imposed under this Title without interest shall be prescribed by the sanggunian concerned. *Payments of real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and only after said delinquencies

are settled may tax payments be credited for the current period. Sec 251. Tax Discount for Advanced Prompt Payment. — If the basic real property tax and the additional tax accruing to the Special Education Fund (SEF) are paid in advance as provided under Section 250 § sanggunian may grant a discount NOT

exceeding twenty percent (20%) of the annual tax due.

Sec 252. Payment Under Protest. (a) No protest shall be entertained unless the

taxpayer first pays the tax. § There shall be annotated on the tax receipts

the words "paid under protest" § The protest in writing must be filed within

thirty (30) days from payment of the tax to treasurer who shall decide the protest within sixty (60) days from receipt.

(b) The tax or a portion paid under protest, shall

be held in trust by the treasurer concerned. (c) In the event that the protest is finally decided

in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of this Code.

Sec 253. Repayment of Excessive Collections.

— When an assessment of real property tax or any other tax under this Title found to be illegal or erroneous and the tax is accordingly reduced or adjusted § the taxpayer may file a written claim for

refund or credit for taxes and interests with the treasurer within two (2) years from the date the taxpayer is entitled to such reduction or adjustment.

§ The provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days from receipt thereof

§ In case the claim for tax refund or credit is denied, the taxpayer may avail of the remedies as provided in Chapter 3, Title II, Book II of this Code.

Sec 254. Notice of Delinquency in the

Payment of the Real Property Tax. — (a) When real property tax or other tax imposed

under this Title becomes delinquent, treasurer shall immediately cause a notice of the delinquency to be posted at the main hall and in a publicly accessible and conspicuous place in each barangay of the local government unit concerned + notice of delinquency shall also be published once a week for two (2) consecutive weeks, in a newspaper of general circulation in the province, city, or municipality.

(b) notice shall specify:

§ the date upon which the tax became delinquent


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§ shall state that personal property may be distrained to effect payment

§ state that any time before the distraint of personal property, payment of the tax with surcharges, interests and penalties may be made in accordance with the next following Section

§ and unless the tax, surcharges and penalties are paid before the expiration of the year for which the tax is due except when the notice of assessment or special levy is contested administratively or judicially pursuant to the provisions of Chapter 3, Title II, Book II of this Code, the delinquent real property will be SOLD at public auction, and the title to the property will be vested in the purchaser, subject, however, to the right of the delinquent owner of the property or any person having legal interest therein to redeem the property within one (1) year from the date of sale.

Sec 255. Interests on Unpaid Real Property Tax. — for failure to pay the basic real property tax or any other tax levied under this Title upon the expiration of the periods when due § subject the taxpayer to the payment of

interest at the rate of two percent (2%) per month on the unpaid amount until the delinquent tax shall have been fully paid

§ Provided, in NO case shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months.

Sec 256. Remedies For The Collection Of Real

Property Tax. — For collection of the real property tax and other tax levied under this Title, the local government unit concerned may avail of the remedies: § administrative action thru levy on real

property § or by judicial action.

Sec 257. Local Governments Lien. —real

property tax and any other tax levied under this Title constitute a lien on the property subject to tax § superior to all liens, charges or

encumbrances in favor of any person § irrespective of the owner or possessor thereof § enforceable by administrative or judicial

action § and may only be extinguished upon payment

of the tax and the related interests and expenses.

Sec 258. Levy on Real Property. — After the

expiration of the time required to pay real property tax or any other tax levied under this Title, real property subject to such tax may be levied through the issuance of a warrant § on or before, or simultaneously with, the

institution of the civil action for the collection of the delinquent tax.

§ The warrant shall operate with the force of a legal execution throughout the province, city or a municipality, within the Metropolitan Manila Area.

§ The warrant shall be mailed to or served upon: § the delinquent owner or person having

legal interest - in case he is out of the country or cannot be located, the

administrator or occupant of the property.

§ At the same time, written notice of the levy with the attached warrant shall be mailed to or served upon the assessor who shall annotate it on the tax declaration

§ AND the Registrar of Deeds of the province, city or municipality within the Metropolitan Manila Area where the property is located who shall annotate the levy on the certificate of title of the property

Sec 260. Advertisement and Sale. — Within

thirty (30) days after service of the warrant of levy, the local treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion thereof as may be necessary to satisfy the tax delinquency and expenses of sale § The advertisement shall be by posting a

notice at the main entrance of the provincial, city or municipal building, and in a publicly conspicuous place in the barangay where the real property is located + by publication once a week for two (2) weeks in a newspaper of general circulation in the province, city or municipality where the property is located.

§ advertisement shall specify: § the amount of the delinquent tax § interest due thereon § expenses of sale § the date and place of sale § name of the owner of the or person

having legal interest § description of the property to be sold.

*At any time before the date fixed for the sale, the owner or person having legal interest may stay the proceedings by paying the delinquent tax + interest due + expenses of sale. *Proceeds of the sale in excess of the delinquent tax, the interest due thereon, and the expenses of sale shall be remitted to the owner of the real property or person having legal interest therein. Sec 261. Redemption of Property Sold. —

Within one (1) year from the date of sale, the owner of the delinquent real property or person having legal interest or their representatives shall have the right to redeem the property upon payment to treasurer of the:

§ amount of the delinquent tax § interest due § expenses of sale - from the date of delinquency

to the date of sale § plus interest of not more than two percent

(2%) per month on the purchase price - from the date of sale to the date of redemption

* payment shall invalidate the certificate of sale issued to the purchaser and the owner of the delinquent real property or person having legal interest shall be entitled to a certificate of redemption *From date of sale until the expiration of the period of redemption, the delinquent real property shall remain in possession of the owner or person having legal interest therein who shall be entitled to the income and other fruits *the property shall be free from lien of such delinquent tax, interest due thereon and

expenses of sale. Sec 262. Final Deed to Purchaser. — In case

the owner or person having legal interest fails to


TAXATION LAW 2

redeem the delinquent property, the treasurer shall execute a deed conveying to the purchaser said property, free from lien of the delinquent tax, interest due thereon and expenses of sale

Sec 263. Purchase of Property By the Local Government Units for Want of Bidder. — In case there is NO bidder for the real property, the real property tax and the related interest and costs of sale § the treasurer conducting the sale shall

purchase the property in behalf of the local government unit concerned to satisfy the claim

§ shall be the duty of the Registrar of Deeds to transfer the title of the forfeited property to the local government unit concerned without the necessity of an order from a competent court.

*Within one (1) year from the date of such forfeiture, the taxpayer or any of his representative, may redeem the property by paying to the treasurer the full amount of the real property tax and the related interest and the costs of sale. If the property is not redeemed as provided herein, absolute ownership thereof shall be vested on the local government unit concerned. Sec 264. Resale of Real Estate Taken for

Taxes, Fees, or Charges. — The sanggunian sell and dispose of the real property acquired under the preceding section at public auction; proceeds of the sale shall accrue to the general fund of the local government unit. § may by ordinance § upon notice of not less than twenty (20) days

Sec 265. Further Distraint or Levy. — Levy may be repeated if necessary until the full amount due, including all expenses, is collected.

Sec 266. Collection of Real Property Tax Through the Courts. — The local government unit concerned may enforce the collection of the basic real property tax or any other tax levied under this Title § by civil action in any court of competent

jurisdiction - civil action shall be filed by the treasurer within the period prescribed in Section 270 of this Code.

Sec 267. Action Assailing Validity of Tax Sale.

— No court shall entertain any action assailing the validity or any sale at public auction of real property or rights until: § taxpayer shall have deposited with the court

the amount for which the real property was sold, together with interest of two percent (2%) per month from the date of sale to the time of the institution of the action

§ amount so deposited shall be: § paid to the purchaser at the auction sale

if the deed is declared invalid § shall be returned to the depositor if the

action fails. *Neither shall any court declare a sale at public auction invalid by reason or irregularities or informalities in the proceedings - unless the substantive rights of the delinquent owner of the real property or the person having legal interest have been impaired.

Sec 268. Payment of Delinquent Taxes on Property Subject of Controversy. — In any action involving the ownership or possession of, or succession to, real property, the court may, motu propio or upon representation of the treasurer - award such ownership, possession, or succession to any party to the action § upon payment to the court of the taxes with

interest due on the property and all other costs that may have accrued § subject to the final outcome of the action.

Sec 270. Periods Within Which To Collect Real Property Taxes. — The basic real property tax and any other tax levied under this Title shall be: § collected within five (5) years from the date

they become due § No action for the collection of the tax,

whether administrative or judicial, shall be instituted after the expiration of such period § In case of fraud or intent to evade

payment of the tax, such action may be instituted for the collection of the same within ten (10) years from the discovery of such fraud or intent to evade payment.

The period of prescription within which to collect shall be suspended for the time during which (PRO): (1) The local treasurer is legally Prevented from

collecting the tax; (2) The owner of the property or the person

having legal interest therein requests for Reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and

(3) The owner of the property or the person having legal interest therein is Out of the country or otherwise cannot be located.

DISPOSITION OF PROCEEDS Sec 271. Distribution of Proceeds. — proceeds

of real property tax, including interest thereon + proceeds from the use, lease or disposition, sale or redemption of property acquired at a public auction shall be distributed as follows: (a) In the case of provinces:

(1) Province — Thirty-five percent (35%) shall accrue to the general fund;

(2) Municipality — Forty percent (40%) to the general fund of the municipality where the property is located; and

(3) Barangay — Twenty-five percent (25%) shall accrue to the barangay where the property is located.

(b) In the case of cities:

(1) City — Seventy percent (70%) shall accrue to the general fund of the city; and

(2) Thirty percent (30%) shall be distributed among the component barangays of the cities where the property is located in the following manner: (i) Fifty percent (50%) shall accrue to

the barangay where the property is located;


TAXATION LAW 2

(ii) Fifty percent (50%) shall accrue equally to all component barangays of the city; and

(c) In the case of a municipality within the

Metropolitan Manila Area: (1) Metropolitan Manila Authority —

Thirty-five percent (35%) shall accrue to the general fund of the authority;

(2) Municipality — Thirty-five percent (35% shall accrue to the general fund of the municipality where the property is located;

(3) Barangays — Thirty percent (30%) shall be distributed among the component barangays of the municipality where the property is located in the following manner: (i) Fifty percent (50%) shall accrue to

the barangay where the property is located;

(ii) Fifty percent (50%) shall accrue equally to all component barangays of the municipality.

(d) The share of each barangay shall be

released, without need of any further action, directly to the barangay treasurer on a quarterly basis within five (5) days after the end of each quarter and shall not be subject to any lien or holdback for whatever purpose.

Sec 272. Application of Proceeds of the Additional One Percent SEF Tax. — The proceeds from the additional one percent (1%) tax on real property accruing to the Special Education Fund (SEF): § shall be automatically released to the local

school boards § Provided, in case of provinces, the

proceeds shall be divided equally between the provincial and municipal school boards

§ the proceeds shall be allocated for the: § operation and maintenance of public

schools § construction and repair of school

buildings, facilities and equipment § educational research § purchase of books and periodicals § sports development as determined and

approved by the Local School Board. Sec 273. Proceeds of the Tax on Idle Lands. —proceeds of the additional real property tax on idle lands shall accrue to the: § respective general fund of the province

or city where the land is located § In the case of a municipality within the

Metropolitan Manila Area, the proceeds shall accrue equally to the Metropolitan Manila Authority and the municipality where the land is located.

Sec 274. Proceeds of the Special Levy. — The

proceeds of the special levy on lands benefited by public works, projects and other improvements shall accrue to the general fund of the local government unit which financed such public works, projects or other improvements.

SPECIAL PROVISIONS Sec 276. Condonation or Reduction of Real

Property Tax and Interest. —sanggunian by ordinance passed prior to the first (1st) day of January of any year + upon recommendation of the Local Disaster Coordinating Council, may condone or reduce, wholly or partially, the taxes and interest thereon for the succeeding year or years in the city or municipality affected by the calamity in cases of: § general failure of crops § substantial decrease in the price of

agricultural or agribased products § calamity in any province, city or municipality

Sec 277. Condonation or Reduction of Tax by the President of the Philippines. —President may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area.


TAXATION LAW 2

START

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax

Purposes-Local Gov’t Code

Owner declares real

property once every 3

years (sec. 202) w/n

Jan 1 to June 30

Assessor declares

real property if owner/

administrator fails to

do so (sec. 204)

Assessor prepares

assessment rolls

wherein real property

shall be listed, valued

and assessed (sec. 205)

For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

Owner may claim

for tax exemption

(sec. 206)

Submit documents

supporting exemption w/

in 30 days from

declaration (sec. 206)Required

Documents

submitted w/in

30 days?Property

proven as tax

exempt?

Property shall be

dropped from

assessment roll

(sec. 206)

Property shall be

listed as taxable in

the assessment

roll (sec. 206)

Within 30 days from

assessment, assessor

sends notice to owner

(sec. 223)

Owner may protest

assessment within 60

days from receipt of notice

to the Local Board of

Assessment Appeals

(LBAA) (Sec. 226)

LBAA must decide

within 120 days

from receipt of

appeal (sec. 229)

If LBAA rejects protest, owner

may appeal to the Central

Board of Assessment Appeals

(CBAA) w/in 30 days from

receipt of notice (Sec. 229)

If CBAA rejects protest,

owner may appeal to

the CTA en banc within

30 days from receipt of

decision

Appeal to the

Supreme Court w/

in 15 days

Yes

YesIs real property

tax exempt?

No

END

No

Yes

No

END


TAXATION LAW 2

START

Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property

Tax-Loc Gov’t Code

Assessor submits

assessment roll to

local treasurer

(sec. 248)

LT posts notice of deadline for

payment at a conspicuous place at

the LGU hall OR publish the same

in a newspaper of general

circulation in the LGU 1x a week for

2 consecutive weeks (sec. 249)

LT collects the tax

starting Jan 1 of

the calendar year.

(Sec. 257)

For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

Owner pays the tax.

Written protest must be

filed with the local

treasurer w/in 30 days

from payment. (sec. 252)

LT must decide w/

in 60 days from

receipt of protest

(sec. 252)

LT decides w/in

60 days?

LT grants

protest?

Amount of tax

protested shall be

refunded or

applied as tax

credit (Sec. 252)

Taxpayer may appeal within within 60

days from receipt of notice (or expiration

of 60 days) to the LBAA (Sec. 226)

LBAA must decide

within 120 days

from receipt of

appeal (sec. 229)

If LBAA rejects protest/

refund, owner may

appeal to the CBAA w/

in 30 days from receipt

of notice (Sec. 229)

If CBAA rejects protest/

refund, owner may appeal to

the CTA en banc within 30

days from receipt of decision

(Rule 43, ROC)

Appeal to the

Supreme Court w/

in 15 days

No

YesYes

No

Taxpayer happy.

END

Refund or tax credit must

be claimed with the local

treasurer w/in 2 years from

the date taxpayer is entitled

to such (sec. 253)

LT acts on claim

for refund/tax

credit w/in 60

days?

LT grants

refund/tax

credit?

No

Yes Yes

No

Taxpayer may appeal

w/in 60 days from

receipt of notice (or

expiration of 60 days)

to LBAA (Sec. 226)

LT- Local Treasurer

LGU - Local Government Unit

LBAA- Local Board of Assessment Appeals

CBAA- Central Board of Assessment Appeals

CTA- Court of Tax Appeals

END


TAXATION LAW 2


TAXATION LAW 2

VIII.VIII.VIII.VIII. TARIFF AND CUSTOMS CODETARIFF AND CUSTOMS CODETARIFF AND CUSTOMS CODETARIFF AND CUSTOMS CODE

Provisions cited are that of

I. ARTICLES SUBJECT TO DUTY A. Export (suspended except on logs) and

import duties

B. Meaning of importation Sec. 1201

All articles imported into the Philippines, whether subject to duty or not, shall be entered through the customhouse at a port of entry Sec. 1202

Importation BEGINS: à vessel or aircraft enters the jurisdiction of Philippines with intention to unlade TERMINATED: 1) payment of duties, taxes and other charges 2) secured to be paid and legal permit for

withdrawal has been granted 3) articles have legally left the jurisdiction of

customs

C. Classes of importation

1. Dutiable importation

All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in other laws. (§100)

2. Prohibited importations (POPP-LAW-

DING) Sec. 101

a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of war, and detached parts thereof, except when authorized by law.

b. Written or printed article in any form

containing: 1) any matter advocating or inciting treason,

rebellion, insurrection or sedition against the Government of the Philippines

2) forcible resistance to any law of the Philippines 3) containing any threat to take the life of or inflict

bodily harm upon any person in the Philippines. c. Written or printed articles, photographs,

engravings, lithographs, objects, paintings, drawings or other representation of an obscene or Immoral character.

d. Articles, instruments, drugs and substances

designed, intended or adapted for Preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly information where, how or by whom human conception is prevented or unlawful abortion produced.

e. Roulette wheels, Gambling outfits, loaded dice,

marked cards, machines, apparatus or

mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances.

f. Lottery and sweepstakes tickets,

advertisements thereof and lists of drawings therein.

à except those authorized by the Philippine Government

g. Any article manufactured in whole or in part of

gold silver or other Precious metal, or alloys thereof, the stamps brands or marks of which do not indicate the actual fineness or quality of said metals or alloys.

h. Any Adulterated or misbranded article of food

or any adulterated or misbranded drug in violation of the provisions of the "Food and Drugs Act."

i. Marijuana, opium poppies, coca leaves, or any

other Narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, any compound, manufactured salt, derivative, or preparation thereof,

à except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever

material. k. All other articles the importation of which is

Prohibited by law. Sec. 1207

It is the duty of the Collector to exercise jurisdiction to - prevent importation (prohibited importation) or - secure compliance with legal requirements (articles that may be imported subject to conditions)


TAXATION LAW 2

3. Conditionally-free importation (Sec. 105)

ARTICLE CONDITIONS

Aquatic products - Caught, gathered and imported by fishing vessels of Phil registry

- Not have landed in foreign territory, or if landed, solely for transshipment

Equipment used for the salvage of vessels or aircraft not available locally

- bond = 1 ½ x of ascertained duties, taxes and charges

- must be exported within 6 months Costs of repair made in foreign country of Phil vessels aircrafts

- Phil must not have adequate facilities to make repair

- Vessel was compelled by weather or casualty to go to foreign port for repair

- Excludes value of article used for repair Articles brought into Phil for repair, processing or reconditioning

- to be re-exported - bond = 1 ½ x of ascertained duties, taxes

and charges - must be exported within 6 months

Trophies, prizes (medals, badges, cups) Those received as honorary distinction

Personal and household effects of returning Phil residents

- formally declared and listed before departure

- including those purchased abroad necessary and appropriate and used for comfort and convenience

- must have been using item abroad for more than 6 mos

- must accompany them or arrive within reasonable time

- not in commercial quantities - total DV not exceed P2,000 à in excess of P2,000 à 50% ad

valorem - returning resident has not previously

availed of this benefit within 1 year - if resident was abroad for less than 6 mos

à 50% ad valorem (DV <P2T) Effects of travelers, tourist (wearing apparel, personal adornment, toiletries, portable tools and instruments, costumes)

- arrive with or at a reasonable time - necessary and appropriate for wear

and use according to nature of journey, comfort and convenience

- articles NOT for hire, sale, barter - Collector may require: written

commitment or bond Personal and household effects, vehicles of foreign consultants and experts hired or rendering service to gov’t - including staff and families

- accompany them or arrive at a reasonable time

- in quantities and kind necessary and suitable to the profession, rank or position

- for their own use, NOT for sale, barter, hire - Collector may require: written commitment

or bond

Professional instruments Tools of trade Wearing apparel Domestic animals Personal & household effects à belong to persons coming to settle in Phil & overseas Filipinos

- in quantities and kind necessary and suitable to the profession, rank or position

- for their own use, NOT for sale, barter, hire - change of residence is bona fide - privilege of free entry was never granted to

them before or qualifies under LOI 105, 163, 210

Articles used exclusively for public entertainment; display in public expos; exhibition or competition for prizes; devices for projecting picture

- must file bond (1 ½ X) - exported within 6 mos - not exhibited for profit - otherwise, confiscation+ penalty

Brought by foreign film producers for making or recording motion pictures on location in Phil Photographic and cinematographic films, undeveloped, exposed outside Phil by resident Filipinos or Phil producing companies

- must file bond (1 ½ X) - exported within 6 mos (unless extended by

Collector for another 6 mos) - principal actors are Filipinos - affidavit by importer that the exposed films

are same films previously exported

Importations used by foreign embassies, legations, agencies of foreign gov’t

- Reciprocity: such foreign country must grant same privilege to Phil agencies

Articles for personal or family use of members and - such privileges must be accorded in a


TAXATION LAW 2

attaches of foreign embassies, legations, consular officers and other reps of foreign gov’t

special agreement between Phil and the foreign country

- privilege may be granted only upon specific instructions of Sec of Finance which will be given only upon request of DFA

Articles donated to or for account of relief organization

- org not for profit - for free distribution to the needy

Containers, holders and similar receptacles - except those that are reusable for shipment or transportation of goods

Supplies of vessel or aircraft - for use or consumption of passengers on board

- any surplus or excess shall be dutiable Articles and salvage after 2 years from filing protest - vessels must have been wrecked or

abandoned in Phil waters Coffins or urns containing human remains, bones ashes Personal and household effects of deceased EXCEPT vehicles

- not exceed P10,000

Samples - unsaleable - no appreciable commercial value

- Models not for practical use Sample medicines Commercial samples

- marked “sample sale punishable by law” - for purpose of introducing new product - imported by person duly registered and

identified to be engaged in that trade - importations authorized by Sec of Finance - authorized by DOH - not available in Phil - not exceed P10,000 àin excess of P10,000, it may be entered

in bond or for consumption - bond (2x) conditioned on exportation w/n

6 mo

Animals and plants à for scientific, experimental, propagation, botanical, breeding zoological and defense purposes

Economic, technical, vocational, scientific, philosophical, historical and cultural books and publications

Phil articles previously exported and returned without increasing value or improved condition Foreign articles previously exported when returned after having been exported and loaned for use temporarily abroad solely for exhibition Foreign container used in packing exported Phil products

Note that if a drawback or bounty was allowed to any Phil article under this subsection, upon re-importation article shall be subject to duty equal to the bounty or drawback

Articles and supplies imported by and for use of scheduled airlines operating under congressional franchise (Aircraft, equipment & machinery, spare parts commissary and catering supplies, aviation gas, fuel & oil)

- such articles are not available locally in reasonable quantity, quality and price

- necessary or incidental to proper operations

machineries, equipment, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosive, chemicals, transpo and communication facilities imported by and used by new mines and old mines aircrafts imported by agro industrial companies, spare parts and accessories

- such articles are not available locally inn reasonable quantity, quality and price

- necessary or incidental to proper operations - used in their agri and industrial operations

Spare parts of vessels or aircrafts of foreign registry engaged in foreign trade

- brought to Phil as replacement or for emergency repair

- spare parts utilized to secure safety, seaworthiness or airworthiness, enable it to continue voyage or flight

Articles of easy identification exported from Phil for repair and subsequently reimported

- cannot be repaired locally - cost of repair made on article shall pay

30% ad valorem Trailer chassis imported by shipping companies for handling containerized cargo

- bond (1 ½ x) to cover 1 year - must be properly identified and registered

with LTO


TAXATION LAW 2

- subject to customs supervision fee - deposited in Customs zone when not in use - upon expiration of period (1 yr or as

extended by Commissioner) duties and taxes shall be paid

Personal and household effects (including one car) officer/ Ee of DFA, attaché, staff assigned to Phil diplomatic mission abroad personnel of Reparations Mission in Tokyo AFP military personnel in SEATO AFP military personnel accorded diplomatic rank on duty abroad à returning from regular assignment, reassignment, dies, resigns, retires

- Car must have been purchased or ordered before the mission or consulate received his order of recall

- the value of personal and household effects shall not exceed 30% of his total salary

II. RATES OF DUTY

A. General Rules

Sec. 104

There shall be levied, collected and paid upon all imported articles the rates of duty indicated. Max rate: NOT exceed 100% ad valorem Rates of duty shall apply to ALL products whether imported directly or indirectly of all foreign products which do not discriminate against Philippine products If foreign country discriminates à additional 100% across-the-board duty on their products Rates of duty shall be subject to periodic investigation by Tariff Commission and may be revised by President upon recommendation of NEDA. Sec 106 DRAWBACKS - in the nature of refund or tax credit

a) Fuel used for Propulsion of Vessels engaged in

trade with foreign countries or coastwide trade à refund or credit not exceeding 99% of

duty imposed by law on such fuel b) petroleum oils and oils from bituminous

minerals, crude oils imported by non electric utilities and then sold to electric utilities for generation of electric power

à refund or credit not exceeding 50% of duty imposed by law

c) exportation of articles manufactured or

produced in Phil (including packing + covering + marking/labeling) of imported materials for which duties have been paid

CONDITIONS:

1. imported material was actually used in the

production of article to be exported 2. refund or credit shall not exceed 100% of

duties paid on the imported material 3. no determination by NEDA of the requirement

for certification on non availability of locally produced or manufactured competitive substitutes for the imported material (I think this means there are no local substitutes for the material..)

4. exportation must be made 1 year after importation of material claim for refund or

credit must be made 6 months from exportation

5. when 2 or more result from the used of same imported material, apportionment shall be made

Ø every application for drawback must pay P500

filing, processing and supervision fees Ø claims shall be paid by Bureau of Customs

within 60 days after receipt of properly accomplished claims

B. Basis of Duty

Sec. 201 Basis of Dutiable Value (note: RA 8181

amended this section)

The DV shall be the Transaction Value which is the price actually paid or payable for the goods when sold for export to the Phil, adjusted by:

a. commissions and brokerage fees costs of containers costs of packing b. value of materials, components, parts and item

incorporated in the imported good; tools, dies, moulds used I the production; materials consumed in the production; engineering, development, artwork, design,

plans and sketches undertaken not in Phil à such goods and services were supplied by

buyer to seller free of charge or at a reduced rate to the extent that value was not included in the price paid

c. royalties and license fees that buyer paid d. any part of the proceeds of a subsequent

resale, disposal or use of good that accrues to the seller

e. transportation cost from port of export to port

of entry in Phil f. loading, unloading and handling charges

(arrastre) g. insurance

Alternative Methods37: 1. TV of identical goods sold for export in Phil at

or about the same time as good being valued 2. TV of similar goods sold for export in Phil at or

about the same time as good being valued

37 Methods are applied successively. Alternative methods are used when value cannot be determined through successive application of previous methods.


TAXATION LAW 2

à if DV still cannot be determined using through the successive application of the methods above, the order of succession of the ff may be reversed upon request of the importer:

3. unit price at which the imported or similar or

identical good is sold domestically à same condition as when imported to persons

not related to seller at or about the same time of the importation of the goods being valued

COMPUTED VALUE = cost of raw materials + profit

and general expenses + freight + insurance fees + transpo expenses

4. using other means consistent with accepted

principles of GATT

Ø values shall be ascertained by Commissioner from reports of revenue and commercial attaches

Ø values shall be published in at least 1 newspaper of general circulation

Ø party dissatisfied with the values can file protest 15 days from date of publication

Ø if it becomes necessary to delay the final determination of DV, release of imported goods may be had by filing cash bond (imposable duties and taxes + 25% thereof)

“Reasonable Doubt” refers to any condition that

creates a probable cause to make the Commissioner of Customs believe in the inaccuracy of the invoice value of imported goods as declared by importer.

It may include the following situations:

1. if sale price is subject to some consideration

which value cannot be determined such as: a. seller fixes price on condition that buyer

will also buy other goods in specified quantities

b. price of imported goods is dependent upon price at which buyer sells other goods to seller

c. price is established on the basis of a form of payment extraneous to the Imported goods

2. part of proceeds of subsequent resale ,

disposal or use of goods will accrue to the seller

3. buyer and seller are related to one another

and relationship affected the price. They are related if: -officers or directors of one another’s

business -legally recognized partners in business -Er-Ee (removed in RA 8181, but included

in CA 2-99)

-Any person owns, controls or holds 5% or more of the outstanding voting stocks of both of them

-One of them directly or indirectly controls the other

-Both directly or indirectly controlled by third person

- members of same family including brothers and sisters (whether full or half), spouse, ancestors and lineal descendants (note change in CA 2-99)

“identical Goods” – same in all respects including physical characteristics, quality and reputation. “Similar Goods” – although not alike in all respects, have like characteristics and component materials which enable them to perform the same functions and be commercially interchangeable

Sec. 202 Bases of Dutiable Weight

a) gross weight: weight of article + weight of all containers, packages, holders and packing where articles were contained during importation

b) legal weight: weight of article + weight of immediate containers, holders where such articles are usually contained at the time of their sale to the public in retail quantities

c) net weight: only the actual weight of article d) articles affixed to cardboard, cards, paper,

wood shall be dutiable together with weight of such holders

e) when a single package contains articles dutiable according to different weights, the common exterior of the receptacle shall be prorated.

Sec. 203 Rate of Exchange

Value quoted in foreign currency shall be converted into Phil currency at the exchange rate published by Central Bank Sec. 204 Effective Date of Rates of Import Duty

Imported articles shall be subject to rates of import duty existing at the time of entry or withdrawal from warehouse For articles abandoned, forfeited or seized by government and sold at public auction, the rate of duty shall be the rates in force at the time of auction Duty based on weight, volume and quantity shall be levied and collected on the weight, volume and quantity at time of entry into warehouse or date of abandonment/forfeiture/seizure. Sec. 205

Imported article deemed “entered” in Phil for consumption when: - entry form is properly filed and accepted

together with related documents - duties, taxes, fees and other charges are paid

or secured to be paid imported article deemed to be “withdrawn” from warehouse in the Phil for consumption when:

- entry form is properly filed and accepted together with related documents

- duties, taxes, fees and other charges are paid or secured to be paid

Sec. 1308

Contents of Commercial Invoice a. place, date, person by whom and the person to

whom articles are sold If imported other than in a purchase, place

from which shipped, date when the person to whom and by whom they are shipped

b. port of entry c. detailed description of the articles (sufficient for

tariff classification and statistical purposes) d. quantities


TAXATION LAW 2

e. if articles bought in pursuance to purchase, purchase price in the currency of purchase and the unit of quantity in which the articles were bought

f. if articles shipped otherwise than purchase, value of each article in unit which the article is usually bought and sold and in the currency they are usually transacted

OR price in the currency manufacturer would receive if sold in ordinary course of trade in usual wholesale quantities

g. all charges h. discounts, rebates, drawbacks, bounties i. current home consumption value or price j. other facts necessary for proper examination,

appraisement and classification of the articles

Sec. 1309 Certificate of Invoice

Commercial invoice must be presented to the consular officer of the Phil for certification at the time or before or immediately after the shipment of article Consular invoice shall be certified in consular district where articles were manufactured or purchased or shippers. à In the absence of Phil consul, the invoice may be certified by consular officer in the district nearest the place of exportation or person designated by DFA

Sec. 1310

All importations exceeding P10, 000 in DV shall be entered only 1. upon presentation of consular invoice under

penalties of falsification, perjury. All importations exceeding P10, 000 in DV shall be entered only upon presentation of consular invoice under penalties of falsification, perjury OR

2. Affidavit showing cause why it is not possible to produce invoice + bond

Exempt from consular invoice requirement: a. conditionally free importations b. tax free importations c. importations of government agencies and

instrumentalities d. importations on consignment basis under RA

3137 and RA 6135 for re export

Sec. 1313 Information Furnished on Classification

and Value

Classification: When article not specifically classified in code, the interested party, importer or foreign exporter may submit a sample with full description of component materials in a written request. Value: Upon written application, Collector shall furnish importer within 30 days the latest information as to the DV of articles to be imported. Importer must present all pertinent papers and documents, act in good faith and unable to obtain information due to unusual conditions Information given is not an appraisal nor is it binding upon the Collector’s right of appraisal.

Customs Administrative Order # 2-99 (effective Jan 1, 1999)

DETERMINATION OF DUTIABLE VALUE

Dutiable Value (DV) shall be determined using one of the 6 methods of valuation. These methods must be applied in sequence. However, method 4 and 5 may be reversed at request of importer(unless there shall be difficulty in using method 5 in which case Commissioner shall reject request) Method # 1

TRANSACTION VALUE Price actually paid or payable for goods when sold for export to Phil

+ commissions & brokerage fees + cost of containers + cost of packing (labor, materials) + assists (value of goods and services supplied by the buyer free of charge or at a reduced price for use in connection with the production and sale for export of the good) + royalties & license fees + value of any part of the proceeds of subsequent resale, disposal or use of imported goods that accrue directly or indirectly to seller + cost of transport + loading, unloading, handling + insurance

DV must NOT include:

- charges for construction, erection, assembly maintenance or technical assistance undertaken after importation

- cost of transport after importation - duties and taxes of Phil - other permissible deduction under WTO

Valuation Agreement

CONDITIONS so the Transaction Value shall be the DV (CREPD) 1. sale for Export to Phil 2. no restrictions as to the Disposition or use of

goods by buyer except: - those imposed by law or Phil authorities - limit the geographical area where goods may

be resold - do not substantially affect the value of the

goods 3. not be subject to some Condition or

consideration for which value cannot be determined

4. no part of the Proceeds of any subsequent disposal shall accrue to the seller

5. buyer and seller are not Related or if they are, relationship did not affect the price

DEEMED RELATED IF: same with Sec. 201 as amended by RA 8181 except for the following:

Customs Admin Order 2-99

Sec. 201 as amended by RA 8181

Employer-Employee None

Together they directly or indirectly control a third person

None

Related by affinity or consanguinity up to 4th civil degree

members of same family including brothers and sisters (whether full or half), spouse, ancestors and lineal descendants

IF RELATED, USE OF TV ACCEPTABLE IF: 1. circumstances surrounding transaction show

that relationship did not influence the price


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2. TV closely approximates: - TV of unrelated buyers of identical or similar

goods - Deductive value of identical or similar goods

determined according to method #4 - Computed value of identical or similar goods

determined according to method #5

Method # 2 TRANSACTION VALUE OF IDENTICAL GOODS

The DV shall be the transaction value of identical goods sold for export to the Phil and exported at or about the same time as the goods being valued. Identical goods must be same commercial level and substantially same quantity as the goods being valued.

Identical goods

- Same in all respects (physical characteristics, quality and reputation)

- Produced in the same country as the goods being valued

- Produced by producer of the goods being valued

à excludes imported goods for which engineering,

development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the producer free of charge or at a reduced rate

Ø When no identical goods produced by the

same person à identical goods produced by different

producer in the same country Ø If NO identical goods at same commercial

level and same quantity, à TV of identical goods at a different

commercial level and different quantity may be utilized

à TV shall be adjusted upward or downward to account for the difference

Method #3 TRANSACTION VALUE OF SIMILAR GOODS The DV shall be the transaction value of similar goods sold for export to the Phil and exported at or about the same time as the goods being valued. Similar goods must be same commercial level and substantially same quantity as the goods being valued. Similar goods: - like characteristics and like component

materials - capable of performing same functions - commercially interchangeable - produced in same country - produced by dame producer à excludes imported goods for which engineering, development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the producer free of charge or at a reduced rate

Ø When no similar goods produced by the same

person à similar goods produced by different producer

in the same country Ø If NO similar goods at same commercial level

and same quantity,

à TV of similar goods at a different commercial level and different quantity may be utilized

à TV shall be adjusted upward or downward to account for the difference

Method # 4 THE DEDUCTIVE VALUE DV is determined on the basis of sales in the Phil of goods being valued of identical or similar imported goods less certain expenses resulting from importation and sale of goods.

Deductive Value is determined by making a deduction from the established price per unit for the aggregate of the ff elements: a. Commissions OR b. additions made in connection with profit and

general expenses AND c. transport, insurance and associated costs d. customs duties and other national taxes

PRICE - COMMISIONS/ADDITIONS - COSTS - DUTIES/TAXES = DEDUCTIVE VALUE

CONDITIONS: 1. sold in the Phil in the same condition as

imported 2. sales taken place at or about the same time of

importation of good being valued 3. if no sale took place at or about the time of

importation à use sales at the earliest date after

importation (of the similar or identical good) but before expiration of 90 days

4. if no sale meet the above conditions, importer may choose the use of sales of goods being valued after further processing

“at or about the same time” à 45 days prior to and 45 days after importation Method # 5 THE COMPUTED VALUE DV is determined on the basis of cost of production + profit + general expenses reflected in sales from exporting country to the Phil of goods of same class or kind DV is calculated by:

determine aggregate of relevant costs, charges and expenses or value of (1) materials and (2) production or processing costs

+ costs (containers, packing, assists, engineering, artwork, plans and sketches undertaken in Phil and charged to producer

+ profits and general expenses + cost of transport, insurance and charges to the port or place of importation

Method # 6 THE FALLBACK VALUE - DV cannot be determined using any of the

above methods - Use other reasonable means consistent with

principles and general provisions of GATT C. Special Duties

Sec. 301 Dumping Duty

When Sec of Finance receives a petition or has reason to believe that a specific foreign article is being imported into, or sold/ likely to be sold in Phil, at a price less than its normal value


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à within 20 days, must determine prima facie case for dumping Sec. 302 Countervailing Duty

When an article is granted any bounty, subsidy or subvention upon its production, manufacture or exportation in the country of origin and importation of which is likely to injure an established industry or retard the establishment of industry in Phil à countervailing duty = ascertained or estimated amount of bounty, subsidy or subvention

v Injury criterion shall be applied only on imports

from countries which adhere to GATT v If article was allowed a drawback, only the

excess of the amount of drawback over the total duties and taxes shall constitute bounty, subsidy, subvention

v When the conditions which necessitated the imposition of countervailing duties have ceased à must discontinue imposition

Sec. 303 Marking a. marking of articles marked in official language of Phil and in

conspicuous places to indicate to the ultimate purchaser the name of country of origin

b. marking of containers failure to mark à5% ad valorem

failure or refusal to mark within 30 days from date of notice shall constitute act o abandonment. no imported article shall be delivered until it has been inspected, examined or appraised

Sec. 304 Discrimination by Foreign Countries

The president may proclaim new and additional duties in an amount not exceeding 100% ad valorem on articles from country where: 1. imposes an unreasonable charge, exaction not

equally enforceable in other laws 2. discriminate against the commerce of Phil in

such a way that it places Phil commerce at a disadvantage

D. Flexible Tariff Rates

Sec.401

Pres is empowered to: 1. increase, reduce or remove existing rates 2. establish quota or ban import of any

commodity 3. impose an additional duty not exceeding 10%

ad valorem the pres’ power to increase or decrease rates of import duty shall include authority to modify the form of duty any order of Pres shall take effect 30 days after promulgation except if the imposition of additional duty is less than 10%, it shall take effect upon the discretion of the President.

III. IMPOSITION OF DUTIES A. Persons liable

Deemed Owner of Imported Articles: 1. consignee 2. holder of bill of lading 3. if consigned to order, the consignor 4. underwriters of abandoned articles and salvors

of articles saved at a wreck

v the liability of importer for the duties, taxes, fees and other charges constitute a personal debt due to the government which may be discharged only upon full payment. It also constitutes a lien upon the articles imported while articles are in custody or subject to control of government

v all importations by the government, its

branches, instrumentalities, GOCCs, agencies or instrumentalities owned or controlled by government are subject to similar duties, taxes and fees except for those provided in Sec. 105 (conditionally free imports)

B. Declaration

Imported articles must be entered in customhouse at the port of entry within 30 days from date of discharge by: 1. importer, being holder of B of L 2. customs broker 3. agent Import entries: 1. Informal entry

- articles of commercial nature intended for sale, barter or hire the DV is P2,000 or less

- personal and household effects, not in commercial quantity, for personal use

2. Formal entry - may be for immediate consumption, or under

irrevocable domestic letter of credit, bank guarantee or bond for: a. placing article in customs bonded

warehouse b. constructive warehousing and immediate

transportation to other Phil ports upon proper examination and appraisal

c. constructive warehousing and immediate exportation

Written Declaration of Import Entry must contain statements that declare: 1. full account of value or price 2. the invoice and entry contains just and faithful

account of the value or price of articles; nothing has been omitted or concealed

3. to the best of knowledge of declaring, all the invoices and B of L are the only ones in exiting in relation to the importation in question

4. the invoices, entries and B of L are genuine and true

à signed by importer, consignee or holder of bill, manager of corporation, firm or association, licensed customs broker Form of Import Entry: - shall be signed by person making entries - have required # of copies as prescribed by RR Contents: - name of importing vessel or aircraft - # and marks of packages, - quantity - description of article


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- value set in the invoice

C. Examination, Appraisal and Classification

(§1405-08)

Procedure: 1. appraisers shall ascertain, estimate, determine

the value or price of articles à file action within 1 year 2. examiners shall render a report 3. appraisers shall describe all articles on the face

of entry in tariff à 15 days An appraisal, fully passed upon and approved by Collector, may not be altered or modified except: 1. statement of error 2. request for reappraisal and/or classification if duty assessed amount is lower than the entered value

D. Assessment of Taxes E. Liquidation (§1601-03) Liquidation shall be made on the face of entry showing the particulars Daily record of entries liquidated shall be posted on the public corridor of customs house Tentative Liquidation-if to determine the exact amount due some future action is required, liquidation is deemed tentative as to items affected and shall be subject to future and final adjustment and settlement within 6 months Finality of Liquidation: After expiration of 1 year from date of final payment of duties In the absence of protest, final and conclusive between the parties unless liquidation was tentative

IV. REMEDIES OF THE GOVERNMENT A. Extrajudicial

1. Enforcement of Tax Lien

Sec. 1508

When an importer has an outstanding and demandable account with the Bureau of Customs, - Collector shall hold the delivery of the

article - Upon notice, he may sell such

importation or a portion of it to satisfy the obligation

à importer may settle his obligation anytime before the sale

2. Seizure and Forfeiture

Sec 2205

WHO: customs official Fisheries Commissions Philippine Coast Guard à to make seizure of any vessel, aircraft, cargo, animal or any movable property when the same is subject to forfeiture or liable for any fine under the tariff and customs law

ADMINISTRATIVE PROCEEDINGS

(Secs 2301 – 2316)

When seizure is made: 1. Collector shall issue a warrant for the

detention of the property Cash bond

- if importer wishes to secure release of article for legitimate use

- amount fixed by Collector - conditioned on payment of appraised

value of article and/or fine, expenses, costs

à article will NOT be released if:

- prima facie evidence of fraud in the importation]

- article is prohibited by law 2. Report to Commissioner and Chairman of

Commission of Audit 3. written notice to owner or importer à he shall he given opportunity to be heard

Notification to an unknown owner - posting for 15 days in the public corridor

of customhouse - publication in newspaper - other means Collector considers desirable

4. Collector shall make a list and particular description and classification of the seized property, appraisal based on local wholesale values by - at least 2 appraising officials - absent such, 2 competent disinterested

citizens

v If within 15 days from notification, no owner or agent is found or appears before Collector

à property forfeited to Government and sold at auction

v SETTLEMENT While case is pending, Collector may accept settlement of any seizure case

- upon approval of Commissioner - payment of fine ( 25% - 80% of the

landed cost of the article) In case of forfeiture, should pay the

domestic market value of the seized article

Settlement NOT allowed:

o Fraud in importation o importation prohibited by law o release would be contrary to law

v PROTEST - written protest - payment before protest is necessary

(amount due + docket fee) When: at the time payment of the amount claimed to be due is made within 15 days thereafter Form: filed according to RR; point out the particular decision or ruling grounds used as basis for the protest


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Scope: limited to the subject matter of a single adjustment (refers to the entire content of one liquidation including duties, fees, surcharges and fines) or other independent transaction à failure to protest will render the action of the Collector final and conclusive except for manifest error à upon demand of Collector, the importer shall furnish samples of the articles which are the subject of the protest

HEARING: 15 days after filing of protest DECISION: within 30 days REVIEW BY COMMISIONER: 15 days after notification in writing of Collector’s decision à if decision of Collector is adverse to government à automatic review DECISION OF COMMISIONER: within 30 days à notice to party who brought case ( if seizure case, personal service if practicable) REVIEW BY SECRETARY OF FINANCE à if decision of Collector is adverse to government à automatic review »»» Inaction of Commissioner or Secretary for 30 days from receipt of records of the case à decision under review becomes final and executory APPEAL TO CTA: within 30 days from receipt of copy of decision v COMPROMISE

Commissioner may compromise any case subject to approval by Secretary

B. Judicial (see flowchart IX)

V. REMEDIES OF THE TAXPAYER

A. Refund (§1707-08)

When: 1. manifest clerical error made in invoice

or entry 2. error in return of weight, measure and

gauge - certified, under penalties of

falsification or perjury, by examining official

3. error in the distribution of charges on invoices - not involving any question of law - certified, under penalties of

falsification or perjury, by examining official

Conditions 1. errors discovered before payment OR

discovered within 1 year after the final liquidation

2. written request and notice from importer OR statement of error certified by the Collector

How: 1. Claim made in writing

2. Collector shall verify with the records in his office

3. certify claim to Commissioner with his recommendation and necessary papers

4. Commissioner shall then cause the claim to be paid if found correct

v If the result of the refund would result

to a corresponding refund of the internal revenue taxes on the same importation, Collector shall certify to Commissioner who shall cause the said excess to be paid, refunded or credited in favor of the importer

B. Protest (§2308-09. 2312)

- written protest - payment before protest is necessary

(amount due + docket fee) When: at the time payment of the amount claimed to be due is made within 15 days thereafter Form: filed according to RR point out the particular decision or ruling ground used as basis for the protest Scope: limited to the subject matter of a single adjustment (refers to the entire content of one liquidation including duties, fees, surcharges and fines) or other independent transaction à failure to protest will render the action

of the Collector final and conclusive except for manifest error

à upon demand of Collector, the importer

shall furnish samples of the articles which are the subject of the protest

C. Abandonment (§1801-03)

Article is deemed abandoned when: 1. owner, importer or consignee expressly

signifies in writing to Collector his intention to abandon

2. after due notice, fails to file an entry within 30 days from date of discharge of last package from vessel or aircraft

3. after filing entry, fails to claim his importation 15 days from date of posting of the notice to claim such importation

Effect: - deemed to have renounced his interest

and property rights - ipso facto deemed property of the

Government à any official or employee who:

- had knowledge of the existence of abandoned article

- custody or charge of such article fails to report within 24 hours from time article deemed abandoned shall be punished accdg to sec. 3604 ( fine: P5000 – P50,000mprisonment: 1 yr – 10 yrs perpetual disqualification to hold public office, vote and participate in election)


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VI. Pertinent Amendments by RA 9135

1. Post-entry Audit & Examination

Sec. 3513. Importers are required to keep at their principal place of business for a period three (3) years from importation, all records of their importations and/or books of accounts, business and computer systems. Brokers are likewise required to do so with respect to transactions they handle.

Sec 3515. Customs Officers authorized by the Bureau of Customs may enter during office hours premises where records are kept by importers/customs brokers to conduct audit of books, records or documents for the purpose of collecting the proper duties and taxes.

2. Acquisition of grossly undervalued

goods

Sec 2317.– In order to prevent undervaluation of goods subject to ad valorem duty, the Commissioner of Customs may acquire imported goods for a price equal to their declared customs value plus any duties already paid on the goods, payment for which shall be made within ten (10) working days from issuance of a warrant signed by the Commissioner of Customs for the acquisition of such goods.


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